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ENTITY OF AUDI SARADAR GROUP
CURRENT PRICE SAR 89.5
FAIR VALUE SAR 108.4
RATING ACCUMULATE
Stock Data
December 4, 2012
HIGHLIGHTS
Ticker SABIC AB
Bloomberg Median TP (SAR) 116.0
Market Cap (SAR mn) 268,500
Market Cap (USD mn) 71,600
Number of Shares (mn) 3,000
Avg Mon Liquidity (SAR mn ) 10,178
52 week High (SAR) 109.8
52 week Low (SAR) 85.3
Ownership Structure
Public Investment Fund 70%
GOSI 5.4%
Free Float 24.6%
Sabic Stock Performance
Bloomberg Consensus
COMPANY COVERAGE
Reine Dagher
Associate
Reine.Dagher@asib.com
Youssef Nizam, CFA
Head of Equity Research
Youssef.Nizam@asib.com
SAUDI BASIC INDUSTRIES CORPORATION (SABIC)
ON TRACK OF REALIZING NEW MILESTONES
EQUITY RESEARCH
CHEMICAL PLAYS: AMONG PRIME BENEFICIARIES OF MONETARY ACOMMODATION
As the global recovery is losing its momentum and signs of sluggish growth are resurfacing,
monetary accommodation is emerging as a crucial policy tool for central banks. With the loosening
of monetary policy by the Fed, ECB and the BoJ to support growth, chances of a stronger recovery in
developed markets and sustained growth in developing markets have increased. Moreover, a likely
compromise on the “fiscal cliff” would help navigate the newly rising uncertainty and would pave
the way for achieving the projected economic growth figures set by the IMF (in the October 2012
World Economic Outlook). Accordingly, as chemical demand is largely dependent on economic
growth, chemical producers will be among the prime beneficiaries of any gained momentum in the
global economic recovery.
A LEADING NAME...AT AN ADVANTAGE OF DISTINGUISHED COST ECONOMICS
Chemical conglomerate Sabic generates annual revenues exceeding $50 billion, positioning it as
6th largest among its global rivals, comprised of chemical producers and the chemical units of the
integrated oil producers. With total assets of c$89 billion and a market cap exceeding $71 billion, Sabic
ranks 5th and 6th largest in asset and market cap size, respectively, among its global counterparts.
Sabic’s cost leadership has played a paramount role in securing these rankings, a competitive
advantage expected to be retained even upon the implementation of the new feedstock pricing
regime in Saudi Arabia (expected in 2013). With US gas prices almost doubling from their 2012lows
and with high crude oil prices continuing to squeeze the margins of naphtha-based producers,
Saudi’s subsidized gas-based feedstock should continue to offer domestic producers leverage over
their global peers. Moreover, with such distinguished cost economics, Sabic stands best-positioned
today to ride any macro-economic wave or withstand any macro-economic shock encountered.
FINANCIAL FLEXIBILITY PAVES WAY FOR 2020 TARGET
Given the sheer size of its balance sheet with cash in excess of $14 billion and a net debt-to-equity
of just 0.23x, in addition to A+ long-term credit ratings by both S&P and Fitch rating agencies, Sabic
holds the financial flexibility to: 1/participate in organic growth 2/acquire growth companies and
3/retain adequate funds for the distribution of dividends. Sabic has invested in many green-field
projects across the years, among which the latest were Yansab and Saudi Kayan, and in turn holds
the key to developing world-scale assets. Moreover, with its robust balance sheet, Sabic can continue
its acquisition trail, in aim of its 2020 target of 130 million tons of output (versus today’s 69 million
tons) and accordingly realizing its vision of becoming the leading chemical producer by 2020.
INITIATING ON REGION’S LARGEST CAP WITH AN ACCUMULATE RATING
Sabic’s commitment to a global growth strategy, combined with its wide-state support and its strong
cost economics, should be reflected in further profit gains and higher returns for shareholders.
Sabic trades at a PE12E of 10.8x, a discount to peers (average of 11.9x), which does not reflect the
company’s growth momentum along with its cost competitive assets. The company’s high dividend
yield of 5.1% for 2012 also gives investors a stable income stream amid a low-yield environment.
Moreover, Sabic generates a FCF/share of SAR 10.5, implying a FCF yield of 11.7% which is materially
higher than the industry’s average. We initiate coverage on the region’s largest cap company with
an Accumulate rating, given an estimated target price of SAR 108.4/share (upside potential of 21%).
FINANCIAL DATA
INITIATION OF COVERAGE
2011 2012E 2013E 2014E 2015E
Sales Revenues (SAR mn) 189,898 184,917 186,565 190,791 195,906
Net Income (SAR mn) 29,242 24,933 29,734 29,180 32,233
EPS (SAR) 9.7 8.3 9.9 9.7 10.7
DPS (SAR) 5.0 5.0 6.0 7.0 9.0
BVPS (SAR) 46.0 49.7 53.7 56.6 58.8
PE 9.9 10.8 9.0 9.2 8.3
Dividend Yield 5.2% 5.1% 6.6% 7.6% 9.6%
PB 2.1 1.8 1.7 1.6 1.5
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SABIC INITIATION OF COVERAGE
EQUITY RESEARCH
December 4, 2012
FOOTNOTES
INVESTMENT CASE
CHEMICAL PLAYS: AMONG PRIME BENEFICIARIES OF MONETARY ACOMMODATION
As the global recovery is losing its momentum and signs of sluggish growth are resurfacing, monetary
accommodation is emerging as a crucial policy tool for central banks. Quantitative easing measures
are already underway given: the unlimited bond-purchase program announced by the European
Central Bank on September 6, the third round of bond-buying by the US Federal Reserve announced
on September 13th, and the Bank of Japan following suit by expanding its asset-purchase fund by
$264 billion. Positive stimulus signals have also extended from China with an infrastructure package
of $158 billion approved in early September. As such, with the loosening of monetary policy by
the Fed, ECB and the BoJ to support growth, chances of a stronger recovery in developed markets
and sustained growth in developing markets have increased. Moreover, a likely compromise on the
“fiscal cliff” would help navigate the newly rising uncertainty and would pave the way for achieving
the projected economic growth figures set by the IMF (in the October 2012 World Economic
Outlook). Accordingly, as chemical demand is largely dependent on economic growth and as
earnings of chemical companies closely track the global manufacturing and industrial activities,
chemical producers will be among the first and the largest to build on any gained momentum in the
global economic recovery. Accordingly, the improvement in real demand for chemicals, combined
with the well-paced capacity expansions, should elevate the global chemical utilization rate from its
33-month low of 84.8%.
Table 1: Projected Growth Rates of Key Economies
Real GDP % 2011 2012E 2013E
World 3.8% 3.3% 3.6%
Advanced Economies 1.6% 1.3% 1.5%
US 1.7% 2.2% 2.1%
Euro Area 1.4% -0.4% 0.2%
Emerging Economies 6.2% 5.3% 5.6%
China 9.2% 7.8% 8.2%
India 7.1% 4.9% 6.0%
Source: IMF World Economic Outlook, October 2012
KEY CHEMICAL MARKETS EXPECTED TO TIGHTEN
Despite a bearish demand environment for crude oil, prices are not expected to subdue in the
medium-term with projections signaling a c$110/bbl floor for Brent. The support for crude oil prices
should stem from: 1/geo-political risks in the region 2/ stimulus effect of QE3 by the US Fed and
3/ further stimulus measures by other key central banks. Not to mention that the first two factors
are expected to linger for an undefined period of time, as geo-political tensions are escalating and
the quantitative easing of the US Federal Reserve is widely expected to be the open-ended type of
bond-buying.
On another front, the oversupplied global chemical markets are expected to tighten over next 4-5
years on the back of stronger chemical demand, as a recovery in developed markets and strong
growth in emerging markets lead to additional demand. Global demand for ethylene, the most
common basic chemical in the industry, is projected to grow at a CAGR of 4.53% for the period 2011
till 2016. Global capacity for ethylene, on the other hand, is projected to grow at a CAGR of 3.05%
for the same period given limited capacity additions across the globe. The excess oversupply of
ethylene is expected to fall from an estimated 23 million tons in 2011 to an estimated 16 million tons
in 2016. Accordingly, the share of the ethylene surplus of global supply will contract from 15.5% to
9.3% for the same period 1 .
1 Source: Braskem Investor Relations presentation, citing IHS
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SABIC
December 4, 2012
FOOTNOTES
INITIATION OF COVERAGE EQUITY RESEARCH
As a result, with a strong crude oil environment 2 and a tighter global chemical market, downside
risk to chemical prices is limited, providing opportunities of wider margins for fixed-cost producers
such as Sabic.
Chart 1: Brent Price Forecasts ($/bbl) Chart 2: Global Ethylene Market
Source: Bloomberg Commodity Price Forecasts Source: Braskem Investor Relations presentation, citing IHS
On a further note, the global industry cost curve is being reshaped with the boom in shale gas
development in the US and the coal-to-chemical technologies in China. The US, which historically
dominated the production landscape, is regaining ground with a wave of new petrochemical
investments estimated at $25 billion 3 . The boost in North American ethylene capacity, estimated at
10 million tons through 2017 or 6.5% of global ethylene capacity 4 , is taking place as the country’s
ethane is resurfacing as a globally competitive feedstock. China, already a leading producer
of petrochemicals, is boosting its share as it is tapping into coal as a new feedstock (given its
massive coal reserves and low prices of coal in the inland West of the country). Yet even with these
developments, the Middle East and particularly Saudi Arabia will remain positioned at the bottom
of the industry cost curve and will accordingly retain its cost leadership (for further details, please
refer to p.13).
Chart 3: Market Shares of Top Producers Chart 4: 2011 Chemical Output of GCC (mn MT)
Source: KPMG, cited by Sixth Annual GPCA Forum Source: MEED
2 Petrochemical prices have a propensity to trail crude oil prices, as the marginal cost of petrochemical production
is determined by naphtha-based producers (mainly European producers)
3 Source: American Chemistry Council, cited by Bloomberg
4 Source: Nexant, cited by Bloomberg
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SABIC
December 4, 2012
FOOTNOTES
INITIATION OF COVERAGE EQUITY RESEARCH
FERTILIZER INDUSTRY FUNDAMENTALS STILL FIRM
Agricultural market conditions have remained tight. Global grain stocks are still at a historical low,
with the stocks-to-use ratio falling significantly over the past ten years. Corn, the most traded
grain in the global coarse grain trade, is witnessing falling stock-to-consumption levels for the crop
calendar year 2012/13, reaching historical lows again.
Chart 5: Global Stocks-to-Use % of Corn
Source: Bloomberg
Moreover, the world population is progressively increasing and eating habits, especially in
developing countries, are improving. In turn, and amid such low stock levels, there is a need for an
increase in global grain production to counter the continuing growth in demand for food, feed and
fuel. Strong grain prices in the markets today should also incentivize farmers to increase agricultural
activity. With global grain production supported across the years, fertilizer demand should also
remain strong. Global demand for nitrogen fertilizers is projected to grow at a CAGR of 1.5% for the
period 2012-2016, with global demand for urea specifically projected to grow at a CAGR 2.1% for
the same period. Global supply of nitrogen fertilizers is also expected to largely increase in parallel,
particularly with the emergence of new capacity in China, with figures pointing to a CAGR 12-16 of
3.6%. Global supply of urea is projected to grow at a CAGR of 4.1% for the period 2012-2016 5 .
Although the growing surplus in the nitrogen fertilizer markets threatens the long-term outlook
of the industry, this threat should be mitigated given that the fertilizer industry today is demanddriven.
Moreover, support for the industry, particularly pricing support, should stem from:
1 Limited export volumes from China, given its strict urea export policy, keeping global markets
somewhat immune from its massive capacity additions
1 Continued project delays slowing down projected capacity growth
1 A tight global grain outlook keeping prices at historical highs
1 Attractive grain prices incentivizing farmers
1 Swing producers’ production cost remaining relatively high
5 Fertilizer Outlook 2012-2016, IFA
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SABIC
December 4, 2012
FOOTNOTES
INITIATION OF COVERAGE EQUITY RESEARCH
These factors should continue supporting fertilizer prices, offsetting any downside risks originating
from supply and demand imbalances in the market. In turn, fertilizer producers with both a cash
cost advantage and a strong market presence, such as Sabic’s fertilizer SBU 6 , should stand best
to capitalize on this stable industry environment and earn a stable income amidst such a volatile
macro-economic environment.
GCC STEEL MARKET STILL EXHIBITING BUOYANT FACTORS
The global steel capacity utilization continues to be around 80%, reflecting weak demand and
major overcapacity. These factors have exerted downward pressure on steel prices, reflected
through a plunge of c14% over the course of the year. Iron ore prices have also fallen by c16% this
year, with the industry expecting continued pricing weakness in the medium-term on the back of 1/
an anemic global economic recovery and 2/ rising output for iron ore. As such, with iron ore prices
continuing to decline in the medium term 7 , the iron ore industry is expected to face the longest bear
market in two decades. The plunging raw material prices should drag steel prices further, given that
the recovery in global steel demand seems distant especially with the faltering economic growth in
China, the world’s largest steelmaker. Nevertheless, the long-term demand outlook for steel remains
positive.
The medium-term market dynamics of the GCC region differ somewhat from those abroad, given
strong regional demand stemming from 1/ high oil prices 2/ government infrastructure projects
and 3/ World Cup 2022 in Qatar, all coupled with a steel shortage in the region 8 . As such, steel
demand in the region is projected to remain buoyant with this healthy pace of infrastructure, real
estate and industrial investments (especially in Saudi Arabia and Qatar). Forecasted growth for
rebar demand in the region is at 10%-15% over the next 5 years 9 . Moreover, the region’s significant
growth potential for steel is reflected by the numerous steel projects on track, estimated at more
than $18 billion worth of investments 10 (For a detailed list of the steel projects in the region, please
refer to Appendix H). Accordingly, the region’s firm steel drive should somewhat support prices, over
the next few years, despite the weaker global market picture. More specifically, in Saudi Arabia,
Sabic’s Hadeed is the main provider of steel rebars, dictating the steel prices in the Kingdom and
accordingly largely benefiting from this pricing power during weak global trends (especially when
the Kingdom imposes import tariffs on steel rebars originating from outside the GCC). Furthermore,
with iron ore as the primary raw material for region’s steelmakers and with the region holding little
iron ore of its own, any decrease in the commodity’s price should result in wider margins for Sabic’s
Hadeed and other steel manufacturers in the GCC.
6 Sabic’s Fertilizer SBU represents 8% of Sabic›s total sales output
7 Bloomberg commodity price forecasts point to a median of $137.5/mt, $130/mt and $115/mt for the years
2013, 2014 and 2015 versus $179/ton average for 2012
8 GCC’s annual steel production is c10 million tons vs annual consumption of c25 million tons (Source: MEED)
9 Source: MEED 2012
10 Source: MEED 2012
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SABIC
December 4, 2012
INITIATION OF COVERAGE EQUITY RESEARCH
SABIC: POSITIONED AMONG LEADING NAMES OF THE INDUSTRY
Sabic is one of the world’s leading diversified chemical companies. It generates annual revenues
exceeding $50 billion, securing a position among the world’s largest chemical firms. The company
ranks 6th largest in revenues against its global rivals, comprised of chemical producers and the
chemical units of the integrated oil producers. Sabic is among the top producers of polyethylene,
polypropylene, advanced thermoplastics, glycols, methanol and fertilizers.
Chart 6: Top Companies by Chemical Sales (USD mn)
Source: ICIS, Bloomberg
With total assets of c$89 billion, Sabic ranks 5th largest amongst these firms. In terms of market cap,
Sabic’s value exceeds $71 billion, which also makes it the 6th largest company in the industry. As a
regional player, Sabic has grown, organically and via acquisitions, to reach the top ranks within its
league. With a committed growth strategy in place, expansions underway and massive financial
flexibility, Sabic is poised to retain its leading spot in the industry.
Chart 7: Market Cap of Peers (USD mn)
Source: Bloomberg
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SABIC
December 4, 2012
FOOTNOTES
INITIATION OF COVERAGE EQUITY RESEARCH
In terms of production volumes, Sabic is the world’s fifth largest producer of polyolefins, producing
over 8 million tons of polyethylene and polypropylene. However, the bulk of Sabic’s polyolefins
output is polyethylene, with output near 6 million tons.
Chart 8: Approximate Production Capacities of Leading 5 Polyolefin Producers (mn tons)
Source: Borealis Facts and Figures 2011/12
Sabic’s product rankings are as follows:
1 Sabic ranks as world’s largest producer of Ethylene glycol 11 , MTBE, Granular Urea, Polyphenylene
and Polyether Imide 12 .
1 Sabic ranks as world’s 2nd largest producer of Methanol and Polycarbonate 13 .
1 Sabic ranks as world’s 3rd largest producer of Polyethylene, Polybutylene Terephtalate and
Engineering plastics 14 .
In regards to its steel business, Sabic owns one of the largest steel manufacturers in the MENA
region. It has an annual production capacity of more than 5.2 million tons, whereby steel rebars
make up c75% of total steel output. Moreover, Hadeed enjoys a market share of over 25% in the
GCC rebar market 15 .
With such rankings among its industry peers, Sabic is best-positioned to capitalize on any upturn in
the global markets.
11 Ethylene glycol output amounted to 6.7 million tons for 2011 or 9.7% of Sabic’s total output (Source: Sabic)
12 Source: Sabic
13 Source: Sabic
14 Source: Sabic
15 Source: MEED
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SABIC
December 4, 2012
FOOTNOTES
INITIATION OF COVERAGE EQUITY RESEARCH
FINANCIAL FLEXIBILITY PAVES WAY FOR 2020 TARGET
Sabic’s balance sheet is fairly robust with cash exceeding $14 billion and a net debt-to-equity of
just 0.23x vis-à-vis a peer average of 0.58x. The company’s Debt-to-Ebitda of 1.7x is also below
the industry average of 2.2x, while enjoying double-digit interest coverage for over ten quarters.
Moreover, Sabic’s interest coverage of 18.1x well exceeds its peer average of 8.8x. In parallel, Sabic
enjoys A+ long-term credit ratings by both S&P and Fitch rating agencies. Given its strong financial
position and favorable credit ratings, Sabic holds the financial flexibility to: 1/participate in organic
growth 2/acquire growth companies 3/ invest in its innovation capability and 4/retain adequate
funds for the distribution of dividends. It is noteworthy highlighting that Sabic has announced
previously this year that it intends to repay $7 billion of debt in 2012. In turn, the significant
deleveraging in 2012 and the years to come should increase notably its cash dividend pay-outs.
Chart 9: Projected Gearing Level Chart 10: Projected Dividend Stream
Source: ASIB Estimates Source: ASIB Estimates
Sabic has invested in many green-field projects across the years, among which the latest were
Yansab and Saudi Kayan, and in turn has the expertise of developing world-scale assets. Moreover,
with its robust balance sheet, Sabic can continue its acquisition trail, in aim of its 2020 target of
130 million tons of output (versus today’s 69 million tons) and accordingly realizing its vision of
becoming the leading chemical producer by 2020. It is noteworthy to mention that Sabic is aiming
to launch over 30 new performance chemicals and polymers in the coming several years, part of
its 2020 vision where this new product line will represent 10% of the company’s revenues by that
year 16 . Thus, the Performance Chemicals SBU will be one of the core drivers of growth.
AN INDUSTRY LEADER WITH CONTINUOUS ACQUISITION APPETITE
Sabic is one of the world’s largest and fastest-growing petrochemical producers, with its 2011
production volume exceeding 69 million tons. With a global growth strategy intact, the company
has been on an acquisition mode for years, making investments around the world. Through these
acquisitions, Sabic has expanded its product portfolio, acquired world-class technology and
boosted its market presence.
16 Saudi Kayan was one of Sabic’s first projects in the performance chemicals arena. It represented the first company
within the Middle East to produce and sell these specialty chemicals. The first shipment of ethanolamines
and ethoxylates was made in June 2012.
8

