Research Sipchem TASI · characteristic to continue. In 2007, world demand for methanol was about 39 million tonnes, against the world’s capacity of over 48 million tonnes. Middle

SIPCHEM SICO Research

1

SICO

Research

Sector Petrochemicals

Market Cap USD 2.3 bn

Primary Exchg Saudi Arabia

Other Exchg -NA-

Price^ SAR 25.70

Target Price: SAR 43.10

Reuters: 2310.SE

Bloomberg: SIPCHEM AB

VALUATION RATIOS

2007A 2008E

P/E x 17.1 11.6

P/BV x 3.4 1.6

EV/EBITDA x 10.2 7.2

Div Yld % 3.3% 5.2%

TRADING DATA

Daily Vol (1Y Avg) 2.6mn

Daily T/o (1Y Avg $) 83.1mn

Issued Ord. shares (mn) 333.3

^Price as on Sep 27, 2008 2007 ratios based on 2007 avg share price.

Sep 28, 2008

Saudi International Petrochemical Company

Methanol represents a highly competitive commodity business, with prices

historically characterized by significant cyclicality, and we expect this

characteristic to continue. In 2007, world demand for methanol was about

39 million tonnes, against the world’s capacity of over 48 million tonnes.

Middle East countries’ share of world methanol capacity stood at 20% in

2007, and is expected to increase further to 24% by 2010. This increase is

primarily driven by a capacity ramp up in Iran and recent addition of 1.7 mn

tonnes capacity by SABIC in Saudi Arabia.

Saudi International Petrochemical Company (Sipchem) accounts for nearly

2% of the world’s methanol capacity. Based on our analysis, Sipchem lies in

the top quartile in terms of margins in the methanol industry, but earnings

remain susceptible to bouts of cyclicality in methanol prices. The company’s

venture into downstream products - acetic acid and vinyl acetate - will

position Sipchem in the zone of relatively stable margins, and aid in

furthering its competitive advantage, which currently stands on the pillar

of cheap feedstock- natural gas.

Net Profit EPS ROE ROA

SAR mn Income chg (%) (SAR) (%) (%)

FY07A 1,528 1,089 594 20% 1.8 22% 15%

FY08E 2,025 1,345 737 24% 2.2 18% 13%

FY09E 2,206 1,462 712 -3% 2.1 13% 11%

FY10E 3,523 2,012 927 30% 2.8 15% 12%

FY11E 3,316 1,868 881 -5% 2.6 14% 11%

CAGR (07-11E) 21.4% 14.4% 10.4% NA 10.4% NA NA

Key Financials

Revenues EBITDA

Capacity expansion to boost the earnings growth- Sipchem is ramping up

its production capacity through its planned venture of 440,000 MT of acetic

acid and 450,000 MT of vinyl acetate monomer (VAM). The added capacity

expansion is expected to come online by 3Q 2009, and be fully operational

by end 2009.

Initiating with an “Overweight’ rating: We initiate our coverage of Sipchem

with an “Overweight” rating based on our fair value of SAR 43.10 per

share, offering 68% upside potential from the current price. The stock is

currently trading at 14.4 times its 2007 earnings, and 11.6 times its 2008E

earnings.

Although, near term valuation multiples suggest a rich valuation, we would

highlight that the company’s new venture will start generating cash by the

second half of 2009, with Sipchem realising the full benefits in 2010. We

strongly believe that market is not fully accounting for the upside that

would accrue from the acetyl project. Our bullish outlook on the new

project convinces us of further upside in the stock from current levels.

© SICO 2008 All Rights Reserved

Attention is drawn to the disclaimer and other information on Page 46

Ankit Gupta Tel. (973)1751 5000 (ext 5063)

[email protected]

Integration is the key

GCC Equities

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Sipchem TASI


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Contents

Investment Arguments .................................................................. 3

Investment Case .......................................................................................... 3

Risks ............................................................................................................. 4

Valuation & Recommendation ...................................................... 5

Discounted Cash Flow Method .................................................................. 5

Relative Valuation ...................................................................................... 7

Trading & Price Performance ................................................................... 10

Sipchem’s 2Q08 – Result Review ............................................................. 11

Business Description ..................................................................... 12

Company Structure ................................................................................... 12

International Methanol Company (IMC) ................................................ 13

International Acetyl Company (IAC) ....................................................... 23

International Vinyl Acetate Company (IVAC) ......................................... 26

Olefins complex ........................................................................................ 29

Management ............................................................................................ 30

Income Statement Analysis ...................................................................... 31

Balance Sheet Analysis ............................................................................. 33

Cash Flow Analysis .................................................................................... 34

Industry Overview and Outlook ................................................... 35

Methanol .................................................................................................. 35

Acetic Acid ................................................................................................ 40

Vinyl Acetate monomer ........................................................................... 43

Financial Statements and Key Ratios ............................................ 44


3

Investment Arguments

Investment Case

Expansion to boost earnings- The acetyl project will come online by 3Q

2009, and would more than double Sipchem’s production capacity, from

the current 1.07 million tonnes. Based on our estimates, the acetyl

complex will be the main contributor to earnings.

Operating rates to remain high over the cycle –Sipchem is better

positioned to weather negative price headwinds due to its feed stock

cost advantage, and accordingly can continue to operate at higher

utilization rates. We expect the company’s average utilization rate to be

in the range of 90% to 96% over 2008-2010. Even with our bearish

methanol price outlook, the cash margin for the company is expected to

be at robust levels.

Integration is the key – Sipchem’s business strategy to venture into

downstream products provides vertical integration to the company. This

integration aids in realizing economies of scale and lower total

structural costs. Integration for a commodity player allows the company

to leverage its current capability by broadening its product offering with

minimal incremental capital. Besides, an integrated petrochemical player

should command a higher trading multiple as compared to a pure

commodity player because of comparatively higher earnings visibility,

increased resilience to feedstock price volatility, and accordingly,

capability to offer better margins over the cycle.

Earnings growth to pace in 2010 – We are bearish on methanol prices

and accordingly on Sipchem’s earnings growth in the near term.

However, we expect earnings to grow by 30% yoy in 2010 even after

accounting for our bearish methanol price outlook and expectations of a

petrochemical cycle downturn by mid 2009. Our bullish stance on

earnings growth is primarily driven by our expectation of full year

earnings accretion from the acetyl project. We expect earnings to grow

by 24%, -3% and 30% in 2008E, 2009E and 2010E respectively.

Valuation attractive based on 2010 multiples – Sipchem is currently

trading at 7.2x times its 2008 estimated EBITDA. Although, the valuation

appears expensive as compared to our peer group average of 6.1x, we

feel that the company is undervalued based on its 2009 and 2010

multiples. We expect the company’s earnings to peak in 2010, which will

be the first year wherein the company would realize the full accretion

from its expansion plans. We value the company at 8.0x based on its

FY10 estimated EBITDA.

Sipchem commands a premium over its peers because of its better

product portfolio coupled with feedstock advantage and product off-

take contracts with global majors. We feel that the recent correction in

the share price was largely due to market expectations of an

international petrochemical cycle downturn and a weak 2Q financial

performance. Accordingly the correction is overdone and we expect the

company’s share price to reach its fair value as the broader market

realizes the upside potential from the company’s expansion plan.


4

Risks

Exposure to volatile markets – We consider the methanol market to be a

riskier one, because of the highly cyclical nature of the business.

However we feel that in the case of Sipchem, the volatility will be

partially mitigated, post the acetyl project coming on-stream.

Dramatic change in feedstock prices- Sipchem receives its main

feedstock, natural gas from Saudi Aramco at a steep discount to market

prices. Any substantial change in raw material prices could affect this

competitive advantage of the company and can make its products

uncompetitive in global markets.

Delay in the capacity addition – We have assumed the new capacities to

be fully operational by the end of 2009. Any further delay in the project

will decrease our earnings estimates and valuation, while capacity being

operational sooner than estimated, would commensurately provide

upside both to our earnings estimates and fair value.

Continual weakness in the global economy- We expect the global

economy to start recovering from current weakness by 2010. Any

prolonged global weakness will hurt the demand, and price, for

petrochemicals. This will affect our earnings estimates negatively and

result in downside to our valuation.

Olefin project not accounted. We have not accounted for any upside

from the announced olefin complex project due to lack of visibility. We

will update our model as and when the details are announced by the

company.

Imposition of ban on end products will be detrimental to demand-

Methanol drives much of its demand from MTBE and formaldehyde,

which are being warned as dangerous to environment and public health.

Any further evidence to reinforce the negative impacts of their usage on

public health would be detrimental to demand, and price, of methanol.


5

Valuation & Recommendation

We initiate our coverage of Saudi International Petrochemical Company

(Sipchem) with an “Overweight” rating and a fair value target of SAR

43.10 per share. At current levels the stock provides an upside potential

of 68%.

Price Weightage

Dis counted Cas h F low Method 53.70 50.0%

Price/ Earnings 32.50 25.0%

EV/EBITDA 32.30 25.0%

Share Price, SAR 43.10

Source: SICO Research

We have used a blended valuation method using both absolute and

relative valuation methods. We have also assigned a weightage of 50%

to the absolute (Discounted Cash flow) valuation method and 50% to

the combined relative valuation methods (Price to Earnings multiples

and EV/EBITDA multiples). In the relative valuation method, we have

used our 2010 estimates, and have adjusted the same by discounting

them to current levels. We have used 2010 estimates as it captures the

upside potential from the ongoing expansion plans of the company.

Calculation of Ups ide (Downs ide)

Fair Value per share, SAR 43.10

Current Price, SAR 25.70

% Up (Down) Side from Current Price 67.7%


Discounted Cash Flow Method

We consider Discounted Cash Flow to be an apt method to value

Sipchem, considering the cyclical nature of the business and volatility of

the company’s earnings based on expected commodity prices.

Beta: We have assumed an adjusted beta of 0.95, using the returns of

the security since its IPO (2006) compared to Saudi market (Tadawul).

Risk Free Rate: We have used the average of US 10-year and 30-year

Treasury as benchmark risk free rate given that Saudi Riyal is pegged to

the US Dollar. The US 10 Year Yield is taken as 3.8% and US 30 Year

Yield is taken as 4.2%.

Equity Risk Premium: We have assumed an equity risk premium of 5.8%,

based on global equity and Saudi risk premia.

