Figure 1 Q results summary. Net profit 5,235 3, % 50% 5,879. Source: Company data, Al Rajhi Capital

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1 Vol mn RSI10 Saudi Basic Industries Corp Petrochemicals Industrial SABIC AB: Saudi Arabia US$94.95bn 21% US$153.7mn Market cap Free float Avg. daily volume Target price % downside Current price as at 30/4/2018 Neutral Underweight Neutral Overweight Performance Price Close MAV50 Source: Bloomberg Earnings estimates Existing rating MAV10 04/17 07/17 10/17 01/18 (SARbn) e 2019e Rev Rev growth 6.4% 13.4% -4.0% Gross Profit Gross margin 33.7% 33.5% 33.7% EBITDA EBITDA margin 28.8% 28.3% 28.7% Net Profit Net margin 12.1% 12.3% 12.4% EPS DPS Payout ratio 68% 71% 73% EV/EBITDA 7.8x 7.0x 7.2x P/E 16.2x 14.0x 14.5x Relative to TADAWUL FF (RHS) Research Department Pritish Devassy, CFA Tel , devassyp@alrajhi-capital.com SABIC (SABIC AB Equity) Q1 earnings in-line SABIC continued to report a see-saw pattern of net profits with Q net income at SAR5.5bn (Figure 2), which was ~6% below our expectation of SAR5.9bn. While there were a few surprises in previously announced results of its listed subsidiaries such as Yansab reporting a shutdown (not announced previously), SAFCO reporting a surge in costs due to restructuring and Kayan delivering its best ever set of quarterly profits, overall SABIC s results were broadly in-line with consensus expectations. The stock has already rallied c13%, since end of February, mainly due to optimism around inclusion in FTSE and (probable) MSCI indices. Rising oil and polymer prices as well as additional details on previously announced large project have supported the rally. On a short term basis, we expect the stock to remain steady as long as product prices continue to remain at these levels. However the key concerns are 1) The historical 20% discount to MSCI chemical peers on EV/EBITDA basis has diminished to 10%, which could reverse 2) Product prices have already mimicked oil prices and may not move up from here unless oil rallies further 3) Margins of marginal cost producers, likely the Asian producers are healthy and thus product spreads may not expand further 4) Supply side risks in the US. As for our valuation, we use an equal mix of relative (EV/EBITDA 7.5x, ~20% discount to MSCI World Chem, SAR114.5/sh.) and DCF valuation (SAR113/sh.) methods and arrive at a TP of SAR114/share. Figure 1 Q results summary (In SARmn) 1Q17 4Q17 1Q18 y-o-y q-o-q ARCe Comments Despite a high single digit increase in prices Revenue 36,954 40, % 3% 43,365 uniformly across the board, the revenue came higher by low single digits on a q-o-q basis indicative of slightly lower operating rates Gross Profit 13,530 12, % 14% 15,328 As costs declined moderately (2% q-o-q), margins improved margin 37% 31% 34% 35% Op. profit 8,350 6, % 36% 8,954 Despite GP miss, Op. profit came exactly inline with our expectations margin 23% 16% 21% 21% Net profit 5,235 3, % 50% 5,879 Net profit came slightly below our exp. The company reported a strategic restructuring initiative which cost the company SAR1.1bn margin 14% 9% 13% 14% Figure 2 See-saw performance of EBITDA and profits continued in Q Net Profit EBITDA 12m average EBITDA Q3 FY16 Q4 FY16 Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18 Please see penultimate page for additional important disclosures. Al Rajhi Capital (Al Rajhi) is a foreign broker-dealer 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 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer.

