PP10551/09/2011(028936) 15 November 2010

MALAYSIA EQUITY Investment Research Daily

IPO Note
Jason Yap +60 (3) 9207 7698 [email protected]

Petronas Chemicals Group

A Rising Star
Petronas Chemicals Group (Petronas Chemicals) is a leading integrated petrochemical producer in the South-East Asia (SEA) region. Its key competitive advantage lies in its reliable and attractively priced gas feedstock supply from Petronas Group. However, its performance can be cyclical given the nature of the industry it operates in. We initiate coverage with a Subscribe / Buy call with some 9% upside to our fair value. SEAs leading integrated petrochemical producer. Petronas Chemicals is the largest producer of methanol by volume in South-East Asia (SEA) and the 4th largest in the world. It is also SEAs largest producer of ethylene glycols as well as the 3rd largest producer of urea and low density polyethylene (LDPE) in SEA by volume. The group also holds the distinction of being the market leader in Malaysias petrochemical industry based on its urea, glycols and methanol sales. Competitive edge in having reliable and cheap gas feedstock. Firstly, producing petrochemicals using gas (ethane) is more cost effective than with oil (naphtha). Secondly, the gas price paid by Petronas Chemicals is close to that paid by its Middle Eastern peers, which is considered the lowest in the industry. In fact, both Petronas Group and Petronas Chemicals have a strong symbiotic relationship whereby Petronas Chemicals sources its feedstock exclusively from Petronas. However, petrochemical is a cyclical industry. According to market research firm Nexant, the duration between 2 peak cycles is 6-11 years. Currently, the industrys short term outlook is a bleak one, but it expects to see gradual recovery in the industrys utilization rates and margins starting from 2011 and peaking in 2015. This recovery would be driven by the Asia Pacific markets, where growth rates are higher compared to developed markets due to the lower level of material substitution for petrochemicals. Increasingly, petrochemicals are used to substitute basic materials like wood, glass, metals, paper and card in the packaging, automotive and construction industries, since they offer higher performance but at lower cost. Initiate with Subscribe / Buy recommendation. Our target price for the company is RM5.51 based on a PER of 16x FY12 EPS. From the financial angle, we like the companys strong backing from Petronas Group, especially in terms of low feedstock prices, and its attractive dividend payout ratio of 50%, which is the highest versus that of its close peers.
FYE Mar (RMm)
Revenue Net Profit % chg y-o-y Consensus EPS (sen) DPS (sen) Dividend yield (%) ROE (%) ROA (%) PER (x) BV/share (RM) P/BV (x) EV/ EBITDA (x)

SUBSCRIBE
Target IPO Price RM5.51 RM5.04

Enlarged Share Capital / Par Value 8.0bn shares/RM0.10 Indicative Listing Date 26 November 2010 Listing Sought Main Board Major Shareholders (post- IPO) Petronas

69.0%

IPO Details Retail offering: Malaysian public - Bumiputera - Non-Bumiputera Directors Employees Customers Total retail Institutional offering: MITI approved Bumiputera investors Other investors Total institutional Total

Shares (m)

80.0 80.0 0.4 123.5 9.1 293.0 920.0 1267.0 2,187.0 2,480.0

Offer for sale consists of 1,780m existing shares.

Utilisation of Proceeds Expansion of business Working capital Listing expenses Total RMm 2,239.0 1,200.0 96.0 3,535.0

FY08
12855.0 3925.0 49.1 26.4 18.3 10.3 1.86 2.7 4.9

FY09
12367.0 2818.0 -28.2 35.2 17.9 12.1 14.3 1.97 2.6 6.3

FY10
12203.0 2199.0 -22.0 27.5 12.9 8.2 18.3 2.13 2.4 6.2

FY11f
12699.5 2248.7 2.3 28.1 14.1 2.8 12.4 7.8 17.9 2.27 2.2 5.9

FY12f
13609.4 2756.1 22.6 34.5 17.2 3.4 14.1 9.1 14.6 2.45 2.1 5.3

OSK Research | See important disclosures at the end of this report

OSK Research

IPO DETAILS
Petronas Chemicals Group Bhd (Petronas Chemicals) is seeking a listing with an enlarged share capital of 8.0bn shares of RM0.10 each on the Main Market of Bursa Malaysia. Upon listing, Petronas Chemicals will have a market capitalization of RM40.3bn, based on the retail IPO price of RM5.04 per share, or 97% of the price paid by institutions. The group expects to raise gross proceeds of about RM3.5bn from the Public Issue, which will be used for expansion of business, general corporate purposes and to pay listing expenses. Figure 1: Shareholding structure of Petronas Chemicals

Shareholders

Number of Shares m

Retail offering: Malaysian public - Bumiputera - Non-Bumiputera Directors Employees Customers Total retail Institutional offering: MITI approved Bumiputera investors Other investors Total institutional Grand total Remaining shares held by Petronas

80.0 80.0 0.4 123.5 9.1 293.0

1.00 1.00 0.01 1.54 0.11 3.66

920.0 1,267.0 2,187.0 2,480.0 5,520.0

11.50 15.84 27.3 31.0 69.0

Source: OSK, Prospectus

Figure 2: Indicative timetable

Events Opening of institutional offering Issue of prospectus/opening of retail offering Closing of retail offering Closing of institutional offering Price determination date Balloting of applications for the retail offering Allotment/transfer of the IPO shares to successful applicants Listing Date 26 Oct 2010 1 Nov 2010 9 Nov 2010 12 Nov 2010 12 Nov 2010 12 Nov 2010 24 Nov 2010 26 Nov 2010

Source: OSK, Prospectus

Purpose for listing. We understand that Petronas intends to consolidate all of Petronas petrochemical activities into a single entity. By doing so, Petronas expects to maximize shareholder value through the consolidation of its position as market leader in the Asian petrochemical industry in terms of the integration of its operations, focus on key growth markets, profitability and return on capital.

