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EQUITY RESEARCH

KSA

PETROCHEMICAL

SAUDI INTERNATIONAL PETROCHEMICAL CO.

CURRENT PRICE FAIR VALUE RECOMMENDATION SAR 22.65 SAR 28.52 ACCUMULATE

TABLE OF CONTENTS

Investment Rationale Industry Outlook

Global Petrochemical Market Zooming in on the Gulf Region Saudi Arabia: the Lion's Share

A RISING GLOBAL PLAYER IN A NEW DECADE

2 5

5 6 8

CAUTIOUS PICTURE IN PLACE

The markets of many petrochemicals display growth rates aligned with those of the global GDP. With a severe economic slowdown witnessed across key economies in 2008 and throughout the first half of 2009 and a soft recovery taking shape in the period that followed, major macro-economic shocks and developments have surfaced again in several parts of the world resulting in the possibility of a downward revision to global economic forecasts. Accordingly, as the macro-economic vision is to a certain extent blurry, with a bumpy global economic recovery remaining ahead, and as petrochemical demand is a function of GDP growth, we hold a cautious stance regarding the global petrochemical demand outlook.

Company Overview

Profile Management Objectives Subsidiaries Phases of Development Production Stream Line of Products Target Markets

11

11 12 12 12 14 15 16 17

EXCESS OVERSUPPLY STILL A CONCERN ­ BUT LESS SO

Our concern of an excess oversupply in the petrochemical industry is still in place, however is somewhat mitigated by expansion delays in the key developing petrochemical hubs of Asia and the Gulf region, coupled with rationalizations in Europe and the US. The flood of excess capacities, in the regional and international markets, comes as China is striving to achieve a self-sufficiency level and the Gulf region is capitalizing on its inherent competitive advantages. Yet, the severeness of the excess oversupply is largely debatable owing to the low visibility surrounding the petrochemical industry globally and lack of consensus on the size of the additional supply to hit the markets.

Financial Analysis

Profitability Capital Structure Asset Composition Liquidity and Utilization Cash Flows

18

18 21 23 24 26

A RISING STAR

Benefiting from massive oil and gas reserves, and the resulting access to low-cost feedstock, the Gulf region has evolved from a low-profile production base into a petrochemical hub. In particular Saudi Arabia, which holds the lion's share of the world's oil reserves and a significant portion of the world's gas reserves, has reached a stardom level in the international petrochemical arena.

Latest Performance SWOT Analysis Valuation

27 29 31

WELCOMING A NEW INTERNATIONAL PLAYER

Sipchem's aggressive expansionary drive will turn the company into one of the largest petrochemical producers in the region and will bring it to the forefront of leading international petrochemical firms. Specifically, Sipchem's acetyl complex will play an instrumental role in the Kingdom's and the region's petrochemical sector development and will promote the company at the international level.

FCFE Methodology 31 Relative Valuation Methodology 33

Report Appendices

WINDOW OF OPPORTUNITY

34 35 36

Projected Income Statement Projected Balance Sheet Table of Key Financial Measures

Even when factoring in a cautious and conservative market environment, Sipchem's stock price today does not reflect the company's earnings and cash flow generation power stemming from vast expansions and a favorable business model. Using the FCFE and relative valuation methodologies, Sipchem's final fair value per share is estimated at SAR 28.52, providing investors with a window of opportunity. Sipchem's stock today trades at SAR 22.65, thus offering investors an upside potential of 25.9%.

STOCK DATA

Price (SAR) Market Cap (SAR 000) Free Float Av. Monthly Liquidity (SAR 000) 52-week High (SAR) 52-week Low (SAR) SECTOR COVERAGE Reine Dagher Senior Equity Analyst [email protected] Youssef Nizam, CFA Head of Equity Research [email protected]

July 14, 2010

22.65 7,549,992 68.30% 528,166 26.60 17.70 13.29 9.89 1.62 2009 0.42 4.42% 2010 E 1.70 4.89%

(SAR)

27 24 22 19 17 14

Sipchem Stock Performance

PE 10 (E) PE 11 (E) PB Year EPS (SAR) Dividend Yield

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

2011 E 2.29 5.05%

2012 E 2.73 5.42%

2013 E 3.27 5.49%

2014 E 3.82 5.90%

1

Jul-10

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INVESTMENT RATIONALE

CAUTIOUS PICTURE IN PLACE

The markets of many petrochemicals display growth rates aligned with those of the global GDP. With a severe economic slowdown witnessed across key economies in 2008 and throughout the first half of 2009 and a soft recovery in the period that followed, major macro-economic shocks and developments have surfaced again in several parts of the world resulting in the possibility of a downward revision to global economic forecasts. The major macro-economic headlines, currently of concern, are: Continuous economic turmoil in the European zone, specifically amid the PIIGS countries Alongside the region-wide austerity measures that have been put in place in an attempt to trim national budget deficits, several monetary actions are speculated to be adopted by the European Central Bank, such as keeping interest rates at a record low. These aggregate measures across the European nation, combined with the unresolved sovereign debt crisis, could significantly derail Europe's weak economic recovery and accordingly affect the global economic recovery. The Chinese government's tighter property regulations China's economy, the economy driving the global recovery, is cooling amid tighter property market measures adopted by the Chinese government in an attempt to reduce a risk of an over-heated property market. The effect of these measures has already been witnessed in the latest headlines regarding manufacturing indices. China's manufacturing PMI1 , for June, has dropped by 1.8 percentage points from the previous month, more than what was anticipated. In turn, the cooling of the Chinese economy will largely affect the road to global economic recovery. Disappointing US data: Housing and unemployment Latest reports on US pending home sales and employment have signaled weaker US economic growth for the remaining half of the year. The expected US economic slowdown comes amid the fading effects of past stimulus measures implemented as government expenditures are diminishing. These weak US figures, regarding home sales and unemployment, are fuelling further the worries over global economic growth. In its latest quarterly World Economic Outlook, July 2010, the IMF modestly raised its 2010 growth forecasts for most of the economies in light of healthier economic activity throughout the first half of the year. The fund however maintained or slightly lowered its 2011 numbers for many of the advanced economies, together with several emerging and developing economies, reflecting the current global macro-economic picture and major developments that came to light during the second quarter of 2010. Global growth for 2010 was raised to 4.6%, up from a previous forecast of 4.1%. For 2011, the fund's forecast of world growth remained unchanged at 4.3%. As for China, the world's economic engine and a major petrochemical consumer, the projected economic growth for 2010 was revised up to 10.5%, from 10.0% previously. But for 2011, the fund revised down its forecast to 9.6%, from 9.9% formerly. Alongside these conservative changes in economic forecasts for 2011 and with a global macro-economic vision that continues to be, to a certain extent, blurry, the road to a global economic recovery remains bumpy. As petrochemical demand is a function of GDP growth, we hold a cautious stance regarding the global petrochemical demand outlook.

EXCESS OVERSUPPLY STILL A CONCERN - BUT LESS SO

Our concern of an excess oversupply in the petrochemical industry is still in place, however is somewhat mitigated by expansion delays in the key developing petrochemical hubs of Asia and the Gulf region, coupled with rationalizations in Europe and the US. The flood of excess capacities, in the regional and international markets, comes as China is striving to achieve a self-sufficiency level and the Gulf region is capitalizing on its inherent competitive advantages. Yet, the severeness of the excess oversupply is largely debatable owing to the low visibility surrounding the petrochemical industry globally and lack of consensus on the size of the additional supply to hit the markets.

FOOTNOTES

July 14, 2010

1

Purchasing Manager's Index: A group of indices used to measure the manufacturing sector performance

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A RISING STAR

Benefiting from massive oil and gas reserves, and the resulting access to low-cost feedstock, the Gulf region has evolved from a low-profile production base into a petrochemical hub. In particular Saudi Arabia, which holds the lion's share of the world's oil reserves and a significant portion of the world's gas reserves, has reached stardom levels in the international petrochemical arena. For 2010, it is projected that the Middle East will witness an increase in petrochemical output of an average of 3.7%. Saudi Arabia, which represents around half of the Gulf region's petrochemical capacity, will enjoy the highest growth in output of a rate of 6.3%.

WELCOMING A NEW INTERNATIONAL PLAYER

Sipchem's aggressive expansionary drive will turn the company into one of the largest petrochemical producers in the region and will bring it to the forefront of leading international petrochemical firms. Sipchem has strategic expansion plans in place up to the year 2015, which include extending the product line to include value-added chemical products, increasing the company's total production capacity and creating a fully integrated production complex. The company is currently in the second phase of development and is expected to enter its third phase in 2013, bringing on a more diversified product mix and an improved profitability.

PRODUCTION LEVEL TO MORE THAN DOUBLE

Sipchem's production for 2010 is expected to nearly double to 2.12 million tons of petrochemical products, with the acetyl complex going online at close to full utilization rates. By year-end 2013, it is expected that Sipchem's production will exceed 2.5 million tons of different products. Total production is expected to witness a CAGR of 19.1% for the period 2009-2014.

ACETYLS COMPLEX ENTERS COMMERCIAL PRODUCTION

Specifically, Sipchem's acetyls complex will play an instrumental role in the Kingdom's and the region's petrochemical sector development and will promote the company at the international level. The commercial start-up of two of three plants of the acetyls complex began recently, in June 2010, with the third plant expected to enter the commercial production stage next month. The production and sales of these added value chemicals are anticipated to boost the company's financial returns, whereby the company's ROE is expected to increase from 2.4% to 9.3% by year-end 2010.

AN OVERHAULED PRODUCTION SYSTEM

During the third quarter of 2009, Sipchem carried out maintenance work across all of its operating units for a period of one month. Consequently, the company's production plants are now set to capitalize on higher utilization rates and in a more efficient manner. Furthermore, Sipchem has put significant effort in minimizing the company's expenses and cash outflows. With overhauled and more efficient production plants in place, new plants going online and a cleaner book, Sipchem is expected to exhibit significant improvement in its financial performance going forward with a CAGR09-14E of 55.4% in net income and a CAGR09-14E of 33.5% in sales revenues.

FAVORABLE BUSINESS MODEL

Sipchem benefits from a well-cushioned business model, with profit margins exceeding the average of the regional and the international petrochemical industry. Its EBIT margin of 30.8% beats the regional average of 23.2% and the world average of 12.1%. Its EBITDA margin of 50.9% surpasses the regional average of 33.6% and the world average of 18.0%.

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HIGHLY-COMMITTED MANAGEMENT

The persistence of Sipchem's management in developing the acetyls complex, even amidst challenges from the global financial and economic turmoil witnessed in 2008 and 2009, demonstrates the management's solid commitment to implementing the company's strategy regardless of any severe obstacle that appears. Going forward, we believe Sipchem will succeed in achieving the objectives it sets itself, overcoming any threat or challenge that might be encountered, be it at a domestic, regional or international level. Along this line, Sipchem created contingency reserve funds, in 2008, partially to ensure the implementation of its strategic plans for future growth.