2 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Saudi Basic Industries Corp Figure 3 Indicative average prices of revenue drivers (polymers, urea, steel) USD/tonne 1Q17 2Q17 3Q17 4Q17 1Q18 y-o-y q-o-q HDPE 1,155 1,106 1,130 1,247 1,331 15% 7% LLDPE 1,155 1,101 1,118 1,170 1,196 4% 2% PP 1, ,077 1,144 1,222 17% 7% MEG 1, ,054 1,148 4% 9% Urea % -2% Long steel % 9% Source: Al Rajhi Capital, Bloomberg Figure 4 Indicative prices of cost drivers (naphtha, propane, butane) USD/t 1Q17 2Q17 3Q17 4Q17 1Q18 y-o-y q-o-q Naphtha % 2% Propane % -8% Butane % -11% Source: Al Rajhi Capital, Bloomberg What to expect in near term? The high-single digit improvement in EBITDA has been mainly driven by improvement in product-feedstock spreads as seen in Figure 3 and Figure 4. Apart from the improvement in spreads, the commercialization of couple of small projects and acquisitions has also helped the company improve its operating performance moderately. We expect the stock price rally to sustain in the near term given the improved oil price. There could also be some support from shutdowns globally which generally tend to lower operating rates in the second quarter. Also given the momentum related to FTSE and probable MSCI inclusion, the stock could remain at these elevated levels in the near term. Concerns: On the other hand, there are some concerns which investors should take a note of: a) The historical 20% discount to MSCI chemical peers on EV/EBITDA basis has diminished to ~10%. Some investors expect the discount to reduce to nil once SABIC gets included in benchmark indices. While this could be very subjective, we have kept historical discounts as it is because we believe liquidity (the main benefit of inclusion in indices) has never been an issue for SABIC. However we have shown scenarios with various estimates of multiples. As long as there are risks of reversal of favourable feedstock pricing and limited disclosures, we believe the discount could continue. The surge in multiples comes at a time when US chemical EV/EBITDA multiples have been dropping. Figure 5 Diminished discount to MSCI World Chemical Index % -5% -10% -15% -20% -25% -30% -35% SABIC MSCI World chem Discount Source: Al Rajhi Capital, Bloomberg Disclosures Please refer to the important disclosures at the back of this report. 2

3 b) As shown in Figure 6, historically, product and feedstock prices have mostly mimicked oil prices. In 2018, despite future possible supply side risks, product prices have surged significantly to levels seen during Hence further upside movement in prices may be limited. The product prices are only just below the two sustained peaks seen ever in the history of product prices. Figure 6 Surge in oil prices have been already mimicked by both Product* and feedstock* prices Source: Al Rajhi Capital, Bloomberg. * For Product, we have used HDPE indicative price and Naphtha for feedstock indicative price c) Margins of marginal cost producers, which are likely the Asian producers, are still healthy and above historical averages which could mean that the cost pressures have been passed on to the customers, implying limited upside in spreads. Figure 7 Median EBITDA margin of top 50 Asian chemical producers is still healthy which could indicate no further surge in product-feedstock spreads 20% 20% 19% 19% 18% 18.1% 17.8% 18.0% 18.0% 18.6% 18% 17% 16.8% 17% 16.4% 16.4% 16% 15.2% 16% 15% Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 Q4 17 Q1 18, Bloomberg d) The obvious other key downside risk remains the often cited oversupply risks due to increase in US capacity. It is important to remember that though polymer product prices trend in the same direction as of oil prices, the product prices do not increase proportionally. For example, even though oil price declined over 50% from 2014 to , product price of HDPE saw only a 22-25% price reduction. This is because the prices are set by the marginal cost producer. So an increase in oil prices will increase product price only by as much costs increase because of oil for the marginal cost producer. With surge in cheaper gas based supply, increase in oil prices will have a lesser impact on polymer prices. At the moment already product prices have increased by high single digit % as compared to similar increase in oil prices. Long term drivers: Success of large-scale projects (such as USD20bn Oil-to-Chemical project, new petchem complex in Texas, CTO & Polycarbonate plants in China) will remain vital to determine the share price trend of SABIC over the long-term. The company aims to spend US$3-10bn on acquisitions, particularly in the specialties and agri-nutrients sectors. As a part of its long-term investment strategy, the company is putting to use the cash available and has recently acquired 24.99% stake in Clariant. We believe that the company s robust cash surplus (~19% of market cap) and healthy leverage position (debt to total asset Disclosures Please refer to the important disclosures at the back of this report. 3

