A Leading Step Into The Downstream
14 May 2012

Macro-Economic Growth Outlook Supports Demand

Sustained global macro-economic growth will be reflected in growing polyolefins and polycarbonates demand. Increasing disposable income in the large economies of India and China will stimulate the demand for electronic applications, construction materials and automotive components which accordingly will increase demand for polyolefins and polycarbonates. Moreover, the latest five-year government housing plan by China, under which 36 million units of subsidized apartments will be constructed, will provide firm support for polyolefins and polycarbonates demand in the period up to 2015. Accordingly, this plan should alleviate worries regarding China’s dwindling demand for petrochemicals in light of downward revisions of its GDP growth.

Commercial Start-Up Just Around the Corner

Saudi Kayan owns one of the largest integrated petrochemical complexes across the globe, and the largest diversified petrochemical complex in Saudi Arabia, with an annual production capacity of six million tons. The complex is still in a trial production phase, with declaration of commercial start-up just around the corner, providing a near-term positive catalyst for the company’s stock. Close to 90% of the company’s total production capacity has entered a trial production phase.

Strong Parental Support

Saudi Kayan enjoys the support from one of the biggest petrochemical players worldwide. Sabic has a principal ownership stake of 35% in Saudi Kayan and has effective management control.

Specialized Chemicals…A Hedge to Kayan’s Returns

Having specialized chemicals in Saudi Kayan’s portfolio will somewhat mitigate the company’s exposure to price swings, as specialized chemicals are less cyclical than traditional petrochemicals. Moreover, the market for specialized chemicals does not face the risk of an excess oversupply which is a threat to the basic or traditional petrochemical market. Thus, the specialized market offers brighter future prospects for producers which have these chemicals in their portfolio and will provide a hedge to these companies’ returns.

New Line of Products to Be Introduced for the First Time

Many of the specialized chemicals, to be produced by Saudi Kayan’s complex, will be introduced for the first time to Saudi Arabia. Such novel products will create many investment opportunities for the downstream sector, especially in light of the country’s energy strategy, which largely emphasizes diversification further down the value chain.

Evidently an Undervalued Stock

We believe that Saudi Kayan’s stock price does not reflect the intrinsic value of a company with a massive production scale and a highly diversified portfolio of products, enjoying notable feedstock leverage and strong parental support from petrochemical giant Sabic. Saudi Kayan’s stock today offers investors an upside potential of 45.3%, given its closing price of SAR 17.95 and an estimated fair value of SAR 26.08.
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