CONTINUOUS FEEDSTOCK SUPPLY

The majority of Sipchem's production plants receive their feedstock internally from one another, with only the natural gas feedstock being supplied by Saudi Aramco, with which Sipchem has a long-term supply agreement. Thus, Sipchem enjoys a relatively constant supply of feedstock and in turn limited risk of a possible feedstock disruption.

WINDOW OF OPPORTUNITY

Even when discounting a cautious and conservative market environment, Sipchem's stock price today does not reflect the company's earnings and cash flow generation power stemming from vast expansions and a favorable business model. Using the FCFE valuation approach, we have obtained an estimated fair value per share of SAR 28.83. Using the relative valuation approach, we have obtained a fair value per share of SAR 27.27 Accordingly, Sipchem's estimated final fair value per share is SAR 28.52, providing investors with an upside potential of 25.9%.

July 14, 2010

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INDUSTRY OUTLOOK

GLOBAL PETROCHEMICAL MARKET

As previously mentioned, the global petrochemical market diplays growth trends aligned with those of global GDP. This correlation stems from the fact that petrochemical demand is largely a function of consumers' everyday spending/income. In turn, the demand curve for this vital industry in the medium term will be significantly affected by the global macro-economic environment that will take shape during that period. With major developments in various key economies continuing to arise and accordingly a blurry financial and macro-economic vision lingering in place for the medium-term, the outlook for petrochemical demand remains cloudy to a certain extent. The revised economic estimates by the IMF for 2010 and 2011 still point to medium-term growth despite the latest financial and economic turbulence. Global GDP growth for 2010 and 2011 is projected at 4.6% and 4.3%, respectively. The projected economic growth for China, a major player in the global economic recovery and a key market in the petrochemical industry, is 10.5% for 2010 and 9.6% for 2011. Furthermore, the projected GDP growth for India, also among the top consumers of petrochemicals, is 9.4% for 2010 and 8.4% for 2011. As such, the latest economic forecasts by the IMF provide some kind of cushion for petrochemical demand growth prospects and accordingly the pricing outlook. Yet the cloud over the global petrochemical market remains firmly in place. With a flow of excess capacities coming onstream in Asia and the Gulf region in the medium term, and with the growth trends of the petrochemical market remaining unclear, the industry will enter an unparalleled era. However, it is important to mention that any rise in energy prices could provide some respite to the petrochemical industry, specifically in the region, as energy costs have historically played a strong role in driving petrochemical prices upward, even during times of weak demand and ample supplies in the market. Accordingly, the many uncertainties and concerns, regarding the global macro-economic recovery and a growing oversupplied petrochemcial market, could be mitigated by any rise in energy costs that could take place, exerting upward pressure on international petrochemical prices. Figure 1: IMF Estimates for Global and China's GDP Growth

14.0 11.6 11.0 9.1 8.4

Growth Rate %

13.0

10.0 8.3

10.1

10.4 9.6 9.1

10.5 9.6

8.0 4.8 5.0 2.3 2.0 2.9 3.6 4.9 5.2

4.5

m

5.1

4.6 4.3 3.0

-1.0

2000 2001 2002 2003 2004 2005 2006 2007 2008

2010E

Global GDP

China's GDP

Source: World Economic Outlook, July 2010

2011E

2009

-0.6

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SAUDI INTERNATIONAL PETROCHEMICAL CO.

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ZOOMING IN ON THE GULF REGION

Benefiting from massive oil and gas reserves, and the resulting access to low-cost feedstock, the Gulf region has evolved from a low-profile production base into a petrochemical hub. As of year-end 2009, the region's proved oil reserves totaled around 754.2 billion barrels, compared to total world proved oil reserves of 1,333 billion barrels. Accordingly, the Middle East region holds over half of the world's proved oil reserves. Moreover, the Middle East region accounts for a major portion of world oil2 production, holding a share of 30.5% based on 2009 data. The region's oil production capacity for 2009 totaled 24.4 million b/d, as opposed to a total world supply capacity of 80.0 million b/d3. Figure 2: Proved Oil Reserves by Region (year-end 2009)

3.2% 5.5% 1 4.9% No rth A merica So uth & Central A merica Euro pe & Eurasia M iddle East A frica 56.6% A sia P acific

9.6%

1 0.3%

Source: BP Statistical Review of World Energy, June 2010

The Middle East is also the world's largest holder of natural gas reserves. The region's gas reserves amount to 76.2 trillion cubic meters of gas, translating into a 40.6% share of the world's total proved gas reserves which amount to 187.5 trillion cubic meters. Furthermore, as previously mentioned, the Middle East region is a key producer of natural gas, producing 407.2 billion cubic meters per day or a 13.6% share of total world production of gas, based on 2009 data4. Figure 3: Proved Gas Reserves by Region (year-end 2009)

4.9% 4.3% North America South & Central America Europe & Eurasia 33.7% Middle East Africa 40.6% Asia Pacific

8.7% 7.9%

Source: BP Statistical Review of World Energy, June 2010

FOOTNOTES

July 14, 2010

Oil includes crude oil, condensates, NGL's BP Statistical Review of World Energy, June 2010 4 BP Statistical Review of World Energy, June 2010

2 3

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With these massive reserves of oil and gas, petrochemical production in the Middle East has swelled making the region a core global producer. According to the Gulf Petrochemicals and Chemicals Association (GPCA), production capacity has soared from 4.5 million tons, in the eighties period, to more than 100 million tons nowadays. For instance, the Middle East region represented just about 5% of global ethylene production capacity in 1990, as opposed to today's market share of close to 20%5. Many petrochemical expansions in the region are still in the pipeline, with an estimated 50 million tons of capacity to be added by 2015, which more or less amount to the European and American market share6. According to GPCA, the Gulf's role in global production is projected to increase from a 16% current share of global output to a 20% share by 2015. Asia will also witness an increase in its share of production, where as North America and Europe will have reduced market shares in the coming years. As such, the Middle East and Asia will represent more than half of the world's petrochemical output by 2015. As for the near-term, it is projected that the Middle East will witness an increase in petrochemical output of an average of 3.7% by 2010, with Saudi Arabia enjoying the highest growth in output of a rate of 6.3%7. Figure 4: Changes in the Market Shares of Production (Current-2015)

20% 31% 23% 20% 25% 20%

16%

36%

Currently

2015

Currently

2015 Asia

Currently

2015 Europe

Currently

2015

Middle East

North America

Source: MEED, June 2010

The advantage of extremely low-cost feedstock access, the key factor underpinning the billions of dollars poured into petrochemical projects in the Gulf region, is at risk as natural gas availability is dwindling in the region. This notion is largely supported by the fact that Sipchem was the last petrochemical producer in Saudi Arabia to obtain an ethane allocation letter, dated in 2006, from the Oil and Mineral Resources Ministry. Ethane has been the most popular feedstock in the region owing the very favorable subsidy it carries. Producers in Saudi Arabia obtain gas feedstock mainly from Saudi Aramco, with whom they have long-term supply contracts, at a fixed price of USD 0.75/ mmbtu8. In contrast, the price of gas feedstock supplied to producers in Iran, Qatar and the UAE varies between USD 1.25-1.50/mmbtu. Saudi producers such as Sabic, for instance, incur a cash cost of only about USD 150/mt for the production of one ton of ethylene whereby the selling price of ethylene today is around USD 850/mt9. The significance of this inherent competitive edge was apparent in the region's performance during the latest global financial crisis, when the Gulf's petrochemical producers were capable of operating at significantly higher utilization rates than the global industry average. Furthermore, this feedstock advantage is reflected in the high rate of ethane cracking in the region, whereby around 71% of the ethylene output in the Arab Gulf is derived from ethane. This is far above the global ethane-cracking level of 30% for the production of ethylene10. With local gas availability waning, the region's producers will need to adopt one of the following options if they wish to expand: Option 1: Find their way around the reduction in local gas feedstock through some mutual supply agreement with local or regional partners. This option was adopted by Sipchem. The company signed a memorandum of understanding with Sabic under which Sabic will supply Sipchem with ethylene and in turn Sipchem will supply Sabic with carbon monoxide for the production of methyl methacylate.

FOOTNOTES

MEED, May 2010 Arabian Business, MEED, June 2010 MEED, June 2010 8 Meed, 2009 9 As of July 13, 2010 10 Arabian Business, June 2010

5 6 7

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Option 2: Seek pricier alternative feedstocks such as naphtha or natural gas liquids (NGL's). The price of naphtha, for instance, is linked to the crude oil price as opposed to the price of ethane which is absolutely fixed. Thus, employing naphtha feedstock will significantly lower the regional producers' financial returns during times of bull runs in the oil market. Nevertheless, even with this lower cost advantage, regional producers will still be enjoying higher financial returns than global peers. Producers in the Middle East will be employing a feedstock mix, whereby even the naphtha and NGL's carry government subsidies11, opposed to global competitors which will have to pay market prices for their feedstocks. Moreover, the increasing employment opportunities, generated by petrochemical projects that are based on naphtha and NGL's, will largely benefit the Saudi Arabian social and economic landscape. These liquid feedstocks, considered as versatile feedstocks, produce a much larger range of chemical products than the ethane feedstock, and in turn many more job opportunities. Accordingly, the lower profitability the Kingdom's petrochemical industry might witness, from an increase in usage of liquid feedstocks, will be offset by a healthier and more lucrative socioeconomic scene at hand. Option 3: Construct fully-integrated complexes, with oil refineries, such that feedstock is constantly available for petrochemical production. This option was adopted by PetroRabigh, whereby the company has simultaneously built an oil refinery with a production capacity of 17.2 million tons of oil derivatives and a petrochemical complex with a production capacity of 2.4 million tons of petrochemical products. This option also leads to increasing employment opportunities, thus benefiting the country's socio-economic state.

With these options available and other competitive advantages, such as its proximity to target markets, remaining, the region is still well-positioned to embark on its plans to grow into the world's premier petrochemical hub.

