sidi kerir petrochemicals - sidpec - re-initiation of coverage - 6 april 2016

PRIME INVESTMENT RESEARCH AUTOMOTIVE |EGYPT

GB AUTO – INITIATION OF COVERAGE JANUARY, 14TH 2016

PRIME INVESTMENT RESEARCH PETROCHEMICALS |EGYPT SIDI KERIR PETROCHEMICALS - SIDPEC – RE-INITIATION OF COVERAGE

APRIL, 6TH 2016

WE RE-INTIATE COVERAGE FOR SIDI KERIR PETROCHEMICALS - SIDPEC ASSIGNING A “BUY” RATING

♦ ONE OF THE MOST BENEFICIARIES OF THE EGPDEVALUATION.

♦ ONE OF THE TOP BENEFICIARIES OF THE GOVERNMENT’SRECENT INCOME TAX CUT, ON THE BACK OF HAVING 0%LEVERAGE & NO TAX EXEMPTIONS.

♦ EGYPT’S SOLE POLYETHYLENE PRODUCER TO DATE.

♦ SOLID EXPORT MARKET WITH MORE THAN 50COUNTRIES.

♦ DECLINING POLYETHYLENE PRICES SINCE 2014 INRESPONSE TO THE DECLINING CRUDE OIL PRICES;HOWEVER AT A LOWER RATE DUE TO THE STRUCTURALSUPPLY GAP.

♦ ABILITY TO SELL POLYETHYLENE AT A DISCOUNT TOINTERNATIONAL PRICES DUE TO FAVORABLE COST OFPRODUCTION RELATIVE TO REGIONAL/INTERNATIONALPLAYERS.

♦ ETHYDCO – 20% OWNED BY SIDPEC HOLDS ANENORMOUS POTENTIAL TO SATISFY THE LOCAL MARKETNEEDS.

WE RE-INITIATE COVERAGE FOR SIDI KERIR PETROCHEMICALS AT A FAIR VALUE OF EGP 17.99/SHARE IMPLYING A 42% UPSIDE POTENTIAL.

HENCE, WE ASSIGN SKPC A “BUY” RATING.

PRIME INVESTMENT RESEARCH SIDI KERIR PETROCHEMICALS – SIDPEC – RE-INITIATION OF COVERAGE

APRIL, 2016

SIDI KERIR PETROCHEMICALS – SIDPEC … ETHYDCO’S VALUE STILL NOT REFLECTED IN SKPC’S MARKET PRICE …

Stock Data Outstanding Shares [mn] 525 Mkt. Cap[Bn] 6.699 Bloomberg – Reuters SKPC EY, SKPC.CA 52-WEEKS LOW/HIGH 9.95 – 15.17 DAILY AVERAGE TURNOVER (‘000S) 2,583

Ownership Egyptian Petrochemicals Holding 20% Egyptian Petrochemicals Company 7% Al Ahly Capital Holding 7% National Investment Bank 7% Social Insurance Fund for Governmental Sector Employees 19% Social Insurance Fund for Public and Private Sector Employees 12% Misr Insurance 3% Nasser Social Bank 2% Free Float 23%

Financial Highlights

EGP mn 2015A 2016E 2017E 2018E Revenues 2,788 2,755 3,138 3,270 GPM (%) 41% 40% 43% 42% EBITDA 1,020 986 1,207 1,220 N.Income 842 802 983 1,012 NPM (%) 30% 29% 31% 31% EPS 1.60 1.53 1.87 1.93 P/E 7.90 8.30 6.77 6.58 DPS 1.40 1.15 1.40 1.54 BV/S 4.88 4.98 5.55 5.87

Source: SIDPEC, Prime Estimates Prices are as 5th April 2016

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SKPC.CA EGX 30 -Rebased

“BUY” MARKET PRICE EGP 12.68 FAIR VALUE EGP 17.99 POTENTIAL 42% UPSIDE

INVESTMENT GRADE “VALUE”

Report Content Financial Statements 3 Assumptions & Forecasts 4 Industry Overview 6 Local Petrochemicals Market 9 Sidi Kerir Petrochemicals Company –SIDPEC 16

Source: Bloomberg

Sidi Kerir Petrochemicals Company – SIDPEC - is Egypt’s sole producer of Ethylene and Polyethylene with a current production capacity of 300,000 tpa of ethylene and 225,000 tpa of Polyethylene. SIDPEC produces its primary products; ethylene and polyethylene, in addition to several secondary products that include Butene-1, Liquefied Petroleum Gas (LPG), Naphtha, Nitrogen and Ethane. Most of the company’s Ethylene production is used internally for Polyethylene production, while, the remaining quantity is supplied to the Egyptian Petrochemicals Company (EPC), a subsidiary of the Egyptian General Petroleum Corporation (EGPC), for its PVC production. SIDPEC has a long term contract with GASCO for the supply of the energy feedstock, for which the price is set according to a formula that links gas prices to global prices of ethylene and polyethylene. In 2010, SIDPEC signed an agreement with GASCO and ECHEM to establish a new Ethylene production facility called “The Egyptian Ethylene and Derivatives Company –ETHYDCO-“. The new facility will have a production capacity of 460,000 tpa of Ethylene, 400,000 tpa of Polyethylene and 20,000 tpa of Butadiene. ETHYDCO’s investment cost is USD 1.900bn and it was planned to be financed through 65% debt and 35% equity. The facility is expected to start operating by 2H2016. We re-initiate our coverage for Sidi Kerir Petrochemicals with a “BUY” rating driven from an upside potential of 42%; driven from our estimated Fair Value of EGP17.99. Using the DCF valuation methodology for SKPC, we utilized an average WACC over our forecasted horizon of 17.32%, a risk free rate of 11.46%, and a market risk premium of 8%. We used the 5-year adjusted beta which is equivalent to 0.73. We applied a perpetual growth rate of 2.5%. SKPC Fair Value is negatively affected by its debt-free policy, where the company’s cash flows are discounted by only the cost of equity, which is higher than the cost of debt. The cost of equity takes into account the risk-free rate “Rf”, in addition to a premium for the expected risk that is inherent in equity positions “Equity Risk Premium”. On the other hand, ETHYDCO was able to benefit from a more flexible capital structure, where it was financed through 65% debt and 35% equity. Petrochemicals – chemicals that are derived from crude oil or natural gas – are an essential part of the chemical industry today. Petrochemistry is a fairly young industry as it only started to grow in the 1940s. Global petrochemicals market size was valued at USD 514bn in 2014. In terms of volumes, the global petrochemical size was 490.5mn tons in 2014. The petrochemicals sector is affected by the global economic activity, growth in the industrial sector and population expansion. The petrochemical industry was expected to grow at an estimated CAGR of 5.1% from 2015 – 2022. The main driver of the market growth will be the globally increasing demand from end-use industries ranging from consumer goods to manufacturing. China is currently the world’s largest consumer of petrochemicals where it consumed more than 23% of the global petrochemicals in 2014; standing at USD 120bn. China is also expected to have the highest growth of 6.2% during 2015-2022.

The petrochemicals sector represents around 12% of Egypt’s total industrial production and is worth around USD 7bn. The Petrochemicals industry contributes c3% of the Egypt’s total GDP.