OSK Research | See important disclosures at the end of this report

OSK Research

PETRONAS CHEMICALS COMPANY BACKGROUND

Petronas Chemicals is the leading integrated petrochemical producer in Malaysia and also one of the largest petrochemical producers in the SEA region. With more than 25 years of experience in the petrochemical industry, the group is primarily involved in the manufacturing, marketing and selling of a diversified range of petrochemical products which include olefins, polymers, fertilizers, methanol and other basic chemical and derivative products. The group has a total production capacity of over 11m tonnes pa. Today, its 2 major operating business segments are: 1) olefins and polymers, and 2) fertilizers and methanol. The group operates through 2 integrated petrochemical complexes (IPC) in the east of Peninsular Malaysia (Kertih and Gebeng) as well as 3 manufacturing complexes - in Gurun, Bintulu and Labuan. Finally, it also has a PVC plant in Vietnam. Petronas Chemicals stands out as the largest th producer of methanol by volume in SEA and 4 largest in the world. It is also the largest producer of rd ethylene glycols in SEA, and the 3 largest producer of urea and low density polyethylene (LDPE) in SEA by volume. It is also the market leader in the Malaysian petrochemicals industry based on sales of urea, glycols and methanol. Figure 3: The groups key milestones
Year 1985 Key Milestones ASEAN Bintulu Fertilizer commenced first commercial production of ammonia and urea in the Bintulu complex. Polyethylene Malaysia commenced production of polyethylene BASF Petronas Chemicals's Acrylic Acid complex fully operational Optimal Companies' olefins plant, glycols plant and chemical plant commenced operations Mega Methanol plant in Labuan commissioned Dow Chemical's interest in the Optimal Companies' JV acquired BP Chemicals' interest in Polyethylene Malaysia and Ethylene Malaysia acquired

1995 2000 2002 2009

2010

Source: OSK, Prospectus

OSK Research | See important disclosures at the end of this report

OSK Research

GROUP STRUCTURE
Petronas Chemicals has 17 100%-owned subsidiaries and majority-owned subsidiaries, and 5 associates and JV entities. Its 2 main operating segments are olefins and polymers, and fertilizers and methanol. Petronas Chemicals also owns 100% of and operates Kertih Port, which provides port services in connection with the sale and distribution of its petrochemical products. Finally, it also owns 100% of MITCO, who co-ordinates its marketing and sales activities with production. Figure 4: Petronas Chemicals olefins and polymers segment
OLEFINSANDPOLYMERSBUSINESSSEGMENT

100%

100%

MTBE MALAYSIA

100%

100%

100%

100%

Polypropylene Malaysia

Vinyl Chloride (Malaysia)

OPTIMAL Chemicals

OPTIMAL Glycols

Polyethlene Malaysia

60%

87.5%

70%

93.11%

88%

PETLIN

Ethylene Malaysia

Aromatics Malaysia

Phu My

OPTIMAL Olefins
40% 30%

BASF PETRONAS Chemicals

Idemitsu SM

Source: Prospectus

Figure 5: Petronas Chemicals fertilisers and methanol segment

FERTILISERSANDMETHANOLBUSINESSSEGMENT

100%

100%

100%

100%

100%

PETRONAS Methanol

PETRONAS Ammonia

PETRONAS Fertilizer

MITCO KertihPort

63.47%

ASEAN Bintulu Fertilizer

30%

20%

BP PETRONAS Acetyls

Malaysian NPK Fertilizer

40%

Kertih Terminals

Source: Prospectus

OSK Research | See important disclosures at the end of this report

OSK Research

MANAGEMENT BACKGROUND
Dato Tengku Mahamad bin Tengku Mahamut. He is the President/Chief Executive Officer of Petronas Chemicals. Prior to joining Petronas Group, he spent 17.5 years with Exxon Chemicals involved in technical sales, marketing and management positions in the polyolefins business across Exxon Chemicals worldwide operations in Malaysia, Belgium, Indonesia, Japan and Hong Kong. He joined Petronas Group as Group Head, Industrial and Specialty Chemicals. He was the Managing Director/Chief Executive Officer of Vinyl Cloride (Malaysia), Aromatics Malaysia and Petronas Methanol between 1998 and 2005. He is now also President of the Malaysian Petrochemical Association and serves on the Executive Committee of the Chemical Industries Council of Malaysia. He currently sits on the Board of Directors of several companies in the Petronas Group. Wan Shamilah binti Wan Muhammad Saidi is the Chief Financial Officer of Petronas Chemicals. She joined Petronas Group in October 1993 as a Finance Executive in Petronas Carigali. She left to work for Morison Stoneham, a firm of Chartered Accountants in England, before rejoining Petronas in 1998 as Manager in Group Finance. Wan Shamilah was also Senior General Manager of Crude Oil Group of Petronas responsible for the global marketing and trading of crude oil for Petronas. Currently, she sits on the Board of Directors of several companies in the Petronas Group. Figure 6: Summary of Petronas Chemicals key management
Name Dato' Tengku Mahamad bin Tengku Mahamut Wan Shamilah binti Wan Muhammad Saidi Abd Manaf bin Abd Hamid Yusa' bin Hassan Fadzilan bin Mohd Daud Maliki Kamal bin Mohd Yasin Ruziah Azdi binti Abdul Rahman Hazlina binti Abdul Hamid Nationality Malaysian Malaysian Malaysian Malaysian Malaysian Malaysian Malaysian Malaysian Age 56 40 51 47 48 47 47 45 Designation President/Chief Executive Officer Chief Financial Officer Head, Olefins and Polymers Head, Fertilisers and Methanol Head, Human Resource Management Head, Legal and Corporate Secretariat Head, Corporate Affairs Head, Risk Management

Source: OSK, Prospectus

OSK Research | See important disclosures at the end of this report

OSK Research

PRINCIPAL ACTIVITIES
2 main business segments. Petronas Chemicals has 2 main business segments, including: 1) olefins and polymers, and 2) fertilizers and methanol. The olefins and polymers business dominates the groups product mix, contributing 70%-75% of its revenue, while the balance 25%-30% is mainly contributed by its fertilizers and methanol business. In the olefins and polymers segment, Petronas Chemicals manufactures and sells a wide product range, ranging from ethylene and propylene which are used as basic feedstock for intermediate products such as ethylene oxide, ethylene glycol, butanol chemicals and various ethylene oxide derivatives, including some basic and high performance chemicals while in the fertilizers and methanol segment, it produces and sells methanol and a range of nitrogen phosphate and compound fertilizers. Figure 7: Petronas Chemicals revenue breakdown
RM'm 12,000 10,000 8,000 6,000 4,000 2,000 FY08 FY09 FY10 FY11f Others FY12f

Olefins&Polymer

Fertilisers&Methanol

Source: OSK, Petronas Chemicals

Ethane and propane the main feedstock for olefins and polymer products. These are supplied to the plants through the Peninsular Gas Utilisation (PGU) pipeline to produce ethylene and propylene. Once produced, these chemicals will be supplied to its other plants to be used in downstream production processes. For example, ethylene is used as feedstock to manufacture polyethylene (HDPE, LLDPE and LDPE), VCM, ethylene glycols and styrene monomer while propylene is the feedstock used together with oxogas and ammonia, which is supplied from its ammonia plant in Kertih IPC to produce butanol chemicals. Figure 8: Olefins and polymers
PETRONASMethanol Methanol PETRONAS PROPANE,BUTANE MTBEMalaysia MTBE PROPYLENE NBUTANE
PROPYLENE
NBUTANE PROPYLENE