SABIC
December 4, 2012
FOOTNOTES
Sabic’s most known for its acquisitions of:
1 GE Plastics, US, in 2007 for $11.6 billion
INITIATION OF COVERAGE EQUITY RESEARCH
1 Huntsman Petrochemicals’ UK operations in 2006 for $685 million
1DSM’s petrochemical unit, Europe, in 2002 for $2.1 billion
Currently market sources are pointing out to another potential acquisition eyed by Sabic, most likely
a company “with a large amount of its own licensed technology, especially in the specialty plastics
sector” (MEED, August 2012). This will fasten Sabic’s path to securing the top spot in the industry, as
it will obtain the technology expertise it misses across the chemical value chain 17 .
NEW EXPANSIONS TAKING SABIC DOWNSTREAM
Sabic has gone through three stages of major expansion since 1976. The company is operationally
present in more than 40 countries, owning about 60 production plants across the globe The
company’s fast expansion has allowed it to reach production volumes of c69 million tons for 2011.
This compares with c47 million tons for 2005 and 6.3 million tons in 1983, when the first plant went
onstream.
Chart 11: Track Record of Events
30% IPO
1984
Source: Sabic Capital
DSM
Petrochemicals
2002
Huntsman UK
Petrochemicals
2006
The latest expansions to go online have been:
GE Plastics
2007
Sinopec Sabic
Tianjin
Petrochemical Co.
Yansab and
Sharq
2010 2010
Saudi
Kayan
1 The integrated phosphate complex of Maaden Phosphate Company, a 70:30 joint venture
between Maaden and Sabic (October 2011). The complex has an annual production capacity
of 2.9 million tons of phosphate fertilizers and 1.1 million tons of ammonia. Investment cost
of this project was $5.5 billion.
1 Cracker of Saudi Kayan, the region’s first producer of polycarbonates (October 2011), followed
by the downstream units. The project, a partnership between Sabic and Al Kayan Petrochemical
Co., has an annual production capacity of 6 million tons of petrochemicals. Investment cost of
this project was $10.8 billion.
1 Phase I of Sinopec Sabic Tianjin Petrochemical Co., a 50-50 joint venture with Sinopec 18 (May
2010). The Tianjin-based plant has an annual production capacity of 3.2 million tons of
petrochemicals, comprised of a one-million ton ethylene cracker and eight downstream units.
Investment cost of this project was $2.7 billion.
1 Phase III of Sharq, a 50-50 joint venture with a group of Japanese companies (April 2010).
This expansion added close to 3 million tons of various petrochemicals, mainly ethylene (1.3
million tons), HDPE (400 thousand tons), LDPE (400 thousand tons) and ethylene glycol (700
thousand tons). Sharq’s production capacity increased to 5 million tons/annum, confirming its
status as the world’s largest producer of ethylene glycol.
17 Sabic has already accelerated its quest for more technology licenses, signing licensing deals lately with technology
providers, such as Mitsui and Linde, for the production of toluene diisocyanate (TDI) and methylene
diphenyl diisocyanate (MDI).
18 China Petroleum and Chemical Corporation
2011
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SABIC
December 4, 2012
INITIATION OF COVERAGE EQUITY RESEARCH
1 Yansab, another Sabic landmark project, with an annual production capacity of 4 million
tons (March 1 2010). Key products are polyethylene (800 thousand tons), ethylene glycol (700
thousand tons) and polypropylene (400 thousand tons). Investment cost for this project was
$5.6 billion.
Sales volumes have amounted to 54 million tons for 2011, versus 37 million tons for 2005. This
growth translates into a CAGR of 6.7% and 6.8%, in production and sales volumes respectively,
for the period 2005-11. Looking beyond, with the diverse expansions going online, Sabic should
witness an estimated CAGR of 4.1% and 3.1% in production and sales volumes, respectively, for the
period 2011-2015.
A large part of the company’s production takes place in Saudi Arabia, with European operations
contributing c20% to the total polymers output and c11% to total chemicals output. On a further
note, European-produced basic chemicals account for 7% of Sabic’s total selling volumes, where as
European-produced polymers account for 4% of Sabic’s total selling volumes.
Chart 12: Production and Sales Volumes (million mt)
Source: Company Reports
Expansions coming onstream in the near-term include:
1 Phase VIII of Gas is expected to begin production by year-end 2012. The expansion has a
production capacity of 1.2 million tons of oxygen gas and 1 million tons of nitrogen gas.
1 Hadeed new steel plant, with an annual production capacity of 1 million tons of steel billets and
500 thousand of long steel products, is expected to be completed in September 2013. Once
operational, Hadeed’s annual production capacity will rise to over 6 million tons, whereby
long products will represent 4 million tons or a 67% share. According to Sabic, ‘the new plant
will make Hadeed self-sufficient in feedstock, intermediate and finished products” and will
therefore protect it to some extent from the fluctuations in the international steel market. The
plant’s estimated investment cost is $630 million.
1 A $400 million plant, for the production of purified terephthalic acid (PTA), is scheduled to
begin production in early 2013. The plant, owned by Ibn Rushd, will have an annual production
capacity of 350 thousand tons of PTA which will be used as feedstock for the production of
polyethylene terepthalate (PET).
1 A polyacetal production plant, in partnership with Celanese Corp., is expected to go onstream
in 2013. The Jubail-based plant, with an annual production capacity of 50 thousand tons, will
use in-house methanol as feedstock for the production of polyacetal. The plant is part of the
National Methanol Co. (Ibn Sina) complex, which is 50% owned by Sabic and the remainder
equally owned by Celanese Corp. and an affiliate of Duke Energy Corp. Total investment cost
for this project is estimated at $400 million.
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SABIC
December 4, 2012
FOOTNOTES
INITIATION OF COVERAGE EQUITY RESEARCH
1 Safco V, a urea plant with an annual production capacity of 1.1 million tons, expected in the
third quarter of 2014. Total investment cost of this expansion is estimated at USD 534 million.
1 A methyl-methacrylate (MMA) and poly-methyl-methacrylate (PMMA) plant in Jubail, a 50-
50 joint venture with Mitsubishi Rayon Company, is scheduled to go on-stream in 2013. The
annual production capacity of the MMA plant will be 250 thousand tons, where as the PMMA
plant will produce 40 thousand tons/annum. These products will be produced for the first time
in the Middle East. The project’s estimated investment cost is $1 billion.
1 A N-Butanol production facility, in equal partnership with Saudi Aramco, Dow Chemical and
Tasnee, is scheduled to go online in late 2014. The plant, of an annual production capacity of
330 thousand tons of N-Butanol, will be part of Saudi Kayan’s acrylic complex. The project’s
investment cost is $500 million.
1 A joint venture with Asahi Kasei and Mitsubishi Corp. to develop world-scale plants in Jubail
Industrial City for the production of acrylonitrile and sodium cyanide. The new company will
be named Saudi Japanese Acrylonitrile Co. (Shrouq). The annual production capacities will be
200 thousand tons of acrylonitrile and 40 thousand tons of sodium cyanide. Total investment
cost of this project is estimated at $561 million. Production is scheduled to start during the
final quarter of 2014.
1 Phase II of Sinopec Sabic Tianjin Petrochemical Co. , with an annual production capacity of
260 thousand tons of polycarbonates, is expected to go fully onstream by 2015. Its investment
cost is estimated at $1.7 billion. The Tianjin-based plant, once operational, will position Sabic
among the world’s leading producers of polycarbonates.
1 A world-scale elastomers project, a 50-50 joint venture with Exxon Chemical Arabia (an affiliate
of ExxonMobil Chemical Co.), is scheduled to go online in 2H 2015. The plant is part of the
Al-Jubail Petrochemical Co. (Kemya) complex. The project will have an annual production
capacity of 400 thousand tons of specialty elastomers (poly-butadiene rubber, ethylene
propylene diene monomer rubber, thermoplastic elastomer and MTBE). Total investment cost
for this project is estimated at $3.4 billion.
1 A joint-venture with Saudi Aramco to construct an aromatics plant near Aramco’s present
Yanbu refinery. Tenders have not yet been made, with market expectations pointing to early
2013 for the submission of the tenders. No additional details regarding this project have been
released yet.
Although the expansions that went online in 2010 and 2011 were larger in production scale than
the upcoming ones, the new expansions will nevertheless give Sabic an additional competitive
edge. These additions will be increasing the company’s footprint in the high-growth markets 19 of
specialized chemicals, bringing it closer to the downstream industries such as the automotive and
construction industries. The global markets for the above performance chemicals are exhibiting fast
growth, as new uses for these high-value products are unfolding, thereby increasing their demand.
As such, serving this high growth market will allow Sabic to 1/ largely diversify its income stream
2/ reach its 2020 aim of specialized chemicals constituting 10% of the company’s revenues and 3/
contribute to the Kingdom’s industrial diversification program and job creation.
19 As an example of the high-growth markets for such products, polycarbonate demand in China is expected to
grow annually by c 10%, reaching 1.78 million tons by 2015. Polycarbonate is China’s most imported engineering
plastic, by volume, given domestic production of just 220 thousand tons. (Sabic)
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SABIC
December 4, 2012
FOOTNOTES
INITIATION OF COVERAGE EQUITY RESEARCH
IN CONTINUAL MODE OF SIGNING NEW DEALS
Sabic has always been on the look-out for new investments and partnerships, however over the
recent years has been focusing on performance chemicals, a new product line which will boost its
competitive edge and take it closer to its 2020 objectives. As observed from the above expansions,
the company has been eyeing several new projects in this specialty chemicals industry and boosting
its dealmaking presence in such markets.
DOMINATING THE DOMESTIC PRODUCTION LANDSCAPE
The growing importance of the Middle East region was evident in its increasing share of global
production over the past decade. From 2001 till 2010, the region’s share of global chemical output
has increased from 10% to 20%, while the US and European share of global output has shrunk from
36% to 24% and from 32% to 21%, respectively. The region’s expanding influence on the industry
should continue in the medium term, as it is projected that the region’s production capacity of
chemicals and petrochemicals will grow at annual rate of 6.6% up until 2016 20 .
Chart 13: Country/Region’s Share of Global Chemical Production (Basic Chemicals)
Source: Petrochemical Industry Overview, SRI Consulting, April 2011, cited by GPCA Sixth Annual Forum
Sabic’s growth has originated from this region and has been a key contributor to the region’s
petrochemical boom, while leading its own country Saudi Arabia’s diversification scheme away from
crude oil. The company today has 15 petrochemical subsidiaries operating in Saudi Arabia, out of
the country’s 42 existing ones (see Appendix G) 21 . Sabic has built chemical clusters in the Kingdom,
with the output of its group representing 95% of the domestic petrochemical production 22 .
Moreover, Saudi Arabia’s production capacity of downstream plastics constitutes c62% of the
GCC’s total capacity. As such, Sabic dominates also the regional production landscape. With the
Saudi government’s firm commitment to moving and expanding downstream (projects tendered
in excess of $20 billion 23 ) and with Sabic’s growing participation in the Kingdom’s downstream
projects, becoming the world’s leading producer of petrochemicals would not be far from reality.
20 GPCA Sixth Annual Forum
21 Source: MEED
22 Source: US Saudi Arabian Business Council
23 Source: MEED, May 2011
12