SAUDI ARABIA: THE LION'S SHARE

Holding the lion's share of the world's oil reserves and a significant stake of the world's gas reserves, Saudi Arabia is one of the leading countries in the production of crude oil and petrochemicals. This status has stemmed from the extremely low production costs inherited by these industries' producers, dominated by Saudi Aramco and Sabic, respectively among the largest oil and petrochemical companies worldwide, in combination with large financial capabilities. Moreover, the Saudi Arabian economy, ranked among the world's most competitive economies and representing around one-fourth of the region's GDP12, is largely reliant on crude oil and oil-related industries such as petrochemicals13. This is reflected in the large share of export earnings and government income, estimated at around 90%, represented by oil export revenues. Figure 5: Saudi Arabia's Exports

5.3% 1.1% 4.0% 10.8%

Crude Oil Refined Products Petrochemicals Construction Materials Agricultural, Food Products and Other Goods*

78.8%

Source: Saudi Arabian Monetary Agency, 45th Annual Report * This item includes re-exported good

FOOTNOTES

July 14, 2010

According to Meed, 2010, NGL's carry a 30% discount on the export price of naphtha and naphtha carries an 11% discount on its export price Saudi Arabian General Investment Authority (SAGIA) 13 The petrochemical sector is regarded as the largest non-oil sector in Saudi Arabia

11 12

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Furthermore, the revenues from these industries make up more than 40% of the Kingdom's GDP14. The significant share of revenues derived from the energy sector has largely encouraged private sector investments in this industry, whereby an estimated USD 79 billion worth of investments are in energy projects under development15. The solid growth in government revenues, largely coming from oil revenues, supports the substantial spending and investments, of the government in the country's infrastructure and social development. With these massive investments, it is projected that Saudi Arabia will witness a 3.7% annual growth rate in real GDP for 2010, ranking second in terms of GDP growth among its Arab neighbors. Saudi Arabia's economic growth for 2010 follows Qatar, whose projected 2010 growth is 18.5%16. Figure 6: Saudi Arabia's Real GGP Growth

6% 5% 4% 3% 2% 1% 0% 2005 2006 2007 2008 2009 2010E 2011E 2015E 0.1% 3.2% 2.0% 5.6% 4.3% 3.7% 4.6%

4.0%

Source: IMF, World Economic Outlook, April 2010

Saudi Arabia's robust generation of oil revenues is underpinned by the Kingdom's vast oil and gas reserves. The country's proved oil reserves amount to 264.6 billion barrels of oil, representing a 35.1% share of the region's proved oil reserves and a 19.8% share of the world's proved oil reserves. The Kingdom's proved gas reserves amount to 7.9 trillion cubic meters of gas, reflecting a 10% share of the region's proved gas reserves and around a 5% share of the world's proved gas reserves17. Figure 7: Countries Holding World's Largest Proved Oil and Gas Reserves

Oil Proved Reserves (billion barrels)

Gas Proved Reserves (trillion cubic meters) US Saudi Arabia Turkmenistan Qatar 6.9 7.9 8.1 25.4 29.6 44.4 0 10 20 30 40 50

UAE Kuwait Iraq Iran Venezuela Saudi Arabia 0 50

97.8 101.5 115.0 137.6 172.3 264.6 100 150 200 250 300

Iran Russia

Source: BP Statistical Review of World Energy, June 2010

As for oil supply, Saudi Arabia holds a share of about 40.0% of the Middle East oil production and a share of around 12.1% of the global oil production. Saudi Arabia is the Middle East's largest oil producer and the world's second largest oil producer, following the Russia. For 2009, the Kingdom's oil production capacity amounted to 9.71 million b/d, whereby Russia's oil production capacity amounted to 10.0 million b/d. The region's oil production capacity amounted to 24.36 million b/d and total world production capacity equaled around 80.0 million b/d18. Accordingly, Saudi Arabia stands out as the largest oil producer in the Middle East and one of the largest producers worldwide.

FOOTNOTES

July 14, 2010

Energy Information Administration, November 2009 SAGIA, 2009 IMF, World Economic Outlook, April 2010 17 BP Statistical Review of World Energy, June 2010 18 BP Statistical Review of World Energy, June 2010

14 15 16

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Figure 8: World's Top Oil Producers for 2009 (000 b/d) Middle East Top Oil Producers 2009 (000 b/d)

Canada China Iran US Saudi Arabia Russia 0 2000 4000 6000 8000 3,212 3,790 4,216 7,196 9,713 10,032 10000

Qatar Kuwait Iraq UAE Iran Saudi Arabia 0

1,345 2,481 2,482 2,599 4,216 9,713 2000 4000 6000 8000 10000

Source: BP Statistical Review of World Energy, June 2010

Holding the world's largest oil reserves and the world's fifth largest gas reserves, Saudi Arabia has emerged as a leading petrochemical producer owing to its abundant access of low-cost feedstock. According to the Saudi Arabian General Investment Authority (SAGIA), the Kingdom is "the world's 11th largest petrochemicals supplier, accounting for 7-8% of total supply". Billions of dollars have and are still being poured into the Kingdom's petrochemical industry, whereby around USD 90 billion worth of petrochemical projects are in the pipeline to date. The country is striving to increase its share of world petrochemical output to 13-14% by 201019. The oil-rich country is host to some of the world's largest and most modern petrochemical production complexes, such as those owned by Sabic and Sipchem. These producers have not only enjoyed abundant and cheap feedstock, but have put in place the latest technologies in their world-scale plants and have benefited from the best-funded research and development centers. This largely contrasts with petrochemical producers elsewhere, who suffer from higher raw material costs and operate much older and less efficient plants. Moreover, Saudi Arabia's close proximity to target markets and improving global logistics have made investments in the petrochemical industry largely lucrative. On the international petrochemical platform, Saudi Arabia has been the most prominent among its neighbors. According to GPCA, Saudi Arabia represents around half of the Gulf region's petrochemical capacity20, with state-owned Sabic having been the dominant producer for decades. Sabic's production of petrochemical and petrochemical products amounts to about 47.2 million tons. The company still has many expansions underway such as the latest facilities to come online, among which is the Tianjin ethylene cracker (1 million tons/year), the Yansab complex (4 million tons/year) and the Sharq additions (2.8 million tons/year). Moreover, the complex of Saudi Kayan, an affiliate of Sabic, will go online in the near-term adding around 6 million tons/year of petrochemical products. Although the dominant producer in Saudi Arabia has been a state-owned company, private sector participation in petrochemical production is growing. SAGIA expects private sector involvement, in the petrochemical sector, to quadruple over the next ten years owing to the industry's many competitive edges. Accordingly, Saudi Arabia will remain positioned as one of the world's largest petrochemical producers, offering an increasing diversity of petrochemical products covering the entire petrochemical value chain.

FOOTNOTES

July 14, 2010

19 20

SAGIA, 2009 Arabian Business, June 2010

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COMPANY OVERVIEW

PROFILE

Saudi International Petrochemical Company (Sipchem) was established in the Kingdom of Saudi Arabia in December 1999, with a paid-in capital of SAR 500 million. The company's industrial complex is located in Jubail Industrial City and employs around 696 employees21. Owing to its inherent advantages, this industrial site is one of the world's most developed and popular industrial cities, offering a competitive landscape for industrial complexes located there. Moreover, Sipchem's site is contiguous to King Fahad Industrial Port and export routes to South East Asia and Europe, providing Sipchem with a significant competitive edge. The company went public on the 10th of November 2006, offering 30% of its share capital at an issue price of SAR 55/share (SAR 10 par value plus SAR 45 premium). This step was part of Saudi Arabia's policy that any petrochemical complex obtaining feedstock from Saudi Aramco must offer shares to the public22. Sipchem's ownership structure, shown below, features a free float rate of 68.3%23. Figure 9: Share Ownership

10.1% 8.3% National Industries Group Holding Co. 7.7% Public Pension Agency Olayan Financial Co. Ltd. Free Float Zamil Group Holding Co.

5.6% 68.3%

Source: Tadawul, as of July 13, 2010

Since its inception, Sipchem's share capital has soared from SAR 500 million to a current balance of SAR 3,333 million24 divided into 333 million shares of SAR 10/share. The company's current market capitalization is around SAR 7,550 million (USD 2,013 million) whereby it enjoys a free-floated market capitalization of SAR 5,157 million (USD 1,375million)25 . Sipchem's weight in the Tadawul All Share Index (TASI) is 1.24% and follows the heavy-weight petrochemical members of the TASI represented by: Sabic (12.29%), Tasnee (2.42%), Saudi Kayan (2.19%) and Yansab (1.90%). Sipchem's weight in the Tadawul All Share Petrochemical Index is 4.59%, with almost half of the index's weight being represented by Sabic. Moreover, Sipchem's weight in the Bloomberg EMEA Chemicals Index is 0.51%, with the largest constituents of the index being Sabic (18.07%), BASF Germany (13.61%) and Bayer Germany (12.34%)26.

FOOTNOTES

Sipchem, as of year-end 2009 MEED, 2008 Tadawul, as of July 13, 2010 24 As of March 31, 2010 25 As of July 13, 2010 26 All weights as of July 13, 2010

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MANAGEMENT

Sipchem's Board of Directors, represented below, is presided by Eng. Abdulaziz A. Al Zamil. Figure 10: Board of Directors

Name Eng. Abdulaziz A. Al Zamil Eng. Reyadh S. Ahmed Mr. Abdulla S. Bahamdan Mr. Abdulrahman A. Al-Turki Dr. Abdulrahman A. Al-Zamil Dr. Saleh H. Al-Humaidan Eng. Mohammed A. Al-Ghurair Eng. Ibrahim M. Al-Humaidan Dr. Abdulaziz A. Al-Gwaiz Mr. Fahad S. Al-Rajhi Ahmad A. Al-Ohali Source: Sipchem Position Chairman Member Member Member Member Member Member Member Member Member Member

OBJECTIVES

Sipchem's main objectives are to invest in the basic and intermediate petrochemical and chemical industry, to produce a variety of value-added chemicals and to market these products to the downstream industries. These industries, the consumers of petrochemicals, then manufacture the final products intended for daily consumer use. Sipchem is responsible for the establishment, management and operation of the petrochemical projects it has developed for attaining these objectives.

SUBSIDIARIES

Sipchem`s aggressive expansion drive has resulted in the majority ownership of several companies. The construction and development costs of a project are incurred first by the parent company Sipchem. The costs are then transferred to the company commissioned and established to run the project. Sipchem's subsidiaries are as follows: Figure 11: Sipchem's Subsidiaries

Company Name International Methanol Co. International Diol Co. International Acetyl Co. International Vinyl Acetate Co. International Gases Co. International Polymers Co. International Benefits Co. Sipchem Marketing and Services Co. Source: Sipchem Methanol Butanediol Acetic Acid and Acetic Anhydride Vinyl Acetate Monomer Carbon Monoxide Ethylene Vinyl Acetate and Polyvinyl Acetate Maintenance services Sales and Marketing services Products/Services Holding 65% 54% 76% 76% 72% 75% 69% 100%

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International Methanol Company (IMC):

IMC was established in 2002, by Sipchem and Japan-Arabia Methanol Co. Ltd. (JAMC), with a capital of SAR 360,970,000. The company was formed to run the methanol production plant, located in Jubail Industrial City. The designing and building of this methanol plant took around 28 months. The facility has an annual production capacity of 970 thousand tons of methanol, whereby commercial production began in early December 2004. For 2009, IMC's total production amounted to 1.05 million tons of methanol, opposed to 1.12 million tons in 2008. The main raw material utilized by the plant is natural gas, which is secured by Sipchem through its supply agreement with Saudi Aramco. Around 80% of the methanol produced is marketed internationally (in Europe, Africa and the Far East) by IMC's shareholder JAMC. The remaining output is marketed by Sipchem Marketing and Services Company (SMSC). It is important to mention that IMC is one of the methanol producers, in Saudi Arabia, facing antidumping duties (ADD's) on its methanol products being imported into China. IDC is also facing ADD's (of 4.5%) on its butanediol products going into the Chinese market27. International Diol Company (formerly known as Gulf Advanced Chemical Industries Company):

IDC was established in 2002, with a capital of SAR 431,250,000. The company was formed to operate the butanediol (BDO) plant, located in Jubail Industrial City. The BDO plant represents the first plant of its kind in the Middle East and remains the sole BDO operating plant in the region. The plant's design and construction took around 33 months. The BDO facility has an annual production capacity of 75 thousand tons of butanediol and derivative products, such as tetrahydrofuran and gammabutyrolactone. Commercial production began in March 2006. For 2009, IDC's total production amounted to 65 thousand tons, compared to 64 thousand tons in 2008. Vinmar international Ltd., Will & Co. B.V. and SMSC are marketing the butanediol, locally and internationally.