PolypropyleneMalaysia Polypropylene BASFPetronasChemicals Acrylics/OXOALCOHOL/BUTANEDIOL IdemitsuSM STYRENEMONOMER PolvethvleneMalaysia LLDPHE/HDPE COMPOUNDS VinylChloride(Malaysia) VCM PVC VCM PhuMy PVC PETUN LDPE OPTIMALGlycols ETHYLENEOXIDE/GLYCOLS ETHYLENEOXIDE

MTBE POLYPROPYLENE ACRYLICS OXOALCOHOLIC BUTANEDIOL STYRENEMONOMER LLDPE/HDPE COMPOUNDS

PETRONAS ETHANE

EtyleneMalaysia ETHYLENE OPTIMALOlefins ETHYLENE PROPYLENE

VCM PVC

PVC LDPE

PETRONAS PROPANE

ETHYLENE

ETHYLENE ETHYLENEGLYCOLS PROPYLENE

PETRONASAmmonia OXOGASAMMONIA PETRONASPenapisan (Terengganu) HEAVYNAPHTHA

OPTIMALChemicals BUTANOL/CHEMICALS

BUTANOLCHEMICALS

AromaticsMalaysia PARAXYLENEBENZENE

PARAXYLENEBENZENE

Feedstocksupply Associates OlefinsandPolymersBusinessSegments

Source: Prospectus

OSK Research | See important disclosures at the end of this report

OSK Research

Methane and hydrogen the main feedstock for fertilizers and methanol products. Both feedstocks are derived from natural gas supplied by Petronas. Methanol is primarily produced at its 2 methanol plants in Labuan using natural gas as feedstock. Once produced, it is either sold to third parties or supplied to its plant in Gebeng IPC whereby the methanol will be used as feedstock for the production of MTBE. Besides Labuan, methanol is also being produced at its production complex in Gurun. Urea and ammonia are produced in Gurun and Bintulu using natural gas as feedstock. Figure 9: Fertilizers and methanol
PETRONAS/PETRONAS Carigali NaturalGas

PETRONASMethanol Methanol Methanol MTBEMalaysia MTBE PROPYLENE NBUTANE

Methanol

PETRONAS NATURALGAS

ASEANBintuluFertilizer UREAAMMONIA

UREAAMMONIA

PETRONAS NATURALGAS

PETRONASFERTILIZER UREA AMMONIA METHANOL

UREA AMMONIA METHANOL

ETHYLENEMALAYSIA, AROMATICSMALAYSIA, PETRONASPENAPISAN (TERENGGANU) HYDROGEN

PETRONASAMMONIA AMMONIA CARBONMONOXIDE OXOGAS

OXOGAS AMMONIA

AMMONIA CARBONMONOXIDE

OPTIMALCHEMICALS ETHYLENEGLYCOL OTHERCHEMICALS

BPPETRONASACETYLS ACETICACID

ACETICACID

Feedstocksupply JointlyControlledEntity OlefinsandPolymersBusinessSegment

Source: Prospectus

OSK Research | See important disclosures at the end of this report

OSK Research

PRODUCTION FACILITIES
Strategic location in Malaysia. Except for its PVC plant in Ho Chi Minh, Vietnam, all its other production facilities are located in Malaysia, as shown in the diagram below. Figure 10: Location of Petronas Chemicals production facilities

Source: Prospectus

Natural gas channeled through pipelines. Petronas Gas has been processing natural gas sourced offshore Terengganu since 1984. This natural gas is transmitted through its PGU pipeline system to endusers in the power, industrial and commercial sectors in Peninsular Malaysia, as well as power plants in Singapore. All of Petronas Chemicals facilities have dedicated pipelines that supply it with feedstock.

KERTIH IPC Background. The Kertih IPC is located on the east coast of Peninsular Malaysia and mainly consists of ethane-based petrochemical projects. The facilities here include: 1) 2 ethylene crackers; 2) 2 polyethylene plants; 3) 1 ethylene oxide/ethylene glycol plant; 4) 1 multi-unit derivatives plant; 5) Vinyl chloride monomer (VCM) and polyvinyl chloride (PVC) plants; 6) ammonia/synthesis gas plants; 7) 1 acetic acid plant, and 8) 1 aromatics complex. Petronas Chemicals owns and operates all these plants. Feedstocks. The main feedstocks are ethane, propane and heavy naphtha. The gas feedstock is delivered through the PGU network while the heavy naphtha is delivered through another dedicated pipeline directly from the oil refinery operated by Petronas Penapisan Terengganu. Other infrastructures. The Kertih Port is wholly-owned by Petronas Chemicals and has 6 berths that can accommodate chemical tankers of up to 50k dwt. Also, there is a 86km dedicated railway system connecting this Kertih IPC to Kuantan Port. Finally, Kertih Terminal - a JV between Petronas, Dialog and Vopak - terminal provides centralized services for the handling, storage and distribution of feedstock, intermediates and finished products from the Kertih IPC.

OSK Research | See important disclosures at the end of this report

OSK Research

Figure 11: Kertih IPC

Source: Prospectus

OSK Research | See important disclosures at the end of this report

OSK Research

GEBENG IPC Background. Located on the east coast of Peninsular Malaysia, this is an integrated self-contained petrochemical complex where its propane and butane-based petrochemicals projects are centered. Petronas Chemicals owns and operates a methyl tertiary butyl ether (MTBE) plant, a propane dehydrogenation plant and a polypropylene plant at the Gebeng IPC. Feedstock. The main feedstocks are propane and butane. The gas feedstock to this Gebeng IPC is delivered through the PGU network. Other infrastructures. The nearby Kuantan Port is used by Petronas Chemicals to transport products from the Gebeng IPC to minimize warehousing and ground transport cost. It also has a storage tank for MTBE near the Kuantan Port, with a dedicated jetty for MTBE product use. Figure 12: Gebeng IPC

Source: Prospectus

LABUAN METHANOL COMPLEX Background. Petronas Chemicals methanol production facilities are located in Labuan. There are 2 plants with a total production capacity of 2.4m mtpa. Feedstocks. The main feedstock used is the natural gas which is purchased from Petronas. This gas is sourced from several gas fields off the coast of Sabah. Other infrastructure. Although located on an island, this production complex is self-sufficient. It has its own electricity supply which is handled integrally to ensure stability and continuous availability of power. However, the water is supplied by the local water authority and we gather that its Plant 1 was shut down earlier due to water shortage. Having said that, management believes that this issue would be addressed soon and hence allow it to raise its utilization rate to above 70% from the existing 60%.