SABIC
December 4, 2012
FOOTNOTES
INITIATION OF COVERAGE EQUITY RESEARCH
STRATEGIC PARTNERSHIPS WITH INDUSTRY LEADERS
Sabic’s growth has leveraged on long-term strategic partnerships with industry leaders. Investing in
joint ventures, Sabic has established companies in the MENA region, Asia, US and Europe. Sabic has
projects in partnership with companies such as Shell, Exxonmobil Chemical, Mitsubishi Chemicals
and Sinopec. Partnering with such names has boosted its competitiveness and strengthened its
market presence, allowing it to reach the ranks it has reached today. Lately, the company announced
its intention to invest further in the US, this time in the country’s shale gas projects. This strategic
aim will give Sabic the opportunity to partner again with leading energy firms and to be part of the
US shale gas epoch.
COMPETITIVELY POSITIONED REGIONALLY AND GLOBALLY
As raw materials and utilities are the largest component of production costs in the petrochemical
industry, with capital and labor playing a minor role, a producer’s competitiveness is then mainly
determined by the type of hydrocarbon feedstock it uses and its pricing structure.
Chart 14: Global Ethylene Production by Feedstock
Source: IHS, Global Olefins Update, 6th Annual GPCA Forum
Saudi producers’ access to subsidized gas-based feedstock, has positioned them at the low-end
of the production cost curve, as the bulk of the country’s petrochemical output is produced from
ethane and methane feedstock. According to our estimates, Sabic’s domestic operations account
for c80% of total output, hence a large portion of its total feedstock cost is relatively fixed, leaving
only its European, US and Asian operations 24 , with a variable cost structure. As such, for the bulk of
its operations, its domestic production, Sabic obtains its ethane and methane feedstock at a set
price of $0.75/mmbtu, at the lowest price worldwide 25 , fixed until 2012-2015 depending on the
project. The heavier feedstocks propane and butane are supplied at a 30% discount to C&F Japan
Naphtha price. This vast cost advantage has allowed Sabic during cycles to maintain operating rates
above 90% at its production plants in Saudi Arabia 26 .
24 Output from European plants, which are Sabic’s only pure naphtha-based facilities, represent around 11% of
the company’s total output. US operations represent around 2% and Asian operations represent around 7%.
25 Its GCC neighbors obtain ethane feedstock at a cost ranging between $1.25/mmbtu-$2.50/mmbtu (MEED)
26 Source: Sabic Capital Presentation, 2010
13