International Acetyl Company (IAC):

IAC was founded in 2006, with a capital of SAR 1,003 million, to operate the acetic acid plant which has an annual production capacity of 460 thousand tons of acetic acid and 50 thousand tons of acetic anhydride. The acetic acid plant is part of Sipchem's acetyl complex in Jubail Industrial City. IAC obtains its main feedstock (methanol, carbon monoxide and hydrogen) internally from IMC and IGC. IAC announced the start-up of its production in November 2009, with the first commercial shipment to Asia made in December 2009. Commercial operations began officially in June 2010. Half of the acetic acid output is employed, by IVC, as a feedstock for the production of vinyl acetate monomer (VAM ). The remaining output will be sold to local and foreign markets. The output of IAC is marketed by SMSC and Helm AG.

International Vinyl Acetate Company (IVC):

IVC was established in 2006, with a capital of SAR 676 million. The company was formed to operate the VAM plant, which has an annual production capacity of 330 thousand tons of VAM. The VAM plant is part of Sipchem's acetyl complex. IVC obtains its acetic acid feedstock internally from IAC. IVC announced the start-up of its operations in December 2009, with the first shipment of VAM made in January 2010 targeted towards European markets. The commercial start-up is expected for August 2010. The output of IVC is marketed, by SMSC and Helm AG, in Saudi Arabia and the rest of the world.

FOOTNOTES

The Chinese government has imposed ADD's on some of its methanol and butanediol imports, whereby IMC and IDC were among of the companies alleged to sell methanol and butanediol in the Chinese market at below international market prices. The anti-dumping investigation was launched in June 2008 whereby litigation works are still in process. It is important to note that methanol exports to China represent around 10%-15% of Saudi Arabia's petrochemical exports (according to Arabian Business, July 2009).

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International Gases Company (IGC):

IGC was formed in 2006, with a capital of SAR 425,400,000, to operate the carbon monoxide plant, which has an annual production capacity of 345 thousand tons of carbon monoxide. The carbon monoxide plant is also part of Sipchem's acetyls complex and is believed to be the largest of its kind worldwide. IGC receives its natural gas feedstock from Saudi Aramco, through supply contracts between Sipchem and Saudi Aramco. The carbon monoxide it produces is being used by IAC for the production of acetic acid. IGC announced the start of production in August 2009, whereby the commercial operations began officially in June 2010. The start-up of the carbon monoxide plant was a crucial step for operating the remaining units of the acetyls complex. The carbon monoxide output is sold, by IGC itself, to IAC.

International Polymers Co. (IPC):

IPC was founded in 2009, with a capital of SAR 166 million. The company was established to operate the polymers project, which has an annual production capacity of 200 thousand tons of ethylene vinyl acetate (EVA) and 125 thousand tons of polyvinyl acetate (PVA). The estimated investment cost of the two plants amounts to SAR 3 billion. The required allocation of ethane feedstock has been granted by the Ministry of Petroleum and Mineral Resources. The ethane will be cracked into ethylene by a Sabic affiliate and then supplied to IPC for the production of EVA. The other feedstock, required by IPC to produce EVA, will be supplied by IVC. Commercial production is expected to begin during the second-half of 2013.

International Benefits Co. (IBC):

IBC was established in 2009, with a capital of SAR 2 million. The company's major owner is Sipchem, with the remaining ownership distributed among IMC, IDC, IGC, IAC and IVC. The company was formed to provide management, operational and maintenance services for the ports of Sipchem's subsidiaries.

Sipchem Marketing and Services Company (SMSC):

SMSC was set up in 2007, with a capital of SAR 2 million, to provide Sipchem with professional sales and marketing services. Sipchem's marketing network stretches from the Middle East to Asia, Europe and the United States. Sipchem, more specifically IMC, has signed a charter agreement with the "NCC28 Rabigh" vessel to transport Sipchem's petrochemical products worldwide. This step will largely assist SMSC in marketing competitively Sipchem's products globally.

PHASES OF DEVELOPMENT:

Sipchem has been in an expansionary mode ever since its inception. The company is currently still in the process of expanding its production base. Sipchem's expansions are part of its strategy of finding more growth opportunities for the company and accordingly higher value for its shareholders. Sipchem expects that its investments will total SAR 13 billion by year-end 2013. Sipchem's aggressive expansion program is divided into three phases of development:

Phase I:

Sipchem commissioned IMC and IDC for the management of the methanol and butanediol production plants, respectively, which represented "two world class operating affiliates"29. IMC and IDC began commercial production during late 2004 and late 2005.

FOOTNOTES

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28 29

National Maritime Transport Company Sipchem, 2008

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Phase II:

Sipchem began construction of its acetyls complex during the second half of 2006 and continued its development irrespective of the global macro-economic and market deterioration that began towards year-end 2007 and continued throughout 2008 and 2009. Sipchem's investment in the acetyl complex, estimated at around SAR 7 billion, is in line with the company's strategy of investing in value-added petrochemical projects and diversifying the company's product mix. Furthermore, the fully-integrated acetyl complex is considered the first of its kind in Saudi Arabia and the region. The complex is comprised of an acetic acid plant, a vinyl acetate monomer plant and a carbon monoxide plant. The project enjoyed significant technical support from leading international chemical companies Eastman Chemicals Co. (USA) and DuPont Co. (USA). Sipchem commissioned three companies, IAC, IVC and IGC, for the management of these plants. Commercial production of the carbon monoxide and acetic acid plants officially began at the beginning of June 2010, with the VAM plant expected to begin its commercial operations in August 2010.

Phase III:

Sipchem entered a joint venture agreement, with Hanwha Chemical Corporation (Korea), to form a polymer venture for the production of value added chemical products. The company will be owned 75% by Sipchem and 25% by Hanwha Chemical Corp. The plants, whose investment will cost an estimated total of SAR 4 billion, will have an annual production capacity of 200 thousand of EVA and 125 thousand tons of PVA. The EVA project will receive technical support from ExxonMobil Chemical Technology Licensing LLC. Commercial production is expected to begin during the second-half of 2013. Figure 12: Road to Development

Phase II: Phase I: IMC and IDC 970 + 75 thousand tons Y ear 2004-2005 IAC, IVC and IGC 460+ 330 +345 thousand tons

Phase III: IPC 325 thousand tons

Y ear 2010

Y ear 2013

Source: Sipchem

PRODUCTION STREAM

Through its various subsidiaries, Sipchem currently has a production capacity of over a million tons of petrochemical products. In 2009, Sipchem manufactured 1,115 thousand tons comprised of 1,050 thousand tons of methanol and 65 thousand tons of butanediol. Full-year production for 2009 was slightly lower than the production of the previous year which amounted to 1,187 thousand tons, as the company carried out maintenance work across all of its operating units for a period of one month. Going forward, Sipchem's production is expected to grow significantly owing to the start-up of the three units of its acetyls complex, in addition to its EVA/PVA complex, coupled with increasing operating rates across all different plants. For the period 2009-2014, a CAGR in production of 19.1% is expected by Sipchem.

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In the long-run, the main contributors to Sipchem's production will be the methanol plant and the acetyls complex. IMC and the three units of the acetyls complex, IAC, IVC and IGC, will represent a 41% and 46% share of Sipchem's total production, respectively. The EVA and PVA plants will contribute around a 10% share in output. Figure 13: Sipchem's Contributing Units

2010E 51% 45%

50% 46% 2012E 47% 2014E 10% 41%

4% IMC IDC Acetyls Complex

3% IMC IDC Acetyls Complex

3% IMC Acetyls Complex IDC EVA/PVA Complex

Source: Sipchem, Audi Capital

LINE OF PRODUCTS:

Methanol: Methanol, a volatile liquid, is used for the production of chemical products, namely

formaldehyde, methyl tertiary butyl ether (MTBE) and acetic acid. Formaldehyde, methanol's most popular derivative, is largely consumed in the automotive and construction industries as it is used for the production of wood-based items such as panels. MTBE, another popular derivative of methanol, is mostly employed in gasoline as an "octane booster and oxygenate"30. Methanol can also be used for fuel cell application and as a substitute for fuel.

Butanediol: Butanediol, a viscous liquid, is a chemical intermediate used for the manufacturing of solvents, polymers and chemicals. It is used in the production of tetrahydrofuran (THF), polybutylene terephthalate (PBT), thermoplastic copolyester elastomers and solvent-borne adhesives, among others. THF, butanediol's most popular derivative, is used in the production of spandex fibers in addition to being employed as a solvent in the production of polyvinyl chloride, cements and coatings. PBT, for instance, is used in the automotive and electronics

industries for the production of engineering plastics.

Acetic Acid: Acetic acid is a chemical used for the making of chemical products such as

vinyl acetate monomer (VAM), purified terephthalic acid (PTA) and acetate esters. Its most popular use is in the production of VAM, representing one third of global acetic acid use31. Its second most popular derivative is PTA, which is used for the production of bottle resins and polyester fibre. PTA represents around a fifth of global acetic acid use. Acetate esters, which are consumed as solvents in mainly paints and inks, represent a 15% share of global acetic acid use32.

Acetic Anhydride: Acetic anhydride is a chemical utilized in the production of cellulose

acetate and cellulose acetate polymers, which in turn go into the production process of cigarette fibers and textiles. Furthermore, acetic anhydride is an important raw material for making aspirin, acetaminophen and various other pharmaceuticals.

FOOTNOTES

It is important to highlight that starting May 2006, MTBE has been banned in the US from being used in gasoline due to its contamination of underground water supplies. However, MTBE is still produced in the US for either export or chemical-end applications. Nevertheless, the growing demand of MTBE from the Middle East and Asia, specifically from their construction activities, and from Europe whereby MTBE is being used for biodiesel production somewhat offset the decline in US demand for MTBE. (ICIS, 2010) 31 ICIS, 2010 32 ICIS, 2010

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Vinyl Acetate Monomer (VAM): VAM, a volatile liquid, is an intermediate chemical used

in the manufacturing of emulsions. VAM's most popular derivative is polyvinyl acetate (PVA), followed by polyvinyl butyral which is produced from PVA. Such chemical products are primarily employed for the production of adhesives, water-based paints, paper coatings, packaging films and textiles. VAM is also consumed in the production of ethylene vinyl alcohol barrier resins, ethylene vinyl acetate polymers and polyvinyl butyral. These chemical products are used for applications such as wire and cable insulation and food packaging.

Carbon Monoxide: Carbon monoxide, a popular industrial gas, is largely employed as a fuel.

Furthermore, carbon monoxide is used to produce chemicals such as aldehydes, methanol and acetic acid. Aldehydes are largely employed in manufacturing detergents.