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OSK Research

Figure 13: Labuan methanol complex

Source: Prospectus

Figure 14: Other plants

Source: Prospectus

Reasonable capacity utilization rate. The average utilization rate for all its plants is 75% to 80%. Usually, all its plants operate non-stop throughout the year except during periods of scheduled maintenance or unscheduled shutdowns.

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OSK Research

SUPPLIERS
Petronas the main supplier. The primary feedstocks for Petronas Chemicals are ethane, propane, methane, butane and heavy naphtha and they are supplied by Petronas Group. In fact, there are no other supplier who accounted more than 10% of its total purchase since 2008. These feedstocks supplied by Petronas Group are on a fixed term basis although the pricing may differ among the supply contracts. Nevertheless, we understand that the price paid for these feedstocks are more attractive than the existing market price. Figure 15: Main raw materials supplied by Petronas

Source: Prospectus

CUSTOMERS
Targeting the local and international markets. Petronas Chemicals sales to the local market accounted for 45%-57% of total sales from 2008-2010. Also, due to the diversity of its customers, no single customer contributes more than 10% of total revenue, which minimizes the risk of relying on a few customers. The domestic market. The groups 550 customers in Malaysia comprise distributors, traders and manufacturers serving the packaging, household, construction and agricultural markets as well as manufacturers of industrial products. Also, Petronas Chemicals is the sole producer of granular urea in the domestic fertilizer market for direct application in the agriculture sector. Figure 16: Target market of petrochemical industry
Others 14% Textile 9% Agricultural 32%

Transportation 11%

Construction 15%

Packaging 19%

Source: OSK, Petronas Chemicals

The international market. Petronas Chemicals exports to about 900 customers in more than 25 countries. Its major markets are SEA, North East Asia, the Indian subcontinent, Australia and New Zealand. However, due to strong competition from its international peers, Petronas Chemicals needs to be competitive in terms of product pricing, quality, reliability as well as flexible on delivery to its customers. Also, in order to be more customer oriented, it has overseas representatives in China, Indonesia, India, Philippines, Thailand, Vietnam, United Arab Emirates and South Africa to reach and service customers more effectively.

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OSK Research

SALES AND MARKETING

MITCO, its main sales and marketing arm. The company is 100%-subsidiary of Petronas Chemicals. MITCOs role is to help sell and market its products in the domestic and Asia Pacific region. There is fixed agreement entered between MITCO and Petronas Chemicals to ensure that MITCO receive a stable supply of chemicals for sale into the market. A presence in many countries. MITCO is present in more than 25 countries. Its major markets include China, SEA, North East Asia and the Indian subcontinent. Figure 17: Sales by geographical location
Restofthe world 3%

OtherAsian Countries 38%

Malaysia 45%

China 14%

Source: OSK, Petronas Chemicals

WORKFORCE
Employs over 4k personnel. Petronas Chemicals employed 4,038 permanent staff, 108 contract staff (direct hire) and 193 contract staff (third party) as at 31 July 2010. Hence, given that about 93% of its staff is permanent, this reduces the risk of the company not having enough workers when the demand for petrochemicals picks up. Figure 18: Permanent and contract staff

Source: Prospectus

Figure 19: Workforce by division

Source: Prospectus

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OSK Research

COMPETITION
4 major competitors reviewed. Although there are many chemical producers in the world, we understand from Petronas Chemicals analyst briefing that the group recognizes 4 peers which have similar businesses and a product mix that is close to its own. These companies are: 1) Saudi Basic Industries Corporation (Sabic); 2) Formosa Petrochemical Corporation (Formosa); 3) PTT Chemical Plc (PTT Chemical), and 4) Reliance Industries Ltd (Reliance). Also, we have included 2 other peers, Honam and LG from South Korea, for comparison. Figure 20: Top 10 South-East Asia producers of olefins (ethylene & propylene)

Company PTT Group Petronas Chemicals ExxonMobil SCG Group Titan Shell/QPI Sumitomo Chandra Asri Pertamina Star Refinery
Source: OSK, Prospectus

Capacity 000 MT p.a 2,600 1,500 1,400 1,350 1,250 1,200 1,000 900 300 100

Sabic, Saudi Arabia. The company was established in 1976 and began production in 1981. It is one of the worlds leading manufacturers of chemicals, fertilizers, plastics and metals. In comparison with its peers, it is one of the worlds 5 largest petrochemical manufacturers with notable products like ethylene, ethylene glycol, methanol, MTBE and polyethylene. It is a public company based in Riyadh in which the Saudi Arabian government owns 70% of its shares while the remaining 30% is held by private investors. It has offices across the globe including Middle East/Africa, Americas, Europe and Asia. Sabic has more than 33k employees and operations in more than 40 countries. Formosa, Taiwan. The company, established in 1992, is the largest olefins producer in Taiwan. Its olefin products are mostly sold to companies within the Formosa Group. Overall, it is in the business of refining crude oil, selling refined petroleum products and producing and selling olefins (including ethylene, propylene, butadiene and BTX) from its naphtha cracking operations. It also sells electricity, steam and certain other products generated from its co-generation power plants. Today, Formosa is the only privately nd owned oil refinery in Taiwan and that countrys 2 largest gasoline and gasoil producer. Its refined petroleum products are both sold domestically and in overseas markets. PTT Chemical, Thailand. The company was formed from the merger of 2 major petrochemical players in Thailand, namely the National Petrochemical Public Company Ltd and Thai Olefins Public Company Ltd PTT Chemical was registered in 2005 and is now Thailands largest producer of olefins and related downstream products. This fully -integrated petrochemical manufacturers core products are ethylene and propylene. Its other downstream petrochemical products include polyethylene, ethylene oxide and ethylene glycol. Reliance, India. The company is one of India's largest private-sector companies. It was founded as a textiles company but successfully completed a backward integration strategy later to transform itself into one of India's largest private-sector petrochemicals companies. Its petrochemicals division is fully integrated and produces a variety of petrochemicals which include polymers, polyester, polyester intermediates and a few others. In fact, some of the chemicals produced are used to support its textile operation, which it focuses particularly on the production of polyester fabrics. Honam, South Korea. Honam Petrochemical Corporation is one of the largest ethylene producers in South Korea. The company, incorporated in 1976, today produces petrochemicals which include polyethylene, polypropylene, functional resins and basic petrochemicals. Recently, it proposed to acquire 100% of Titan Chemicals Group Bhd at RM2.35/share.