Egypt’s production capacities are relatively small compared to its other regional players (GCC) and international players. Capacities are expected to expand dramatically in the coming years on the back of the National Master Plan that began in 2002 and is managed by ECHEM. The first phase has been implemented according to the plan; however the second phase seems to be running behind schedule. In 2002, the petrochemicals production stood at 520K tpa, while in 2015 it stood at 3,425K tpa, showing a CAGR rate of 16%. A huge expansion is expected to take place in 2016, where the production is expected to stand at 5,290 tpa, showing a 50% rise y-o-y.

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Valuation Summary Total Per Share

Enterprise Value of SKPC EGP 6,106.16mn EGP 11.63

SKPC Share in ETHYDCO EGP 3,338.88mn EGP 6.36

Total EGP 9,445.04mn EGP 17.99

Upside Risks:

- Faster recovery of crude oil prices. - Further devaluation of the EGP - Earlier than anticipated operations of ETHYDCO or higher than anticipated utilization rates. - Lower costs of feedstock (Ethane/Propane Mix).

Downside Risks: - Deterioration of crude oil prices. - Appreciation of the EGP and reversing all/portion of the devaluation effect. - Selling Polyethylene at higher discounts to global prices. - Postponement of ETHYDCO’s operations. - Higher than anticipated costs of feedstock or/and fuel.

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SOURCE: SIDPEC & PRIME ESTIMATES


INCOME STATEMENT

BALANCE SHEET

- Financial Statements … Historical & Forecasts

In EGP’000s 2015A 2016F 2017F 2018F

Revenues 2,787,929 2,754,617 3,138,229 3,270,445

COGS 1,640,123 1,645,927 1,791,764 1,896,303

Gross Profit 1,147,806 1,108,690 1,346,465 1,374,142

S, G & Adm. Expenses (72,988) (80,286) (88,315) (97,146)

Ongoing Provisions (67,169) (46,191) (56,650) (64,225)

Other Operating Income 12,176 6,740 8,533 9,149

Other Operating Expenses

(3,013) (2,896) (2,199)

EBITDA 1,019,826 985,939 1,207,138 1,219,723

Depreciation 63,649 64,019 64,408 64,663

Reported EBIT 956,177 921,920 1,142,730 1,155,060

Interest Income 81,254 55,079 73,538 102,487

Other Non-Operating Income 8,896 9,783 9,783 9,783

Other Non-Operating Expenses 6,299 3,037 3,764 3,805

NPBT 1,040,028 983,745 1,222,287 1,263,525

Deferred Tax (4,781) (2,442) (3,835) (4,303)

Income Tax 259,958 232,981 285,489 293,720

NPAT 784,851 750,764 936,797 969,805

Capital Gain/Loss 30 - - -

FOREX Gains 57,474 51,727 46,554 41,899

Net Income 842,355 802,491 983,351 1,011,703

Less : Non-Appropriation Items 105,897 84,762 104,659 107,733

Net Attributable Income 736,458 717,729 878,693 903,970

In EGP ‘000s 2015A 2016E 2017E 2018E

Assets Total Current Assets 1,718,382 1,900,424 2,408,190 2,731,879

Total Non-Current Assets 1,468,786 1,403,129 1,293,007 1,237,519

Total Assets 3,187,167 3,303,552 3,701,197 3,969,398

Liabilities & Shareholder's Equity Total Current Liabilities 412,531 458,556 517,104 566,237

Total Non-Current Liabilities 214,948 229,542 271,917 321,455

Total Liabilities 627,478 688,098 789,021 887,691

Shareholders' Equity 2,559,689 2,615,455 2,912,176 3,081,707

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SOURCE: BLOOMBERG

SOURCE: BLOOMBERG, WORLD BANK, PRIME ESTIMATES

GLOBAL MARKET DYNAMICS

GLOBAL CRUDE OIL & PE PRICES

- Assumptions & Forecasts: We forecasted the Ethylene and Polyethylene prices based on the correlation with crude oil prices. A strong positive correlation (0.59) exists between crude oil prices and Polyethylene prices.

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F

Average Crude Oil Prices

USD/Barrel 79.51 106.53 111.67 104.1 96.2 50.8 37 48 51.4

Growth 28.10% 34.00% 4.80% -6.80% -7.60% -47.20% -27.17% 29.73% 7.08%

Global PE Prices

USD/ton 1,561.90 1,597.43 1,622.91 1,815.27 1,816.29 1,464.26 1,229.38 1,445.20 1,505.65

Growth 6.80% 2.30% 1.60% 11.90% 0.10% -19.40% -16.04% 17.55% 4.18%

PE Prices - Exports Market

USD/Ton 1,167.09 1,448.66 1,376.98 1,516.08 1,474.86 1,361.59 1,167.92 1,300.68 1,355.08

Growth 12.90% 24.10% -4.90% 10.10% -2.70% -7.70% -14.22% 11.37% 4.18%

Ratio of Global PE 0.75 0.91 0.85 0.84 0.81 0.93 0.95 0.9 0.9

Discount to Global PE 34% 10% 18% 20% 23% 8% 5% 11% 11%

PE Prices - Local Market

USD/Ton 1,251.08 1,420.91 1,406.65 1,610.03 1,651.53 1,436.73 1,232.36 1,365.72 1,422.84

Growth 11.30% 13.60% -1.00% 14.50% 2.60% -13.00% -14.22% 10.82% 4.18%

Ratio to Ex. 1.07 0.98 1.02 1.06 1.12 1.06 1.06 1.05 1.05

Discount to Global PE 25% 12% 15% 13% 10% 2% 0% 6% 6%

Ethylene Prices -Local Market

USD/Ton 1,076.40 1,382.80 1,307.48 1,398.18 1,290.27 981.97 842.29 956.00 995.99

Ratio to Global PE 0.86 0.97 0.93 0.87 0.78 0.68 0.68 0.7 0.7

Growth 0.90% 28.50% -5.40% 6.90% -7.70% -23.90% -14.22% 13.50% 4.18%

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PE Prices Crude Oil Prices

Global prices of Ethylene and Polyethylene (Local and Export) in relation to global crude oil prices. SIDPEC sells its products in the exports markets at a discount to global prices. The average discount during the period 2010-2015 was c19%. We forecast that the discount to global prices for the period 2016-2020 will stand at c10%

Ethylene prices are forecasted as a ratio of global Polyethylene prices. During the period 2010-2015, Ethylene prices were equal to 0.85 of Polyethylene prices. We forecast that the Ethylene prices would have the average of 0.75 of the global Polyethylene prices. For more than 2 years, global oil prices have been declining and the prices of petrochemicals have followed suit. This is mainly due to the supply surpassing the demand by more than 1.5mn barrels per day. The World Bank expects oil prices to start picking up by 2017 and to reach USD58.8/barrel.