Ethylene Vinyl Acetate (EVA): EVA is used for the production of products such as

adhesives, wrapping, shoe soles and glue sticks. EVA is also employed to coat films made from polypropylene, polyethylene terephthalate and aluminum, in addition to coating wires.

Polyvinyl Acetate (PVA): PVA, the key derivative of VAM, is employed primarily for adhesion purposes. Mostly, PVA is used as an adhesive for wood, paper and plastic films. Moreover, PVA is used for paper and industrial coatings.

TARGET MARKETS:

Geographically, Sipchem's presence stretches from the US to Asia. This broad coverage is largely attributable to its subsidiaries' strong marketing and sales networks. The company's largest two markets are Asia and Europe. Figure 14: Target Markets

1 5% 1 % A sia Euro pe 57% M iddle East US

27%

Source: MEED, 2009

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FINANCIAL ANALYSIS

PROFITABILITY

Net earnings for the full year 2009 amounted to SAR 140.9 million, falling by 73.8% from the net earnings of the previous year. The plummeting of earnings on a Y-o-Y basis was a result of lower production, sales volumes and product prices resulting from weaker global demand for petrochemical products. Moreover, Sipchem faced much higher production and operating costs during the year 2009, compared to 2008, largely affecting its profitability margins. During the third quarter of 2009, Sipchem had a scheduled production stoppage at its operational plants for a period of 25 days for maintenance-related work. The company seized the opportunity of weak macro-economic and market conditions to overhaul its production plants and increase their efficiency and capability rates ahead of the global macro-economic and market rebound. It is important to highlight another event that took place in 2009, which was the sale by Sipchem of 11% its shares in IAC and IVC, of a value of SAR 240 million, to Ikarus Petroleum Industries Co. (Kuwait). Accordingly, Sipchem realized profits of SAR 55 million from this transaction. The financial crisis witnessed across the globe had spillover effects in the region. It severely affected the petrochemical industry and the sales of the producers, particularly during the first-half of 2009. Accordingly, Sipchem realized sales revenues33 of only SAR 830.4 million, opposed to the company's record level34 of SAR 1,708.6 million for the previous year. Moreover, in the second quarter of 2009, Sipchem incurred a markdown of its fourth quarter sales in 2008 by an amount of SAR 55 million. Its key product, methanol, had witnessed an annual drop of 36.7% in its price, from an average price of USD 374/mt in 2008 to USD 236/mt in 2009. With overhauled and more efficient production plants in place, new plants from Phase II and III going online and a cleaner book, Sipchem is well-positioned for significant growth in its top-line and bottom-line figures going forward. Furthermore, Sipchem's selling and marketing strategies will play a significant role in achieving these levels of growth. Not to mention, the projected increase in energy prices which would result in higher petrochemical prices. For sales revenues, a CAGR09-14E of 33.5% is expected, with 2010E sales revenues expected to more than double from the previous year. For net earnings, a CAGR09-14E of 55.4% is expected, with 2010E net earnings expected to grow by four-fold from the previous year. Figure 15: Sales and Earnings Growth (2009-2014E)

4,000,000 3,500,000 3,000,000 2,500,000

SAR 000

CAGR09-14E in Sales of 33.5%

3,209,434 2,646,004 2,053,845 2,820,623

3,517,266

2,000,000 1,500,000 1,000,000 500,000 2009 2010E 2011E 2012E 2013E 2014E 830,403 568,019 140,880 763,060 908,811 1,091,620 1,272,257

Sales Revenues

Net Income

Source: Sipchem, Audi Capital estimates

FOOTNOTES

Each of Sipchem's projects has its own marketer. According to the company report's summary of revenue recognition "Sales are made directly to final customers and also to the Marketers' distribution platforms. The sales through the distribution platforms are recorded at provisional prices at the time of shipments, which are later adjusted based on actual selling prices received by the Marketers from their final customers, after deducting the cost of shipping, distribution and marketing. Both export and local sales are recognized at the time of delivery of the product at the loading terminals located at the plants and at the King Fahd Industrial Port of Jubail Industrial City" (Sipchem report). 34 In 2008, Sipchem managed to record its highest level of sales ever, despite the financial and economic turbulence that was spreading worldwide and the weaker utilization rates towards the fourth quarter of the year.

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The projected growth in Sipchem's sales and profits will be underpinned by the anticipated expansion in its profit margins, based on the following factors: A highly-controlled cost environment, owing to the company's access to subsidized feedstock (Feedstock costs are the largest component, estimated at around 50%, of production costs followed by electricity costs) An overhauled and therefore a more efficient production process and improved utilization rates An increase in production and selling volumes Improved industry fundamentals and higher energy prices Improvement in product prices

Operating and net profit margins are expected to more than double by year-end 2014, whereby the gross, EBIT and EBITDA margins are also expected to show strong gains over our forecast horizon. These expanding profit margins will act as a safety cushion for Sipchem in the medium term, protecting the company from any severe shock that might appear on a macro-economic or micro-economic level. Below are the projected profit margins for Sipchem, reflecting the company's improved operational efficiency and management effectiveness: Figure 16: Projected Profit Margins (2009-2014E)

2,000,000 1,600,000

SAR 000

48.7% 48.3%

50.5%

51.8%

54.2% 52% 44% 36%

2,000,000 1,600,000

SAR 000

44.0% 43.6%

45.8% 47.2%

49.6%

55% 45% 35%

1,200,000 800,000 400,000 2010E 2011E 2012E 2013E 2014E 2009

1,200,000 800,000 400,000 2010E 2011E 2012E 2013E 2014E 2009

28.4% 28% 20%

20.3%

25% 15%

Gross Profit

Gross Margin

Operating Profit

Operating Margin

2,250,000 1,800,000

SAR 000

63.1% 58.1% 55.9% 53.4% 50.9% 59.4%

65% 60% 55% 50% 45%

1,250,000

SAR 000

32.2% 27.7% 28.8% 17.0%

34.0%

36.2%

38% 31% 24% 17% 10%

1,000,000 750,000 500,000 250,000 -

1,350,000 900,000 450,000 2010E

2010E

2011E

2012E

2013E

EBITDA

EBITDA Margin

Net Profits

Net Margin

Source: Sipchem, Audi Capital estimates

The profit margins of Sipchem compare favorably to industry peers in the region and across the globe. For 2009, all of Sipchem's margins, except the net margin, measured at the same level or higher than the regional and global industry average. The graph below depicts Sipchem's favorable profit margins relative to industry peers.

2014E

2011E

2012E

2013E

2014E

2009

2009

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Figure 17: Sipchem vs Industry Peers

50.9% 50% 40% 30% 20% 10% 0% Gross Margin Operating Margin Sipchem EBIT Margin EBITDA Margin Net Margin 30.8% 28.4% 28.5% 21.9% 23.2% 21.7% 20.3% 12.1% 11.6% 33.6% 20.1% 18.0% 17.0% 10.6%

Regional Average

Global Average

Source: Sipchem, Bloomberg as of year-end 2009

Sipchem's financial returns are also expected to show significant improvement, as its net profits take a significant leap from the current level. The substantial growth in net income CAGR09-14E of 55.4%, accompanied by a growth CAGR09-14E of only 9.8% in total equity, will lead to notable improvements of the company's return on common equity (ROE). The most notable improvement, Y-o-Y, will be in 2010 as the company enters Phase II commercial production. Sipchem's ROE will expand from 2.4% (2009) to 9.3% (2010E). Sipchem's ROE will reach 14.4% by year-end 2014. Figure 18: Projected ROE (2009-2014E)

10,000,000 8,000,000

SAR 000

11.5% 9.3%

12.5%

13.8%

14.4%

16% 12% 8%

6,000,000 4,000,000 2,000,000 2009 2010E 2011E Total Equity 2012E ROE 2013E 2014E 2.4% 4% 0%

Source: Sipchem, Audi Capital estimates

Comparing Sipchem's 2009 ROE to its industry peers regionally and globally, we observe that the company's returns are below the industry average of 12.1% (regionally) and 12.8% (globally). However, going forward, we expect Sipchem's ROE to approach and perhaps exceed industry levels. As for the company's return on capital employed (ROCE), this financial return will leap from 2.3% (2009) to 12.7% (2014) on the back of soaring growth in profits. Again, the largest increase in Sipchem's ROCE will be in 2010 as its financial return will jump from 2.3% (2009) to 6.4% (2010E).

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Figure 19: Projected ROCE (2009-2014E)

15,000,000 12.7% 12,000,000 9.7%

SAR 000

16% 11.2% 8.4% 6.4% 8%

12%

9,000,000 6,000,000 3,000,000 2009 2010E 2.3%

4%

0% 2011E 2012E 2013E ROCE 2014E

Total Capital Employed

Source: Sipchem, Audi Capital estimates

On the back of higher production levels, an improved pricing environment and healthier profit margins, Sipchem's return on assets (ROA) is projected to grow generously from current levels. Yet again, the largest increase in Sipchem's ROA is anticipated for 2010, a jump from 1.2% (2009) to 4.2% (2010E). By 2014E, Sipchem's ROA should reach 8.1%. However, we note that for 2009 Sipchem's ROA was significantly below the industry peer average, both regionally (7.7%) and globally (6.3%). This is largely attributable to the company's book of assets growing amid massive expansions in the pipeline. Total assets will grow from a current level of SAR 11,818 million, as of year-end 2009, to SAR 15,850 million, as of year-end 2014. Going forward, Sipchem' s financial return is expected to reach a level in line with regional and global industry players. Figure 20: Projected ROA (2009-2014E)

10% 8% 5% 3% 0% 2009 2010E 2011E Total Assets 2012E ROA 2013E 2014E

14,000,000 11,200,000

SAR 000

8.1% 7.0% 5.8% 4.2% 4.9%

8,400,000 5,600,000 2,800,000 1.2%

Source: Sipchem, Audi Capital estimates

CAPITAL STRUCTURE

With an expansion underway, Sipchem's debt grew by a CAGR of 26.5% between 2005 and 2009. As of year-end 2009, total debt amounted to SAR 4,906 million, marking an increase of 31.6% from the previous year's level. The supplementary debt was mainly in the form of a Public Investment Fund (PIF) loan, where an amount of SAR 1,256 million was added to the company's books. The additional funding was secured to finance Sipchem's share in the rising construction costs of the plants operated by IAC, IVC and IGC, the companies commissioned to run the acetyls complex. As of year-end 2009, the majority of Sipchem's total debt was of a long-term nature, whereby long-term debt represented about 95% of the company's total debt level. Long-term debt is mainly comprised of a PIF loan, a Saudi Industrial Development Fund (SIDF) loan and a syndicated bank loan.