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OSK Research

LG, South Korea. LG Petrochemical Co Ltd manufactures and markets petrochemical products such as ethylene, propylene, butadiene, benzene, toluene, xylene, benxene, propane, pentane, phenol, acetone, high-density polyethylene, nonaromatic raffinate, and mixed xylene. The company was formerly known as Lucky Petrochemical Co and was founded in 1978. A local rival in Titan Chemicals Group Bhd. Malaysias petrochemical industry is dominated by 2 major producers, namely Petronas Chemicals and Titan, although Shell Chemicals does command a small portion of the market. The main difference between Petronas Chemicals and Titan is Petronas Chemicals uses low priced gas feedstock as well as produces a wider petrochemical products compared to Titan, which uses naphtha as feedstock and focuses on the production of olefins and polyolefins. Shell Chemicals, on the other hand, is active in propylene production via refinery integration. Figure 21: Production capacity of local competitors

Source: Prospectus

Figure 22: Domestic market share

Shell 4%

Titan 43%

Petronas Chemicals 53%

Note: Total capacity is 2.9m MT p.a. in 2009 Source: OSK, Prospectus

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OSK Research

PETROCHEMICAL INDUSTRY TIMING OF CYCLES IS CRUCIAL

A cyclical industry. The petrochemical industry is quite cyclical. A typical cycle starts with demand building up, which in turn prompts petrochemical manufacturers to increase production capacity. This will lead to over-capacity in the industry and hence poor utilization rates as well as product pricing pressure. It would take a pick-up in demand before a new cycle starts. Based on a survey conducted by Nexant, the duration between 2 peak cycles is between 6 and 11 years as there are also many factors influencing this timeframe, such as the health of the global economy and so on. Short term outlook bleak, but its just a cycle. Nexant expects the petrochemical industry to remain under pressure as further capacity is forecast in the immediate term. However, it also sees a gradual recovery in the industry in terms of utilization rates and margins starting from 2011 and peaking in 2015. To recap, the previous major peak was reached in 2006/2007. Figure 23: Petrochemical industry cyclical nature

Source: Prospectus, Nexant

Recovery starting from 2011 driven by Asia Pacific. Starting from 2H10, there appears to be a recovery in the petrochemical industry, beginning with inventory restocking as buyers had been conservative in their inventory holdings prior to 2H10 owing to the global economic crisis. Also going into 2011, there is less capacity start-up being scheduled, which would in turn support the pricing and margins of chemical products. Figure 24: Net imports of major petrochemical products in 2015f

Source: Prospectus, Nexant

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INDUSTRY DEMAND
Demand driven by developing markets. These markets include Asia Pacific, South America and Middle East, which enjoy higher growth rates compared to developed markets because the lower level of material substitution of petrochemicals in the emerging markets. These petrochemicals are used to substitute basic materials like wood, glass, metals, paper and card in the packaging, automotive and construction industries and tend to offer higher performance at a lower cost. Olefin and polyolefin Polyolefin a better measure of industry demand. This is because most olefins (ethylene and propylene) are used to produce other olefin derivatives while polyolefin is consumed directly by end users in various industries such as construction, automotive, packaging, agricultural products, textiles and various consumer goods. Global CAGR for polyolefin consumption to rise 5.0% from 2010-2017. Global demand for polyolefin totaled 111m tonnes in 2009 versus supply of more than 130m tonnes p.a. As for olefins, Nexant estimated that the combined consumption of olefins (both ethylene and propylene) was about 185m tonnes (versus supply of 237m tonnes p.a.) in 2009. Going forward, Nexant expects the consumption growth to be led by the Middle East, at a higher CAGR of 7.8% due to its low base compared to North America and Europe, which only achieved a 3.5% CAGR due to their mature markets. China a significant demand contributor to overall Asia Pacific growth. China will drive growth in North East Asia with a forecast consumption growth of 6.4%. Besides the strong growth from industrialization, we believe that Chinas high demand for petrochemical is spurred by the need to substitute the basic materials mentioned earlier to further reduce production cost as we understand that Chinese labour cost has risen quite significantly over the past few years. Figure 25: Global olefins supply and demand

Source: Prospectus, Nexant

Figure 26: Global polyolefins supply and demand

Source: Prospectus, Nexant

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Ethylene Glycol Asia Pacific dominates demand. The Asia Pacific market makes up about 72% of global ethylene glycol demand. This chemical is a major raw material used in the production of polyester fibre and resin. It is itself produced from ethylene oxide. Global demand in 2009 totaled 18m tonnes (versus supply of about 25m tonnes, and is expected to grow at a CAGR of 4%-5% from 2010-2017. The key consumption driver is the textile market, in which polyester commands a strong share based on cost on performance versus other fibres. Figure 27: Global ethylene glycol supply and demand

Source: Prospectus, Nexant

Methanol Growth driven by new and emerging applications. The global annual methanol demand of about 45m tonnes (versus supply of about 87.6m tonnes) and expected to grow at a 9% CAGR over the period of 2010-2017. Methanol is either used as a chemical feedstock or in fuel related markets. If used as chemical feedstock, it would form formaldehyde, which is used in producing resins (glues) for the use in binding plywood and chipboard. On the other hand, fuel related use, it forms methyl tertiary butyl ether (MTBE) Figure 28: Global methanol supply and demand

Source: Prospectus, Nexant

Asia Pacific is one of the global largest markets for methanol. This region consumed about 24m tonnes in 2009, with the high consumption driven by China. In fact, Nexant forecasts that demand growth in China is about 15% CAGR from the 2010-2017 period.

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Urea Demand fuelled by global GDP and population growth. Fertilizer growth is mainly driven by food consumption on the back of GDP and population growth. The increased demand for fertilizer will drive demand for ammonia and urea. Urea is the primarily source of nitrogen for corp nutrition. It is also used in the production of certain resins such as melamine and urea formaldehyde resin, which is used as wood glue in the particle board, chipboard and plywood industries. The global demand for urea is about 150m tonnes (versus supply of about 187.3m tonnes). Going forward, the growth in urea demand would likely come from developing regions where population growth is the fastest and where farming techniques are being improved and industrialized via increased use of fertilizers, which include China and India. As for North America and Europe, we expect these regions to exhibit limited growth due to their slower population growth and well-developed agricultural industries. Figure 29: Global urea supply and demand

