Saudi Petrochemicals sector Spreads mixed in May; Trend likely to continue

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1 Saudi Arabia 08 June 2017 January 18, 2010 Monthly update In our monthly note, we update price movements of major petrochemical products, manufacturing activity in key demand markets, recent announcements and valuations of Saudi petrochemical companies & peers. Price movement of key petrochemical products Products 1Month* YoY Ethylene 15.6% 15.2% HDPE 4.3% 3.5% LDPE 3.1% +4.2% Propylene +8.9% +21.1% Polypropylene 2.8% +5.5% Methanol 6.7% +17.3% Benzene 1.3% +20.8% Ammonia 16.7% 9.1% Urea 0.0% 0.0% * Last month change Research Department Pritish K. Devassy, CFA Tel , devassyp@alrajhicapital.com Saudi Petrochemicals sector s mixed in May; Trend likely to continue Saudi Aramco kept NGL prices unchanged for June. Aramco has kept Propane price unchanged for June at US$385/t, despite US propane price increasing 3.3% mom in May. Butane price for June also remained unchanged at US$390/t. On the other hand, Naphtha price declined for the fourth consecutive month, down by 4.2% mom in May, primarily on account of a ~3% drop in oil prices. Given the unchanged Propane price for June and the recent decline in Naphtha price, Propane discount (~10% or US$41/t) to Naphtha has reached its historical average. We expect nearterm Naphtha price to continue moving along with oil price, while NGLs prices for July could remain unchanged or marginally decline unless demand becomes strong or oil price increase. Product prices fell in May: Prices of most key petrochemical products that we monitor fell in May, in line with our expectations. Ethylene (15.6% mom) declined the most, due to rising supply from Iran and Saudi Arabia (source: Platts) coupled with weak upstream costs. Other polymer products such as HDPE (4.3% mom), LDPE (3.1%), Polypropylene (2.8%) and Polystyrene ( 2.0%) were also down, mainly due to weak demand in key markets like China amid low operating rates. Despite lower downstream demand, Propylene prices improved during the second half of May, posting a gain of ~9% mom in May on tight supply ahead of a likely maintenance shutdown at three PDH plants in China in June (source: Platts). We expect polymer prices to remain under pressure in June due to weak seasonal product demand. Meanwhile, Methanol prices (6.7% mom) extended its decline for the third consecutive month amid weak demand from the MTO plants in China (source: Platts). Urea prices remained unchanged in May after declining in the previous three months. s remained mixed in May: As expected, product spreads remained mixed in May with Ethane/Naphthabased plants witnessing a decline in its relevant product spread due to a higher decline in respective product prices, while PDH plants witnessed an improvement in spreads on account of a higher decline in feedstock prices. We believe that product spreads are likely to remain under pressure in the nearterm unless oil prices increase. Oil prices fell in May: Oil prices reversed its earlier monthtodate gain after OPEC s decision to extend its agreement till 1Q18. While OPEC countries believe that the ninemonth extension of the production cut agreement would reduce inventory level to historical fiveyear average by the end of this year, there are concerns of rising US crude production amid rising drilling activities, which could limit OPEC s efforts to balance the oil market. Meanwhile, US crude production reached 9.32mmb/d (up by 573,000 b/d yoy) for the week ended June 2. Further, US producers continued to add oil rigs for the 12 consecutive months in May 2017 (722 at the end of May vs. 697 at the end of April 2017; source: Baker Hughes). Additionally, crude inventory surprisingly rose by 3.3mmbbl last week, ending its eighth straight weekly decline. We believe OPEC and NonOPEC compliance level, US production and inventory data remain important to monitor in the coming months. US president s recent decision to withdraw a Paris climate pact renewed worries that US production could increase faster than expected, hinting a downside risk for oil, while the latest geopolitical tensions surrounding several Middle East countries snapping diplomatic ties with Qatar could pose nearterm upside risk though only slightly as Qatar s oil supply is not significant. Please see penultimate page for additional important disclosures. Al Rajhi Capital (Al Rajhi) is a foreign brokerdealer unregistered in the USA. Al Rajhi research is prepared by research analysts who are not registered in the USA. Al Rajhi research is distributed in the USA pursuant to Rule 15a6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRAmember brokerdealer.

2 ($/MT) ($/MT) Share price (SAR) ($/MT) ($/MT) ($/MT) ($/MT) Saudi Petrochemicals Trading opportunities We have analyzed historic stock price movements vs. weighted price spreads (between the end product prices and key feedstock, unadjusted for production). Our tracker model shows the stock price movements and relevant weighted price spread are highly correlated and we expect the trend to continue going forward. Based on our tracker model, we expect YANSAB, SAFCO and SABIC continue to trade lower in the nearterm on declining average product spread in Q2. Figure 1 APCC Price and Figure 2 YANSAB Price and 1, , , , APCC Share Price YANSAB Share Price Figure 3 SIPCHEM Price and Figure 4 SAFCO Price and SIPCHEM Share Price SAFCO Share Price Figure 5 Tasnee Price and Figure 6 SABIC Price and 2, , 1, , 60 1, Tasnee Share Price SABIC Price Disclosures Please refer to the important disclosures at the back of this report. 2