4 ratio: ~18%, lower than peer average) should provide sufficient headroom to fund its aggressive investment plans in future. Valuation: Given unexpected improvement in product prices, we revise our forecasts for both feedstock and product prices higher (see base case expectations in next paragraph). Post revision in our estimates and updating our target EV/EBITDA multiple (7.5x, that is ~20% discount to MSCI chemical peers which trade at 9.3x), we revise our target price to SAR114/share based on equal mix of DCF and relative valuation. We remain Neutral on SABIC, given the upside of -0.4% ( ~4% after including 2018e dividends of SAR5/share). The stock is currently trading at an EV/EBITDA of 7.8x on our 12month forward EBITDA, which is c8% above historical average. We believe 7.5x is a fair estimate given that we are more likely at the upper end of the cycle than at the lower end and hence justifies a lower valuation multiple than historical levels. What can go wrong with our estimates? In our base case, we expect product prices to likely dip by mid-single digits given that we are operating in a cyclical industry having already witnessed a sharp rally in oil prices. Beyond 2019, we expect prices to increase by 2-3% on an average. In the below we have assessed a few scenarios whereby we have assumed various discount to MSCI World Chemical peers and movement in product prices and feedstock in 2019 over We have assumed YTD average price levels to be sustained in Based on these, there is significant potential if the discount to target multiple declines. Figure 8 Scenario analysis Discount to MSCI peers Price & feedstock movement in % -5% 0% 5% 20% % % % Risks: Key upside triggers are associated with faster than expected successful commercial launch of its above mentioned future expansion projects and increase in product spreads. SABIC is most likely to be included in MSCI EM Index, generating additional global interest in the stock once Saudi Arabia upgrades to Emerging market list, which could eliminate a bit of the discount compared to global peers provided disclosures improve. Downside risks include weak oil & thereby decline in petchem product prices, unplanned plant shutdowns and any further unexpected revision in the subsidized feedstock prices. The newer projects such as the OTC project are quite large and are unconventional, the success of which could be a key factor. Disclosures Please refer to the important disclosures at the back of this report. 4

5 IMPORTANT DISCLOSURES FOR U.S. PERSONS This research report was prepared by Al Rajhi Capital (Al Rajhi), a company authorized to engage in securities activities in Saudi Arabia. Al Rajhi is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution to major U.S. institutional investors in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the Exchange Act ). Any U.S. recipient of this research report wishing to effect any transaction to buy or sell securities or related financial instruments based on the information provided in this research report should do so only through Rosenblatt Securities Inc, 40 Wall Street 59th Floor, New York NY 10005, a registered broker dealer in the United States. 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6 Disclaimer and additional disclosures for Equity Research Disclaimer This research document has been prepared by Al Rajhi Capital Company ( Al Rajhi Capital ) of Riyadh, Saudi Arabia. It has been prepared for the general use of Al Rajhi Capital s clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Al Rajhi Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Al Rajhi Capital. The information contained was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. 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Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the price or value of such securities and investments may rise or fall. Fluctuations in exchange rates could have adverse effects on the value of or price of, or income derived from, certain investments. Accordingly, investors may receive back less than originally invested. Al Rajhi Capital or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related investments, including long or short positions in securities, warrants, futures, options, derivatives, or other financial instruments. 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This research document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or which would subject Al Rajhi Capital or any of its affiliates to any registration or licensing requirement within such jurisdiction. Explanation of Al Rajhi Capital s rating system Al Rajhi Capital uses a three-tier rating system based on absolute upside or downside potential for all stocks under its coverage except financial stocks and those few other companies not compliant with Islamic Shariah law: "Overweight": Our target price is more than 10% above the current share price, and we expect the share price to reach the target on a 12 month time horizon. "Neutral": We expect the share price to settle at a level between 10% below the current share price and 10% above the current share price on a 12 month time horizon. "Underweight": Our target price is more than 10% below the current share price, and we expect the share price to reach the target on a 12 month time horizon. "Target price": We estimate target value per share for every stock we cover. This is normally based on widely accepted methods appropriate to the stock or sector under consideration, e.g. DCF (discounted cash flow) or SoTP (sum of the parts) analysis. Please note that the achievement of any price target may be impeded by general market and economic trends and other external factors, or if a company s profits or operating performance exceed or fall short of our expectations. Contact us Mazen AlSudairi Head of Research Tel : alsudairim@alrajhi-capital.com Al Rajhi Capital Research Department Head Office, King Fahad Road P.O. Box 5561, Riyadh Kingdom of Saudi Arabia research@alrajhi-capital.com Al Rajhi Capital is licensed by the Saudi Arabian Capital Market Authority, License No /37. Disclosures Please refer to the important disclosures at the back of this report. 6