USD/Bl USD/ MT

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SALES BREAKDOWN -SIDPEC-

SALES BREAKDOWN - ETHYDCO-

Revenues - SIDPEC

2015A 2016F 2017F 2018F

Ethylene

Sales Volume (Tons) 34,480 20,625 20,625 20,625

Sales Value (EGP '000s) 262,646 151,417 176,472 183,853

Polyethylene

Total Sales Volume (Tons) 224,021 236,250 236,250 236,250

Local Sales Volume (Tons) 136,191 141,750 141,750 141,750

Local Sales Value (EGP '000s) 1,517,842 1,522,575 1,732,633 1,805,102

Export Sales Volume (Tons) 87,830 94,500 94,500 94,500

Export Sales Value (EGP '000s) 927,671 961,967 1,100,084 1,146,097

Production Wastes

Sales Volume (Tons) 194 468 468 468

Sales Value (EGP ‘000s) 1,603 4,152 4,735 4,933

Total PE Sales Value 2,447,116 2,488,694 2,837,453 2,956,132

Secondary Products

Sales Volume (Tons) 29,730 37,059 38,086 39,086

Sales Value (EGP '000s) 78,167 114,505 124,305 130,460

Total SIDPEC’s Sales Value 2,787,929 2,754,617 3,138,229 3,270,445

Revenues – ETHYDCO:

2016F 2017F 2018F

Ethylene

Sales Volume (Tons) 5,000 15,000 20,000

Sales Value (USD '000s) 4,211 14,340 19,920

Polyethylene

Total Sales Volume (Tons) 100,000 300,000 400,000

Local Sales Volume (Tons) 100,000 300,000 320,000

Local Sales Value (USD '000s) 123,236 409,715 455,308

Export Sales Volume (Tons) 0 0 80,000

Export Sales Value (USD '000s) 0 0 108,407

Total PE Sales Value (USD '000s) 123,236 409,715 563,715

Butadiene

Sales Volume (Tons) 5,000 15,000 20,000

Sales Value (USD '000s) 8,250 24,750 31,350

Total Sales Value 135,698 448,805 614,985

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SOURCE: VIRTUAL CHEMBOOK

Industry Overview: What are Petrochemicals … Petrochemicals are chemicals made from petroleum (crude oil) or natural gas. Both, petroleum and natural gas are made up of hydrocarbon molecules, which are compromised of one or more carbon atoms, to which the hydrogen atoms are attached. Oil and natural gas are the main raw materials (feedstock) used in the industry due to its relatively cheap prices and them being abundant and readily available. A minimal amount - c5% - of the oil and gas consumed is needed to produce all the petrochemicals worldwide. Products made from petrochemicals include plastics, soaps, detergents, solvents, paints, drugs, fertilizers, pesticides, explosives, synthetic fibers, rubbers and flooring materials.

The petrochemicals products are quiet diversified, where they can be generally classified into 2 main categories: 1) Primary Petrochemicals and 2) Intermediates and Derivatives.

Primary Petrochemicals

1) Olefins Are petrochemicals produced by cracking the feedstock such as Ethane, Propane, Butane and Naphtha from the main raw materials; crude oil and natural gas The steam cracking divides the long chain carbon molecules into smaller chains to produce olefins.

Ethylene

Chemicals, Plastics and Plastic Products

Butadiene

Synthetic Rubber

Propylene

Chemicals, Plastics and Plastic Products

2) Aromatics

Are by-products of cracking the feedstock and they are produced in the same olefin plants and refinery units.

Benzene

Dyes and Synthetic Detergents

Xylenes

Plastics and Synthetic Fibers.

Toluene

Explosives

3) Synthesis Gas

Is a mixture compromising of carbon monoxide, carbon dioxide and hydrogen. they

Methanol

Solvent and Chemical Inter

mediate

Ammonia

Fertilizers (Urea) and Explosives

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https://en.wikipedia.org/wiki/Chemical


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SOURCE: WORLD BANK & PRIME ESTIMATES


SOURCE: VIRTUAL CHEMBOOK

1.

Intermediates & Derivatives

Petrochemical Intermediates Are generally produced by the chemical conversion of primary petrochemicals to form more complicated derivative products

Petrochemical Derivatives

Can be made in several ways: directly from primary petrochemicals; through intermediate products which still contain only carbon and hydrogen; and, through intermediates which incorporate chlorine, nitrogen or oxygen in the finished derivative. Of all the processes used, one of the most important is polymerization. It is used in the production of plastics, fibers and synthetic rubber, the main finished petrochemical derivatives.

Vinyl Chloride

Alpha Olefins

Styrene

Acrylic Acid

Acrylonitrite

Cumene Cyclohexane

PTA

Polyethylene Polyester

Polypropylene

Nylon

Polystyrene Ethylene Glycool

Acrylic Fibers

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Global Petrochemicals Market Dynamics: Cost and Availability of Feed Stock …. Cost Competition is Key to Petrochemicals Success… The feedstock cost is the most important factor determining the competitiveness of the petrochemical producers. It is crucial for the petrochemical producers to choose a feedstock that provides a cost advantage. However feedstock options for the petrochemical producers are limited and mainly depend on the location of the manufacturing facilities. The three main feedstocks used in the the global petrochemicals industry are naphta, natural gas and coal.

Most of the regions are dominated by only one single feedstock. Naphtha is a dominant feedstock used for petrochemical production in Asia Pacific and Europe, while on the other hand, natural gas is dominant in the Middle East, Africa, and North America regions. Naphtha and natural gas are converted into petrochemicals by a process known as “steam cracking”. Naphtha is a liquid mixture of hydrocarbon produced from distillation of crude oil and is directly used in the steam cracking. Natural gas is not used directly in steam cracking but its components such as ethane, propane and butane are used to produce petrochemicals. These components are produced as by-products during extraction of methane from natural gas. Mixtures of these gases are known as Natural Gas Liquids (NGLs) and are most prevalent in the Middle Eastern countries for the petrochemical production. Coal is another major feedstock used for petrochemical production but its use is limited to the Chinese market. The global petrochemical industry is dominated by naphtha feedstock, which accounts for the largest share in the petrochemical production. However, the selection of feedstock depends on many factors, such as the availability of petroleum resources and the production cost of the feedstock in the region. The Middle Eastern petrochemical producers (including Egypt) use natural gas as key feedstock as it is available to them at subsidized prices. The subsidies on natural gas in the Middle Eastern countries make it 60-70% cheaper compared to natural gas in Europe and North America. It is worthy to note that Saudi Arabia, the Middle East’s largestpetrochemicals producer uses Naphtha as its feedstock. Availability of huge natural gas resources has brought the Middle East to the forefront of global petrochemical industry, making it one of the most competitive regions in the world. The global petrochemical industry is witnessing significant changes in the feedstock supply trend.

Global petrochemicals market size was valued at USD 514bn in 2014. In terms of volumes, the global petrochemicals market size was 490.5mn tons in 2014. Generally, the petrochemicals sector is affected by the global economic activity, growth in the industrial sector and population expansion. The petrochemical industry was expected to grow at an estimated CAGR of 5.1% from 2015 – 2022. The main driver of the market growth will be the globally increasing demand from end-use industries ranging from consumer goods to manufacturing.

China is currently the world’s largest consumer of petrochemicals where it consumed more than 23% of the global petrochemicals in 2014; standing at USD 120bn. China is also expected to have the highest growth of 6.2% during 2015-2022. This comes as a result of growing demand for several plastic products (such as polyethylene and polypropylene) and engineering plastics from domestic automotive, packaging and construction industry.

There are other Asian countries such as India and Thailand that are expected to witness significant gains in their consumption of petrochemicals on the back of expected rapid industrialization and government support to increase FDIs.

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SOURCE: ECHEM

Local Petrochemicals Market:

Egypt’s Petrochemicals Industry Key Milestones

1945

The Petrochemicals industry started in Egypt in the mid- forties with the establishment of Al-Ahleya Plastic Company.

1950 The Suez governorate witnessed the first production of fertilizers from the surpluses of Ammonia by the refinery units of Abboud plants in Ataka.