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Figure 21: Long-term Debt Components

9.1% Obligations under Capital Lease SIDF Loan 28.3% Syndicated Bank Loan PIF Loan

33.2%

29.4%

Source: Sipchem

Total equity as of year-end 2009 amounted to SAR 5,832 million, translating into a debt-toequity ratio of 0.84x as opposed to 0.64x for the year-end of 2008. As of year-end 2009, Sipchem's debt-to-capital ratio was 0.46x as opposed to 0.39x as of year-end 2008. Sipchem's debt level indicates a highly-leveraged capital structure, however this kind of capital structure is typical for a petrochemical producer as it operates in a capital­intensive industry. The average debt-to-equity ratio for petrochemical players regionally and globally is 1.25x and 0.94x, respectively. Accordingly, Sipchem's leverage rate is lower than its peers in the industry. Figure 22: Capital Structure of Selected Key Players Globally and Regionally (Debt-to-Equity ratio)

Huntsman Corp Exxon Mobil Corp EI du Pont de Nemours & Co Dow Chemical Co/The Yanbu National Petrochemicals Co Saudi Kayan Petrochemical Co Sipchem Saudi Basic Industries Corp Rabigh Refining & Petrochemicals Co National Industrialization Co Methanol Chemicals Co Advanced Petrochemicals Co Industries Qatar Royal Dutch Shell PLC Sumitomo Chemical Co Ltd BASF SE Total SA Sidi Kerir Petrochemcials Co Sinopec Shanghai Petrochemical Co. 0.0 0.00 0.54 1.0 2.0 3.0 4.0 0.50 0.80 0.31 0.25 1.21 1.03 0.88 1.51 0.84 0.71 3.76 1.23 1.06 2.20 0.08 1.44 2.26

Source: Bloomberg

Going forward, and accounting for the additional financing Sipchem will obtain for the construction and development costs of its polymers complex (EVA/PVA), we project that Sipchem's total debt level will increase from SAR 4,906 million as of year-end 2009 to SAR 7,642 million as of year-end 2010, and then gradually decrease. As a result, the company's debt-to-equity ratio will increase to 1.21x in 2010 and thereafter drop below the 1.00x level. Thus, Sipchem's capital structure will shift to being less debt-based in the long-term. It is projected that its debt-to-equity ratio will contract from 0.84x, as of year-end 2009, to 0.52x, as of year-end 2014x.

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SAUDI INTERNATIONAL PETROCHEMICAL CO.

KSA

Figure 23: Projected Capital Structure (2009-2014E)

1.5 7,500,000 6,000,000

SAR 000

1.21 1.05 0.84 0.86 0.68 0.52

1.2

4,500,000 3,000,000 1,500,000 2009

0.9

0.6

0.3

2010E 2011E Total Debt 2012E 2013E 2014E

Debt-to-Equity

Source: Sipchem, Audi Capital estimates

ASSET COMPOSITION

As it is operating in a capital-intensive environment and with expansions taking place, non-current assets tend to dominate the company's books, representing the bulk of total assets. Sipchem's fixed assets constituted around 81.2% of total assets as of year-end 2009, whereby property, plant and equipment (PPE) represented almost 81% of total assets. Figure 24: Asset Composition (Year-end 2009)

1.2% 15.5% 2.1% 0.7% Cash and cash equivalents Trade receivables Inventories Property, plant and equipment Other assets 80.5%

Source: Sipchem

Sipchem's asset structure has been skewed towards fixed assets for many years. This was exacerbated in 2009 with an increase in the weight of fixed-to- total assets to 81.2%, from 73.8% in the previous year. Over our forecast horizon, non-current assets will grow from a balance of SAR 9,600 million as of year-end 2009 to SAR 13,095 million as of year-end 2014. The majority of the increase will pertain to expansions in the company's PPE base amid new projects being developed. Total assets will grow from a balance of SAR 11,818 million as of year-end 2009 to SAR 15,850 million as of year-end 2014. Accordingly, the ratio of fixed-to-total assets will average around 76.3% during this projection period.

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Figure 25: Projected Asset Structure (Ratio of non-current-to-total assets 2009-2014E)

18,000,000 15,000,000 12,000,000

SAR 000

82.6%

CAGR09-14E in Non-current Assets of 6.4%

9,000,000

81.2%

80.4% 77.4% 72.4% 68.7%

6,000,000 3,000,000 2009 2010E 2011E

2012E

2013E

2014E

Non-current Assets

Total Assets

Source: Sipchem, Audi Capital estimates

LIQUIDITY AND UTILIZATION

Current assets amounted to SAR 2,218 million as of year-end 2009, reflecting a 22% decrease Y-o-Y. The shrinking of current assets was mainly attributed to lower cash balances resulting from working capital and capex financing. Cash and cash equivalents dropped by 29.1% Y-o-Y, amounting to SAR 1,831 million as of year-end 2009. Current liabilities decreased by only 7.8%, Y-o-Y, which was an insufficient decrease to result in improved liquidity amid the drop in cash and current assets. Accordingly, Sipchem's liquidity indicators weakened in 2009. Cash ratio, as of year-end 2009, contracted to 2.03x from 2.64x as of year-end 2008. Current ratio, as of year-end 2009, contracted to 2.46x from 2.90x as of year-end 2008. The average cash ratio of petrochemical producers, regionally and globally, is 1.6x and 1.1x, respectively. The average current ratio of petrochemical producers, regionally and globally, is 2.7x and 2.5x, respectively. Thus, Sipchem's cash ratio status is somewhat more favorable than that of the industry on average. Sipchem's liquidity measures will only improve in 2010 amid a boost in its cash balances, but these measures will weaken in 2011 and thereafter. This will be mainly due to rising short-term obligations, on the back of a highly debt-based capital structure, in addition to an increase in accounts payables on the back of rising operations. Figure 26: Projected Liquidity Indicators (2009-2014E)

4.0 3.2 2.46 2.4 1.6 0.8 2009 2010E 2011E Current Ratio 2012E Cash Ratio 2013E 2014E 2.03 2.19 1.73 1.77 1.29 1.44 0.93 1.33 0.76 3.90 3.32

Source: Bloomberg, Audi Capital estimates

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SAUDI INTERNATIONAL PETROCHEMICAL CO.

KSA

Figure 27: Liquidity Measures of Selected Key Players Globally and Regionally

Current Ratio Huntsman Corp Exxon Mobil Corp EI du Pont de Nemours & Co Dow Chemical Co/The Yanbu National Petrochemicals Co Saudi Kayan Petrochemical Co Sipchem Saudi Basic Industries Corp Rabigh Refining & Petrochemicals Co National Industrialization Co Methanol Chemicals Co Advanced Petrochemicals Co Industries Qatar Royal Dutch Shell PLC Sumitomo Chemical Co Ltd BASF SE Total SA Sidi Kerir Petrochemcials Co Sinopec Shanghai Petrochemical Co. 0.0 2.3 1.1 1.5 1.3 1.8 2.3 2.5 3.2 1.8 2.3 1.7 1.1 1.2 4.8

Cash Ratio Huntsman Corp Exxon Mobil Corp EI du Pont de Nemours & Co Dow Chemical Co/The Yanbu National Petrochemicals Co Saudi Kayan Petrochemical Co Sipchem Saudi Basic Industries Corp Rabigh Refining & Petrochemicals Co National Industrialization Co Methanol Chemicals Co Advanced Petrochemicals Co Industries Qatar Royal Dutch Shell PLC Sumitomo Chemical Co Ltd BASF SE Total SA Sidi Kerir Petrochemcials Co Sinopec Shanghai Petrochemical Co. 1.0 0.7 2.1 2.0

0.2 0.2 0.4

0.8

0.1

1.7 0.6 0.6 1.3

1.7 1.4 6.1 2.0 3.0 4.0 5.0 6.0

0.1 0.2 0.2 0.3 0.1 0.0 0.5 1.0 1.5 2.0 2.5 3.0

3.1

3.8 3.5 4.0

0.6 1.0

Source: Bloomberg

A close review of the company's receivable and inventory management effectiveness in 2009 reveals a weaker turnover rate than that in the previous year. Accounts receivables turnover for 2009 equaled 4.64x, as opposed to 8.67x for 2008, translating into 79 days compared to 42 days previously. The industry average for accounts receivables days is 67 days regionally and 57 days globally. Hence, Sipchem's receivables turnover figures for 2009 pointed to a deficiency in the company's receivables collection process. Inventory turnover for 2009 was 6.41x as opposed to 6.66x for 2008, translating into 57 days compared to 55 days in the year before. The industry average for inventory days is 81 days regionally and 74 days globally. In turn, Sipchem's inventory management process can be viewed as efficient. Payables turnover for 2009 equaled 3.21x, above the 2.39x reported for 2008, translating into 114 days as opposed to 153 days. The industry average for accounts payables turnover is 55 days regionally and 45 days globally. Therefore, the company enjoys sufficient time and flexibility to manage and settle its accounts with suppliers. Sipchem's conversion cycle totaled 22 days, compared to an industry average of 70 days regionally and 82 days globally. Thus, Sipchem's capital is less tied up in the business process when compared to its industry peers, thus providing the company with a significant operational and management edge.

Figure 28: Turnover of Sipchem and Industry Peers (Days)

200 45 57 150 55 82 67 100 81 74

50 79 57

114

70

22 0 Accounts Receivables Sipchem Inventory Regional Average Accounts Payables Global Average Conversion Period

Source: Sipchem, Bloomberg

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Despite the increase in operations, production and sales, we expect that this significant operational and management edge will remain during our forecast horizon as the conversion period will remain at very low levels. Figure 29: Turnover Measures (2009-2014E)

150 120 90 60 30 2009 2010E 2011E Inventory Days 2012E Payable Days 2013E 2014E 79 57 22 5 4 4 4 65 40 114 112 76 47 118 83 53 81 51 132 127 131

82 53

Receivable Days

Conversion Period

Source: Sipchem, Audi Capital estimates

CASH FLOWS

Sipchem's operational and free cash flows will largely improve in the coming years as the company's Phase II of development fully enters the operational stage, operating rates rise, product prices improve and sales revenues increase. From negative operational and free cash flows for 2009, Sipchem will smoothly enter the positive cash flow territory along the coming years. Figure 30: Cash Flows (2009-2014E)

2,500,000 1,500,000

SAR 000

1,998,319 1,159,402 1,434,108 1,659,364

785,197 (174,857)

500,000 (500,000) (1,500,000)

(174,803)

199,402

474,108

699,364

1,038,319

(1,707,219) (2,500,000) 2009 2010E 2011E 2012E 2013E 2014E Operating Cash Flows Free Cash Flows

Source: Sipchem, Audi Capital estimates

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KSA

LATEST FINANCIAL PERFORMANCE

On July 12th, 2010, Sipchem released its preliminary results for the second quarter of 2010 reporting net profits of SAR 87.7 million and marking a growth of 8.0% Q-o-Q. The numbers were significantly below the consensus etimate of SAR 160 million as the market was factoring in new capacity from the acetyls complex in its estimates. However, as previously mentioned, only two units out of the three began commercial production to date, whereby the official commencement was in June 2010. The third unit is expected to begin commercial production in August. In turn, we expect the second half of 2010 to show impressive growth in Sipchem's numbers.