Based on the above assumptions we arrived at a cost of equity of 9.5%

and a WACC of 8.8%. In addition, we have assumed a perpetual growth

rate of 2.5% to derive the terminal value of the company, which aptly

accounts for cyclicality in the business, the company’s higher

profitability, better management and our assumption of increase in the

price of the main feedstock, natural gas, post 2016.

Based on these assumptions, the DCF method leads to a fair value of SAR

53.80 per share, offering an upside of 109% from the current levels.


6

The table below highlights the key assumptions underlying our DCF

valuation.

Cost of Debt 8.0%

Pos t Tax Cos t of Debt 7.8%

Cost of Equity

Ris k-free rate 4.0%

Equity Risk Premium 5.8%

Beta (x) 1.0

Cost of Equity 9.5%

Target Debt/Total Capital 40.0%

WACC 8.8%

Terminal Growth Rate 2.5%

2008 E Enterprise Value (mln SAR) 21,274

2008 ENet (debt)/cash (mln SAR) (459)

2008 E minority interest (mln SAR) (2,396)

Implied equity value 18,419

No. of Shares Outs tanding (mn) 333.3

Fair value per share as at Dec 08E (SAR) 55.3

Fair value per share (adj to current date) 53.7

Around 77% of DCF based value is derived from the terminal value. This

makes the valuation extremely sensitive to the cost of capital and

terminal growth rate assumptions.The sensitivity of valuation to the

assumed WACC and terminal growth rate is presented in the table

below.

53.7 1.5% 2.0% 2.5% 3.0% 3.5%

6.8% 69.2 76.0 84.5 95.1 109.0

7.8% 56.3 60.8 66.2 72.8 80.9

8.8% 46.9 50.1 53.8 58.2 63.4

9.8% 39.8 42.2 44.9 47.9 51.5

10.8% 34.2 36.0 38.1 40.3 42.9

WA

CC

Terminal Growth Rate

Sensitivity to commodity prices – Sipchem’s earnings exhibit a strong

sensitivity to underlying commodity prices - methanol, acetic acid and

vinyl acetate monomer prices (VAM). The difference in the realised

prices from our assumptions could substantially impact our earnings

estimates. Refer to the industry section for impact of change in

underlying prices on our earnings estimates.


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Relative Valuation

We have used EV/EBITDA and PE multiples to arrive at a fair value for

Sipchem in comparison to its global peers. The relative valuation

method enables investors to have a fair idea on how Sipchem is

positioned within the global petrochemical industry. Sipchem commands

a premium valuation to its global peers, as its profitability is

unparalleled in the industry and we expect Sipchem to further this

competitive edge through its venture into the acetyl intermediaries

segment, expected to be operational by mid 2009.

Currently Sipchem is a pure methanol play; the commodity is very

cyclical, and we expect prices to correct in the medium term. But post

2009, the company’s venture into the acetyl intermediaries will provide a

degree of diversification and resilience to the company’s earnings. Based

on our analysis, the acetyl business offers better fundamentals in the

medium term and lesser cyclicality.

It is worth nothing that valuing the commodity chemical business using

valuation multiples is counterintuitive; with multiples getting

compressed in the period of near term peak earnings. This duly reflects

the investor unwillingness to bid up the shares. As earnings are revised

downwards, the absolute and relative valuation multiples of most

commodity sensitive companies expand to reflect depressed earnings.

Hence, we consider valuing a company at normalised earnings over the

cycle offers better insight.

We expect earnings in the methanol segment will peak by the end of

2008 to mid 2009 and decline over the cycle, with trough expected in

2011. Having said that, we do not expect methanol prices to correct to

2005 levels, and expect the long term price support at $325/tonne.

For acetyls, we expect the tight supply-demand dynamics, and robust

expected demand for acetic acid and its derivatives to support prices

during our forecast period (2008-12E).

Discussion on Target multiples

Sipchem is currently trading at multiples of 11.6x and 12.0x based on FY

08E and FY09E estimated earnings. Also, on EV/EBITDA basis, the

company is trading at 7.2x and 6.6x based on our FY08E and FY09E

EBITDA estimates. These trading multiples represent a premium to its

global peer group as shown below. Accordingly, Sipchem should

command a premium because of its higher profitability and its

enhancing product portfolio.


8

Company Sipchem CE MEOH Sabic Dow Eas tman Honam Average

BBG Ticker SIPCHEM AB CE US MEOH US SABIC AB DOW US EMN US 011170 KS

Price 25.7 30.3 21.3 100.0 34.0 58.0 71700.0

Crncy SAR SAR USD SAR USD USD KRW

Mkt Cap (US$mn) 2,287.1 4,542.0 1,996.3 79,877.5 31,421.2 4,429.3 1,961.8

PER

2007 14.42 11.25 5.76 11.10 11.21 15.97 4.93 10.66

2008E 11.62 7.75 8.39 10.27 10.99 10.86 6.16 9.43

2009E 12.03 7.17 9.10 10.31 11.69 10.59 6.45 9.62

EPS Growth(%)

2007 20.3% 7.6% -16.7% 33.1% -21.7% -27.1% 21.4% 2.4%

2008E 24.1% 45.1% -31.3% 8.1% 2.0% 47.1% -20.0% 10.7%

2009E -3.4% 8.0% -7.9% -0.3% -6.0% 2.5% -4.4% -1.6%

EV/EBITDA(x)

2007 8.9 6.9 3.7 7.9 6.9 5.6 5.2 6.4

2008E 7.2 5.2 4.9 7.1 6.7 5.7 6.0 6.1

2009E 6.6 5.1 4.8 7.5 6.9 5.6 5.7 6.0

EBITDA growth(%)

2007 14.2% 8.6% -18.5% 31.5% -10.8% -11.3% 3.1% 2.4%

2008E 23.5% 33.1% -25.5% 10.4% 2.9% -1.9% -14.0% 4.1%

2009E 8.7% 2.2% 2.3% -5.1% -2.8% 2.1% 6.2% 2.0%

PBV

2007 2.9 4.6 1.6 3.3 1.6 2.2 0.8 2.4

2008E 1.6 3.9 1.3 2.7 1.6 2.2 0.7 2.0

2009E 1.5 3.0 1.2 2.3 1.5 2.2 0.7 1.8

Source : Bloomberg, SICO Research

Relative Valuation Metrics ( Global peers )

The chart shown below compares the CAGR growth in revenue and net

income for Sipchem and its global peers during 2005-2008E. The

company leads its peer group in both matrices, and this fact is further

augmented by the high average net margins of 40% (2005-08E) for

Sipchem.

Graph 1: CAGR 05-08E Revenue and net income growth

0%

10%

20%

30%

40%

50%

-20%

-10%

0%

10%

20%

30%

40%

50%

SIPCHEM CE US MEOH US SABIC AB DOW US

Revenue Growth(LHS) Net Income Growth(LHS) Net Margins(RHS)

Source: Bloomberg, SICO Research

Since the Oct 2006 IPO, Sipchem has traded at multiples of 11.9 - 29.6x

on a 1-year forward PER basis. Currently the company is trading at 12.0

times 2008E earnings.


9

The trading multiple seems rich for a commodity player at the expected

peak earnings, but reflects the growth potential the company offers,

primarily due to its expansion plans. The company is trading at 12.0

times its 2009E earnings, against a peer average of 10.2 times. We

consider that the company should command a premium and value the

company at a multiple of 14x our 2010 estimates, implying a price of SAR

38.9 per share, translating to a current fair value per share of SAR 32.5.

On an EV/EBITDA basis, Sipchem is currently trading at 7.2x and 6.6x

based on our FY08E and FY09E EBITDA estimates. We consider that the

multiple does not capture the growth potential of the company, and

value Sipchem at 8.0x 2010 estimates, implying a price of SAR 38.3, and

translating to current fair value of SAR 32.3.

Graph 2: Sipchem – PER Band

Oct

-06

De

c-0

6

Fe

b-0

7

Ap

r-0

7

Jun

-07

Au

g-0

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Oct

-07

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Fe

b-0

8

Ap

r-0

8

Jun

-08

Au

g-0

8

26x 23x 20x 17x 14x 11x Sipchem

`


Graph 3: EV/EBITDA vs ROCE – Peer group

Sipchem

CelaneseMethanex

SabicDow

Honam

Eastman

0

1

2

3

4

5

6

7

8

0.0 5.0 10.0 15.0 20.0 25.0

20

08

E

EV

/EB

ITD

A(x

)

ROCE(%)



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We estimate the return on capital to decrease to 11% by 2009,

predominantly due to high capex requirements and without any

commensurate cash flows from the incremental capex in 2009. We

expect the return on capital to improve by over 2% in 2010 over 2009,

and expect the Sipchem to generate 6% excess return over the cost of

capital in the longer run.

Our target multiple premiums are justified by the high EBITDA margins

the company has generated over the years as compared to its peers. The

expansion venture should further improve its product portfolio and

margins.

Graph 4: EBITDA and EBITDA growth – Peer group

0%

20%

40%

60%

80%

-10%

0%

10%

20%

30%

40%

SIPCHEM CE US MEOH US SABIC AB DOW US

EBITDA Growth(LHS) EBITDA Margin(RHS)


dddddd

Trading & Price Performance

Sipchem is a prominent player in the Saudi petrochemical industry, with

a market capitalization of over 8.5 bn SAR (~2.3 bn USD). The company’s

stock has a weightage of 1.4% in Saudi Arabia’s main index, Tadawul,

and is among the most actively traded shares on Tadawul, with average

volumes of over 2.6 million shares during the last year.

Graph 5: Sipchem – Trading Pattern

0

2,500

5,000

7,500

10,000

12,500

15,000

17,500

20,000

22,500

20

25

30

35

40

45

50

Dec-

06

Feb

-07

Ap

r-07

Jul-

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Dec-

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Feb

-08

Ap

r-08

Jul-

08

Sep

-08

Vo

lum

es(

'000s)

Pri

ce (SA

R)

Volume (000's) Price

Source: Company Reports


11

Net margins are highly

volatile, ranging from

26.8% to 51.1% during the

last 8 quarters.

Sipchem’s 2Q08 – Result Review

2Q08 Revenue up 24.9% y/y, down 29.3% q/q -Sipchem reported 2Q08

revenue of SAR 413 mn, an increase of 24.9% y/y and a decrease of

29.3% q/q. Revenues were negatively impacted on quarterly basis

because of low 2Q methanol prices, which were down nearly 32% q/q.

