15 February 2011 Asia Pacific/Malaysia Equity Research Major Chemicals

Petronas Chemicals Group (PCGB.KL / PCHEM MK) Rating OUTPERFORM* [V] Price (11 Feb 11, RM) 6.01 Target price (RM) 7.50¹ Chg to TP (%) 24.8 Market cap. (RM mn) 48,080 (US$ 15,748) Enterprise value (RM mn) 43,631 Number of shares (mn) 8,000.00 Free float (%) 23.00 52-week price range 6.37 - 5.39 *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix).

Research Analysts Paworamon (Poom) Suvarnatemee, CFA 662 614 6210 [email protected] Puchong Kometsopha 66 2 614 6215 [email protected]

INITIATION

Awakening petrochemical giant ■ Most leveraged to oil prices. We initiate coverage of Petronas Chemicals Group (PCG) with an OUTPERFORM rating and a target price of RM7.50 implying 25% upside. PCG is the largest petrochemical stock by market cap and the most leveraged to oil prices compared to its peers in the O&G and chemicals sector in SEA markets.

■ Improving efficiency added to its core strength of low-cost gas. PCG reorganised itself prior to the IPO by consolidating its control in different petrochemical ventures. Its petrochemical complexes are now being run as a single entity, which should result in improvement in overall utilisation and cost control. This should further strengthen its core competitiveness, which is centred around its access to low-cost gas feedstock from the Petronas Group.

■ Earnings improvement to be the catalyst. Our forecast of PCG’s average annual growth rate of earnings during FY11-13 of 18% is above the expected growth of its regional peers of between 0.6% and 8.5%. Its earnings growth is expected to be driven initially by better efficiency, while a recovery in the petrochemical cycle would drive its earnings beyond 2012.

■ Target price RM7.50. Though PCG’s current valuation is at par with regional peers, we see upside bias to its share price. Its earnings growth momentum is expected to be superior to its peers. Within the Malaysian market, PCG is the largest and most liquid stock that gives exposure to the oil and gas sector, which is pivotal to the government’s Economic Transformation Programme (ETP). Relative to other stocks in Malaysia, PCG is attractively valued based on its premium ROE and higher prospective dividend yield. Our target price of RM7.5 is based on DCF which assumes ethane prices would be doubled after the agreements expire. We initiate our coverage with an OUTPERFORM rating. Share price performance Price (LHS)

Rebased Rel (RHS) 120 110 100 90 80

8 7 6 5 4 Dec-10

The price relative chart measures performance against the KUALA LUMPUR COMPOSITE index which closed at 1494.52 on 11/02/11 On 11/02/11 the spot exchange rate was RM3.05/US$1

Performance over Absolute (%) Relative (%)

1M 0.50 5.1

3M — —

12M — —

Financial and valuation metrics Year Revenue (RM mn) EBITDA (RM mn) EBIT (RM mn) Net income (RM mn) EPS (CS adj.) (RM) Change from previous EPS (%) Consensus EPS (RM) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)

3/10A 12,203.0 4,145.0 3,249.0 2,199.0 0.27 n.a. n.a. -22.0 21.9 — 10.2 2.8 13.4 Net cash

3/11E 13,260.7 4,806.2 3,789.2 2,862.3 0.36

3/12E 14,916.1 5,667.0 4,673.0 3,426.4 0.43

3/13E 15,756.6 6,210.4 5,236.3 3,994.5 0.50

0.34 30.2 16.8 3.0 9.1 2.5 15.7 Net cash

0.42 19.7 14.0 3.6 7.3 2.2 16.8 Net cash

0.48 16.6 12.0 4.2 6.3 2.0 17.7 Net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates.

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

15 February 2011

Focus charts and tables Figure 1: PCG remains attractive on P/E against its two-

Figure 2: PCG’s valuation and return are attractive against

year earnings CAGR

the Malaysian stock market 25

P/E 24.0

19.7

FPCC

20

22.0

15.3 15

20.0 Far Eastern

18.0 16.0

12.0 10.0

0.0

5

Nan Ya

5.0 10.0 2-year CAGR (%)

2.8 3.6

2.2 2.2

0

PCG

Honam FCFC LG Chem

Hanwha

-5.0

13.9

10

Reliance Formosa Industries Plastics

14.0

16.8

15.8 14.0

P/E (x )

EPS grow th

P/B (x )

ROE (%)

(%)

15.0

20.0

(%) Malay sia market

* PTTCH is excluded due to the planned merger deal. Source: Credit Suisse estimates

Div idend y ield

PCG*

* PCG’s valuation is based on FY12E which ends in March 2012 while market is based on FY11E. Source: Credit Suisse estimates

Figure 3: Margin outlook by products Ethylene Propylene PVC & VCM Paraxylene Benzene EG PE Urea Methanol

FY12E

FY13E-15E

!" !" !" $ !" # !" # #

# # !" !" !" # # # #

Majority of PCG’s products should see margin improvement in the future

Source: Credit Suisse estimates

Figure 4: Impact of changes in earnings assumptions to PCG’s FY12 earnings Current Net profit Units assumptions (RM mn) Base case RM/US$ (5% appreciation) RM/US$ Oil price (+ US$10/bbl) US$/bbl Ethane cost (+ 10%) US$/t HDPE-naphtha spread (+ US$100/t) US$/t PX-naphtha spread (+ US$100/t) US$/t EG-ethylene spread (+ US$100/t) US$/t PP-naphtha spread (+ US$100/t) US$/t Methanol price (+ US$100/t) US$/t Urea price (+ US$100/t) US$/t