As only preliminary results for the second quarter of 2010 are available on the Tadawul website and in the absence of detailed financial statements, we will review Sipchem's financial performance for the first quarter of the year. The historical figures below show consecutive growth in Sipchem's top line number. The 51.5% jump in sales, between the third and fourth quarter of 2009, was on the back of higher output in the latter quarter as the third quarter witnessed a scheduled production stoppage for a period of 25 days for maintenance-related work. Accordingly, lower sales volumes resulted during the third quarter of the year. Furthermore, methanol prices averaged 8% lower in the third quarter compared to the fourth quarter of 2009, which also contributed to lower thirdquarter sales revenues. For Q1/10, sales revenues softly increased by 2.5%, mainly attributed to the increase in international methanol prices which averaged 15% higher than the prior quarter. Sipchem saw significant improvement, starting the third quarter of 2009, in most of its profit margins due to an improved and more efficient cost structure. The enhancement of the company's production efficiency and capability, along with higher output from new plants, has contributed to better margins in the last quarters. Moreover, as previously mentioned, international methanol prices edged higher during the last two quarters. Comparing Sipchem's margins of the beginning quarter of 2009 to the ending quarter of the year (closely resembling Q1/10 margins), gross margin more than tripled and operating margin grew more than ten-fold. Net profits, for the first three-month period of 2010, grew by 43.6% from the prior quarter. The results were driven by higher sales revenues, coupled with lower production and operating costs. Simultaneously with the start of trial production at Sipchem's acetyls complex, accounts payables have increased by 43% Q-o-Q. Along with higher short-term debt, current liabilities have increased by 57% and the current and cash ratios have narrowed as a result. However, with a significant increase in sales, the company's liquidity should no longer be an issue given the strong improvement in its cash balances. Sipchem's debt balance approached its equity balance in the first quarter of 2010, yet remains below the company's equity level.

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SAUDI INTERNATIONAL PETROCHEMICAL CO.

KSA

Figure 31: Quarterly Financial Figures

(SAR 000) Sales Cost of sales Gross Profit General and administrative expenses Operating Income Investment Income Provision for project development cost Financial charges Net income (expenses) of pre-operating activities Other income Income before Minority Interest and Zakat Minority interest Net Income before Zakat Zakat Net Income Source: Sipchem Reports Q1/09 159,735 (136,938) 22,798 (17,155) 5,643 7,420 25,000 (13,840) (497) (555) 23,171 6,951 30,122 (948) 29,174 Q2/09 175,761 (150,634) 25,126 (16,807) 8,319 2,838 (13,562) (41) (147) (2,593) 4,371 1,778 (1,267) 511 Q3/09 196,777 (147,872) 48,905 (17,347) 31,558 2,347 50,000 (9,362) (4) 161 74,700 (2,338) 72,362 (17,700) 54,661 Q4/09 298,130 (158,970) 139,160 (16,375) 122,785 2,120 (8,989) (1,166) 371 115,122 (38,146) 76,976 (20,443) 56,533 Q1/10 305,611 (156,768) 148,843 (14,237) 134,605 2,344 (7,786) (541) (1,301) 127,321 (42,191) 85,131 (3,935) 81,196

Figure 32: Quarterly Financial Measures

Q1/09 Business Assessment & Profitability Measures: Gross Margin Operating Margin EBIT Margin EBITDA Margin Net Margin Liquidity Measures: Current Ratio Cash Ratio Leverage Measures: Debt-to-Equity Source: Sipchem Reports 0.68 0.88 0.86 0.84 0.91 2.87 2.63 4.06 3.65 3.22 2.73 2.87 2.35 1.95 1.58 14.3% 3.5% 23.2% 52.9% 18.3% 14.3% 4.7% 6.2% 34.4% 0.3% 24.9% 16.0% 42.7% 52.3% 27.8% 46.7% 41.2% 41.6% 56.8% 19.0% 48.7% 44.0% 44.2% 56.2% 26.6% Q2/09 Q3/09 Q4/09 Q1/10

Figure 33: Methanol Quarterly Average Prices USD/mt (2009-2010)

330 290 250 210 170 130

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10

Q1/09 of $192/mt

Q1/10 of $314/mt Q4/09 of $274/mt

Q2/09 of $227/mt

Q3/09 of $253/mt

Q2/10 of $258/mt

Source: Methanol CFR China, Bloomberg

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SAUDI INTERNATIONAL PETROCHEMICAL CO.

KSA

SWOT ANALYSIS

STRENGTHS

An unmatched competitive cost advantage due to availability of a low-cost feedstock Continuous availability of other feedstocks for most subsidiaries, as they are provided internally by other Sipchem subsidiaries A vertically-integrated business structure An optimal location for the industrial complex, facilitating operations and export marketing activities Relatively low export charges to South East Asian markets due to the Kingdom's geographical proximity Partnered with internationally recognized petrochemical and chemical companies, with high technical and marketing expertise Highly-committed management with strong investment capability High level of transparency Long-term strategy in place to triple production Profit margins (gross, operating, EBITDA and net margins) exceed global industry averages EBIT and EBITDA margins higher than the regional averages Payables turnover period largely exceeds the peer average regionally and globally Much shorter conversion period than the industry's average

WEAKNESSES

Large dependence on overseas sales Protective measures adopted by countries representing key markets for Sipchem Increase in financing costs, in light of Sipchem's highly debted capital structure, to lower net earnings Unexpected or unscheduled halts in operations, especially for the company's new production plants35, to negatively affect company's performance Sipchem's financial returns, ROE and ROA, are lower than the regional and global industry averages Increasing freight rates

FOOTNOTES

July 14, 2010

35

Recent history has shown that the newly constructed plants in Saudi Arabia are not experiencing smooth start-ups

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SAUDI INTERNATIONAL PETROCHEMICAL CO.

KSA

SWOT ANALYSIS

OPPORTUNITIES

Rising crude oil prices further enhance the competitive edge of Middle East producers Sustained economic growth in key petrochemical markets Possible delays and cancellations of petrochemical projects in the region and in Southeast Asia to reduce the projected excess oversupply Saudi Arabia's energy strategy encourages the diversification into downstream products Lower cost-competitiveness of South-East Asian, European and American petrochemical products

THREATS

Troubled construction and automotive sectors in the US, key end-markets for petrochemical products Softening demand from China's construction sector, a key consumer of petrochemicals Shaky global demand of petrochemicals, amid a bumpy macro-economic recovery globally An expected excess oversupply of petrochemicals Continuous market and economic turmoil in the European zone37 Increasing domestic petrochemical investments in India and China, the key rivals to the Gulf region and who also hold a major share of petrochemical demand Renewed plunges in crude oil prices Pricier alternative feedstocks, to ethane, to become the dominant feedstock

FOOTNOTES

July 14, 2010

Continuous market and economic turmoil in the European zone to affect demand for petrochemicals, especially that Europe is among the key markets Sipchem exports to

36

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SAUDI INTERNATIONAL PETROCHEMICAL CO.

KSA

VALUATION

FCFE METHODOLOGY

We used the Free Cash Flow to Equity (FCFE) valuation model, based on a five year forecast horizon, to value Sipchem. We chose this methodology in light of the earnings and cash flows generation power released by Sipchem's aggressive expansion drive that is supported by healthy margins. The model draws heavily on the fundamentals of the methanol and petrochemical industry as a whole, largely focusing on the outlook of crude oil prices and global GDP rates. Moreover, we drew heavily on the expansions Sipchem is realizing currently and in the medium term, accounting for the company's competitive marketing and selling strategies. Furthermore, we assumed stable operating rates, close to full capacity, as the company is opting to operate at full rates. With the high correlation between oil and petrochemical prices, we derived the projected product prices for our forecast horizon, taking into consideration the potential market excess oversupply that might develop. We have based our FCFE valuation on the following scenarios of crude oil prices:

Crude Oil (USD/bbl) 2009 2010E 2011E 2012E 2013E 2014E

Base Case Scenario Optimistic Scenario Pessimistic Scenario Source: Bloomberg Contributors, Audi Capital

61.8 61.8 61.8

72.0 79.0 67.5

77.5 83.5 70.2

80.5 86.1 73.8

82.4 87.8 76.5

85.6 92.0 79.2

With a risk-free rate of 3.03%, an expected market return of 11.49% and a beta of 1.10, we obtained a cost of equity of 12.30%. In turn, for the base-case scenario, a fair value of SAR 29.17/share was derived (as detailed below).

2009 Free Cash Flow to the Equity (SAR 000) PV of Free Cash Flow to the Equity (SAR 000) Present Value of Terminal Value (SAR 000) Enterprise Value (SAR 000) Discount Rate Terminal Growth Rate Shares Outstanding (000) Fair Value/Share (SAR) Source: Audi Capital (1,707,219) 2010E (174,803) (155,662) 2011E 199,402 158,122 2012E 474,108 334,791 2013E 699,364 439,777 2014E 1,038,319 581,423 8,366,521 9,724,973 12.30% 5.00% 333,333 29.17

With the weights shown below assigned to each scenario, a fair value of SAR 28.83 was derived for Sipchem's share using the FCFE approach.

Fair Value (SAR) Best Case Base Case Worst Case Source: Audi Capital 37.67 29.17 21.09 Valuation Weight 15% 65% 20% 28.83 Final Fair Value (SAR)

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SENSITIVITY ANALYSIS

The data table below presents a sensitivity analysis to our price target valuation, for the base-case scenario, assuming various growth and discount rates. Our calculated fair value of SAR 29.17/share, for the base case scenario, was based on a cost of equity of 12.30% and a growth rate of 5.00%.

Cost of Equity 12.00% 4.00% 4.25% Growth Rate 4.50% 4.75% 5.00% 5.25% 5.50% 5.75% 6.00% Source: Audi Capital 27.10 27.90 28.75 29.66 30.63 31.68 32.81 34.03 35.35 12.10% 26.70 27.47 28.30 29.18 30.13 31.14 32.23 33.41 34.68 12.20% 26.31 27.06 27.87 28.72 29.64 30.62 31.68 32.81 34.04 12.30% 25.93 26.66 27.44 28.27 29.17 30.11 31.13 32.23 33.42 12.40% 25.56 26.27 27.03 27.83 28.70 29.62 30.61 31.67 32.82 12.50% 25.19 25.89 26.62 27.41 28.24 29.14 30.10 31.12 32.23 12.60% 24.84 25.51 26.23 26.99 27.80 28.67 29.60 30.60 31.67 12.70% 24.49 25.15 25.85 26.59 27.38 28.22 29.12 30.08 31.12 12.80% 24.16 24.80 25.47 26.19 26.96 27.78 28.65 29.58 30.59

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RELATIVE VALUATION METHODOLOGY

Using the relative valuation approach, we have valued Sipchem on an equal basis with selected regional peers operating in the petrochemical industry. The average estimated P/E 10 and P/E 11 of this group is around 15.33x and 11.91x, respectively. This means that, on a forward P/E basis, Sipchem is trading at a discount to the average multiple of its peer group as the company's estimated PE 11 stands at 9.89x. Based on the regional peer average forward P/E of 11.91x, the relative valuation methodology would have resulted in an estimated fair value of SAR 27.27/share for Sipchem.