2Q08 Gross margins declined to 70.8%, from 2Q07 margins of 72.7% -

Gross margins declined by 190bps over 2Q07, and 480 bps over 1Q08.

The decline in margins was primarily because of a 20-22% q/q increase in

butane prices and low methanol prices in 2Q. Sipchem has high

operating leverage because of relatively fixed cost structure, with

natural gas being procured at fixed costs.

Adjusted 2Q08 EPS at SAR 0.40, up 33.6% y/y, down 42.3% q/q – 2Q08

reported earnings was SAR 133.3 mn, representing a margin of 32.3%.

Net margins increased 200bps y/y while declined 730bps q/q. We

estimate Butanediol(IDL) currently contributes nearly 20% to revenues,

while contribution to net margins is less than 5%, thus dragging total

net margins lower. Although, the company does not provide segmental

details, based on our estimates net margins in Butanediol is relatively

less (~5-10%), because of high butane cost (nearly 65%-70% of global

prices) and low capacities, leading to inefficient operations.

Graph 6 : Sipchem- Revenues, Gross Profit and Net Margins

0%

10%

20%

30%

40%

50%

60%

0

100

200

300

400

500

600

700

Q3'06 Q4'06 Q1'07 Q2'07 Q3'07 Q4'07 Q1'08 Q2'08

Revenues (SAR mn) Gross Profit (SAR mn) Net margins

Source : Company Reports, SICO Research

Debt increased by 58% over 1Q08 to SAR 1.5bn – Debt increased due to

high capex plans to finance the acetyl project. Capex for 2Q08 was

SAR782mn versus 747mn in 1Q08 and SAR 346mn in 2Q07. We see debt

levels increasing further to about SAR2.8bn by end of 2008.

Q2'08 Q2'07 Q1'08 y/y q/q

Revenue 413.0 330.8 584.5 24.9% -29.3%

COGS 120.6 90.3 142.8 33.5% -15.5%

Gross Profit 292.5 240.5 441.7 21.6% -33.8%

G&A expense 16.0 15.7 14.1 1.9% 13.5%

Interest Exp. 18.8 22.1 27.3 -15.1% -31.1%

Net Income 133.3 100.1 231.6 33.2% -42.4%

EPS 0.40 0.30 0.69 33.2% -42.4%

Company Reports, SICO Research.

Note : Adjusted for share dividend, splits and rights.

Comments

Methanol prices decreased by over 14% q/q

Production of butanediol declined q/q

Lower methanol prices coupled with increase


12

Business Description

Saudi International Petroleum Company (Sipchem) is a leading Saudi

private sector petrochemical company. Sipchem started its commercial

operations in Dec 2004, and currently has a total production capacity of

1.075 mn tonnes per annum, including 1.0 mn tonnes capacity of

methanol and 75,000 tonnes of butanediol.

Sipchem was established in December 1999 as a Saudi closed joint stock

company with an initial paid up capital of SAR 500mn. It went public in

November 2006 by issuing 45 million shares, representing 30% of the

company’s share capital at an offer price of SAR 55 per share.

Graph 7 : Shareholding structure

Zamil

Group

9%

National

Industries

Group

8% Ikarus

Petroleum

8%Olayan

Financing

Co

7%

Public

Pension

Agency

6%Al Ghurair

Investment

4%

Other

Financial

Institutions

14%

Public

44%

Source : Zawya

Company Structure

Sipchem operates through various subsidiaries, producing different

products across the petrochemical chain. The main subsidiaries are:-

- International Methanol Company (IMC)

- International Diol Company (IDL)

- International Acetyl Company (IAC)

- International Vinyl Acetate Company (IVAC)

- International Gases Company (IGC)

SIPCHEM

IVAC

72%

IGC

72% IMC

65%

IAC

72%

IDL

54%


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International Methanol Company (IMC)

International Methanol Company (IMC) is a Saudi limited liability

company established in 2003. The principal activity of IMC is the

manufacture and sale of methanol. Sipchem owns 65% stake in IMC,

with the rest owned by Japan-Arabia Methanol Company (JAMC), a

consortium of Japanese companies led by Mitsui Chemicals.

Graph 8 : IMC Shareholding pattern

SIPCHEM,

65%

Mitsui,

55%

Mitsubishi,

15%

Daicel,

15%

Lino Kaiun

Kaisha, 15%

JAMC, 35%


IMC owns and operates a Methanol plant in Jubail, Saudi Arabia with a

production capacity of 1.0 mn metric tonnes per annum (mtpa). The

plant started its commercial operations in Dec 2004, and since then the

plant is operating at nearly or over 100% utilization rates.

Production Process

IMC operates proven steam methane reforming and methanol synthesis

technology licensed by Jacobs Engineering UK Limited (Jacobs). The

production process starts with purification of natural gas, which then is

converted into Syn gas, consisting of CO2, CO, water and hydrogen by

catalytic reforming of methane and steam. CO and Hydrogen in Syn gas

is then catalytically converted to produce Methanol.

Feedstock

The main feedstock for the production is natural gas, which Sipchem

receives from Saudi Aramco under a long term contract at a fixed price

of $0.75/MMBtu. The contract was signed in March 2001 and has a term

of 30 years.

The natural gas price under the contract has been unchanged since

signing, and the Saudi Ministry of Petroleum and Mineral Resources has

announced a policy decision stating that prices will remain fixed at this

level for projects that are brought on-stream before 31 December 2008

for a period of seven years following the start-up of such projects. We

have assumed that the natural gas will be supplied at the same rates

(USD0.75/MMBTU) to SAFCO until 2015, and thereafter, will be charged

at USD1.5/MMBTU, which will still offer a steep discount compared to

current global natural gas prices.

We judge that these lower prices would not be affected by WTO

regulations. Saudi authorities advocate that low support prices of LNG

feedstock, which includes natural gas and LPG, are in full compliance of

WTO regulations on the following grounds-


14

Support prices are determined considering the alternative use of

feedstock i.e. exports. In case of exports, alternate cost consists

of the costs of developing infrastructure and shipping the

product to major export markets. The cost of logistics was

estimated to be about 30 percent of Saudi export price.

Accordingly, where LNG is used locally for petrochemicals, price

would be 30 percent less than the export price, reflecting savings

in logistics costs.

There is no disparity in gas prices, as lower cost is available to

anyone willing to invest in Saudi Arabia, and thus the policy

should be considered as a move to promote Saudi industry.

Government is not providing any subsidy on gas, per se, and

support prices duly accounts for the commercial considerations

i.e. full recovery of costs and a reasonable profit. Given that

liquefied natural gas (LNG) is primarily extracted from associated

gas, which is a by- product of crude oil production, its production

cost is modest and hence provides the region a natural feedstock

advantage.

Because of the above factors, we judge that the region is in a position to

supply gas at low prices, which offer a substantial discount to global

prices. The fixed price long term contract provides an unparalleled

competitive advantage to Sipchem. These contracts have led to higher

margins for the company in a period of increasing global natural gas

prices, with the high cost marginal producers in the US setting the

methanol prices. This increase in prices of end products percolates to the

bottom line margins for Sipchem because of its high operating leverage.

According to our estimates, the gas supply contract provides enough gas

to operate at levels of maximum 113%. Thus, we see this to be the

highest benchmark at which IMC can operate even after deploying de-

bottlenecking measures. We expect the company to maximize its

operating rates to capitalize on the high operating leverage that is been

presented in the methanol business in the region and due to cheap

feedstock.

Marketing

IMC has a marketing contract with JAMC, under which JAMC will off-

take most of the methanol production after meeting the subsidiaries’

methanol requirements. JAMC has the right to sell the methanol in all

international markets, except in the Middle East where Sipchem directly

markets the product. According to the contract with JAMC, IMC provides

methanol to JAMC at prices related to market prices. In addition, IMC

must deliver at least 800 metric tonnes of methanol per contract year to

JAMC.

Since IMC’s inception in 2005, about 95% of methanol produced is sold

internationally but primarily in Europe and Asia, with the rest being sold

in the Middle East. The central location of the plant enables IMC to

economically ship product to Europe, the Middle East, Africa and the Far

East.


15

Graph 9 : Geographic Sales Percentage by Region

0%

20%

40%

60%

80%

100%

2004 2005 2006 2007

Middle East Europe Asia


IMC also has a contract with International Diol Company (IDL) to deliver

a maximum 8,000 metric tons of methanol per contract year at a

purchase price determined by average of the FOB price of methanol

traded in major regions for the 3 months preceding the month in which

the methanol is been delivered.

Sales and margins

Sales are primarily a function of methanol price and plant operating

rate. We judge Sipchem to lie in the lowest quartile of the cost curve in

methanol production, and hence expect the company to continue

operating at higher levels. Since inception, the plant is operating at

nearly, or over, 100% utilization rate.

Graph 10 : Production and operating rates

85%

90%

95%

100%

105%

110%

115%

800.0

850.0

900.0

950.0

1,000.0

1,050.0

1,100.0

1,150.0

2005 2006 2007 2008E 2009E 2010E

('000 M

T)

Production(LHS) Operating Rate(RHS)


We see methanol as a highly volatile commodity, and expect prices to

correct in the medium term as we expect a deteriorating supply-demand

dynamic. (Refer to the industry section for details). Over the last five

years, methanol prices exhibited a high volatility of 31%.


16

Graph 11 : Methanol Prices ( CRF South East Asia prices)

0

100

200

300

400

500

600

Jun

-03

Dec-

03

Jun

-04

Dec-

04

Jun

-05

Dec-

05

Jun

-06

Dec-

06

Jun

-07

Dec-

07

Jun

-08

($/t

on

)


Currently, most of the methanol produced by IMC is sold in the open

market; going forward (post 2Q 2009) we feel that nearly 25% of the

production will be routed to Sipchem’s subsidiary, International Acetyl

Company (IAC) for production of acetic acid. We suppose that methanol

supplied to IAC will be at manufacturing costs; accounting for various

factors including the actual variable production cost, direct fixed

production cost and capital expenditure.

We see the use of methanol for acetic acid production to provide

Sipchem with substantial integration advantage, helping the company

to partially hedge itself from substantial methanol price volatility, thus

providing a degree of stability to revenues and margins.

The graph below depicts revenues and margins of the subsidiary over

the years.