1955 In the mid-fifties, Egypt established one of the earliest production units of nylon worldwide in Kafr-El- Dawar.

1975 Talkha and Alexandria witnessed the establishment of 2 urea plants.

1980

The establishment of the Egyptian Petrochemical Company (EPC) at Amereya - Alexandria as a public sector company owned by the Egyptian General Petroleum Corporation (EGPC), EPC produces Polyvinyl Chloride with a total capacity of 80KT/Y, on which the plastic industry depends. EPC was regarded as the core for the petrochemical industry in Egypt.

1990

The establishment of Sidi Kerir Petrochemicals Company (SIDPEC), where it used to produce ethylene and polyethylene with a plant capacity of 225KT/Y Ethylene. It is worth mentioning that the local gas feedstock, retrieved from the western desert, was used by EPC to cover local market demand of Ethylene, while exporting the surplus.

2002

The Egyptian Petrochemicals Holding Company (ECHEM) was established to manage and develop the Petrochemicals industry in Egypt. ECHEM’s priority is to enhance the growth of Petrochemicals industry through implementing The National Petrochemicals Master Plan with the target of realizing the optimum utilization of natural gas in value added products. The plan covers 14 complexes including 24 projects and 50 production units during the 20 years.

The petrochemicals sector represents around 12% of Egypt’s total industrial production and is worth around USD 7bn. The petrochemicals industry contributes c3% of the Egypt’s total GDP. As of 2013, the petrochemical industry consisted of 91 companies operating inland with total investments of USD 4.65bn and 14 companies operating in free zones with total investments of USD 182.64mn. Egypt represents one of the most promising markets for petrochemicals and is expected to become a significant exporter of petrochemicals over the long-term. Total Exports of Manufactured Fuels reached USD 19.4bn during FY2013/14 representing 11% of the total exports.

Even though Egypt is considered a key petrochemical producer in Africa, its production capacities are relatively small compared to its other regional players (GCC) and international players. Production capacities have expanded in the last decade and it is expected to keep expanding at even higher rates. The capacity of Ethylene production was expected to expand by 6 times in 2013-2017

Major new projects are expected to take place in the coming period, on the back of the government’s National Plan for Petrochemicals that was set in 2002. The plan targets to reduce imports, increase exports, create new production facilities and complexes and create job opportunities.

In BMI's latest Petrochemicals Risk/Reward Index for the Middle East and Africa region, Egypt ranked the 8th place with a score of 49.3 points, up 0.7 points since the previous quarter as a result of the ongoing improvements in the political and economic environments. The increase in its score has enabled it to pull ahead of Turkey in the regional ranking, putting it 2.2 points ahead of South Africa and 1.3 points ahead of Turkey, with a considerable upside for further improvement.

The local demand for petrochemicals is considerably high in Egypt. The demand for plastics (main consumer of petrochemicals) and rubber stood at 2.2mn tons in 2014. Plastics and rubber consumption in Egypt is c25kg for each citizen on an annual basis.

Egypt is an important worldwide exporter of petrochemical products. Egypt supplies petrochemical products to about 50 countries worldwide, with Europe consuming the majority of Egyptian Exports. France and the UK are the largest importers of Egyptian fertilizers of total fertilizers, while around 30% of total plastics exports were directed to Germany and Belgium.

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KEY FEATURES OF PETROCHEMICALS MASTER PLAN

Petrochemicals Sector Drivers:

i. A wide variety of products creating strong demand: Plastics, fertilizers, pharmaceuticals, and acrylics are produced in Egypt.

ii. Natural Resource Abundance: Egypt is ranked No. 16 globally in natural gas production, as it produced more than 61bn m3 in 2015. Egypt also has one the world’ largest gas reserves, as it stood at 1.8tn m3 in 2014. Moreover, Egypt has reserves of many raw materials needed for the manufacturing of several petrochemicals products.

iii. Competitive Production Costs: The production of petrochemicals is being skewed towards countries with lower feedstock prices and natural gas costs, such as Egypt

iv. Feeder and Support Industries: Egypt has several feeder industries to support the petrochemicals sector. This facilitated doing business and it reduces the outsourcing costs.

v. Proximity to Customers: Egypt is close to major petrochemical consumers in Europe, Africa and the Middle East. vi. Infrastructure: Egypt has more than 15 commercial and 51 specialized ports, including 15 for petroleum. Egypt also

has several international ports, airports and highways. This delivers quiet flexible export options and ease of transport.

vii. Built in Market: With a population that crossed 90mn, Egypt’s domestic consumption is expected to keep growing.

Government Support for the Petrochemicals Industry:

The government of Egypt has shown its intention to collaborate with the private sector to expand business opportunities in the petrochemicals sector through public private partnerships (PPP). In the early 2000s, The Egyptian Ministry of Petroleum has established the Egyptian Petrochemicals Holding Company (ECHEM) to accelerate the implementation of new petrochemicals projects.

The government has adopted a 3-phase, 20-year master plan (2002-2022) in order to guide investment decisions in the petrochemicals industry, with an estimated budget of USD 20bn. It is expected that the plan’s implementation will last longer than anticipated, due to the occurrence of 2 revolutions in Egypt, one taking place in January 2011 and the other in June 2013. The main aim of the master plan is to displace the imports and develop the minimal self-sufficiency of the Egyptian petrochemicals.

14 Complexes

24 Projects

50 Production Units

Achieve:

USD 15bn / Annum Revenues

Produce:

15mn TPA of Intermediate and Final Products

Create:

100,000 Job Opportunities (Direct & Indirect)

Invest:

USD 20bn in 20 Years

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SOURCE: SIDPEC

SOURCE: SIDPEC

PETROCHEMICALS PRODUCTION CAPACITIES IN EGYPT

The government reserved 6 different locations in different governorates where the petrochemicals complexes can be established. The proposed locations were Alexandria, North Gulf of Suez, Damietta, Port Said, Zaafarana and Rosetta.

Market Dynamics: Production, Consumption and Balance of Trade:

According to The General Authority for Investments and Free Zones - GAFI -, the petrochemicals industry represents around 12% of the Egyptian industrial output. The Master Plan has effectively enhanced the “Production Capacity”; total petrochemicals’ production capacity increased from around 600,000 tpa in 2002 to 3.15mn tpa in 2012 and 5.27mn tpa in 2015.

L

Phase 1 - (2002 – 2008)

USD 5.6bn

Phase 2 - (2009 – 2015)

USD 6bn

Phase 3 - (2016 - 2022)

USD 7.4bn

Acrylic Fiber - 2009

Polystyrene – 2011

Methanol – 2010

Urea – 2009

PVC – 2010

LAB – 2009

Polypropylene - 2010

Polyethylene - 2011

Styrene

Polyester

Aromatic Complex

Ethoxglates

PTA

SB Latex

2ND Olefins Complex

Methanol II

Vinyl’s Complex

Propylene

Polypropylene

3RD Olefins Complex

Styrenic Complex

Butadiene

SB Latex

Detergents

National Plan for Petrochemicals Industry

- 14 Petrochemicals Industrial Complexes - Estimated Investment Cost USD 20bn

Most of the projects of phase 2 are either under construction or under development. The delay in the 2nd phase is due to political turmoil in the previous period.