SABIC
December 4, 2012
FOOTNOTES
INITIATION OF COVERAGE EQUITY RESEARCH
Further to Saudi Arabia holding one-fifth of the world’s proven oil reserves 27 , with Saudi Aramco
producing c12% of the world’s crude oil 28 , the Kingdom holds the world’s fourth largest proven
gas reserves. As such, the government is largely committed to growing its gas infrastructure,
which should in turn reduce the gas shortage risk constraining the ethane supply for domestic
petrochemical producers. This sustained competiveness, accordingly, will allow key players such as
Sabic to withstand any global oversupply threats and to remain best positioned to capitalize on any
upturn in the global economy.
On a further note, worries around the price increase of ethane in the Kingdom are exaggerated.
Despite the increase of ethane prices most likely to $1.5/mmbtu, from the current $0.75/mmbtu,
there will remain a price advantage over US gas-based feedstocks and the naphtha-based
feedstocks used by its European peers (which are highly correlated to crude oil prices). Based on
an ethane price of $0.75/mmbtu, the production cost of one ton of ethylene would amount to $90-
$100, whereas if the ethane price jumps to $1.5/mmbtu, ethylene production cost would only rise
to $160/mt. These numbers compare very favorably with average production costs of $700-$800/mt
for naphtha-based operators in Europe and $600/mt for gas-based operators in the US 29 .
In turn, Saudi producers will retain the cost leadership advantage over rivals even upon the
implementation of the new pricing regime (expected in 2013). Moreover, with naphtha-based
producers expected to remain price-setters, profit margins for ethane-based producers such as
Sabic should remain supported across time.
Chart 15: Feedstock Cost Advantage (Ethylene Production Cost)
Source: Bloomberg Commodity Price Forecasts, ASIB estimates Source: MEED, ASIB estimates
LEADING ITS COUNTERPARTS WITH SUPERIOR MARGINS
Generating an operating margin close to 30%, Sabic stands apart from major counterparts who
generate an average operating margin of 11%. With an Ebitda margin of over 30%, Sabic also leads
its peer group who hold an average Ebitda margin of 15%. This wide gap between Sabic and its
global counterparts is in large due to: 1/ the competitive feedstock cost structure 2/ economies of
scale 3/ logistics advantage and 4/ the integrated facilities employing world-scale plants it operates
within Saudi Arabia, which account for the bulk of the company’s total production (17 out of the 23
manufacturing affiliates are based in the KSA). As Sabic is expected to retain this competitiveness,
mainly feedstock competitiveness, the impact on profitability from threats such as cyclical
downturns and increasing competition should be contained.
27 Source: US Energy Information Administration
28 Source: Energy Intelligence, cited by US Energy Information Administration
29 Source: MEED, February 2012
14