Graph 12 : IMC Revenues and Margins

78%

79%

80%

81%

82%

83%

84%

85%

86%

0

200

400

600

800

1,000

1,200

1,400

1,600

2007 2008E 2009E 2010E

Revenue(LHS) EBITDA(LHS) EBITDA margin(RHS)


IMC’s cost structure is relatively fixed with its major feedstock - natural

gas - procured at fixed costs. Thus, the cash cost of sales per tonne

increased by just over 3% from 2005 to 2007 according to our estimates.


17

We see this as an opportunity for IMC to capitalize on its high operating

leverage, and hence maximize its operating rates.

Like many of the petrochemical players operating in the Middle East, we

estimate that the profitability of IMC improves with higher natural gas

prices. We reckon that for marginal producer (higher cost North

American producers), natural gas accounts for approximately 90% of the

methanol cash costs. As a consequence with the escalation of gas prices,

the cost of production at the marginal facilities increases dramatically,

and consequently, substantially increases the minimum benchmark prices

for methanol, auguring well for methanol producers based in low cost

feedstock regions.

Since the Nov 2006 IPO, Sipchem’s share price and natural gas prices

depict a high correlation of 66.3%; however we expect going forward

this correlation to subdue as the methanol industry is envisioning a shift

in geographical production.

Graph 13: Share price movement with natural gas prices

y = 2.329x + 14.72R² = 0.440

0

10

20

30

40

50

60

4 6 8 10 12 14

Pri

ce(S

AR)

( $/MMbtu)


The competitive advantage in methanol production offered in the GCC

region by the availability of cheap feedstock - natural gas - is

comparatively muted as compared to most of the other basic

petrochemical businesses, where the predominant cost of production is

attributed to feedstock. This is because most of the existing capacity is

based in low cost feedstock regions, and further capacity being built and

added in ‘cheap’ gas regions, replacing some older higher cost

capacities. The share of high cost North American and Europe capacities

in methanol declined to 11% in 2007, from 25% in 2002, and is further

expected to decline to 8% by 2010. Having said that, there are concerns

on the availability of gas in many of the low cost regions like Chile, with

the largest producer in Chile now operating at levels of 25%-35% due to

gas unavailability, and which is giving some support to methanol prices.

We remain cautious on methanol prices going forward. We consider SE

Asia methanol prices as a good benchmark for realised prices for

Sipchem as nearly 60% of methanol sales are in Asia. We have assumed

realized methanol prices of $328/tonne, $308/tonne and $277/tonne for

2008, 2009 and2010 respectively in our projections. Higher prices than


18

estimated would provide upside to our valuation; while lower than

estimated prices will lead to a decline in our earning estimates.

2008E 2009E 2010E

20.0% 23.1% 23.2% 13.5%

10.0% 11.5% 11.6% 6.7%

0.0% 0.0% 0.0% 0.0%

-10.0% -11.5% -11.6% -6.7%

-20.0% -23.1% -23.2% -13.5%Me

tha

no

l

pri

ce

s

EPS impact

We expect the contribution of IMC to Sipchem’s sales to decline to 21%

by 2010, from current 74%; primarily because of production of further

downstream product by the company from late 2009 and partly because

of our view that realized prices will be 16% lower in 2010, from 2008

levels.


19

International Diol Company (IDL)

International Diol Company (IDL) is a Saudi limited liability company

established in 2002 with an initial paid up capital of SAR 187.5mn.The

principal activity of IDC is the manufacture and sale of specialty

chemicals such as Butanediol (BDO), Tetrahydrofuran (THF) and Gamma-

butyrolactone (GBL). SIPCHEM owns 53.91% stake in IDC, with the rest

owned by various stakeholders, including PPA, GOSI, Davy and

Huntsman.

Graph 14 : IDL Shareholding pattern

Sipchem,

54%PPA, 19%

Davy, 5%

Hunstman,

5%

Other, 18%


IDL owns and operates a Butanediol (BDO) plant in Jubail, with a

capacity to produce 75,000 metric tonnes per annum (mtpa) of BDO and

its derivative, Tetrahydrofuran (THF). The plant started its commercial

operations in March 2006, and exported about 46 million tonnes in 2006.

Production Process

IDL employs BDO/THF process technology provided by Davy and

Huntsman. This combination of processes is commercially proven, and is

acknowledged as being one of the leading technologies available in the

BDO industry.

The feedstock- butane- received from Saudi Aramco contains a mixture

of iso-butane and n-butane. UOP's r-butamer technology is employed to

produce n-butane through a process that starts by separating iso-

butane, and then rearranges molecules of iso-butane to form n-butane.

The Huntsman process is used to produce MA by catalytic oxidation of n-

butane. Davy's Mark II process is used to convert MA to BDO and THF in

three process stages. The MA is initially esterified with methanol to

dimethyl maleate and is then hydrogenated to the crude product

containing BDO and THF at moderate temperature and pressure. The

crude product is then refined to market quality BDO and THF by

distillation, with methanol recovered for recycling to the esterification

stage.


20

Feedstock

The main feed stocks for the production are butane, methanol and

hydrogen.

Butane is procured from Saudi Aramco at prices which are linked to

Japanese Naphtha prices. We estimate that currently the cost of butane

to the company is about 60-62% to the global prices, thus, providing it

with significant competitive advantage.

According to our estimates butane and propane are currently supplied

at prices calculated by a multiplication factor of 0.68 times Japanese

naphtha prices (after adjusting for transportation costs.) We suppose the

multiplication factor will be gradually increased to 0.70 by 2011.

As per WTO regulations, the discount on Naphtha linked products is

required to be removed gradually (by 2012). Although, the future of the

discounts remain uncertain, Saudi Aramco will continue to offer naphtha

linked feedstock at prices which will enable the linked local

petrochemical industry to be globally competitive. We estimate that the

absence of feedstock cost advantage could result in substantial decline

in the margins of the related business, and at times would result in

negative margins unless been augmented with other value added

products.

Marketing

IDL has off-take contracts with various companies, including Vinmar,

Taminco T.V., Will & Co. and Huntsman for different quantities of BDO

and THF. Although the details of the contracts are not available, we

expect that on an average the agreements cover over 65% of the

maximum production capacity, and the prices are linked to the market.

IDC production is mainly targeted for global markets, primarily Europe

and Asia.

Graph 15: Geographic Sales Percentage by Region

0%

20%

40%

60%

80%

100%

2005 2006 2007

Americas

Asia

Europe

Middle East



21

Sales and Margins

IDL posted sales of SAR 276mn in 2006, which rose by over 28% in 2007

to SAR 353.6mn. We estimate the revenues to post a CAGR growth of

18.8% over 2007-10E to SAR 593mn.

The major cost of producing Butanediol is feedstock cost- - butane which

derives its price from Naphtha prices.

Graph 16 : Butane prices

0

200

400

600

800

1,000

1,200

Fe

b-0

1

Au

g-0

1

Fe

b-0

2

Au

g-0

2

Fe

b-0

3

Au

g-0

3

Fe

b-0

4

Au

g-0

4

Fe

b-0

5

Au

g-0

5

Fe

b-0

6

Au

g-0

6

Fe

b-0

7

Au

g-0

7

Fe

b-0

8

($/t

on

)

Source : Bloomberg

Because of comparatively muted feedstock advantage coupled with sub

optimal capacities, we expect IDL’s margins to be lesser than other of

Sipchem’s business lines, and expect IDL to continue to drive down

Sipchem’s net margins.

We estimate the contribution of IDL to Sipchem’s sales to decline to

17.7% by 2010, from 2007 level of 25.3% primarily because of Acetyl

products coming online in mid 2009. IDL business is a low margin

business for the company, with net margins of about 10% in 2007 (after

adjusting for minority interests). We expect the margin to improve from

the historical levels driven by higher utilization rates and increased

prices.

Historically, the plant has been operating at lower utilization rates

which we are led to believe were due to some performance concerns

with the plant. However these issues are behind them, and going

forward the utilization rates would improve to 80%. Accordingly, we

estimate the business to generate positive returns on net basis, though

at levels of 20-25%.


22

Acetyl complex Sipchem is ramping up its production capacity through its planned

Acetyl complex. The Acetyls Complex is designed to exploit the

competitive advantages of vertical integration across the petrochemical

chain, and will be producing acetyl intermediaries, namely Acetic Acid

and Vinyl Acetate monomer (VAM).

The complex is being build through various subsidiaries namely:

International Acetyl Company (IAC), International Vinyl Acetate

Company (IVAC) and International Gas Company (IGC) and is expected to

be operational by mid 2009.

The diagram below depicts the flow of different products produced by

Sipchem and highlights the integration advantage that the company will

derive, post the operational launch of the acetyl project.

Source: Company Reports, SICO Research

We expect the total project to cost about SAR 7.4 bn, being financed

44% through debt and 56% equity. We estimate the acetyl complex will

start commercial operation by 3Q, 2009 and to be operational at full

capacity by 2009 end.


23

International Acetyl Company (IAC)

International Acetyl Company (IAC) is a Saudi limited liability company

established in January 2006, and is currently 72% owned by Sipchem,

with the rest being owned by Ikarus Petroleum (15%) and Helm Arabia

(12%). IAC is developing an acetic acid plant in the kingdom with a

production capacity of 400,000 metric tonnes per annum (mtpa) of acetic

acid and up to 50,000 mtpa of acetic anhydride. As of 2Q 2008, the plant

is 78% complete, and we expect the plant to be operational by 2Q

2009.This will be the first of its kind plant to produce acetic acid and its

derivatives to be based in Saudi Arabia.

Graph 17 : IAC shareholding structure

Sipchem,

72%

Ikarus*, 15

%

Thales

Intl., 42%

Helm

AG, 58%

Helm

Arabia, 12%


Note- * reflects share sale expected in 4Q, 2008.

Production Process

IAC will use the methanol carbonylation technology to produce acetic

acid (AA) and acetic anhydride (AAn), licensed by Eastman. Globally,

methanol carbonylation accounts for over 77% of acetic acid production,

and is considered to be the most effective way to produce acetic acid.

The production process is based on the reaction between an alcohol,

such as methanol, and carbon monoxide in a liquid reaction medium in

presence of a catalyst. Over the years, the process has seen many

modifications, and currently the technology owned by Celanese (Acid

Optimization plus) is considered to be the most effective.

Feedstock

The main feedstock for the production is methanol and carbon

monoxide. Methanol will be supplied by IMC at cost, while carbon

monoxide will be supplied by International Gas Company (IGC) at a fixed

price of about $185 per metric ton. IMC and IGC have an exclusive

agreement for a term of 12 years, which we expect to be extended later

at terms beneficial to IAC. At full capacity, the plant would require

about 256,000 tonnes per year (mtpa) of carbon monoxide.