Total: 600KTA

- EPC: 80 KTA PVC - SIDPEC: 225 KTA PE - LAB Unit: 50 KTA LAB - OPC: 165 KTA PP

Total: 1,400 KTA

- Acrylic Fibers: 54 KTA AF - E-LAB: 100 KTA LAB - MOPCO: 600 KTA Urea & 50 KTA Ammonia

Total: 3,150 KTA

- E-Methanex: 1,150 KTA Methanol - EPP: 400 KTA PP - E-Styrenics: 200 KTA PS

2002 2009 2012 2015

Total: 5,270 KTA

- Styrenics: 300 KTA Styrene

- -EIPET: 420KTA PET - MOPCO: 100KTA

Ammonia & 1300 KTA Urea

11


APRIL, 2016

SOURCE: OXFORD BUSINESS GROUP

PETROCHEMICALS PRODUCTION – KT – 2002 PETROCHEMICALS PRODUCTION – KT – 2009

ETHYLENE PRODUCTION CAPACITIES

The Egyptian petrochemicals capacity is still considered relatively small, compared to the Gulf countries, such as Saudi Arabia and Qatar, which is mainly explained by the difference in the raw materials’ abundance and greater oil and gas reserves. In January 2013, the total capacity of ethylene production in the Middle East and Africa stood at 26mn tpa (representing c18% of the global production capacity which is equivalent to 143.3mn tpa), where Egypt’s capacity represented only 1.3%. Saudi Arabia has the region’s largest capacity of 13.2mn tpa, followed by Iran with 4.7mn tpa, followed by Qatar, the UAE and Kuwait with 2.5mn tpa, 2.05mn tpa and 1.65mn tpa respectively. When comparing Egypt to its African counterparties, Egypt is the second largest producer in North Africa, where it is behind Libya’s capacities of 350,000 tpa and it is ahead of Algeria with a capacity of 133,000 tpa. Egypt is considered the third largest producer in Africa, among other major producers as South Africa – 585,000 tpa and Nigeria – 300,000 tpa.

Ethylene Production Capacities –MEA - 2013

Ethylene Production Capacity MN TPA % of MEA

Capacity % of World Capacity

1. Saudi Arabia 13.2 51% 9%

2. Iran 4.7 18% 3%

3. Qatar 2.5 10% 2%

4. UAE 2.05 8% 1%

5. Kuwait 1.65 6% 1%

* Egypt 0.338 1% 0%

MEA Capacity 26 - 18%

World Capacity 143.4 - -

Capacities are expected to expand dramatically in the coming years, with the previously mentioned National Master Plan that began in 2002 and is managed by ECHEM. The first phase has been implemented according to the plan; however the second phase seems to be running behind schedule. In 2002, the petrochemicals production stood at 520K tpa, while in 2015 it stood at 3,425K tpa, showing a CAGR of 16%. A huge expansion is expected to take place in 2016, where the production is expected to stand at 5,290 tpa, showing a 50% rise y-o-y. This massive increase will be mainly from Urea, Polyethylene and Polypropylene.

520

225

165

80

50

0 100 200 300 400 500 600

Total

HDPE

PP

PVC

LAB

1,274

600

165

225

80

150

54

0 500 1000 1500

Total

Urea

PP

HDPE

PVC

LAB

Acrylic Fiber

Ethylene Production Capacities - Africa – 2013

Ethylene Production Capacity TPA

1. South Africa 585,000

2. Libya 350,000

3. Egypt 338,000

4. Nigeria 300,000

5. Algeria 133,000

12


APRIL, 2016

SOURCE: SIDPEC

SOURCE: STATISTA SOURCE: SIDPEC

PETROCHEMICALS PRODUCTION – KT – 2015 PETROCHEMICALS PRODUCTION – KT – 2016 E

3425

1150

600

420

400

280

225

200

150

0 1000 2000 3000 4000

Total

Methanol

Urea

PET

PP

PVC

HDPE

PS

LAB

5290

1900

1150

565

525

420

280

150

150

150

0 1000 2000 3000 4000 5000 6000

Total

Urea

Methanol

PP

HDPE

PET

PVC

LAB

PS

LLDP

The consumption of petrochemicals is mainly measured according to the end uses, mainly plastics. Egypt is one of the countries with consumption per capita of plastics is far above the regional average level, while lower than the global average level. Currently Egypt has a consumption per capita level of 25kg/annum.

The average growth rate for the plastics demand is c6% annually. In 2006, Egypt’s consumption of plastics stood at 1.64mn tons, while in 2015 it stood at 2.22mn tons of plastics. Egypt produces only 28% of the plastic materials that are locally consumed.

PLASTICS CONSUMPTION IN EGYPT (MN. TONS)

1.64

2.07 2.22

0

0.5

1

1.5

2

2.5

2006 2012 2015

PLASTICS CONSUMPTION (KG/CAPITA/ANNUM) - MEA

16

10

3

0 5 10 15 20

2015

2005

1980

PLASTICS CONSUMPTION (KG/CAPITA/ANNUM) - WORLD

45

30

11

0 10 20 30 40

2015

2005

1980

13


APRIL, 2016

SOURCE: CAPMAS

EXPORTS, IMPORTS & TRADE BALANCE

EXPORTS, IMPORTS & TRADE BALANCE

Egypt has always been considered a net importer of petrochemicals and chemical products. The trade balance shows a huge deficit over the 2003-2014 period. However, it is worthy to note that the value of exports’ growth has increased at a faster rate than that of imports. Egypt exports petrochemicals to more than 30 countries, where European countries were the largest importers (67%), followed by Asian (21%) and African (12%) countries.

Mn EGP 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Exports Chemical Products

1,989 1,417 1,620 1,993 1,913 13,746 14,963 17,965 22,305 21,502 24,469 22,613

Imports Chemical Products

-6,344 -7,238 -9,346 -8,449 -9,312 -23,419 -21,080 -24,921 -30,714 -36,053 -41,665 -46,064

Trade Balance -4,355 -5,821 -7,726 -6,456 -7,399 -9,673 -6,117 -6,956 -8,409 -14,551 -17,196 -23,451

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Exports - y-o-y Change - -29% 14% 23% -4% 619% 9% 20% 24% -4% 14% -8%

Total Change 1037%

CAGR 25%

Imports - y-o-y Change - 14% 29% -10% 10% 151% -10% 18% 23% 17% 16% 11%

Total Change 626%

CAGR 20%

Trade Balance - y-o-y Change - 34% 33% -16% 15% 31% -37% 14% 21% 73% 18% 36%

Total Change 438%

CAGR 17%

-50,000

-40,000

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

40,000

50,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Exports - Chemical Products - Mn EGP Imports - Chemical Products - Mn EGP Trade Deficit

14


APRIL, 2016

SOURCE: SIDPEC

SOURCE: SIDPEC

Out of all the polymers, Egypt produces only 3 types; Polyethylene, Polypropylene and Polyvinyl Chloride (PVC)

Polymer Consumption KTA Balance

Polyethylene (PE) 555 65% Imported

Polypropylene 460 60% Imported

Polyvinyl Chloride (PVC) 390 70% Imported

Polyethylene Terephthalate 300 60% Imported

Polystyrene 120 100% Imported

Others 400 100% Imported

Total 2225

Egypt imports all of the Engineering and other plastics materials. These engineering plastics represent more than 12% of the Egyptian plastics demand.