Source: Prospectus, Nexant

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INDUSTRY SUPPLY
Olefins and polyolefins New supply of olefin mainly from Middle East and Asia Pacific. The total global olefin capacity is estimated to be around 237m tonnes p.a. The Middle East is expected to increase global olefin capacity by about 10m tonnes a year. This expansion is of course primarily driven by low cost gas in the region. China tops the 2nd largest new olefin supply. Nexant forecasts that China alone will contribute about 6m tonnes of new olefins capacity annually from 2010-2015, supported by available feedstock from the local coal reserves and new refinery investments (naphtha). To recap, coal based projects are now being promoted by the Chinese government to reduce the nations dependence on oil-based products. Minimal new capacity from US, Europe and Japan. In comparison with the Middle East and Asia Pacific, the US, Europe and Japan have been going through rationalization of their older and higher cost plants and this trend is expected to continue over the next few years. Hence, this had led to minimal new capacities coming out from these countries. In fact, we understand that there is going to be about 1m MT of olefins capacity to be closed in US and Europe between 2010-2015. Figure 30: Olefins capacity changes forecast

Country North America South America Western Europe Middle East/Africa Central & Eastern Europe Other Asia North East Asia South East Asia
Source: OSK, Prospectus, Nexant

2010 m' MT 51.1 9.4 40.2 36.3 10.9 8.7 65.7 15.1

2015F m' MT 50.6 16.8 40.4 48.8 13.6 13.1 71.6 19.2

CAGR % -0.21 12.43 0.13 6.13 4.49 8.53 1.75 5.00

New capacity from elsewhere. Besides China, major new capacity investments are also being made in India, Thailand and Singapore although the incremental amount may not be significant. In the longer term, Nexant expects Vietnam and Indonesia to make significant new capacity investments but the SEA market is forecast to grow at a CAGR of 5% from 2010-2017, adding about 4m tonnes in new capacity annually. Malaysia a small contributor to global olefin capacity. Malaysias total olefin capacity is about 2.9m tonnes, contributed by 3 companies, namely Petronas Chemicals, Titan and Shell Chemicals. Petronas Chemicals holds the majority capacity share with an estimated share of 53% of the domestic market, followed by Titan at 43% and the balance 4% by Shell Chemicals. Figure 31: Polyolefins Top 10 South East Asia Producers

Company PTT Group Titan Chemicals SCG Group ExxonMobil Sumitomo/Shell Petronas Chemicals Chevron Phillips Tri Polyta JG Summmit Petrochemicals Chandra Asri
Source: OSK, Prospectus, Nexant

Capacity 000 MT p.a 1,580 1,480 1,450 930 810 600 400 390 390 350

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Ethylene Glycol New capacity from Asia Pacific and Middle East. This new capacity is linked to wider olefin complexes which are typically constructed with upstream integration into ethylene oxide. Nexant expects the high capacity addition in 2010 to reduce global utilization rates significantly to below 80%. New capacity of some 3.5m tonnes is expected to come onstream by 2010, bringing the annual global capacity to about 25m tonnes. Small contribution from SEA producers. The regions annual capacity of only about 1.1m tonnes is supplied by 4 companies, namely Petronas Chemicals, PTT, EG Singapore (JV between Shell Chemicals and Mitsubishi) and PolyChem (Indonesia). Methanol More supply from the China. Currently, annual global methanol supply totals 87.6m tonnes. Going forward, China is expected to add another 28m tonnes a year of new capacity between 2009 and 2015. The new projects in China will be based on coal feedstock. Besides China, we expect regions with access to cheaper natural gas such as the Middle East, South America and SEA to expand capacity too. Producers fragmented. In 2009, the top 20 producers only accounted for about 30% of the global methanol capacity while the remaining 70% comprised a highly fragmented group of largely small coal based producers in China. Petronas Chemicals has an annual production capacity of about 2.4m tonnes and is currently ranked 4th in the world. Figure 32: Methanol capacity changes forecast

Country North America South America Western Europe Middle East/Africa Central & Eastern Europe Other Asia North East Asia South East Asia
Source: OSK, Prospectus, Nexant

2010 m' MT 1.1 13.3 2.9 18.5 4.7 1.4 41.2 4.4

2015F m' MT 0.5 14.9 3.3 27.1 6.1 1.0 52.7 4.4

CAGR % -14.91 2.29 2.64 7.88 5.36 -8.00 8.78 0.00

Urea Supply to exceed demand. The global supply of urea is estimated at about 187.3m tonnes a year but even though supply still exceeds demand, there is an estimated new capacity of about 9m tonnes a year coming on stream by 2011. This excess capacity is expected to further pressure margins and utilization rates. Figure 33: Urea capacity changes forecast

Country North America South America Western Europe Middle East/Africa Central & Eastern Europe Other Asia North East Asia South East Asia
Source: OSK, Prospectus, Nexant

2010 m' MT 10.8 8.9 5.6 26.1 23.1 22.5 66.1 21.2

2015F m' MT 9.2 12.3 3.4 36.4 23.4 24.6 67.9 24.7

CAGR % -3.05 6.78 -9.44 6.87 0.28 1.75 0.5 3.04

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Urea producers very fragmented. The top 10 urea producers only account for 16% of total global capacity and comprise mainly players who have access to low cost gas such as the Middle Eastern, African and Russian producers. In SEA, urea supply is mainly dominated by 2 players, namely Indonesia and Malaysia. Petronas Chemicals is ranked the 3rd largest producer in this region. Figure 34: Urea top 10 South East Asia producers

Company Pupuk Kaltim Pupuk Sriwidjaja Petronas Chemicals Pupuk Iskandar Muda Pupuk Kujang PetroVietnam Petrokimia Gresik Myanmar Petrochemical Enterprises Habac Nitrogen Fertilizer Chemicals
Source:OSK, Prospectus, Nexant

Capacity 000 MT p.a 3,500 2,300 1,500 1,200 1,200 800 500 500 200

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MARGINS DRIVEN BY FEEDSTOCK COSTS

Middle Eastern producers have cost advantage. Compared with the other world producers, the Middle Eastern producers incur the lowest olefin cost, whereby ethane is supplied to them at a price fixed below the market price since they have linkages to the energy market. Besides lower feedstock, the Middle East players also have the advantage of lower average utility costs, lower capex associated costs and good economies of scale production. According to Nexant, a typical new ethylene plant constructed in Middle East has about 1.2m tonnes p.a, which usually double the size of the typical ethylene cracker in operation in Europe, US and Asia Pacific. Petronas Petrochemicals margin should be quite comparable to Middle East producers. This is because Petronas Petrochemicals gas feedstock such as ethane, which makes up about 60% of its total production cost, is purchased from Petronas Group at attractive prices. Hence, this gives it an edge over its non-Middle Eastern peers as we believe its other costs such as energy and utilities, depreciation, staff costs and so on are quite comparable between producers. We believe the Middle East producers capture a slightly higher EBITDA margin of over 50% compared to Petronas Chemicals 40% and above due to feedstock price advantage. The other gas based petrochemical producer in the region is PTT Chemical but its margin is still lower than Petronas Chemicals. Figure 35: EBITDA margin trend of Petronas Chemicals and its peers between 07-09
60% 50% 40% 30% 20% 10% 0% Petronas Chemicals Sabic Formosa PTTChemical Reliance 2007 2008 2009