3 Figure 7 Price movement of key petrochemicals, fertilizers and metals Products Recent Price* % Change 1Month** QTD YTD 1Year European Brent (US$/bbl) 50.0 (2.7) (5.5) (12.1) 1.8 WTI (US$/bbl) 47.7 (2.6) (7.3) (16.0) (8.0) Henry Hub Natural Gas (US$/mmbtu) 2.8 (5.4) (8.6) (23.1) 22.9 Naphtha Japan (US$/ton) 426 (4.2) (9.2) (14.2) (1.0) Propane Aramco (US$/ton) 385 (10.5) (19.8) Butane Aramco (US$/ton) 390 (20.4) (35.0) (7.1) 2.6 Key petrochemicals (US$/ton) Ethylene (FOB Japan) 975 (15.6) (10.6) (11.4) (15.2) HDPE (SE Asia) 1,110 (4.3) (4.3) (5.1) (3.5) LDPE (SE Asia) 1,230 (3.1) (3.1) (4.7) 4.2 Propylene (FOB Korea) (0.6) 21.1 Polypropylene (SE Asia) 1,060 (2.8) (1.9) Methanol (CFR China) 265 (6.7) (9.2) (24.3) 17.3 MTBE (Asia) 630 (1.6) 9.6 (8.7) (0.8) Benzene (FOB Korea) 755 (1.3) (6.2) (9.0) 20.8 Toluene (CFR Japan) 640 (0.8) 0.0 (5.9) 5.8 Styrene (FOB Korea) 1, (7.3) (8.1) 8.5 Polystyrene (Asia) 1,230 (2.0) (6.8) (6.8) 5.1 Other petrochemicals (US$/ton) Monoethylene glycol SABIC 890 (7.8) (14.0) (15.2) 12.7 Ethylene dichloride (FOB NWE) (1.5) Vinyl Acetate Monomer (China) Polyvinyl chloride (SE Asia) (8.5) (4.4) 4.9 Titanium Dioxide (Asia) 2, Acrylic Acid (China) 840 (2.3) (31.7) (33.9) 10.5 Fertilizers (US$/ton) Ammonia (Middle East) 300 (16.7) (11.8) 46.3 (9.1) Urea (Middle East) 0.0 (7.0) (18.4) 0.0 DAP (Middle East) (5.2) Metals Gold US Spot (US$/oz) 1, Aluminum LME (US$/ton) 1, (1.2) Copper LME (US$/ton) 5,560 (1.3) (4.9) Source: Bloomberg, Argaam, Al Rajhi Capital. * Last closing. ** 1Month represents the last month change. Figure 8 Historical 1Year Forward PE Multiples Trend Figure 9 Historical 1Year Forward EV/EBITDA Multiples Trend Jun14 Nov14 Apr15 Sep15 Feb16 Jul16 Dec16 May17 4 Jun14 Nov14 Apr15 Sep15 Feb16 Jul16 Dec16 May17 SABIC MSCI World Chemical Index SABIC MSCI World Chemical Index Source: Bloomberg, Al Rajhi Capital Source: Bloomberg, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 3