SABIC
December 4, 2012
FOOTNOTES
INITIATION OF COVERAGE EQUITY RESEARCH
Chart 16: Peer EBIT Margins (%) Chart 17: Peer EBITDA Margins (%)
Source: Bloomberg Source: Bloomberg
EXPOSED TO OVER 10 INDUSTRIES
Sabic’s product portfolio ranges from chemicals (basic and performance chemicals) to plastics
(polymers and innovative plastics) to fertilizers to steel, whereby an entire range of sub-products
fall under these categories.
The largest strategic business unit (SBU) is the Chemicals SBU, whereby it represents 64% of
production volumes and 58% of sales volumes. This SBU includes performance chemicals or
specialty chemicals, which were first introduced by Saudi Kayan. Having these products in Sabic’s
portfolio will assist in mitigating the company’s exposure to price swings, as specialty chemicals are
less cyclical than traditional or commodity petrochemicals. Moreover, the market for specialized
chemicals does not face an excess oversupply risk, a threat faced by the basic or traditional
petrochemical producers. Finally, specialized chemicals are produced in much smaller volumes,
owing to their specialized structure & functions and are of higher value, with their demand linked
more to performance specifications than price 30 . In turn, brighter and more opportunistic prospects
exist for producers with a portfolio mix that includes these performance chemicals.
Next in line is the Polymers SBU, whereby the bulk pertains to polyethylene and polypropylene
production. Although innovative plastics (dominated by polycarbonates) are the smallest
contributors to Sabic’s total output and sales volume, the contribution of this SBU to total sales
revenues should not be underestimated at all. Products such as polycarbonates and innovative
plastics in general are high-value products, thus they enjoy prices equal to a manifold of those of
commodity or traditional chemicals.
Chart 18: Production Breakdown by SBU Chart 19: Sales Output Breakdown by SBU
*Includes Performance Chemicals *Includes Performance Chemicals
Source: Company Reports 2011 Source: Company Reports 2011
30 Bloomberg BusinessWeek
15

SABIC
December 4, 2012
FOOTNOTES
INITIATION OF COVERAGE EQUITY RESEARCH
Sabic’s exposure to so many industries, with different fundamentals, should largely reduce the
company’s market risk.
A BROAD AND DIVERSIFIED MARKET PRESENCE
Given its global reach of more than 100 countries, Sabic faces limited country risk. In terms of
regions, Asia represents the largest market for Sabic, generating 35% of sales, with the Middle
East making up for the next largest market. Sabic has been continuously seeking new markets and
strengthening its presence in existing home markets, especially in key market China. Its JV in China
with Sinopec, along with its 41 offices, 10 production sites and 5 T&I centers in Asia, has solidified
the company’s foothold in one of the world’s highest growth markets. The geographical proximity
of Asia to Saudi Arabia has given domestic producers a material advantage over European and US
counterparts.
Attractive growth dynamics are also present in the MENA region, as the per capita consumption of
various polymers is significantly below that of North America and Europe 31 . Hence, with ambitious
global growth initiatives set, robust emerging market demand and growth potential in the MENA
region, Sabic’s market share is expected to grow.
Chart 20: Geographical Market Segmentation of Sales Revenues
Source: Company Reports 2011
A STATE-OWNED ASSET CONTRIBUTING TO THE KINGDOM’S WELL-BEING
A stake of 30% was floated to the public in 1984. Since then the Saudi government has retained its
70% of Sabic, through the Public Investment Fund, thus granting Sabic the backing of the world’s
largest holder of oil reserves (KSA’s S&P Credit Rating: AA- for Local and Foreign Currency LT Debt ).
Government support for Sabic has been evident in “feedstock supply, funding and infrastructure”
(Sabic). About 11% of Sabic’s loan book is through funding from government-related agencies.
Moreover, as a state-owned asset, Sabic is leading the country’s industrial diversification program
and developing its downstream industries.
By investing increasingly in the specialty chemicals sector, Sabic is establishing the groundworks
for the government’s drive to add more value to its crude oil. This vision will be realized by taking
the petrochemical industry downstream (key examples are Sabic, Saudi Kayan and Tasnee) and
developing industrial parks at proximity to petrochemical complexes. Such integrated sites should
in turn attract multinational names in prime manufacturing industries such as the automotive and
electronics industries. With these industries developed, and additional jobs created for the young
and unemployed, a large part of the government’s economic program would be implemented.
31 Source: MEED, May 2011
16

SABIC
December 4, 2012
FOOTNOTES
INITIATION OF COVERAGE EQUITY RESEARCH
Finally, it is worth noting that Sabic is a key employer in the Kingdom, having over 15,000 employees
in the country alone 32 . With job creation a top priority for the government of Saudi Arabia, Sabic’s
move downstream will play a major role in meeting these targets. As such Sabic will remain an
integral asset for the Kingdom and will accordingly continue to leverage on its wide state-support,
leading its country’s largest non-oil sector and contributing to the Kingdom’s overall well-being.
TECHNOLOGY & INNOVATION UNIT 33: CONSTANTLY EVOLVING IN AIM OF 2020 VISION
Research, technology and innovation are among the key determinants of a company’s
competitiveness and in turn success. Sabic is constantly investing in new technologies and innovative
solutions, a practice that has given the company its leading status today. Its growing investment in
T&I, with technological fixed assets representing investments of c$90 billion until today 34 , will allow
Sabic to develop the new products targeted by 2020 and in turn realize its objectives. Sabic has its
12 T&I centers spread globally, with ones in Saudi Arabia, the US, Europe, China, Japan, Korea and
India. These centers are present in such countries to make Sabic closer to its partners and more so
to its clients, to better meet their needs. Furthermore, Sabic’s T&I unit “develops more than 150 new
products every year” and enjoys the backing of over 8000 global patents, with Sabic Innovative
Plastics (SIP) holding the lion share as it is supported by more than 5000 global patents 35 . The highperformance
engineered plastics SIP offers are marketed under well-known brands, especially in
the automotive industry, with names such as Lexan, Xenoy, Noryl and Valox. Out of the c$6 billion
worth of intangibles on Sabic’s books, representing 6.8% of total assets, patents and trademarks
constituted around 24% of total intangibles or $1.4 billion (as of September-end 2012).
Despite, Sabic’s current R&D to sales of 0.4% being below the industry average of 1.6% 36 , the
company is increasingly strengthening its focus on R&D. It has three technology centers under
construction and research programs constantly underway.
UNDER-PERFORMER OVER COURSE OF YEAR
Over the course of the year, Sabic’s shares have under-performed global peers (represented by
the Bloomberg World, Americas and EMEA Chemical indices). This could be partially explained by
the region’s social, economic and political instability. However, the unjustified performance gap
should narrow given Sabic’s inherent competitiveness, margin expansion and earnings/cash flow
generating power. Moreover, Sabic, which is down by 7% YTD, has also underperformed Brent crude
oil on a YTD basis by c11% aggregate.
Chart 21: Price Performance (Rebased) Chart 22: Price Performance (Rebased)
Source: Bloomberg Source: Bloomberg
32 Source: Sabic Capital
33 Sabic has restructured its Research & Technology unit, changing its name to Technology & Innovation unit (T&I)
34 Source: Sabic
35 Source: Sabic
36 Source: Bloomberg
17

SABIC
December 4, 2012
FOOTNOTES
INITIATION OF COVERAGE EQUITY RESEARCH
TRADING AT A DISCOUNT TO ITS 10-YEAR HISTORICAL AVERAGE AND TO ITS PEERS
Sabic is trading at PE 12E of 10.8x and a PE 13E of 9.0x, reflecting a discount to the weighted peer
average 37 of 11.9 x and 9.8x, respectively. The discount to peers is not justified owing to its various
competitive advantages, most importantly its cost leadership. Moreover, Sabic is trading at relative
historical lows, trading at 40% discount to its 10-year historical average of 17.8x, signaling the extent
to which global macro-economic and industry threats are factored in its current price. In turn, these
levels provide an attractive entry point for investors.
Chart 23: Sabic Historical PE’s
Source: Bloomberg
INITIATING COVERAGE WITH AN ACCUMULATE RATING
Despite reduced growth prospects for domestic petrochemical producers given feedstock
constraints in Saudi Arabia, Sabic is adamant in pursuing its growth objectives. The company is
delving downstream into new product lines and extending its portfolio. With the company’s growth
momentum expected to continue, and given Sabic’s 1/ secured access to low-cost feedstock 2/ widestate
support 3/ strong balance sheet (net debt-to-equity of just 0.23x), we project further profit
gains in the medium term and higher returns for shareholders. Sabic trades at a PE 12E of 10.8x,
a discount to peers (average of 11.9x), which does not reflect the company’s growth momentum
along with its cost competitive assets. The company’s high dividend yield of 5.1% for 2012 also gives
investors a stable income stream amid a low-yield environment. Moreover, Sabic generates a FCF/
share of SAR 10.5, implying a FCF yield of 11.7% which is materially higher than the industry (peer
average of 8.0%). We initiate coverage on the region’s largest cap company, with an Accumulate
rating given its estimated target price of SAR 108.4/share (upside potential of 21%).
37 The peer group, used to calculate the weighted peer average, is comprised of leading names across all
industries Sabic pertains to.
18