Source: OSK, Petronas Chemicals

Figure 36: Petronas Chemicals has higher EBITDA margin over peers between 07-09

Company Petronas Chemicals Sabic PTT Chemical Reliance Formosa

Source: OSK, Petronas Chemicals

Average EBITDA 40% 33% 25% 16% 11%

Petrochemical industry still affected by oversupply. The industry has been experiencing a downturn in profitability following a period of good margins from 2005 to 2007. Since that time, margins had fallen in tandem with the decline in global GDP and the sharp increase in incremental petrochemical supply whereby net ethylene capacity had increased by 11m tonnes a year between 2008 and 2010 while consumption grew only about 9m tonnes during this period. In the next 6 to 9 months, we believe that product margins will remain under pressure as further capacity is expected to come onstream. Industry should recover starting from 2H11. This is on the expectation that there will be fewer capacity start ups scheduled during this period. The estimated new ethylene addition in 2011 is about 5m tonnes compared to 11k tonnes in 2010. Also, the combined new additional capacity for both ethylene and propylene of 18m tonnes in 2010 is expected to fall to 6m tonnes by 2014, resulting in an expected margin peak in 2015, after which the industry believes that the down-cycle will return due to the rush in capacity expansion to capitalize on the attractive margin.

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CHEMICALS PRICE TRENDS - RISING

Petrochemical prices turn around. We note that most of the petrochemical prices have been on an uptrend since early 2009, as seen in the charts below. Figure 37: Ethylene
USD/MT 1400 1200 1000 800 600 400 200 0 Jan09 Apr09 Jul09 Oct09 Jan10 Apr10 Jul10 Oct10

Figure 38: Polyethylene

USD/MT 1600 1400 1200 1000 800 600 400 200 0 Jan09 Apr09 Jul09 Oct09 Jan10 Apr10 Jul10 Oct10

Source : OSK, Bloomberg

Source : OSK, Bloomberg

Figure 39: Propylene

USD/MT 1400 1200 1000 800 600 400 200 0 Jan09 Apr09 Jul09 Oct09 Jan10 Apr10 Jul10 Oct10

Figure 40: Polypropylene

USD/MT 1400 1200 1000 800 600 400 200 0 Jan09 Apr09 Jul09 Oct09 Jan10 Apr10 Jul10 Oct10

Source : OSK, Bloomberg

Source : OSK, Bloomberg

Figure 41: PVC

USD/MT 1200 1000 800 600 400 200 0 Jan09 Apr09 Jul09 Oct09 Jan10 Apr10 Jul10 Oct10

Figure 42: VCM

USD/MT 1000 900 800 700 600 500 400 300 200 100 0 Jan09 Apr09 Jul09 Oct09 Jan10 Apr10 Jul10 Oct10

Source : OSK, Bloomberg

Source : OSK, Bloomberg

Figure 43: Benzene

USD/MT 1400 1200 1000 800 600 400 200 0 Jan09 Apr09 Jul09 Oct09 Jan10 Apr10 Jul10 Oct10

Figure 44: Methanol

USD/MT 400 350 300 250 200 150 100 50 0 Jan09 Apr09 Jul09 Oct09 Jan10 Apr10 Jul10 Oct10

Source : OSK, Bloomberg

Source : OSK, Bloomberg

OSK Research | See important disclosures at the end of this report

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OSK Research

PETRONAS CHEMICALS COMPETITIVE EDGE

Reliable and attractively priced gas feedstock. Petronas Chemicals has secured a reliable supply for gas feedstock through its LT supply agreement with Petronas Group at an attractive price, which we understand is quite close to that for Middle Eastern gas suppliers. These feedstock, including methane, ethane, propane and butane, are delivered to its facilities through the PGU pipeline network operated by Petronas Group. Both parties have a strong symbiotic relationship whereby Petronas Chemicals is the only company to which Petronas Group supplies the gas feedstock and it also does not purchase the commodity from any other suppliers, other than Petronas Group. Figure 45: Global ethylene cost curve

Note: ME (Middle East), E/P (ethane/propane) Source: Prospectus

Figure 46: Comparison of ethylene production cost

Country Saudi Arabia Malaysia Gas Middle East North America Singapore Other Malaysia Western Europe China
Source: OSK, Prospectus

USD/MT 90 120 120 480 720 720 810 810

Ethane-based plant gives rise to cheaper feedstock. Ethylene is produced from either oil or gas through a steam cracking process. Oil-based ethane feedstock such as naphtha produces a greater proportion of propylene and butadiene per unit of ethylene produced while gas feedstock such as ethane produces almost 100% ethylene. Hence, it is cheaper to produce ethylene through gas (ethane) compared to oil (naphtha). Also, a naphtha-based plant has a more complex facility and incurs higher capex spending since it separates and utilizes both the end products from the cracking of naphtha, compared to ethane from the gas, which immediately transforms into ethylene. Petronas Chemicals has the advantage over its peers in having ethane-based plants besides getting cheaper gas from Petronas Group. Also, its price is less affected by fluctuations in crude oil price compared to naphtha.

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OSK Research

Figure 47: Impact of crude oil pricing on ethylene production cost

Source: Prospectus

A leader in South East Asia. Petronas Chemicals is one of the largest petrochemical producers in this region, with some of its notable characteristics set out in the company background section below. Strategic location. Both the Kertih and Gebeng IPCs form a petrochemical hub on the east coast of Peninsular Malaysia that connects to the seaports for marine transportation to international locations through the rail and road networks. Malaysia is itself strategically located between the trade lines of Asia and Europe. Huge customer base. Petronas Chemical has about 550 customers in Malaysia and 900 customers in over 25 countries internationally. This reduces its risks on relying on a few large customers and also allows the group to easily sell new chemical products in the future given that it already has established markets. Strong strategic partnerships with the other global petrochemical players. Some of its notable petrochemical partners are BASF, Dow Chemical, Sasol Limited, BP Chemicals, Mitsubishi Corporation and Idemitsu Kosan. These partnerships allow Petronas Chemicals to widen its access to international markets as well as obtain technology and production knowhow while its partners benefit from its attractively priced feedstock and integrated production facilities in Malaysia. Riding on Petronas strong reputation. Given that Petronas is the largest shareholder of Petronas Chemicals, the group can ride on the principal shareholders well established brand name in the industry. Meeting mass market needs via diversified product portfolio. In comparison with some of its peers which only concentrate on commodity chemical production, Petronas Chemical, after having undergone vertical integration in the past, has today a highly diversified product portfolio. Now, the group is capable of producing a full range of products along each of the methane, ethane, propane and butane value chains as well as from upstream olefins through to downstream intermediate and derivative chemicals. Big enough to be fully integrated. This integration allows it to achieve production efficiency, minimizing both logistics costs and product wastage between each step of the production chain. Ultimately, this will lead to lower fixed costs/product unit.