Polymers Consumption KTA Balance

Acrylic Polymers and PMMA 120

100% Imported

Synthetic Rubber 80

Acrylonitrile and Styrene Polymers (ABS and SAN) 65

Polyurethanes 50

Polyvinyl Acetate/Alcohol 25

Polyesters 20

Ethylene Vinyl Acetate ( EVA ) 10

Others (Polycarbonates, Epoxies, Polyamide …. etc.) 30

Total 400

15


APRIL, 2016

SOURCE: SIDPEC

OWNERSHIP STRUCTURE Sidi Kerir Petrochemicals Co. - SIDPEC -

Operational Overview:

SIDPEC’s main products are Ethylene and Polyethylene; however it produces other secondary products; namely Liquefied Petroleum Gas (LPG), Ethane, Nitrogen, Naphtha and Butene-1. SDIPEC is Egypt’s sole producer of both Ethylene and Polyethylene. The current annual production capacity of SIDPEC stands at 300,000 tpa for Ethylene and 225,000 tpa for Polyethylene. More than 90% of the produced Ethylene is used for the production of Polyethylene, where the remaining 10% is sold to the Egyptian Petrochemicals Company (EPC), which is a subsidiary of the Egyptian General Petroleum Corporation (EGPC). SIDPEC works through 4 different plants; the Ethylene plant, the Polyethylene plant, the Butene-1 plant and the LPG plant.

Ethane/Propane Mix to Ethylene:

The Egyptian Natural Gas Company “GASCO”, a subsidiary of the Egyptian General Petroleum Corporation (EGPC), provides SIDPEC with the main feedstock “Ethane/Propane Mix”. The mix is comprised of 90% Ethane and 10% Propane and it is provided to the company through GASCO’s pipelines. Due to the abundance of natural gas in Egypt and its relatively low price compared to naphtha, SIDPEC uses natural gas rather than naphtha as its energy feedstock. SIDPEC has entered into a long-term contract with GASCO for the supply of the mixture; however the pricing formula has never been disclosed. The feedstock price is set according to a formula, where the feedstock price is set in accordance to the global Ethylene and Polyethylene prices. The pricing formula sets an upper and lower limit for the prices, where it limits the margin from expanding beyond a certain limit during cycle upturns and limiting the margins from declining below a certain level during the cycle downturns. The inputs that are used in the pricing formula are reviewed every 3 years. We believe that the feedstock cost is determined as a function of 20-25% of the global Ethylene and Polyethylene prices. It is worthy to note that the feedstock factor is 1.6; 1.6 tons of Ethane/Propane mix is required to produce 1 ton of Ethylene.

Sidi Kerir Petrochemicals Co. - SIDPEC - is an Egyptian joint stock company that was established in 1997 under the Egyptian Investment Law. SIDPEC is Egypt’s sole producer of Ethylene and Polyethylene. It also produces Butene-1, Naphtha and Nitrogen among other products. It produces different types of polyethylene such as HDPE and LLDPE, which are used in several applications, such as film grades, blow molding grades, injection molding grades and roto molding grades. The company has a current capacity of 300,000kta of Ethylene, 225,000kta of Polyethylene, 25,000kta of LPG, 10,000kta of Naphtha

The company’s authorized capital amounts to EGP 5.1bn and its paid-in-capital is EGP 1.05bn distributed over 525mn shares at a par value of EGP2. SIDPEC was listed on the EGX on March 2005, where The Egyptian Petrochemicals Holding Co. is still the major shareholder with ownership of 20%. The free float represents c23% of the company’s shares.

20%

7%

7%

7%

19%

12%

3%

2%

23%

Egyptian Petrochemicals Holding Egyptian Petrochemicals Company Al Ahly Capital Holding

National Investment Bank

Social Insurance Fund for Governmental Sector Employees Social Insurance Fund for Public and Private Sector Employees Misr Insurance

Nasser Social Bank

Free Float

16


APRIL, 2016

Ethylene to Polyethylene and Other Secondary Products:

The produced Ethylene is distributed among 3 different routes: SIDPEC’s Polyethylene plant, Butene-1 plant and the LPG plant. Most of the Ethylene is directed towards the Polyethylene plant and the remaining Ethylene is sold to the The Egyptian Petrochemicals Company (EPC), a subsidiary of EGPC, for its Polyvinyl Chloride (PVC) production.

SIDPEC’s products are sold under the brand name of “Egyptene” and the company offers Polyethylene of two different grades: Linear Low Density Polyethylene (LLDP) and High Density Polyethylene (HDPE). There are several applications for Egyptene products:

1. Film: used in the production of shopping and grocery bags and sheets.2. Blow Molding: used in the production of containers.3. Injection Molding: used in the manufacturing of pallets, boxes, dustbins and seats.4. Roto Molding: used in the production of tanks.

17

PRIME INVESTMENT RESEARCHSIDI KERIR PETROCHEMICALS – SIDPEC - INITIATION OF COVERAGE

APRIL, 2016

Sidi Kerir Petrochemicals Company – SIDPEC- Production Scheme

Ethylene Plant

50,000 TPA

Ethylene

Egyptian Petrochemicals Company “EPC”

468,000 TPA

Ethane/ Propane Mix

Acid Gas Removal

Cracking Heaters

Compression & CO2

Removal & Drying

Chilling &

Separation & Ethylene Recovery

Refrigeration

225,000 TPA

Ethylene

S.R.U

F.S.U

Polyethylene Plant

Train I, Cr

C.A.U P.P.U P.U

Train II, Zg

A.P.U 225,000TPA

Polyethylene – HDPE & LDPE

GASCO Co.

Natural Gas

SOURCE: SIDPEC & PRIME RESEARCH

50,000 TPA

LPG

LPG Unit

+C3

Demi Water

Cooling Water

Fire Fighting Water

Potable Water

Process Water

Plant Air

Instrument Air

Breathing Air

HS

Utilities & Offsite Facilities

R.S.U.

10,000TPA

Ethylene

C.P.U P.P.U P.U

Butene-1

Butene-1 Plant

B.U.

PE Plant Unit’s Abbreviations:

- S.R.U.: Solvent Recovery Unit

- F.S.U.: Feed Stock Unit

- R.S.U: Reagent Storage Unit

- C.A.U: Catalyst Activation Unit

- P.P.U: Pre-Polymerization Unit

- P.U: Polymerization Unit

- A.P.U: Additives & Pelletizing Unit

- B.U: Bagging Unit


APRIL, 2016

SOURCE: SIDPEC

Production:

As previously mentioned, SIDPEC’s capacity is 300,000tpa of Ethylene and 225,000tpa for Polyethylene. The utilization rate is usually above 95% for both. The feed stock factor for Polyethylene production is 1.1; 1.1 ton of Ethylene is required to produce 1 ton of Polyethylene. In 2015, both the production of Ethylene and Polyethylene declined by 0.7% and 1.4% respectively. This is due to the lower levels of the provided feedstock from GASCO. GASCO changed the specifications of the feedstock by raising the carbon dioxide levels, which affected the production levels negatively. Moreover, during the severe storms that hit Alexandria during the winter, the agriculture drainage got mixed with the cooling units at the complex.

2010A 2011A 2012A 2013A 2014A 2015A

Ethylene

Designed Capacity 300,000 300,000 300,000 300,000 300,000 300,000

Actual Capacity 275,000 275,000 275,000 275,000 275,000 275,000

Utilization rate 100% 103% 93% 107% 98% 97%

Production 276,000 283,000 255,000 293,000 270,000 268,000

Raw for PE production 248,600 253,593 239,800 267,300 248,870 245,300

Polyethylene PE Capacity 225,000 225,000 225,000 225,000 225,000 225,000

Utilization rate 100% 102% 97% 108% 101% 100%

Production 226,000 230,539 218,000 243,000 226,245 223,000

Sales & Pricing:

SIDPEC sells its products in the local market and it has a solid export base. In the local market, it sells its products to major distributors and large plastic manufacturers. As for the export markets, the company exports only its main product - Polyethylene - to more than 50 countries. In 2015, 33% of SIDPEC’s revenues came from its export markets.