Marketing

IAC has a marketing contract with Helm AG to off take up to 150,000

mtpa of acetic acid (equivalent to 38% of the capacity) to sell in

international markets, except in Middle East (excluding Turkey and

North Africa). According to the contract, the purchase price will be

based on the market prices minus marketing costs and fees.


24

In addition, Sipchem has entered into an agreement with Eastman to

off-take up to 50,000 mtpa of acetic anhydride, equivalent to 100% of

the capacity at purchase price linked to the spot market prices.

Sales and margins

Sales are primarily a function of the end product prices (AA and AAn),

production rate of downstream product, Vinyl acetate monomer (VAM)

and operating rates.

Globally, the pricing and profitability of the acetyl chain is not very

transparent, as major raw materials - natural gas and synthetic gas -are

usually procured under long term confidential contracts. Also, the end

market for the products is concentrated, with major sales to a handful

customers. Although, the market for acetic acid is concentrated

providing some pricing power to the producers, we consider it to be

essentially a commodity, though we see the cyclicality in the acetyl chain

to be muted compared to other commodity chemicals (C2 based

chemicals), and hence expect margins to be comparatively stable for this

segment.

Graph 18 : Acetic Acid Prices

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Feb

-01

Au

g-0

1

Feb

-02

Au

g-0

2

Feb

-03

Au

g-0

3

Feb

-04

Au

g-0

4

Feb

-05

Au

g-0

5

Feb

-06

Au

g-0

6

Feb

-07

Au

g-0

7

Feb

-08

($/t

on

)

Source : Bloomberg

We estimate Sipchem realized prices of acetic acid at $970, $780 and

$740 for 2009E, 2010E and 2011E respectively. Though currently globally

announced capacity expansion plans signal an overcapacity by early

2010, we expect the expansion plans to be delayed, and expect the

market to be tight until the end of 2010 to early 2011. Also, we expect

some rationalization of high cost capacities to keep the operating rates

at elevated levels, and support prices.

Currently, its been estimated that over 15% of the world capacity is

based on high cost capacity i.e. based on ethylene and ethanol. The

share of high cost capacity is expected to go down to 10% over the

forecast period because of a ramp-up in capacity based on methanol

carbonylation (better, cheaper technology) over the years.


25

2009E 2010E 2011E

20.0% 2.4% 9.1% 9.5%

10.0% 1.2% 4.5% 4.8%

0.0% 0.0% 0.0% 0.0%

-10.0% -1.2% -4.5% -4.8%

-20.0% -2.4% -9.1% -9.5%

EPS impact

Ace

tic

Acid

pri

ce

s

We expect the margins for IAC to be amongst the best in the industry

because of integration of the IAC plant with methanol plant, and the

availability of methanol at cost, which is lower given cheap feedstock.

We anticipate the product to be mainly marketed in Europe, and see the

dominant position of Helm AG in Europe to aid in sales of the product.

We estimate IAC to contribute 4.7% to Sipchem’s revenues in 2009E,

increasing to 14.9% primarily because of being fully operational in 2010.

IAC will aid in augmenting the benefits of the cheap production cost of

methanol. At full capacity, IAC would require about 248 Ktpa of

methanol equivalent to about 25% of the nameplate capacity of IMC. In

addition, it would also require about 256 Ktpa of carbon monoxide,

equivalent to 75% of the capacity of IGC. We see the extra methanol

and carbon monoxide capacity providing leeway for future expansion in

IAC’s capacity.

We estimate the cash operating margins for IAC to be about 46.5% in

2009E, declining to 30.6% in 2010E. The margins offered by the business

would be much higher than the global peers.


26

International Vinyl Acetate Company (IVAC)

International Vinyl Acetate Company (IVAC) is a Saudi limited liability

company established in January 2006, and is currently 72% owned by

Sipchem, with the rest being owned by Ikarus Petroleum (15%), Helm

Arabia (12%) and the Ministry of Endowments (3%). IVAC is building a

Vinyl acetate monomer (VAM) plant in Saudi Arabia with a production

capacity of 330,000 metric tonnes per annum (mtpa) of VAM. We expect

the plant to start operation by 2Q 2009, with full scale operation to be

achieved by 4Q 2009.

Graph 19 : IVAC shareholding structure

Sipchem,

72%

Ikarus*, 15

%

Thales

Intl., 42%

Helm

AG, 58%

Helm

Arabia, 12%


Note- * reflects share sale expected in 4Q, 2008.

Production Process

IVAC will use the catalytic oxidation technology to produce VAM,

licensed by Du Pont. Globally, this process accounts for over 95% of

worldwide VAM manufacturing capacity.

Feedstock

The main feedstocks for the production are acetic acid and ethylene.

Acetic acid will be internally sourced through IAC at cost, while ethylene

will be procured from Saudi Ethylene and Polyethylene Company (SEPC).

Sipchem has entered into a contract with SEPC to provide ethylene at

prices linked to European contract prices, and adjusted for duties and

freight costs. At 100% operating rate, VAM plant will require about

218,000 mtpa of acetic acid, equivalent to 47% of the AA production

capacity of IAC.

Marketing

IVAC has signed a marketing contract with Helm AG to off-take a

minimum of 60% of the VAM produced per annum, with a cap of

maximum 240,000 mtpa, translating to 72.7% of the nameplate capacity.

Under the contract, Helm has exclusive rights to sell VAM in: (1) Central

and South America (excluding the United States, Canada and Mexico),

(2) Europe, (3) Asia Pacific (excluding the Middle East and Pakistan), (4)

Africa, (5) Turkey, and (6) India (only up to the fifth anniversary of the

VAM Plant's first commercial production date).

Sipchem will sell the remaining quantities of VAM produced directly in:

(1) the Middle East (excluding Turkey and North Africa), (2) Pakistan, and

(3) India (starting from the fifth anniversary of the VAM Plant's

commercial production).


27

Sales and margins

Sales are primarily a function of prices and operating rate. We are

bullish on the company’s margins from IVAC driven by better price

expectations of VAM and lower cost of production as acetic acid, with

the main raw material sourced through IAC at prices reflecting the cash

cost of acetic acid production.

Graph 20 : Vinyl Acetate Monomer (VAM) Prices

0

400

800

1,200

1,600

2,000

Feb

-01

Au

g-0

1

Feb

-02

Au

g-0

2

Feb

-03

Au

g-0

3

Feb

-04

Au

g-0

4

Feb

-05

Au

g-0

5

Feb

-06

Au

g-0

6

Feb

-07

Au

g-0

7

Feb

-08

($/t

on

)

Source : Bloomberg

The plant will operate at high utilization rates, and expect it to operate

at over 90% versus the global utilization rate of 82%.

We estimate IVAC to contribute 10.9% to Sipchem’s revenues in 2009E,

increasing substantially to 36.9% in 2010 as it becomes fully operational.

At full capacity, IVAC would require about 218 Ktpa of acetic acid

equivalent to about 48% of the nameplate capacity of IAC. In addition,

it would also require about 115 Ktpa of ethylene which will be supplied

by Saudi Ethylene and Propylene Company (SEPC).The feedstock, acetic

acid, will be provided internally by International Acetyl Company (IAC)

thus ensuring an uninterrupted supply of feedstock.

We estimate Sipchem’s realized prices of VAM at $1260, $1125 and

$1070 for 2009E, 2010E and 2011E respectively. Any difference in

realised prices as compared to our assumed prices would have an impact

on our EPS estimates as shown in the table below.

2009E 2010E 2011E

20.0% 3.9% 16.1% 16.6%

10.0% 2.0% 8.1% 8.3%

0.0% 0.0% 0.0% 0.0%

-10.0% -2.0% -8.1% -8.3%

-20.0% -3.9% -16.1% -16.6%

EPS impact

VA

M p

rice

s


28

International Gases Company (IGC)

International Gases Company (IGC) is a Saudi limited liability company

established in May 2005. The company is currently 72% owned by

Sipchem, with rest being owned by the National Power Company (25%)

and the Saudi Ministry of Endowments (3%). The plant is designed to

produce up to 340,000 mtpa of Carbon Monoxide (CO), and is expected

to be operational by April 2009.

Graph 21 : IGC Shareholding structure

Sipchem72%

NPC 25%

Govt., 3%


Production Process

IGC will use methane steam reforming technology to produce Carbon

monoxide (CO), licensed by Lurgi. Methane steam reforming is a widely

accepted and commercial process to produce CO.

Feedstock

The main feedstock, natural gas (methane) will be supplied by Saudi

Aramco. Although, the details of the contract are not available, we

estimate the supplies to be in line with other natural gas contracts in

Saudi Arabia i.e. to be supplied at $0.75/MMBtu. We have assumed the

prices to be constant till 2015, and thereafter been increased to

$1.50/MMBtu.

Sales and Margins

IGC will be an exclusive supplier to IAC to meet its carbon monoxide

requirements. At 100% utilization rate, IAC would require about 256

ktpa of carbon monoxide, equivalent to 75% of the name plate capacity

of IGC plant. We expect the IGC plant to operate at 68%-76% during our

forecast period. We see the excess capacity to provide leeway for future

expansion plans.

The operating rate of IGC will be guided by the production rates of

acetic acid by IAC. Although, the end product, CO will be sold at fixed

prices, we expect IGC to realize high margins.

Carbon monoxide will be produced by the steam reforming process; the

same process can be used to provide feedstock to a methanol or

ammonia plant, and therefore, we cannot discount the possibility of the

company leveraging on this operation by building an ammonia plant,

which is highly plausible, or further increase its methanol capacity.


29

We would consider the establishment of an ammonia plant to be a

major boost to the subsidiary’s earnings in the medium term.

Recently, we heard that SAFCO is entering into tolling arrangement with

Sabic to utilize its access gas allocated for production of methanol by

Sabic’s Ar Razi-5 plant.

Olefins complex

In 2007, Sipchem announced its plans to build an olefin complex

comprising of an ethane cracker, an HDPE plant with a capacity of 400

Ktpa, a LDPE plant with a capacity of 400 Ktpa, an ACN plant with a

capacity of 200 Ktpa and a MMA plant with a capacity of 250 Ktpa. In

addition, the company has also announced a plan to build an ammonia

plant with a capacity of 600 Ktpa. Earlier this year, Sipchem reported

that that it expects the olefin complex to come on stream by end 2009,

and expects it to cost over SAR 30 billion.