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INVESTMENT RISKS
Cyclical changes in the petrochemical industry. The operating environment of the industry is quite cyclical whereby it is affected by periods of tight supply when utilization rates and margins are high then followed by a period of oversupply as a result of significant capacity additions to the industry. Demand and supply subject to economic conditions. The industry is affected by global economic conditions whereby during the economic crisis, it will experience a down-cycle as demand weakens. This is followed by declining usage of fertilizers, resins, adhesives, plastics, textiles, packaging materials and other industrial and consumer products. Natural gas price hike of minimal concern for Petronas Chemicals. This is mainly because it hasa LT agreement with Petronas to buy feedstock on an agreed fixed priced and is unlikely to be subject to a price hike. Strong competition. There are many competitors in this business whereby some have bigger scale of operations and greater financial resources than Petronas Chemicals. Hence, there are times where a price war will emerge and erode margins. Anti-dumping by some countries. For example, the export of methanol to China by suppliers from the Middle East and Asia-Pacific is subject to anti-dumping investigation by the Chinese authorities. Forex risks. We understand that a substantial portion of Petronas Chemicals revenue is dominated in USD. Hence, the weakening of USD against MYR will hit both its topline and bottomline. Complex and hazardous business. Given that petrochemical operations are complex and involve the production and transportation of highly flammable, explosive and toxic materials, there is always risk of fires, explosions, release of toxic fumes, death, property damage or environmental damage.

STRATEGY GOING FORWARD

Consolidating its petrochemical activities. The purpose of this move is to have a centralized management so that all the petrochemical activities within the group can be co-ordinated more efficiently and effectively to enable the group to respond faster to market needs. This also helps in achieving economies of scale in production, which will bring down cost per unit. Expanding its product range. Petronas Chemicals intends to go further downstream as these petrochemical products can fetch better margin. This move is in line with the groups objective to increase its profitability level as well as capture new target markets to expand its global presence. Raising production capacity. We gather from the analyst briefing that Petronas plans to set up a fertilizer plant in Sabah estimated to cost about USD1bn. Also, it may set up an integrated refinery and petrochemical complex in Peninsular Malaysia but this is still in the early stage and no capex is being estimated as yet. Finally, it may increase its production capacity by venturing further with its JV partners. Merger and acquisition opportunities. This is part of its plan to expand its presence further in and outside the Asia Pacific market.

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VALUATION AND RECOMMENDATION

Initiate with Subscribe / Buy recommendation. We are initiating coverage on Petronas Chemicals with a Subscribe / Buy recommendation. Our target price for the company is RM5.51, based on a PER of 16x FY12 EPS. This PER is slightly above its close peer average of 15x as we believe the company deserves such valuations since it gets strong support from Petronas Group, especially in terms of low feedstock prices, which make up closed to 40% of its total cost. Also, Petronas Chemicals pays an attractive dividend payout ratio of 50%, which is considered the highest compared with peers like Sabic, at 41%, PTT Chemical (30%) and Reliance (12%). Other plus points are its competitive edge over its peers, as discussed in the earlier section of this report. Hence, we are initiating coverage on Petronas Chemicals with a BUY recommendation. Figure 48: Peers valuation
Company Bloomberg Ticker SABIC AB RIL IN 6505 TT 051910 KP PTTCH TB Mkt Cap (USD'm) 82400 82364 27302 22928 13032 8323 Average
Source: OSK, Bloomberg

PER FY1 (x) 15 17 23 12 18 23 18

PER FY2 (x) 13 14 20 12 15 14 15

Sabic Basic Industries Corporation Reliance Industries Ltd Formosa Petrochemical Corp LG Chem Ltd Petronas Chemicals Group Bhd PTT Chemical PCL

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EARNINGS FORECAST `
FYE Mar (RMm) Turnover EBITDA PBT Net Profit EPS (sen) DPS (sen) Margin EBITDA (%) PBT (%) Net Profit (%) ROE (%) ROA (%) Balance Sheet Fixed Assets Current Assets Total Assets Current Liabilities Net Current Assets LT Liabilities Shareholders Funds Net Gearing (%) FY08 12855.0 6588.0 6120.0 3925.0 49.1 0.0 FY09 12367.0 5121.0 4411.0 2818.0 35.2 0.0 FY10 12203.0 5171.0 3368.0 2199.0 27.5 0.0 FY11f 12699.5 5410.0 3331.7 2248.7 28.1 14.1 FY12f 13609.4 6056.2 4020.7 2756.1 34.5 17.2

51.2 47.6 30.5 26.4 18.3

41.4 35.7 22.8 17.9 12.1

42.4 27.6 18.0 12.9 8.2

42.6 26.2 17.7 12.4 7.8

44.5 29.5 20.3 14.1 9.1

13110.0 8379.0 21489.0 2582.0 5797.0 1751.0 17156.0 Net cash

13577.0 9657.0 23234.0 3702.0 5955.0 1714.0 17818.0 Net cash

15655.0 11237.0 26892.0 5395.0 5842.0 2449.0 19048.0 Net cash

16271.1 12416.1 28687.3 6011.7 6404.5 2404.3 20271.3 Net cash

16354.8 13945.6 30300.4 6197.8 7747.8 2349.3 21753.2 Net cash

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SK Research Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated (NR): Stock is not within regular research coverage All research is based on material compiled from data considered to be reliable at the time of writing. However, information and opinions expressed will be subject to change at short notice, and no part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. We do not accept any liability directly or indirectly that may arise from investment decision-making based on this report. The company, its directors, officers, employees and/or connected persons may periodically hold an interest and/or underwriting commitments in the securities mentioned. Distribution in Singapore This research report produced by OSK Research Sdn Bhd is distributed in Singapore only to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, CAP. 289 of Singapore. If you are not an Institutional Investor, Expert Investor or Accredited Investor, this research report is not intended for you and you should disregard this research report in its entirety. In respect of any matters arising from, or in connection with, this research report, you are to contact our Singapore Office, DMG & Partners Securities Pte Ltd (DMG).

All Rights Reserved. No part of this publication may be used or re-produced without expressed permission from OSK Research. Published and printed by :OSK RESEARCH SDN. BHD. (206591-V) (A wholly-owned subsidiary of OSK Investment Bank Berhad)

Chris Eng

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