Country CH EG FR GE IN IN JN JN JN JN JN NE QA SR SR SR SR SR SR SR SR TA TA US US US US Company Sinopec Shanghai Petrochemical Co Ltd Sidi Kerir Petrochemcials Co Total SA BASF SE Jubilant Organosys Ltd Reliance Industries Ltd Asahi Kasei Corp Nissan Chemical Industries Ltd Shin-Etsu Chemical Co Ltd Showa Denko KK Sumitomo Chemical Co Ltd Royal Dutch Shell PLC Industries Qatar Advanced Petrochemicals Co Methanol Chemicals Co National Industrialization Co Rabigh Refining & Petrochemicals Co Sahara Petrochemical Co Saudi Basic Industries Corp Saudi Kayan Petrochemical Co Yanbu National Petrochemicals Co Formosa Petrochemical Corp Formosa Chemicals & Fibre Corp Dow Chemical Co/The EI du Pont de Nemours & Co Exxon Mobil Corp Huntsman Corp PE 10E 9.02 6.78 8.43 11.12 11.59 14.70 NA NA NA NA NA 9.70 11.09 12.28 21.74 10.55 26.31 18.34 12.48 NA 18.40 17.81 11.80 14.82 13.84 10.43 43.43 PE 11E 8.37 7.25 7.47 10.17 9.84 12.58 NA NA NA NA NA 7.86 9.02 10.86 11.39 10.16 10.54 12.80 10.62 24.22 12.26 16.40 11.09 9.97 12.39 8.87 10.64 PBR 1.22 3.21 1.50 2.23 2.70 2.23 1.03 1.67 1.24 1.05 1.07 2.38 2.71 1.74 1.23 1.60 3.27 1.79 2.36 1.74 3.87 3.13 1.64 1.81 4.26 2.45 1.31 Dividend Yield 09 (%) 1.18 11.24 5.92 3.68 NA 1.28 2.15 2.32 2.38 1.75 1.61 6.28 5.05 8.52 NA 2.64 NA NA 1.68 NA NA 4.97 7.59 2.34 4.50 2.90 4.45 1.0 0.8 1.0 1.1 0.9 1.2 1.0 1.5 1.2 1.2 1.1 1.1 1.2 1.1 0.9 1.2 1.2 1.1 1.2 1.1 1.2 0.7 0.8 1.2 1.1 0.8 0.9 Beta

Gulf Region Average World Average, excl. Gulf Region

15.33 14.72

11.91 10.47

2.42 1.94

5.83 3.46

1.1 1.0

Sipchem Source: Bloomberg, Audi Capital estimates

13.29

9.89

1.62

4.42

1.10

FINAL VALUE

Thus, with 80% weight attributed to the FCFE model and the remaining weight attributed to the relative valuation model, we have arrived at a final fair value of SAR 28.52/share for Sipchem. With a current price of SAR 22.65/share, Sipchem offers investors upside potential of 25.9%.

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APPENDIX A: PROJECTED INCOME STATEMENT

(SAR 000) 2009 2010E 2011E 2012E 2013E 2014E

Sales Cost of sales Gross Profit General and administrative expenses Operating Income Investment Income Provision for project development cost Financial charges Net income (expenses) of pre-operating activities Other income Income before Minority Interest and Zakat Minority interest Net Income before Zakat Zakat Net Income Earnings per share (EPS)

830,403 (594,666) 235,737 (67,405) 168,331 14,726 75,000 (45,388) (1,708) (559) 210,402 (29,164) 181,238 (40,358) 140,880 0.42

2,053,845 (1,053,556) 1,000,290 (95,682) 904,607 4,776 2,600 (53,513) (2,833) (188) 855,450 (197,900) 657,550 (89,531) 568,019 1.70

2,646,004 (1,368,789) 1,277,214 (123,269) 1,153,945 3,980 (89,381) (3,757) 4,750 1,069,537 (247,428) 822,110 (59,050) 763,060 2.29

2,820,623 (1,397,266) 1,423,357 (131,404) 1,291,953 2,952 (79,162) (4,069) 20,410 1,232,085 (285,031) 947,054 (38,243) 908,811 2.73

3,209,434 (1,546,140) 1,663,294 (149,518) 1,513,776 2,293 (69,295) (4,682) 8,324 1,450,417 (335,540) 1,114,876 (23,256) 1,091,620 3.27

3,517,266 (1,610,240) 1,907,026 (163,858) 1,743,167 1,837 (73,758) (5,165) 11,162 1,677,244 (388,015) 1,289,229 (16,972) 1,272,257 3.82

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APPENDIX B: PROJECTED BALANCE SHEET

(SAR 000) 2009 2010E 2011E 2012E 2013E 2014E

Cash and cash equivalents Trade receivables Prepayments and other receivables Inventories Total current assets Property, plant and equipment Projects development costs Intangible assets Other current assets Total non-current assets

1,831,202 251,832 55,960 78,682 2,217,677 9,517,403 52,032 31,092 9,600,527

4,107,459 483,437 72,036 154,709 4,817,641 10,316,204 129,204 142,059 10,587,466

3,422,546 622,820 93,590 200,999 4,339,954 11,076,535 172,867 147,731 11,397,134

2,538,969 663,922 95,537 205,180 3,503,609 11,748,893 136,604 137,790 12,023,286

1,971,643 755,441 105,716 227,042 3,059,842 12,378,286 76,138 131,719 12,586,143

1,580,122 827,899 110,099 236,454 2,754,574 12,970,528 6,356 118,078 13,094,962

Total Assets

11,818,204

15,405,107

15,737,088

15,526,895

15,645,985

15,849,537

Accounts payable Other liabilities Short term loans Short term shareholder advances Current portion of long term debts Current portion of capital lease Total current liabilities Long term debts Obligations under capital lease Long term interest rate swap Long term shareholder advances End-of-service indemnities Total non-current liabilities Share capital Statutory reserve General reserve Fair value of cash flow hedge Retained earnings Total stockholders' equity Minority interest Total stockholders' equity and minority interest

263,282 356,907 19,492 220,610 42,811 903,103 4,240,780 401,351 143,524 257,172 40,319 5,083,145 3,333,333 932,907 275,000 (102,918) 483,759 4,922,081 909,874 5,831,956

386,045 477,497 24,710 305,353 42,811 1,236,416 6,935,426 358,541 195,012 308,606 48,481 7,846,066 3,333,333 989,709 275,000 (151,729) 682,565 5,128,879 1,193,746 6,322,625

501,553 620,369 22,101 791,127 42,811 1,977,960 6,144,300 315,730 282,889 58,295 6,801,214 3,333,333 1,066,015 275,000 1,064,095 5,738,444 1,219,471 6,957,915

511,987 633,275 23,405 762,427 42,811 1,973,905 5,381,873 272,919 295,748 70,097 6,020,636 3,333,333 1,156,896 275,000 1,563,941 6,329,171 1,203,183 7,532,354

566,538 700,748 22,753 796,747 42,811 2,129,597 4,585,126 230,108 289,318 84,287 5,188,840 3,333,333 1,266,058 275,000 2,240,746 7,115,137 1,212,411 8,327,549

590,025 729,800 23,079 689,967 42,811 2,075,682 3,895,160 187,297 292,533 101,350 4,476,340 3,333,333 1,393,284 275,000 3,067,712 8,069,330 1,228,185 9,297,514

Total Liabilities, Stockholders' Equity and Minority Interest

11,818,204

15,405,107

15,737,088

15,526,895

15,645,985

15,849,537

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EQUITY RESEARCH

PETROCHEMICAL

SAUDI INTERNATIONAL PETROCHEMICAL CO.

KSA

APPENDIX C: TABLE OF KEY FINANCIAL FIGURES

2009 Business Assessment & Profitability Measures: Gross Margin Operating Margin EBIT Margin EBITDA Margin Net Margin ROE ROCE ROA Liquidity Measures: Current Ratio Cash Ratio Leverage Measures: Debt-to-Equity Interest Coverage Utilization Measures: Receivable Turnover Receivable Days Inventory Turnover Inventory Days Payable Turnover Payable Days Conversion Period Financial Coverage Measures: Short Term Debt Coverage Operating Cash Flow to Total Debt Free Cash Flow to Total Debt (0.66) (0.04) (0.35) 2.26 0.10 (0.02) 1.39 0.16 0.03 1.78 0.22 0.07 1.98 0.29 0.12 2.73 0.41 0.22 4.64 79 6.41 57 3.21 114 22 5.59 65 9.03 40 3.25 112 (7) 4.78 76 7.70 47 3.08 118 5 4.38 83 6.88 53 2.76 132 4 4.52 81 7.15 51 2.87 127 4 4.44 82 6.95 53 2.78 131 4 0.84 5.64 1.21 16.99 1.05 12.97 0.86 16.56 0.68 21.93 0.52 23.74 2.46 2.03 3.90 3.32 2.19 1.73 1.77 1.29 1.44 0.93 1.33 0.76 28.4% 20.3% 30.8% 50.9% 17.0% 2.4% 2.3% 1.2% 48.7% 44.0% 44.3% 55.9% 27.7% 9.3% 6.4% 4.2% 48.3% 43.6% 43.8% 53.4% 28.8% 11.5% 8.4% 4.9% 50.5% 45.8% 46.5% 58.1% 32.2% 12.5% 9.7% 5.8% 51.8% 47.2% 47.4% 59.4% 34.0% 13.8% 11.2% 7.0% 54.2% 49.6% 49.8% 63.1% 36.2% 14.4% 12.7% 8.1% 2010E 2011E 2012E 2013E 2014E

July 14, 2010

36

EQUITY RESEARCH

PETROCHEMICAL

SAUDI INTERNATIONAL PETROCHEMICAL CO.

KSA

FAIR VALUE DEFINITION

It is an unbiased estimate of the 12-month potential market price of the stock

RECOMMENDATION GUIDE

SELL

Downside

REDUCE -30% -10%

HOLD

ACCUMULATE +10% +30%

BUY

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%

ADDRESS

Audi Capital - KSA

Centria Building · Prince Mohammad bin Abdulaziz Road (Tahlia) · P.O. Box 250744 · Riyadh 11391 · Saudi Arabia Phone: +966 1 2199300 · Fax: +966 1 4627942 · Email: [email protected]

DISCLAIMER

"All rights reserved. This research document is prepared for the use of clients of Audi Capital - KSA and Bank Audi SAL and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Audi Capital - KSA and Bank Audi SAL. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Audi Capital - KSA and Bank Audi SAL. The information herein was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. Audi Capital - KSA and Bank Audi SAL make no representations or warranties whatsoever as to the data and information provided and Audi Capital - KSA and Bank Audi SAL do not represent that the information content of this document is complete or free from any error. This research document provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate, and that the price or value of such securities and investments may rise or fall. Accordingly, investors may receive back less than originally invested. Audi Capital - KSA and Bank Audi SAL or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related investments. Audi Capital - KSA and Bank Audi SAL shall not be liable for any loss or damages that may arise, directly or indirectly, from any use of the information contained in this research document. This research document is subject to change without prior notice."

July 14, 2010

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