In mid 2008, the company announced that it had scrapped its plan to

build an ethane cracker under its olefin complex, preferring to source

ethylene and propylene from current operating crackers in Saudi to feed

its plants planned under olefin complex. The company is likely to

undertake toll contracts with Sabic to provide ethylene and propylene,

but due to lack of clarity we have not accounted for any upside from the

planned olefin venture. We will update our projections once more

details are furnished by the company.

Additionally, we judge that the company will gradually proceed with its

ammonia venture as it is already producing hydrogen (part of feedstock

to produce ammonia) from its subsidiary, International Gas Company.

We do not have any clarity on the time frame for this venture as well,

and accordingly have not accounted this in our projections. We see any

concrete steps to develop this facility as a major upside to our

projections.


30

Management

Abdulaziz A. Al-Zamil – Chairman

Mr Zamil heads Sipchem’s board of Directors. A Masters in Industrial

Engineering from the US, he served as Vice Chairman and CEO of Sabic

from 1976 to 1983. He also held positions in the Saudi Ministry of

Industry and Electricity for over 12 years, and currently is the chairman

of al Zamil Group, a diversified industrial group based out of Saudi

Arabia.

Ahmad A. Al-Ohali – Executive President

Mr Ohali has held the position of President of Sipchem since 1999. A

pioneer in the petrochemical industry, Mr. Ohali has served at

prestigious positions across the Saudi petrochemical industry. He held

the position of GM –Operations at National Methanol Company, a

subsidiary of Sabic from 1981 to 1996, before joining Saudi German Co.

as its President in 1996.

Abdulrahman A. Al-Saif – President, IDL and IDC

A BS in Chemical Engineering, Mr Saif joined Sipchem in 2001, before

serving for over 20 years in Al-Jubail Petrochemical Company (Sabic).

Abdullah S. Al –Saadoon – President, IAC, IVAC and IGC

Mr Saadoon completed his BS in Chemical Engineering in 1980, and

thereafter joined SWCC. After serving a seven year stint with the

company, he joined National Methanol Company (Sabic) and held the

position of GM-Operations before joining Sipchem in 2001.

Abdullatif M. Bhairi – V.P. Planning and Project Development

Mr Bhairi is a PhD in Chemical Engineering from Oklahoma University,

and has served in various industrial and academic organisations across

the globe before joining Sipchem.

Kevin J. Hayes- Vice President, Corporate Planning

Mr. Hayes is a Bachelor in Business Administration from Florida

University, U.S. In his professional career, he has worked with many

global leaders in energy including Enron Corp., and Dresser. Before

joining Sipchem in 2006, he served for over 11 years at Qatar Petroleum

as a senior financial advisor.


31

Income Statement Analysis

Over the last 3 years, Sipchem’s revenues grew by over 40% CAGR, led by

capacity addition and increased methanol prices.

Currently, revenues are attributed to sales of methanol, butanediol and its

derivatives. We estimate that for FY07 methanol contributed to over 80%

of the sales, with the rest contributed by butanediol. We expect revenue to

grow by 24.5% CAGR for FY07-10, although the contribution of methanol is

expected to gradually decline to nearly 30% during the forecast period,

primarily because of a new acetyl plant coming online and partly because

of our bearish medium term outlook on methanol.

We consider the move into downstream products, acetic acid and VAM to

be positive for the company as it will provide the much needed

diversification and aid Sipchem to be partially insulated from the methanol

cycle, which is very volatile and exposed to medium term pricing pressure.

Graph 22: Sipchem – Revenue contribution by Products

0%

20%

40%

60%

80%

100%

2006 2007 2008E 2009E 2010E

Methanol BDO Acetyl pdts.


Margin analysis

Sipchem enjoys among the best margins in the methanol industry globally.

Although, we expect the company to maintain its leading position, we

expect the gross margins to decline further during our forecast period.

Gross margins declined from 79% in 2005 to 74% in 2007, and expect to

further decline to 58% by FY10. We attribute the decline in margins from

2005 to the addition of Butanediol to the product portfolio of Sipchem in

2006, which we consider to be a low margin business.

We expect the margins to decline further as the company builds on a

current competitive advantage - namely cheap feedstock - and hence costs

are expected to increase at a rate much higher than the revenues. Having

said that we consider the strategy to venture into downstream products to

be beneficial for the shareholders, as it will aid in providing access to a

product line (Acetyls) where the growth is expected to be significantly

higher than the methanol market. Also, it will help the company to

partially insulate itself from the bouts of cyclicality in the methanol market.

In comparison to its global peers, we expect the margins to remain in the

top quartile in the industry.


32

We estimate that the cash cost per tonne of sales increased merely by 4-5%

in the last 3 years, versus revenue increased by over 15-17% over the same

period. This signifies the high operating leverage Sipchem enjoys, bolstered

by access to main feedstock - natural gas - at fixed prices.

Graph 23: Sipchem – Revenues, Profit and margins

0%

20%

40%

60%

80%

0

1,000

2,000

3,000

4,000

2006 2007 2008E 2009E 2010E

Revenues(LHS) Gross Profit Net Profit

Gross Margins Net Margins


We see the use of methanol (about 25% of production) internally to

provide dual benefits to the company, namely access to the downstream

product line and medium to further its competitive advantage. We expect

growth, and hence pricing power will be more significant in downstream

products as compared to basic commodities.

.


33

Balance Sheet Analysis

Leverage and Liquidity

Sipchem had a reasonably low financial leverage of 0.37x (Debt to total

capital) as of the end of 2007, which we expect it to decline modestly to

0.34 x by 2008 end.

Sipchem has a high capex requirement, primarily due to the building of the

acetyl complex, which we expect to be operational by mid 2009. We

forecast the total project to cost over SAR 7.3 bn, and financed through

44% debt and 56% equity. 2008 capex is projected to be around SAR 3.3

bn, leading to an increase in 2008 end debt by about 80% from its 2007

levels to SAR 2.8 bn.

We judge that the company has sufficient liquidity to meet its near term

capital requirements. In May 2008 the company signed a financing

agreement worth SAR 2.78 bn with SABB, which will cover the entire

commercial financing requirement for the acetyl complex. Additionally, the

company has additional financial arrangements with Public Investment

Fund (PIF) and Saudi Industrial Development Fund (SIDF) to meet any

capital needs. As of 2Q, 2008 the company had cash of SAR 1,860mn. We

project the cash to modestly decline to SAR 1817mn by 2008 end. Sipchem’s

net leverage (net debt to total capital) is expected to increase to 14% in

2008, from 3.9% at 2007 end. By 2010, we expect Sipchem to be debt free

on net basis.

Increase in paid up capital

Sipchem increased its paid up capital through a rights offering in 1Q 2008.

The company issued 133.3 mn shares in 1Q, 2008 at a premium of SAR5 per

share over the par value of SAR 10.

Return on Equity

Sipchem offers the best margins in its peer group, but that is not suitably

reflected in the returns. This is because of its exceptionally low asset

turnover.

Sipchem CE MEOH Sabic Dow Eas tman Honam

Asset Turnover(x) 0.23 0.81 0.85 0.6 1.13 0.68 1.12

Tax Burden(x) 70.38 93.1 71.9 66.5 68.3 77.8 63.8

Interest Burden(x) 94.3 61.6 96.8 98.9 109.2 218.0 76.3

Leverage (x) 2.41 8.63 2.09 2.58 2.59 1.24 2.96

EBIT Margin(%) 58.58 11.27 23.82 32.52 7.24 12.12 9.02

Return on Equity(%) 21.6 45.1 29.4 33.1 15.8 17.3 14.6Source: Bloomberg, SICO Research

We should highlight that the low asset turnover is partly because of

substantial expansion plans, with capital work in progress accounting for

over 52% of the total assets. We expect that contribution of these assets to

further increase to 58% by 2008 end because of high expected capex over

the period, and lead ROE to decline further to 16.7%. We forecast the long

term ROE to settle at over 17%; due to an expected high asset base and

comparatively lower returns from the acetyl business.


34

Cash Flow Analysis

With a moderately leveraged balance sheet, the company is well placed to

support its capex commitments.

Although, we estimate the free cash flow to be negative by over SAR 1.3 bn

for FY08, primarily because of the time lag between the investments and

the cash flow from the capex program. We expect the company to generate

significant free cash flows over the forecast period, with free cash flow

estimated to be nearly SAR 2bn by 2010E.

Interest Coverage

Sipchem’s EBIT to interest coverage declined from 12.4 x in 2005 to 9.6

times in 2007. We project the ratio to further decline to 6.1x by 2008 end,

but remain at comfortable levels. We expect the EBIT interest coverage

ratio to improve to 7.9 times by 2010E.

Dividend policy

Sipchem does not follow any set dividend policy, and the payouts are

driven by cash generated from operations and future capex requirements.

The company has a very limited dividend history. For FY07, the company

paid a dividend of SAR 1.00 per share, implying a dividend payout of

56.1%. Going forward, we estimate the dividend payout ratio to be

maintained at 60% driven by significant levels of expected free cash flows

from operations in the coming years and limited capex requirements during

the forecast period. Our dividend expectations offer a dividend yield of

5.0% for FY08E at current levels.


35

Industry Overview and Outlook

Methanol

Methanol (Ch30H), also known as methyl alcohol, is a clear, colourless

liquid and is one of the primary commodity material used in chemical

synthesis. It is produced from fossil fuels containing carbon and

hydrogen, such as coal, wood, natural gas, LPG, residual fuel oil or from

biological sources. Over 80% of methanol is produced using natural gas

as its main feedstock by a process known as steam reforming. Besides

that about 14% of the current methanol production capacity is based on

coal, largely based in China. Methanol is a colourless liquid, and is highly

toxic particularly by oral ingestion.

The methanol business is a highly competitive commodity industry, with

prices significantly impacted by supply and demand fundamentals and

global energy prices. Methanol prices have historically been, and are

expected to continue to be, characterized by significant cyclicality. The

global demand for methanol in 2007 is estimated at approximately

39 million tonnes, versus global 2007 end capacity estimated at 48

million tonnes, implying a utilization of 81% on the name plate capacity.

Adjusting for lost production because of maintenance shutdown and

feedstock unavailability, 2007 effective utilization rate is estimated at

94%, thus implying support to high methanol prices.