SABIC
December 4, 2012
VALUATION
FCFF VALUATION
INITIATION OF COVERAGE EQUITY RESEARCH
We valued Sabic using the Free Cash Flow to the Firm (FCFF) model, given its strong earnings and
free cash flow power. We accounted for Sabic’s expansions, in addition to the double-edge effect
of crude oil prices on the prices of Sabic’s products together with its impact on the production
cost of mainly its European operations. We ran a regression on petrochemical prices, using oil as
the independent variable given that the marginal cost of petrochemical production is determined
by naphtha-based producers. Furthermore, we included an adjustment factor to account for the
demand/supply imbalances in the various petrochemical markets, and the economic growth outlook
of major end-markets. For the fertilizer and steel SBU, a similar approach was adopted, however we
used the anthracite coal as the independent variable in our regression model for fertilizers and for
the steel SBU we used iron ore as the independent variable for deriving steel prices (both long and
flat). The model was based on a 4-year forecast period, with the below oil prices used and the below
prices for key commodities and products derived.
Table 2: Projected Product Prices
2012E 2013 E 2014 E 2015 E
Brent Crude Oil ($/bbl) 113 109 110 115
Ethylene ($/mt) 1,188 1,124 1,140 1,220
MEG ($/mt) 1,011 992 997 1,021
LDPE ($/mt) 1,330 1,302 1,309 1,344
HDPE ($/mt) 1,355 1,333 1,339 1,365
PP ($/mt) 1,393 1,374 1,378 1,403
Anthracite Coal ($/mt) 207 227 235 236
Urea ($/mt) 489 492 504 506
Ammonia ($/mt) 496 523 529 531
Iron Ore ($/mt) 179 138 130 115
Long Steel ($/mt) 621 512 492 453
Source: Bloomberg Commodity Price Forecasts, ASIB Estimates
Using a long-term expected profitability of 8.9% and a retention rate of 15%, a perpetual growth
rate of 1.3% was derived. The profitability accounted for the premium Sabic retains due to its cost
leadership in the chemical industry, state-of-the-art production plants in addition to its firm statesupport.
For the discount rate, we used a WACC of 10.3%, based on a cost of equity of 14% and a cost
of debt of 2%. The FCFF model resulted in an estimated target price of SAR 112.4/share, implying
upside potential of 26%.
19

SABIC
December 4, 2012
Table 3: FCFF Model
INITIATION OF COVERAGE EQUITY RESEARCH
SAR mn 2012 E 2013 E 2014 E 2015 E
Net Income 24,933 29,734 29,180 32,233
Change in Working Capital (6,087) (1,095) 1,197 952
Non-Cash Charges 12,459 12,570 12,855 13,200
Capex (10,034) (10,124) (10,353) (10,630)
Interest Expense (2,282) (1,841) (1,504) (1,098)
Free Cash Flow to the Firm 35,728 35,118 31,989 34,948
Present Value of Free Cash Flow to the Firm 35,728 28,885 23,863 23,644
Present Value of Terminal Value 268,426
Intrinsic Value of the Firm 380,546
Net Debt 43,268
Intrinsic Value of Equity 337,278
WACC 10.3%
Terminal Growth Rate 1.3%
Shares Outstanding (mn) 3,000
NAV per share (SAR) 112.4
Source: ASIB Estimates
SENSITIVITY ANALYSIS
The data table below presents a sensitivity analysis to our price target valuation assuming various
growth and discount rates. Our calculated fair value of SAR 112.4 /share, for the base case scenario, was
based on a WACC of 10.3 % and a terminal growth rate of 1.3%.
Table 4: Sensitivity Analysis
WACC
Terminal Growth Rate
1.0% 1.5% 2.0% 2.5% 3.0%
8.0% 145.4 155.5 167.4 181.4 198.2
8.5% 135.0 143.7 153.7 165.4 179.3
9.0% 126.0 133.5 142.1 152.0 163.5
9.5% 118.1 124.6 132.0 140.5 150.2
10.0% 111.1 116.9 123.3 130.6 138.9
10.5% 104.9 110.0 115.6 122.0 129.1
11.0% 99.3 103.8 108.8 114.4 120.6
11.5% 94.3 98.3 102.8 107.7 113.2
12.0% 89.8 93.4 97.4 101.7 106.6
Source: ASIB Estimates
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SABIC
December 4, 2012
RELATIVE VALUATION
INITIATION OF COVERAGE EQUITY RESEARCH
We valued Sabic on an equal basis with selected global peers from across the three industries:
chemical, fertilizer and steel. Our peer group included companies such as Dow Chemical, BASF,
DuPont, Total, Yara, CF Industries and Tata Steel. Again, Sabic should be trading at a premium given
that it: 1/ is positioned at the low-end of the production cost curve 2/ enjoys superior profitability
levels in contrast to its counterparts 3/ has very strong government support and 4/ plays a strategic
role in the country’s economic and social development.
Global peers trade at a weighted average of 11.9x estimated 2012 earnings, opposed to Sabic trading
at 10.8x, implying an unjustified discount. In turn, a fair value of SAR 98.8/share is derived, based on
our 2012 earnings per share (EPS) estimate of SAR 8.31.
On an EV/EBITDA 12E basis, Sabic trades at a multiple of 6.5x versus a weighted peer average of 6.2x.
Yet, given Sabic’s trading premium historically to the industry average, we added this premium which
resulted into a weighted peer average EV/EBITDA 12E of 7.3x Accordingly, based on EBITDA 12E of SAR
54,293 million, a fair value of SAR 105.7/share was obtained.
Table 5: EV/EBITDA Valuation
SAR mn
EBITDA 2012E 54,293
Enterprise Value 396,618
Net Debt as of YE12E 25,210
Minority Interest as of YE12E 54,294
Market Capitalization 317,115
Shares Outstanding 3,000
Source: ASIB Estimates
FINAL VALUATION
NAV per Share (SAR) 105.7
Attributing a 60% weight to the FCFF valuation and a 40% weight to the relative valuation, a final fair
value of SAR 108.4/share was derived for Sabic, offering an upside potential of 21%.
Table 6: Final Valuation
Fair Value (SAR) Weight
FCFF Valuation 112.4 60%
Relative Valuation
Source: ASIB Estimates
P/E 98.8 20%
EV/EBITDA 105.7 20%
Final Fair Value per Share (SAR) 108.4
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December 4, 2012
INVESTMENT RISKS
1 Cyclicality of industry
1 Recessionary threats in US and Europe
1 Hard landing in China
1 Reduced import demand from Asia
INITIATION OF COVERAGE EQUITY RESEARCH
1 Increase of US competitiveness given access to low-cost gas-based feedstocks
1 Dwindling availability of gas feedstock in the Kingdom
1 Upward revision to gas prices in the Kingdom
1 Increasing use of NGL’s (propane, butane and naphtha) in the feedstock mix
1 Rise in costs of feedstocks benzene and propylene (where not entire rise can be passed on to
customers) for US operations
1 Rise in naphtha costs for European operations
1 Price increase in iron ore imports
1 Rise in steel imports from neighboring producers
1 Unannounced plant stoppages
1 Increase in competition from local and neighboring expansions (Borouge, Qatar Petroleum...)
22