Sales in 2015 Quantity (Tons) Value (EGP Mn.) % of Value

Ethylene 34,480 262.65 9%

Polyethylene

- Local 136,191 1,517.84 54%

- Export 87,830 927.67 33%

- Production Wastes 194 1.60 0%

LPG 17,749 48.47 2%

Butene-1 459 4.22 0%

Naphtha 11,168 20.54 1%

Ethane 339 4.92 0%

Nitrogen 15 0.02 0%

Total 288,425 2,787.93 100%

19


APRIL, 2016

SOURCE: WORLD BANK & SIDPEC

- Pricing:

The selling prices of SIDPEC’s products are set in terms of USD. The selling prices in the local market are also set in USD, however they are paid in EGP using the prevailing exchange rate. SIDPEC is among the top companies that benefit from the EGP devaluation. On the other hand, the cost of the energy feedstock is also set in terms of USD.

SIDPEC sets the prices of Ethylene and Polyethylene (Local and Export) in relation to crude oil prices. SIDPEC sells its products in the exports markets at a discount to global prices. The average discount during the period 2010-2015 was c19%. This pricing strategy enabled the company to maintain its global market share and it is supported by the higher margins that SIDPEC can attain due to its favorable production mechanisms using natural gas rather than naphtha. SIDPEC changes its pricing strategy in response to any changes that occur in the global Polyethylene prices; when the global prices tend to rise, the company is able to maintain or even increase its discount to global prices and on the other hand, during the periods of declining global prices, SIDPEC would slightly decrease its discount to global prices in order to maintain its margins. In the local market, SIDPEC also sells its Polyethylene at a discount to global prices; however the discount is always less than the discount for its exports, with an average of c13%. In 2015, SIDPEC followed the same strategy where it sold its products at prices very close to the global prices, where it minimized the discount in order to maintain its margins.

2010 2011 2012 2013 2014 2015

Average Crude Oil Prices

USD/Barrel 79.51 106.53 111.67 104.10 96.2 50.8

Growth 28.1% 34.0% 4.8% -6.8% -7.6% -47.2%

Global PE Prices

USD/ton 1,561.90 1,597.43 1,622.91 1,815.27 1,816.29 1,464.26

Growth 6.8% 2.3% 1.6% 11.9% 0.1% -19.4%

PE Prices - Exports Market

USD/Ton 1,167.09 1,448.66 1,376.98 1,516.08 1,474.86 1,361.59

Growth 12.9% 24.1% -4.9% 10.1% -2.7% -7.7%

Ratio of Global PE 0.75 0.91 0.85 0.84 0.81 0.93

Discount to Global PE 34% 10% 18% 20% 23% 8%

PE Prices - Local Market

USD/Ton 1,251.08 1,420.91 1,406.65 1,610.03 1,651.53 1,436.73

Growth 11.3% 13.6% -1.0% 14.5% 2.6% -13.0%

Ratio to Export Price 1.07 0.98 1.02 1.06 1.12 1.06

Discount to Global PE 25% 12% 15% 13% 10% 2%

Ethylene Prices - Local Market

USD/Ton 1,076.40 1,382.80 1,307.48 1,398.18 1,290.27 981.97

Ratio to Global PE 0.86 0.97 0.93 0.87 0.78 0.68

Growth 0.9% 28.5% -5.4% 6.9% -7.7% -23.9%

20


APRIL, 2016

- Product Sales:

2010A 2011A 2012A 2013A 2014A 2015A

Ethylene

Sales Volume (Tons) 41,302 44,280 34,803 42,815 37,669 34,480

Sales Value (EGP '000s) 251,185 362,485 279,852 407,070 347,513 262,646

2010A 2011A 2012A 2013A 2014A 2015A

Polyethylene

Total Sales Volume (Tons) 228,544 230,090 217,451 242,590 225,493 224,021

* Local Sales Volume (Tons) 136,665 157,754 137,394 158,866 136,752 136,191

% of Production 60% 69% 63% 65% 61% 61%

Local Sales Value (EGP' 000s) 966,033 1,326,993 1,188,579 1,739,296 1,614,824 1,517,842

* Export Sales Volume (Tons) 91,879 72,336 80,057 83,724 88,741 87,830

% of Production 40% 31% 37% 35% 39% 39%

Export Sales Value (EGP '000s) 605,856 620,359 677,959 863,141 935,794 927,671

*Production Wastes (Tons) 356 449 807 471 326 194

% of PE Production 0.16% 0.19% 0.37% 0.19% 0.14% 0.09%

Sales Value (EGP' 000) 1,791 2,556 3,898 3,220 2,943 1,603

Total PE Sales Value 1,573,680 1,949,908 1,870,436 2,605,657 2,553,561 2,447,116

21


APRIL, 2016

SOURCE: SIDPEC & PRIME

OWNERSHIP STRUCTURE - ETHYDYCO

Long-Term Investments – ETHYDCO:

ETHYDCO Production Plants

Secondary Products Sales 2010A 2011A 2012A 2013A 2014A 2015A

LPG


Sales Value (EGP '000s) 31,604 33,720 26,326 32,446 46,818 48,471

Ethane

Sales Volume (Tons) 988 1,056 1,178 601 411 339

Sales Value (EGP '000s) 10,262 11,942 13,636 7,898 5,582 4,915

Nitrogen

Sales Volume (Tons) 121 59 87 18 15 15

Sales Value (EGP '000s) 156 193 115 24 20 20

Naphtha


Sales Value (EGP '000s) 17,393 18,552 16,560 21,741 20,151 20,538

Butane

Sales Volume (Tons) 1,179 850 951 757 749 459

Sales Value (EGP '000s) 6,632 6,050 6,919 6,249 6,353 4,223

20%

20%

11%

21%

14%

10% 4%

ECHEM

SIDPEC

GASCO

Al Ahli Capital Holding

National Investment Bank

Banque Misr

Nasser Social Bank

In 2010, SIDPEC signed an agreement with GASCO and ECHEM to establish a new petrochemicals company, named The Egyptian Ethylene and Derivatives Company - ETHYDCO-. It was established in January 2011, under the Egyptian Investment Law with a total investment cost of USD 1.9bn. It was planned that it would be financed through 35% equity and 65% debt, however, currently; the debt portion is fully paid. The complex will produce 3 products; Ethylene, Polyethylene and Butadene.

We believe that even though ETHYDCO will have almost double the capacity of SIDPEC – 460,000tpa of Ethylene and 400,000 of Polyethylene; we believeit will not impose a threat to SIDPEC as SIDPEC only covers 45% of the local market needs. It is possible that SIDPEC may focus more on exporting its products in order to secure FX for the government, while ETHYDCO may satisfy the local market needs.