Graph 24 : Methanol- Supply, Demand and Operating Rate

72%

74%

76%

78%

80%

82%

84%

86%

0

10

20

30

40

50

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

(%)

('0

00 M

T)

Demand(LHS) Supply(LHS) Operating Rate(RHS)


Production Process

IMC produces methanol in a 4 stage process

Feedstock Purification

Steam Reforming

Methanol synthesis

Methanol purification

Feedstock purification

Methanol production process starts with purification of natural gas to

remove sulphur by desulphurization process to levels of less than one

part per million (1ppm).


36

Steam Reforming

Steam Reforming transforms the methane (CH4) and the steam (H2O) to

intermediate reactants of hydrogen (H2), carbon dioxide (CO2), carbon

monoxide (CO). Carbon dioxide is also added to the feed gas stream at

this stage to efficiently produce methanol. This process is carried out in a

Reformer furnace which is heated by burning natural gas as fuel.

Methanol Synthesis

After removing excess heat from the “reformed gas” it is compressed

before being sent to the methanol production stage in the synthesis

reactor. Here the reactants are converted to methanol and separated

out as crude product with a composition of methanol (68%) and water

(31%). Traces of by-products are also formed. Methanol conversion is at

a rate of 5% per pass hence there is a continual recycling of the

unreacted gases in the synthesis loop.

Methanol Purification

The 68% methanol solution is purified in two distinct steps in tall

distillation columns called the topping column and refining column to

yield a refined product with a purity of 99% methanol classified as

Grade AA refined methanol.

The methanol process is tested at various stages and the finished

product is stored in a large secured tankage area off the plant until such

time that it is ready to be delivered to customers. Since 99% of our

product is sold on the overseas market, it is shipped by ocean going

tankers while local sales are made via pipelines and drums.

The diagram below depicts the pictorial representation of Methanol

production flowchart.

Source: CMAI

Sulfur

Removal

Satu

rato

r Reforming and Heat

Recovery Wate

r R

em

oval

Methanol

Synthesis

Reaction

S

ep

era

tio

n

Pu

rifi

cati

on

Steam

Synthesis

GasNatural Gas

Makeup Water

Methanol

Crude Methanol

Synthesis

Gas

Purge Gas

to Fuel

Methanol Production by Steam Reforming


37

Supply

Globally, most methanol is produced from natural gas, except in China

where coal is used as a major feedstock for manufacture. Thus, currently

methanol production is concentrated in the regions with access to cheap

natural gas like Chile, Trinidad and the Middle East.

The structural rise in oil and gas prices have led to the decline of

Europe’s and North America’s share in the methanol market to about

11% in 2007, from 26% in 2002. This is further expected to decline to

8% by 2010. Meanwhile in 2007, South America and Middle East

accounted for 46% of the world’s capacity, from 36% in 2002. It is

expected to decline to about 44% of world’s capacity by 2010 amid

capacity closures in South America and expansion in China.

Methanol capacity is expected to grow by 8-9% CAGR over 2007-2010E.

The major expansions during the period are expected to be in China and

the Gulf. The table below depicts the major planned expansion plans in

the Gulf:-

Company Country Capacity Expected

Sabic Jubail, Saudi Arabia 1,750 2008

Oman Methanol Sohar,Oman 500 2008

Chemanol Saudi Arabia 230 2008

Zagros PC Iran 750 2008

Zagros PC Iran 500 2008

Zagros PC Iran 1,250 2009

Kharg Iran 1,400 2009 Source: Company Reports, SICO Research

We expect the expansions in Iran to be delayed by one to two quarters

because of geopolitical tensions, licenses, gas availability and manpower

concerns, coming online between late 2009 to mid 2010.

The methanol industry is fairly concentrated with the top 5 companies

accounting for nearly 30% of world’s capacity, thus providing the

producers with some pricing power.

Company Capacity ('000 MT)

Methanex 6.7

Sabic 6.2

Methanol Holdings 4.0

Zagros PC 1.7

Petronas 1.1 Source: Company Reports, SICO Research

Demand

Global methanol demand has historically been similar to the growth in

global GDP. Methanol demand grew by about 4.9% per annum over

1996-2007, while global GDP grew by 4.8% over the same period.

Chemical Market Associates Inc. (CMAI) projects methanol demand to

grow by 4.5% CAGR over 2007-2012.


38

Graph 25: 2007 Methanol demand by

product

Graph 26: 2012E Methanol demand by

product

Formalde

hyde, 35%

Acetic Acid, 10%

MTBE/TA

ME, 15%

Gasoline/

Fuel, 8%

DME, 3%

MTO/MTP,0%

Others,

19%

Formalde

hyde, 35%

Acetic Acid, 10%

MTBE/TA

ME, 15%

Gasoline/

Fuel, 8%

DME, 3%

MTO/MTP,0%

Others,

19%



In terms of products, currently formaldehyde is the largest consumer for

methanol, and accounted for over 35% of 2007 world methanol

demand. Its share in methanol demand is expected to decline to 29% by

2012E. Other important uses of methanol are in the production of acetic

acid, MTBE: together these 3 products accounted for over 60% of 2007

methanol demand.

The demand of formaldehyde is driven by the construction industry,

with main usage being the production of adhesives for manufacturing

various construction board products. The growth in formaldehyde

consumption is quite similar to GDP rates, influenced by housing and

construction industries.

It is worth noting that formaldehyde is considered a probable human

carcinogen by US Environmental Protection Agency (EPA). It implies that

the Agency considers it to be a probable cause for cancer on exposure,

but lacks any conclusive evidence to substantiate this claim. The result

from studies by The International Agency for Research on Cancer (IARC)

is expected by mid-2009, and any conclusive evidence on this claim

would be detrimental to formaldehyde demand, and in turn demand for

methanol.

Regionally, stronger demand growth is expected from Northeast Asia,

predominantly driven by China, which is expected to account for over

45% of world methanol production by 2012. Demand for methanol

largely depends upon levels of global industrial production, changes in

general economic conditions and energy prices.

Price Outlook

Global methanol capacity is expected to grow by over 10% CAGR over

2007-2011 against the demand growth estimated at 4.5% per annum

over the same period. Although, growth in supply at a rate much higher

than demand suggests a steep correction in the methanol prices, closures

of high cost capacity plants and net import growth to China will curtail

the negative impact of capacity expansions. Methanol being a pure

commodity, price is set by marginal producers with marginal cost of

production increasing dramatically over the past years. This is due to

escalating natural gas and coal prices and hence prices are expected to

form a higher bottom at $325/tonne as per our bearish case scenario.


39

The chart below depicts the average estimated production cost of

methanol production in different regions at current levels of oil

(~$100/bbl) and gas ($7/MMBtu) prices.

Graph 27: Methanol base price increased driven by spike in costs

0

150

300

450

0 8000 16000 24000 32000 40000Est

ima

ted

Deli

vere

d C

ash

co

st (

$/T

)

Estimated Cumulative Annual Production (000's T/Y)

Chile, Trinidad, Qatar, Saudi, Oman, Malaysia, Iran, Venezula

China, Russia Exports, Germany, India, E-Europe, Mexico, USA

SE Asia, E-Europe, China, Russia, India, Argentina

Source: Methanex, SICO Research

China currently accounts for over 35% of world methanol capacity; 70%

of which is based on thermal cost as a feedstock. The average capacity of

a Chinese methanol plant is small in comparison to global standards and

hence is less efficient in capacity. The majority of methanol demand in

China is emerging from coastal provinces, while feedstock and plants are

widely dispersed with major presence in interior regions making

transportation costs a large factor in delivered cash costs. We expect

China to remain a net importer of methanol during our forecast period,

and gives support to prices.

We remain cautious on methanol prices in the medium term and

estimate the prices to level at about $315/ metric tonne. We expect

Sipchem to continue to leverage its low cost position, and access to

sufficient gas supplies and operate at levels over 100% of the name

plate capacity during our forecast period.

Graph 28: Methanol- Prices and Margins (indicative)

(200)

(100)

0

100

200

300

400

500

0

100

200

300

400

500

600

700

Feb-01 Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08

$/M

T

Methanol

Price(LHS) Margin(RHS)


Note: Margins reflect the difference between spot methanol price and US natural gas price


40

Acetic Acid

Acetic acid is an industrial chemical primarily used to produce vinyl

acetate monomer (VAM) and purified terephthalic acid (PTA) which

together accounted for over 60% of global acetic acid demand in 2007.

Industry capacity is estimated to be approximately 11.1 million metric

tons. There are five major production routes to acetic acid; methanol

carbonylation, acetaldehyde, ethanol, hydrocarbon oxidation (typically

butane or naphtha) and PVA (polyvinyl alcohol) hydrolysis, a by-product

recovery process.

Industry capacity is estimated to be approximately 11.1 million metric

tons. There are five major production routes to acetic acid; methanol

carbonylation, acetaldehyde, ethanol, hydrocarbon oxidation (typically

butane or naphtha) and PVA (polyvinyl alcohol) hydrolysis, a by-product

recovery process.

Production Process

Until the 1970’s acetic acid was mainly produced from ethylene and

butane. However, methanol carbonylation has been adopted as the

preferred method of acetic acid production. In acetic acid production

through ethylene, ethylene is first converted to acetaldehyde, which is

then oxidised to acetic acid.

Methanol carbonylation today accounts for over 77% of the global

acetic acid production and is considered to be the most effective

commercial production process of acetic acid. In this technology,

methanol and carbon monoxide in the presence of a metal catalyst react

to produce acetic acid. By modifying the process conditions, acetic

anhydride can also be produced using the same technology.

Flowchart for Acetic acid production from Methanol

Synthesis Gas

Carbon monoxide

Natural Gas

and O2Ethylene

Vinyl Acetate

Methanol VAMAcetic Acid

Source: Lyondell, SICO Research

Supply

Currently, over 76% of the acetic acid capacity is based on methanol

carbonylation, with rest been primarily produced from acetaldehyde,

ethanol and hydrocarbon oxidation. We expect the contribution of this

technology to increase to over 85% by 2012, as most of the capacity

ramp up is based on methanol carbonylation.


41

Acetic acid supply is expected to grow by 9% CAGR over 2007-12E to

16,000 mtpa versus 2007 end capacity of 11.2 thousand mtpa. China

currently accounts for 24% of the world’s capacity, which is expected to

increase to 45% by 2012. The Middle East’s share in total capacity is

around 2% in 2007, and is expected to increase to 4% by 2010 chiefly

due to the addition of 400,000 mtpa capacity by Sipchem. The table

below shows the major expansion projects over the next 3 years.