SABIC
December 4, 2012
FOOTNOTES
COMPANY PROFILE
INITIATION OF COVERAGE EQUITY RESEARCH
1 Saudi Basic Industries Corp. (Sabic) was established in September 1976 through a royal decree,
with the first plant beginning production in 1981. The company’s capital has been raised
several times, amounting today to SAR 30,000 million comprised of 3,000 million shares of
SAR 10/share.
1 Sabic is a heavy-weight on several regional market indices. The stock represents c10% of the
Tadawul All Share Index and 40% of the Tadawul All Share Petrochemical Index. Furthermore,
it represents c12% of the Bloomberg EMEA Chemicals Index.
1 The company has five strategic business units, whose combined output amounted to 69.1
million tons for the full year 2011. Although separated into two different SBU’s, polymers and
innovative plastics fall under the same product range of plastics. As such, the product range
of Sabic could be narrowed down to: Chemicals-Plastics-Fertilizers-Metals (for a detailed
summary of Sabic’s products, please refer to Appendix C).
Table 7: Breakdown of Production and Sales Volumes (for FY 2011)
(Million Mt) Chemicals* Polymers Fertilizers Metals Innovative
Plastics
Production 44.5 11.3 6.7 5.4 1.1 69.1
Sales 31.4 11.4 4.5 5.5 1.4 54.2
* Includes Performance Chemicals of 439 thousand tons; Performance Chemicals were introduced to Sabic’s portfolio for first
time in 2010
Source: Company Reports 2011
1 Sabic has over 40,000 employees today (versus 790 employees in 1980). There are more
than 15,000 employees in Saudi Arabia, around 11,000 employees in the US, around 6000
employees in Europe, with the remainder spread across various countries.
1 Sabic has operations across 40 countries. The company operates :
- 2 massive production sites in Saudi Arabia (Al-Jubail and Yanbu) comprising 19 world-scale
complexes
- 10 manufacturing sites in Asia
- 17 manufacturing sites in the US
- 13 manufacturing sites in Europe
Overall, Sabic operates a total of 60 world-scale plants 38 .
1 Most of the subsidiaries consolidated in Sabic’s books pertain to the management and
operations of its Chemicals, Polymers and Innovative Plastics SBUs. Among these subsidiaries
are: Sharq, Ar-Razi, Ibn Zahr, Ibn Sina, Kemya, Yanpet, Sadaf, Yansab and Kayan (for a summary
of the subsidiaries consolidated in Sabic’s consolidated financial statements, please refer to
Appendix D).
1 Out of Sabic’s 24 manufacturing affiliates, 18 affiliates are for the production of petrochemicals,
three affiliates are for the production of fertilizers and the remaining three are for the
production of steel. Moreover, most of Sabic’s manufacturing affiliates are based in Saudi
Arabia (for a summary of Sabic’s manufacturing affiliates, please refer to Appendix F).
38 Source: Sabic
Total
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SABIC
December 4, 2012
FOOTNOTES
INITIATION OF COVERAGE EQUITY RESEARCH
Table 8: Geographic Presence of Manufacturing Affiliates
KSA Bahrain Europe USA Asia
# of Manufacturing Affiliates 17 3 1 1 1
Source: Company Reports
The bulk of production takes place in the Kingdom. The output of Sabic Europe approximates 8
million tpa or 11% of total output (for 2011), comprised of almost 5 million tons of basic chemicals
(10% of consolidated basic chemicals output) and 3 million tons of polymers 39 (27% of consolidated
polymers output). US operations account for around 1 million tons of output or c2% of output,
whereas Asian operations account to approx. 5 million tons or c7% of total output 40 .
1 Sabic ‘s hydrocarbon feedstock mix includes ethane, methane, propane, butane and naphtha.
From these feedstocks, Sabic produces its basic chemicals such as olefins and aromatics
which in turn are used to produce polyolefins and other polymers.
1 Sabic’s top-line and bottom-line figures are foremost derived from the sale of chemicals,
polymers and innovative plastics. Below is a comprehensive breakdown, prior to the
consolidation adjustments and eliminations (based on 2011 report).
Table 9: Breakdown of Operations (for FY 2011)
(SAR million) Chemicals* Fertilizers Metals Corporate** Total***
Sales 218,725 8,654 15,532 17,877 260,788
Gross profit 47,038 5,706 2,829 5,104 60,677
Net profit 32,618 5,952 2,036 30,854 71,460
*Chemicals Segment account for basic chemicals, performance chemicals, polymers and innovative plastics.
**Corporate Segment “includes the corporate operations, technology and innovation centers, the investment activities
and Sabic Industrial Investments Co. “ (Sabic)
***Prior to Consolidation Adjustments and Eliminations
Source: Company Reports
39 Sabic Europe produces mainly HDPE, LDPE, LLDPE and Polypropylene
40 Source: Sabic, ASIB Estimates
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SABIC
December 4, 2012
INITIATION OF COVERAGE EQUITY RESEARCH
APPENDIX A: PRO-FORMA INCOME STATEMENT
(SAR mn) 2011 2012E 2013E 2014E 2015E
Sales revenues 189,898 184,917 186,565 190,791 195,906
Cost of sales (127,768) (132,350) (126,411) (128,721) (129,342)
Gross profit 62,130 52,567 60,154 62,069 66,565
S,G&A expenses (13,292) (12,954) (13,069) (16,217) (16,652)
Operating income 48,838 39,613 47,085 45,852 49,913
Other income 2,039 2,221 1,629 1,711 1,652
Finance charges (2,993) (2,282) (1,841) (1,504) (1,098)
Income before minority interests and zakat 47,885 39,552 46,873 46,060 50,467
Minority interests (16,043) (12,673) (15,019) (14,759) (16,171)
Income before zakat 31,842 26,878 31,853 31,301 34,296
Zakat (2,600) (1,945) (2,119) (2,121) (2,063)
Net Income 29,242 24,933 29,734 29,180 32,233
APPENDIX B: PRO-FORMA BALANCE SHEET
(SAR mn) 2011 2012E 2013E 2014E 2015E
Cash and cash equivalents 50,389 51,011 53,221 55,907 53,972
Accounts receivables 31,426 29,303 29,564 30,234 31,044
Inventories 31,464 32,718 31,250 31,821 31,974
Other receivables and prepayments 19,122 14,907 14,238 14,498 14,568
Total current assets 132,401 127,939 128,273 132,459 131,559
Investments 9,701 9,013 9,060 9,825 10,444
Property, plant and equipment 165,805 164,590 163,363 162,109 160,822
Intangible assets 21,891 21,529 20,396 19,262 18,129
Other non-current assets 2,986 3,658 3,879 4,113 4,361
Total non-current assets 200,382 198,789 196,697 195,310 193,756
Total Assets 332,784 326,728 324,970 327,769 325,315
Accounts payable 16,388 17,391 16,610 16,914 16,996
Short-term bank facilities 1,333 1,299 1,311 1,627 1,670
Current portion of long-term debt 13,264 14,735 11,600 13,597 13,029
Accrued liabilities and other payables 8,944 13,906 10,176 10,362 10,412
Zakat payable 3,140 2,810 3,797 5,129 6,928
Total current liabilities 43,070 50,142 43,494 47,629 49,035
Long-term debt 87,907 60,187 48,586 34,989 21,960
Employees' service benefits payable 8,555 9,071 9,618 10,199 10,814
Other non-current liabilities 4,046 3,793 3,514 3,257 3,018
Total non-current liabilities 100,508 73,050 61,719 48,445 35,793
Share capital 30,000 30,000 30,000 30,000 30,000
Statutory reserve 15,000 15,000 15,000 15,000 15,000
General reserve 69,781 80,242 92,136 100,890 107,337
Retained earnings 23,242 24,000 24,000 24,000 24,000
Total shareholders' equity 138,022 149,242 161,136 169,890 176,337
Minority interests 51,183 54,294 58,620 61,805 64,150
Total Liabilities and Equity 332,784 326,728 324,970 327,769 325,315
25

SABIC
December 4, 2012
APPENDIX C: SABIC’S PORTFOLIO
INITIATION OF COVERAGE EQUITY RESEARCH
Chemicals Plastics Fertilizers Steel
Olefins PVC Urea Long Steel
Ethylene Polyester Ammonia Rebars
Propylene Polystyrene DAP Wire Rod
Butadiene Polyolefins MAP Rebar in Coil
Butane-1 HDPE Billets
Oxygenates LDPE Flat Products
Methanol LLDPE Hot Rolled Coil
MTBE PP Cold Rolled Coil
Aromatics Advanced thermoplastic
sheet and film materials
Hot Dip Galvanized Coil
Styrene Monomer Polycarbonates Pre-Painted Coil
Benzene ABS
Pyrolysis Gasoline Resins
PTA Lexan
Chemical Intermediates Noryl
Caustic Acid Ultem
Ethylene Di-chloride Valox
Vinyl Chloride Monomer Xenoy
Glycols Xylex
Mono-ethylene Glycol
Di-ethylene Glycol
Tri-ethylene Glycol
Industrial Gases
Gaseous Nitrogen
Liquid Nitrogen
Liquid Argon
Crude Krypton/Xenon
Gaseous Hydrogen
Linear Alpha Olefins
Performance Chemicals
Ethoxylates
Ethanolamines
Source: Sabic
26