SOURCE: ETHYDCO

22


APRIL, 2016

1- Ethylene & Butadiene Plant Ethylene: Capacity: 460 KTA

Butadiene: Capacity: 20 KTA

2- Polyethylene Plant Capacity: 400 KTA

3- Butadiene Derivatives Plant Capacity : 36 KTA

4- Utility Plant -

In 2013, SIDPEC granted the new venture the right to use 77 fedans of unused land for annual fee of EGP 27.5 /sqm until the project becomes operational. The fee will be revised upwards by 10% every 3 years. In March 2016, SIPEC announced that 97.2% of the project is completed and production is expected to commence in 2H 2016.

SOURCE: ETHYDCO

23


APRIL, 2016

SOURCE: SIDPEC

Financial Overview:

- Revenues:

Revenues Breakdown 2010A 2011A 2012A 2013A 2014A 2015A

Ethylene Sales Volume (Tons) 41,302 44,280 34,803 42,815 37,669 34,480

Sales Value (EGP '000s) 251,185 362,485 279,852 407,070 347,513 262,646

Polyethylene Total Sales Volume (Tons) 228,544 230,090 217,451 242,590 225,493 224,021

Local Sales Volume(Tons) 136,665 157,754 137,394 158,866 136,752 136,191

Local Sales Value (EGP '000s) 966,033 1,326,993 1,188,579 1,739,296 1,614,824 1,517,842

Export Sales Volume (Tons) 91,879 72,336 80,057 83,724 88,741 87,830

Export Sales Value (EGP '000s) 605,856 620,359 677,959 863,141 935,794 927,671

Production Wastes Sales Volume (Tons) 356 449 807 471 326 194

Production Wastes Sales Value (EGP '000s) 1,791 2,556 3,898 3,220 2,943 1,603

Total PE Sales Value 1,573,680 1,949,908 1,870,436 2,605,657 2,553,561 2,447,116

Secondary Products Sales Sales Volume (Tons) 41,037 41,220 33,550 36,409 31,666 29,730

Sales Value (EGP '000s) 66,047 70,457 63,556 68,358 78,924 78,167

Total Sales Value 1,890,912 2,382,850 2,213,844 3,081,085 2,979,998 2,787,929

In 2015, SIDPEC reported net sales of EGP 2,787mn compared with EGP 2,980mn a year earlier, declining by 6%. In terms of volume, Ethylene sales volume dropped by 8% reaching 34,480 tons in 2015, compared to 37,669 tons in 2014. As for the Polyethylene sales volume, it dropped by just 1%, reaching 224,021 tons in 2015, compared with 225,493 in 2014. Almost 60% of the total Polyethylene was sold in the local market, while the remaining 40% was exported to 53 countries, mainly in Europe.

- COGS & Gross Profit:

Total COGS increased in 2015 by 8% reaching EGP 1,640mn, as compared with EGP 1,513mn in 2014. COGS/Sales increased on the back of rising COGS and declining Revenues. COGS/Revenues stood at 58.83% in 2015 versus 50.76% in 2014. Moreover, the company achieved a gross profit of EGP 1,148mn in 2015, yielding a GPM of 41%, compared to a gross profit of EGP 1,467mn in 2014, which yielded a GPM of 49%. We expect that total COGS will increase at a CAGR of 4% over the period 2016-2020, on the back of rising international prices of Ethylene and Polyethylene and the government slightly reducing the subsidies on fuels over the coming years.

COGS Breakdown - 2015

Raw Materials 65%

Fuel 14%

Packing 3%

Spare Parts 2%

Utilities 0%

Labor 14%

Other 3%

SIDPEC’s COGS is dominated by raw materials. Raw materials which is mainly the required stock of the ethane/propane mix represents c65% of the total COGS. The feedstock factor to produce Ethylene is 1.6; 1.6 tons of Ethane/Propane mix is required to produce 1 ton of Ethylene. The price per ton is determined based on certain ratio of the average global prices of Polyethylene and Ethylene. The ratio had an average of 21% during 2010-2015, where it is revised upwards during declining global prices and revised downwards during rising global prices. The cost of raw materials increased in 2015 by 7% reaching EGP 1,067mn versus EGP 993mn in 2014.

25

PRIME INVESTMENT RESEARCHSIDI KERIR PETROCHEMICALS – SIDPEC - INITIATION OF COVERAGE

APRIL, 2016

ESTYRENCS Co. SIDPEC Co.

Ethylene

60,000 TPA Ethylene

Butene-1

HPDE / LLDPE

GASCO Co. Ethylene Plant

460,000 TPA

400,000 TPA Polyethylene Plant

400,000 TPA 400,000 TPA

Butadiene

Butadiene Unit

20,000 TPA Butadiene

20,000 TPA

Butadiene Derivatives Plant

36,000 TPA

20,000 TPA

SSBR / LCBR

36,000 TPA

LCBR

Utilities ESTYRENCS Co.

SOURCE: ETHYDCO & PRIME RESEARCH

ETHYDCO – Integration with Sister Companies


APRIL, 2016



EGP ‘000s 2010A 2011A 2012A 2013A 2014A 2015A

Revenues 1,890,912 2,382,850 2,213,844 3,081,085 2,979,998 2,787,929

COGS 949,833 1,097,684 1,057,038 1,328,235 1,512,758 1,640,123

Gross Profit 941,079 1,285,166 1,156,806 1,752,850 1,467,240 1,147,806

Gross Profit Margin (GPM) 50% 54% 52% 57% 49% 41%

COGS/Revenues 50.23% 46.07% 47.75% 43.11% 50.76% 58.83%

2016F 2017F 2018F

COGS (EGP '000s) 1,645,927 1,791,764 1,896,303 Gross Profit Margin (GPM) 40% 43% 42%

- Net Profit:

SIDPEC’s bottom line dropped by 15% in 2015, where it reached EGP 842mn, yielding a NPM of 30%, versus EGP 997mn in 2014 with a NPM of 33%. Consequently the EPS dropped from EGP 1.90/share in 2014 to EGP 1.60/share in 2015. SIDPEC has one of the highest payout ratios. The shareholders of Sidi Kerir Petrochemicals decided to increase the 2015 cash dividends payout to EGP1.40/share from the proposed EGP1.25/ share. They agreed to distribute EGP1 per share within a month as of the approval date and EGP 0.40 after three months. In 2014, the company paid out dividends at EGP 1.65/share, totaling EGP 866.2mn.

EGP ‘000s 2010A 2011A 2012A 2013A 2014A 2015A

Revenues 1,890,912 2,382,850 2,213,844 3,081,085 2,979,998 2,787,929

Net Income 821,003 889,689 869,655 1,298,738 996,574 842,355

Net Profit Margin (NPM) 43% 37% 39% 42% 33% 30%

Per Share Data 2014A 2015A 2016F 2017F 2018F

EPS per share 1.90 1.60 1.53 1.87 1.93

D.P.S per share 1.65 1.40 1.15 1.40 1.54

- Cash & Liquidity Status:

SIDPEC holds a solid liquidity position, as the company reported EGP 991mn in 2015 of cash and cash equivalents. The company enjoys a debt-free position. Even though the debt-free capital structure of the company provides it with a solid position, it weights down the company’s value due to the higher cost of equity, compared to the cost of debt as mentioned earlier.

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- Tax Position:

SIDPEC does not enjoy any tax shield, due to the fact that it is debt-free. Consequently, SIDPEC would be benefit largely from the change in the corporate income tax that was approved in 2015, where the corporate income tax was lowered from 25% to 22.5%

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sidi kerir petrochemicals - sidpec - re-initiation of coverage - 6 april 2016

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