4 Figure 10 Margins and Valuation Metrics Saudi petrochemical companies vs. global peers Company Name Saudi Arabia Market Cap (US$ 'mn) Operating margin Net margin 2017 PE P/B 2017E EV/Sales 2017E EV/EBITDA ROE Operating ROE SABIC 78, x 1.8x 2.2x 7.2x SAFCO 7, x 4.1x 8.5x 16.4x Sipchem 1, x 1.0x 2.7x 7.9x NIC 2, x 1.2x 1.6x 6.7x Yansab 8, x 2.0x 4.1x 8.5x APC 2, x 3.0x 3.7x 9.7x SPC 1, x 1.1x 2.4x 9.3x Saudi Kayan 3, x 0.9x 3.6x 9.1x PetroRabigh 2,789 (0.2) (0.6) NA 1.3x 1.9x 20.4x (2.1) (0.6) (0.3) SIIG 2, x 1.4x 3.3x 9.7x Chemanol 212 (10.8) (14.1) 13.4x 0.7x 2.1x 6.6x (7.0) (5.4) (3.6) Nama 96 NA NA NA 1.2x NA NA NA NA NA Alujain x 1.5x 2.5x NA National Petrochemical 2, x 1.4x 2.7x 8.6x Median x 1.3x 2.7x 8.9x Average x 1.6x 3.2x x Middle East & Africa (exsaudi Arabia) Industries Qatar 17, x 2.0x 11.8x 49.7x Mesaieed Petrochem 4,885 NA NA NA 1.3x NA NA 7.3 (0.1) 7.2 Sidi Kerir x 2.5x 1.3x 4.2x Al Qurain 1, NA 1.0x NA NA Sasol 19, x 1.2x 1.7x 5.6x Median x 1.3x 1.7x 5.6x Average x 1.6x 5.0x 19.8x Europe BASF 88, x 2.3x 1.5x 8.0x Solvay 14, x 1.2x 1.4x 7.0x Lanxess 6, x 2.4x 0.8x 6.1x Arkema 8, x 1.7x 1.1x 6.7x Yara 10, x 1.1x 1.0x 7.3x Akzo Nobel 21, x 2.9x 1.4x 9.6x Clariant 7, x 4.3x 16.7x 2.7x 1.4x 9.2x 10.4x x Median x 2.3x 1.4x 7.3x Average x 2.1x 1.2x 7.7x North America Eastman 11, x 2.5x 2.0x 8.4x Dow 77, x 2.8x 1.8x 8.8x Westlake 8, x 2.2x 1.5x 7.3x Celanese Corp 12, x 4.7x 2.6x 9.3x Methanex 3, x 2.2x 1.7x 5.9x LyondellBasell Industries 32, x 5.0x 1.2x 5.8x Huntsman Corp 5, x 4.0x 1.0x 7.1x Median x 2.8x 1.7x 7.3x Average x 3.4x 1.7x 7.5x Asia Indorama Ventures 5, x 2.0x 0.9x 9.2x Mitsui Chemicals 5, x 1.3x 0.8x 6.7x Sumitomo 9, x 1.2x 1.0x 7.4x Formosa Chemicals & Fibre Corp 17, x 1.6x 1.6x 10.3x Lotte Chemical Corp 10, x 1.2x 0.8x 3.6x Formosa Plastics Corp 18, x 1.8x 2.7x 19.6x LG Chem 18, x 1.4x 0.9x 5.4x Median x 1.4x 0.9x 7.4x Average x 1.5x 1.2x 8.9x Indices S&P500 Chemical Index 460, x 4.4x 2.5x 11.3x MSCI World Chemical Index 1,106, x 2.9x 1.9x 9.9x TASI 431, x 1.6x 3.3x x x 2.4 Source: Bloomberg, Al Rajhi Capital. Notes: 1) Market cap as of June 3, ) All valuation ratios as of June 3, ROA Disclosures Please refer to the important disclosures at the back of this report. 4

5 Figure 11 Performance of Saudi petrochemical companies vs. global peers Company Currency Last Price* % Change 52Week Dividend 1 Month** QTD YTD 1 Year High Low LTM Yield Saudi Arabia SABIC SAR (0.9) % SAFCO SAR (5.8) (4.8) (11.3) % Sipchem SAR (20.1) (20.5) (25.4) (1.0) NA NA NIC SAR (18.0) (20.1) (19.8) NA NA Yansab SAR (1.7) (2.3) % APC SAR (2.5) (3.1) (1.3) % SPC SAR (11.3) (9.9) (5.5) % Saudi Kayan SAR 8.55 (14.6) 7.8 (3.3) NA NA PetroRabigh SAR (19.5) (6.0) NA NA SIIG SAR (4.3) (4.1) % Chemanol SAR 6.59 (10.8) (5.2) (17.8) (1.2) NA NA Nama SAR (21.7) (28.9) (54.7) (55.2) NA NA Alujain SAR % National Petrochemical SAR (11.5) (9.2) (12.8) % Middle East & Africa (exsaudi Arabia) Industries Qatar QAR (2.6) (5.7) (8.4) % Mesaieed Petrochem QAR (6.0) (5.2) (6.8) (19.1) % Sidi Kerir EGP (2.9) (9.9) % Al Qurain KWd (1.2) % Sasol ZAr 38, (4.4) (1.0) (1.8) (15.8) 46, , , % Europe BASF EUR (3.3) (4.9) (0.1) % Solvay EUR % Lanxess EUR % Arkema EUR (2.2) % Yara NOK (0.4) (3.2) % Akzo Nobel EUR (7.2) (1.0) % Clariant CHF % North America Eastman USD % Dow USD (1.3) (0.8) % Westlake USD (1.0) (4.4) % Celanese Corp USD (0.6) (1.5) % Methanex USD (10.1) (11.9) (5.1) % LyondellBasell Industries USD (5.0) (11.2) (4.8) % Huntsman Corp USD (3.5) (0.1) % Asia Indorama Ventures THB % Mitsui Chemicals JPY (3.5) % Sumitomo JPY (8.1) (2.7) % Formosa Chemicals & Fibre Corp TWD (1.6) (3.9) (5.8) % Lotte Chemical Corp KRW 354, (4.5) (4.1) , , , % Formosa Plastics Corp TWD (1.1) (1.2) % LG Chem KRW 294, , , % Indices S&P500 Chemical Index USD (0.1) % MSCI World Chemical Index USD % TASI SAR 6, (2.0) (2.0) (4.8) 6.4 7, , % Source: Bloomberg, Al Rajhi Capital. * Last closing as of June 3, ** 1 Month represents the last month change. Disclosures Please refer to the important disclosures at the back of this report. 5

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