Company Country

Capacity

('000 MT)

Expected

Time

Sipchem Saudi Arabia 400 2Q 2009BP/Sinopec China 550 2009

Lunan Cathay China 350 2010

Sopo China 600 2010

Tianjin Bohei China 200 2010

The acetic acid market is dominated by 2 companies, BP and Celanese,

who account for over 47% of the acetic acid capacity as of 2007 end. We

see the access to better technology to be the reason for their dominance

in the acetic acid production, and expect markets to remain

concentrated in the longer run.

Graph 29: 2007 Acetic Acid production

Celanese,

29%

BP, 18%

Lyondell/Mi

llenium,

5%

Eastman,

4%

Others,

44%


Demand

Demand for acetic acid in 2007 is estimated at about 9.5 million tons,

versus 2007 end capacity at 11.2 million tons, implying a utilization rate

of 85%. Demand is expected to grow by 4-5% CAGR over 2007-2010E

primarily driven by demand of vinyl acetate monomer (VAM) and

purified terephthalic acid (PTA). Vinyl acetate and PTA accounted for

over 60% of 2007 acetic acid global consumption.


42

Graph 30: Acetic Acid – End Use by Product

0

2,000

4,000

6,000

8,000

10,000

2000 2004 2007

Aci

tic

Aci

d D

em

an

d,

'000 m

t

Acetic Acid End-Use Growth (2000 - 2007)

VAM PTA Esters Anhydride Other

Source: Celanese Reports, SICO Research

Pricing outlook

Global acetic acid capacity is expected to grow by 8% CAGR over 2007-

2010 against the demand growth estimated at 4.5% per annum over the

same period. Currently, over 22% of the global capacity is based on high

cost technology, and accounted for nearly 15% of 2007 production.

Graph 31: Acetic Acid – Supply by feedstock and technology

0 2,000 4,000 6,000 8,000 10,000 12,000 14,000

By-product

Conventional

MeOH/CO

Ethanol

Ethylene

2010E Acetic Acid Cost Curve (kt)

High Cost

Supply

AOPlus TM/Leading Competition

Celanese

Technology

Source: Celanese Reports

Although, the demand and supply fundamentals offered in acetic acid

are better than many of other petrochemicals, prices of acetic acid could

fall over 2008-2010, due to our expectations of weakness in methanol

prices. Profitability, we estimate, in the acetic acid market to continue at

above average levels, as declines in prices would be more than offset by

a decrease in raw material costs.

Currently, prices of acetic acid are set by marginal producers who are

producing acetic acid using high cost ethylene/ethanol based

technology. We see a gradual closure of such facilities and pricing to be

eventually based on methyl carbonylation based technology. Although,

we see this to be longer term threat to acetic acid prices, we deem these

facilities to continue being the price setters during our forecast period.


43

Vinyl Acetate monomer

Vinyl Acetate Monomer VAM is a key raw material for the production of

polyvinyl acetate (PVAC) and polyvinyl alcohol (PVOH). Approximately

76% of all VAM produced in the world is used to make these two

chemicals. VAM is also used to make polyvinyl butyral (PVB), ethylene-

vinyl acetate (EVA) copolymers, and ethylene vinyl alcohol (EVOH) resins.

Vinyl acetate is primarily used in paints, adhesives, paper coatings and

textile applications. The demand for Vinyl acetate is directly linked to

the construction sector, and hence in turn to the health of the global

economy. The end market of vinyl acetate is highly segregated, and

hence contract prices are a better representation of margins in the vinyl

business. The graph below depicts the movement of prices and margins,

based on U.S. spot prices and spot ethylene prices.

Graph 32: VAM - Prices and Margins (indicative)

(200)

(100)

0

100

200

300

400

500

600

-100

200

500

800

1,100

1,400

1,700

2,000

Feb-01 Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08

$/M

T

VAM

Price(LHS) Margin(RHS)


Note: Margin reflects the difference between spot VAM price and feedstock prices.


44

Financial Statements and Key Ratios

All Figures in SAR mn 2005 2006 2007 2008E 2009E 2010E 2011E

Revenues 726.1 1,334.0 1,527.7 2,024.5 2,206.3 3,523.0 3,315.8

Growth(%) 83.7% 14.5% 32.5% 9.0% 59.7% -5.9%

Cost of Sales 149.9 339.0 389.9 613.1 662.5 1,380.8 1,324.8

Revenues(%) 20.6% 25.4% 25.5% 30.3% 30.0% 39.2% 40.0%

Gross Profit 576.2 995.0 1,137.8 1,411.4 1,543.9 2,142.2 1,991.0

Margin(%) 79.4% 74.6% 74.5% 69.7% 70.0% 60.8% 60.0%

EBITDA 553.9 953.6 1,089.1 1,344.6 1,462.3 2,011.8 1,868.4

Margin(%) 76.3% 71.5% 71.3% 66.4% 66.3% 57.1% 56.3%

Profit After Tax 455.0 714.5 844.0 1,068.2 1,002.9 1,305.0 1,241.3

Minority Interest 130.1 220.8 250.0 331.1 290.9 378.5 360.0

Net Profit 325.0 493.7 594.0 737.1 712.1 926.6 881.3

Margin(%) 62.7% 37.0% 38.9% 36.4% 32.3% 26.3% 26.6%

EPS 0.97 1.48 1.78 2.21 2.14 2.78 2.64

Growth(%) 51.9% 20.3% 24.1% -3.4% 30.1% -4.9%


Total non current assets 3,125 3,438 5,755 8,464 9,604 9,118 8,646

Property Plant & Equipment,net 2,487 3,200 5,416 8,156 9,326 8,869 8,427

Total current assets 1,302 1,824 1,995 2,909 2,817 4,092 4,675

Cash and cash equivalent 1,164 1,507 1,562 2,354 2,212 3,127 3,766

Accounts Receivable & Prepaid Exp. 84 257 331 444 484 772 727

Inventory 55 60 102 111 121 193 182

Total Assets 4,428 5 ,262 7 ,750 11,373 12,421 13,210 13,320

Total Shareholder's Equity 1,912 2,406 2,997 5,423 5,783 6,298 6,640

Total non-current liabilities 2,305 2,255 2,590 5,089 5,694 5,535 5,372

Long Term Debt( incl Capital leases) 1,854 1,688 1,572 2,618 2,925 2,674 2,423

Minority Interest 443 555 895 2,396 2,603 2,679 2,751

Total current liabilities 211 601 2,164 861 944 1,377 1,309

Total Liabilit ies & Equity 4,428 5 ,262 7 ,750 11,373 12,421 13,210 13,320

SIPCHEM - Balance Sheet

SIPCHEM - Income Statement


45


Operating Ac t iv it ies

Net profit for the year 325 494 594 737 712 927 881

Adjustments for

Depreciation and Amortization 105 182 194 186 350 592 572

Working Capital change (75) (186) 291 (569) 10 72 (11)

Net Cash from operat ing ac t iv it ies 502 712 1 ,306 686 1 ,363 1 ,969 1 ,802

I nv est ing Ac t iv it ies

Purchase of property plant and equipment (405) (551) (2,152) (2,895) (1,319) (106) (99)

Net Cash used in inv est ing ac t iv it ies (754) (295) (2,298) (2,895) (1,319) (106) (99)

Financ ing Ac t iv it ies

Inc. in LT debt, net 636 (106) (68) 1,077 340 (219) (219)

Minority Interest change, net - - (168) 1,169 (83) (303) (288)

Dividends Paid - - - (333) (442) (427) (556)

Net Cash from f inanc ing Ac t iv it ies 1,384 (73) 1 ,047 3 ,002 (186) (949) (1 ,063)

Inc .(Dec .) in Cash and Cash Eqv ts . 1 ,133 344 55 792 (142) 915 639

Cash and Cash Eqv ts . at the period beg. 31 1,164 1,507 1,562 2,354 2,212 3,127

Cash and Cash Eqv ts . At the period end 1,164 1 ,507 1 ,562 2 ,354 2 ,212 3 ,127 3 ,766

Year to December 31 2005 2006 2007 2008E 2009E 2010E 2011E

Operating performance rat ios

Gross margins(%) 79.4% 74.6% 74.5% 69.7% 70.0% 60.8% 60.0%

EBITDA margin (%) 76.3% 71.5% 71.3% 66.4% 66.3% 57.1% 56.3%

Operating margin (%) 61.8% 57.9% 58.6% 58.7% 51.8% 41.2% 40.0%

Net margin (%) 69.3% 61.6% 63.1% 63.7% 57.1% 44.3% 44.7%

Annual Growth

Revenues (%) NA 83.7% 14.5% 32.5% 9.0% 59.7% -5.9%

EBITDA margin (%) NA 72.2% 14.2% 23.5% 8.7% 37.6% -7.1%

Operating margin (%) NA 72.1% 15.9% 32.8% -3.9% 26.9% -8.5%

Net margin (%) NA 51.9% 20.3% 24.1% -3.4% 30.1% -4.9%

Per Share Ratios

EPS (SAR) 0.97 1.48 1.78 2.21 2.14 2.78 2.64

BVPS (SAR) 5.74 7.22 8.99 16.27 17.35 18.90 19.92

DPS (SAR) - - 1.00 1.33 1.28 1.67 1.59

Payout ratio (%) 0.0% 0.0% 56.1% 60.0% 60.0% 60.0% 60.0%

24.1% -3.4% 30.1%

Return(%)

Return on Asset 14.2% 17.0% 14.8% 13.5% 10.6% 12.2% 11.2%

Return on Equity 24.5% 22.9% 22.0% 17.5% 12.7% 15.3% 13.6%

Return of Invested Capital 16.2% 24.1% 21.4% 17.7% 12.8% 15.8% 15.3%

Return on Capital Employed 15.2% 18.1% 18.3% 15.7% 11.2% 13.1% 12.2%

Valuation Ratios

PER (x) NA 17.4 17.1 11.6 12.0 9.2 9.7

PBV (x) NA 3.6 3.4 1.6 1.5 1.4 1.3

Dividend yield (%) NA 0.0% 3.3% 5.2% 5.0% 6.5% 6.2%

EV/EBITDA (x) NA 9.8 10.2 7.2 6.6 4.8 5.2

Note : Valuation ratios for 2006 and 2007 are based on average market price for respective years

SIPCHEM - Financial Ratios

SIPCHEM - Cashflow Statement


46

NOTES

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