SABIC
December 4, 2012
FOOTNOTES
INITIATION OF COVERAGE EQUITY RESEARCH
APPENDIX D: SABIC’S CONSOLIDATED SUBSIDIARIES 41
Company Name* Direct and Indirect Shareholding
Sabic Industrial Investments Company (SIIC) and its subsidiaries 100%
Sabic Luxembourg (SLUX) and its subsidiaries 100%
Sabic Asia Pacific Pte. (SAPPL) and its subsidiaries 100%
Arabian Petrochemical Company and its subsidiary (Petrokemya) 100%
Saudi Iron and Steel Company (Hadeed) 100%
Sabic Sukuk Company (SUKUK) 100%
Sabic Industrial Catalyst Co. (Sabcat) 100%
Saudi European Petrochemical Company (Ibn Zahr) 80%
Jubail United Petrochemical Company (United) 75%
National Chemical Fertilizer Company (Ibn Al-Baytar) 72%
National Industrial Gases Company (Gas) 70%
Yanbu National Petrochemical Company (Yansab) 52%
Saudi Methanol Company (Ar-Razi) 50%
Al-Jubail Fertilizer Company (Al-Bayroni) 50%
Saudi Yanbu Petrochemical Company (Yanpet) 50%
National Methanol Company (Ibn Sina) 50%
Saudi Petrochemical Company (Sadaf) 50%
Eastern Petrochemical Company (Sharq) 50%
Al-Jubail Petrochemical Company (Kemya) 50%
Arabian Industrial Fiber Company (Ibn Rushd) 47%
Saudi Arabian Fertilizer Company (Safco) 43%
Saudi Kayan Petrochemical Company (Saudi Kayan) 35%
Source: Sabic Report 2011
*17 companies out of these consolidated subsidiaries are manufacturing subsidiaries
APPENDIX E: SABIC’S INVESTMENTS
Associated Companies Shareholding
Gulf Petrochemical Industries Co. (GPIC) 33%
Gulf Aluminum Rolling Mills Co. (Garmco) 31%
Maaden Phosphate Company 30%
Power and Water Utilities Company 25%
Aluminum Bahrain BSC (Alba) 21%
National Chemical Carrier Company 20%
Source: Sabic Report 2011
41 Tianjin Petrochemical Company, owned by Sabic, SIIC and Sinopec, is proportionately consolidated in Sabic›s
consolidated financial statements.
27

SABIC
December 4, 2012
INITIATION OF COVERAGE EQUITY RESEARCH
APPENDIX F: SABIC’S MANUFACTURING AFFILIATES
Location Est.
Date
Onstream
Date
SBU Products
Ar-Razi KSA 1979 1983 Chemicals Methanol
Sadaf KSA 1980 1985 Chemicals Ethylene,Styrene,Caustic
Soda,Ethylene Di-chloride, MTBE
Ibn-Sina KSA 1981 1985 Chemicals Methanol, MTBE
Yanpet KSA 1980 1985 Polymers Ethylene, Propylene,MEG,
Polyethylene, Polypropylene
Petrokemya KSA 1981 1985 Chemicals Ethylene,Polystyrene,Butene-1,
Propylene,Butadiene,Benzene,
Polyethylene, PVC,ABS
Kemya KSA 1979 1985 Polymers Ethylene, Polyethylene
Sharq KSA 1981 1985 Chemicals Ethylene,Propylene,MEG,DEG,
TEG,LLDPE,HDPE
Ibn Zahr KSA 1984 1988 Polymers MTBE,Polypropylene
Ibn Rushd KSA 1993 1995 Polymers Aromatics, PTA,PET,Acetic Acid
Al-Bayroni KSA 1979 1983 Fertilizers Ammonia,Urea,DOP
Safco KSA 1965 1969 Fertilizers Ammonia,Urea
Ibn Al-Baytar KSA 1985 1987 Fertilizers Ammonia,Urea,Phosphate
Hadeed KSA 1979 1983 Metals Steel Rebars,HRC,CRC,Wire
Rod,Flat Steel products
Gas KSA 1983 1984 Chemicals Hydrogen,Oxygen,Nitrogen
United KSA 2001 2004 Chemicals Ethylene,Polyethylene,MEG,LAO
Yansab KSA 2004 2008 Polymers Ethylene,Propylene,LLDPE,
HDPE, MEG, MTBE,
Polypropylene, Butene-1,Butane-
2,TolueneXylene
Kayan KSA 2007 2011 Performance
Chemicals
Ethylene,Propylene, LDPE,HDPE,
Polypropylene,MEG,Acetone,PC
and other specialty products
Garmco Bahrain 1981 1985 Metals Aluminum Sheet, Can Stocks
GPIC Bahrain 1979 1985 Chemicals Ammonia,Methanol,Urea
Alba Bahrain 1968 1971 Metals Liquid Metal,Ingots,Billets
Sabic Europe Netherlands
Sabic
Innovative
Plastics
Tianjin
Petrochemical
Co.
Source: Sabic
UK
Germany
US
Netherlands
Spain
NA NA Polymers Ethylene,Propylene,Aromatics
Polyethylene,Polypropylene
NA NA Innovative
Plastics
Thermoplastic resins,
Coatings,Specialty Compounds,
Film,Sheet
China 2008 2010 Polymers Ethylene, MEG, Polypropylene,
Polyethylene,Butatiene,Phenol,
Butene-1
28

SABIC
December 4, 2012
INITIATION OF COVERAGE EQUITY RESEARCH
APPENDIX G: SAUDI ARABIA’S PETROCHEMICAL LANDSCAPE
Source: Middle East Economic Digest (MEED)
29

SABIC
December 4, 2012
INITIATION OF COVERAGE EQUITY RESEARCH
APPENDIX H: STEEL PROJECTS IN THE MIDDLE EAST
Project Country Est. Cost
($m)
Status Award Completion
Sefid Dasht steel plant Iran 300 Design Q4 2012 2014
Rolling mill plant expansion Iran 500 EPC bid Q1 2012 2014
Direct reduction iron (DRI) plant Iran 350 EPC bid Q1 2012 2014
Torbat Heydariyeh DRI Plant Iran 2,330 EPC bid Q1 2012 2014
Yazd blast furnace steel plant Iran 500 EPC bid Q1 2012 2014
Gol-e-Gohar DRI plant Iran 500 EPC bid Q3 2012 2014
Ahwaz steel plant expansion Iran 200 EPC bid Q1 2012 2014
Khorasan Razavi steel plant Iran 1,000 EPC bid Q1 2012 2014
Steel plant Iran 325 Study Q4 2012 2014
Meltshop expansion Iran 615 Study Q4 2012 2014
Qaenat steel plant Iran 300 Study Q4 2012 2014
Erbil steel plant Iraq 100 Feed Q4 2012 2014
Sulaimaniyeh steel mill Iraq 130 Study Q4 2012 2015
Basra steel plant rehabilitation Iraq 1,000 Study Q4 2012 2014
Doukkala steel plant Morocco 172 Study Q3 2012 2015
Sohar Ferrochrome smelter Oman 85 Study Q4 2012 2014
Gas-fired steel plant Oman 3,000 Study Q1 2013 2015
Sohar steel complex expansion phase III Oman 600 Study Q4 2012 2015
Meltshop upgrade Qatar 1,000 EPC bid Q1 2012 2013
King Abdullah Economic City steel plant KSA 3,000 EPC PQ Q3 2012 2015
DRI plant KSA 500 Study Q4 2012 2014
Pipe mill KSA 70 Study Q4 2012 2014
Pipe mill KSA 50 Study Q4 2012 2014
Dammam steel billet plant KSA 700 Study Q4 2013 2014
Jubail Industrial City billet caster and
rolling mill
KSA 240 Study Q3 2012 2014
Steel plant expansion Tunisia 200 Study Q4 2012 2016
Emirates Steel plant phase III UAE 1,000 EPC bid Q1 2012 2014
Al-Ghurair Iron & Steel plant phase II UAE 40 Study Q3 2012 2014
Steel plant expansion Yemen 1,600 Study Q3 2013 2015
Integrated steel plant Yemen 250 Study Q3 2012 2015
Source: Middle East Economic Digest (MEED)
30

SABIC
FAIR VALUE DEFINITION
December 4, 2012
RATING GUIDE
ISSUER
INITIATION OF COVERAGE EQUITY RESEARCH
It is an unbiased estimate of the 12-month potential market price of the stock
SELL REDUCE HOLD ACCUMULATE BUY
Downside -30% -10% +10% +30% Upside
BUY: Upside potential in share price is more than 30%
ACCUMULATE: Upside potential in share price is between 10 and 30%
HOLD: Upside or downside potential in share price less than 10%
REDUCE: Downside potential in share price is between 10 and 30%
SELL: Downside potential in share price is more than 30%
Audi Saradar Investment Bank
Audi Saradar Investment Bank SAL • Lebanese joint stock company with a registered capital of
10,000,000,000 Lebanese Pounds • Commercial Registrar in Beirut: 30812 • Holding number 33 on
the Central Bank’s Banks List.
Address: Bank Audi Plaza • Bab Idriss • Beirut 2021 8102 Lebanon • P.O. Box 11-2560 • Beirut 1107
2808 • Lebanon. Phone: +961 1 964072 • Fax: +961 1 970403 • Email: contactus@asib.com
31

SABIC
December 4, 2012
DISCLAIMER
INITIATION OF COVERAGE EQUITY RESEARCH
“All rights reserved. This research document (the “Document”) is prepared by Audi Saradar Investment Bank SAL (“ASIB”),
being an entity of Audi Saradar Group, for the use of the clients of ASIB and/or the clients of any entity within the Audi
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32