3.06 85 161 466 500 350 566 306 377

3,426 3,126 3,980 3,390 3,526 3,535 3,505 3,441 3,628 3,631

% change from base

EPS (RM)

P/E (x)

-8.8 16.1 -1.1 2.9 3.2 2.3 0.4 5.9 6.0

0.43 0.39 0.50 0.42 0.44 0.44 0.44 0.43 0.45 0.45

14.2 15.6 12.3 14.4 13.8 13.8 13.9 14.2 13.5 13.4

PCG’s earnings are sensitive to oil prices due to its relatively fixed ethane costs

Source: Credit Suisse estimates

Petronas Chemicals Group (PCGB.KL / PCHEM MK)

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15 February 2011

Awakening petrochemical giant We initiate coverage of Petronas Chemicals Group (PCG) with an OUTPERFORM rating and a target price of Rm7.50, implying 25% upside. PCG is the largest petrochemical stock listed in SEA and among the five largest stocks in Malaysia. It is most leveraged to oil prices among its peers in the O&G and chemicals sector in ASEAN markets. Its operations are divided into two main segments: (1) olefins and polymers (which contribute almost 80% of profit in FY10); (2) fertilizers and methanol. PCG started trading in November 2010.

Most leveraged to oil prices compared to peers PCG’s core strengths rely on its access to the relatively fixed price ethane from the Petronas Group. With its existing feedstock cost structure, PCG’s profitability is higher and more leveraged to oil prices compared to other listed firms in the oil and gas sector in SEA. Its low ethane price has put PCG’s ethylene cost and its derivative products at a similar level to that of the Middle East producers. PCG also has access to feedstock at a discount to market price for methane, propane, and butane. However, costs of these feedstock are higher than its ethane cost and not fixed but linked to end-product prices or global price indices. We estimate that for every US$10/bbl increase in oil price, its earnings will rise by 16%, compared to its peers of between 10% and 12%.

Core strength rely on access to cheap gas feedstock

Steady growth path PCG is planning to pursue a steady growth strategy. In FY11-12 when the petrochemical cycle remains at the trough, PCG is expected to achieve earnings growth by reaping benefits from the recent reorganisation. Prior to the listing, PCG bought out the minority shareholders in its various ventures in the olefins chain and effectively gained control of those operations. Those plants have since been operated as a single resource starting in FY11, allowing for revenue maximisation by improving plants’ utilisation (through central planning) and cost reduction by consolidating administrative functions. In the medium term, PCG has plans to increase output or enhance efficiency by making changes to the configuration of its production process. From FY13 onwards, we expect margin improvement to drive PCG’s profitability as margins for the majority of its products in ethylene, methanol and urea are currently at a cyclical low.

To improve efficiency before reaping the benefits from margin recovery

Initiate with OUTPERFORM Our forecast of PCG’s average annual growth rate of earnings during FY11-13 of 18% is above the expected growth of its regional peers of between 0.6% and 8.5%. Its earnings growth is expected to be driven by improving efficiency during FY11-12, while the recovery of the ethylene cycle is expected to drive earnings beyond 2012. We expect margins of all PCG products to improve from the current level, with the exception of paraxylene which may see a short-term correction.

Earnings momentum to be the catalyst

Though PCG’s current valuation is at par with its regional peers, we see upside bias to its share price. PCG’s earnings growth momentum is expected to be superior to its regional peers. Within the Malaysian market, PCG is the largest and most liquid stock that has exposure to the oil and gas sector, which is pivotal to the government’s Economic Transformation Programme (ETP). Relative to other stocks in Malaysia, PCG looks attractively valued based on its premium ROE and a higher dividend yield. Our target price of RM7.50 is based on DCF which assumes ethane prices would be doubled after the agreements expire in 2016 and 2023.

OUTPERFORM with target price of RM7.50

Risks The key risk to PCG’s competitiveness is the potential increase of ethane cost as part of the government’s moves to phase out the discount available to various sectors of the economy. Other risks are petrochemical price volatility and a stronger Malaysian ringgit.

Petronas Chemicals Group (PCGB.KL / PCHEM MK)

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15 February 2011

Financial summary Figure 5: Key financial data Year-end 31 March

FY09

FY10

FY11E

FY12E

FY13E

3.43 82.1 87 95 586 213 454 275

3.46 69.6 88 79 576 391 292 224

3.14 83.1 87 84 475 420 292 260

3.06 85.0 92 92 466 500 377 306

3.06 85.0 95 92 512 550 400 350

12,367 4,867 5,130 4,443 2,818 2,818 2,818 2,818

12,203 3,642 4,145 3,249 2,199 2,199 2,199 2,199

13,261 4,443 4,806 3,789 2,862 0.36 2,862 0.36

14,916 5,358 5,667 4,673 3,426 0.43 3,426 0.43

15,757 5,961 6,210 5,236 3,994 0.50 3,994 0.50

7,081 1,360 11,121 23,234 2,896 745 586 5,416 15,736

7,532 2,237 12,992 26,892 4,734 623 1,254 7,844 17,069

8,157 1,954 12,975 28,231 1,691 447 3,261 7,225 19,411

9,986 2,198 12,681 30,331 1,833 600 2,761 7,049 21,407

10,904 2,322 12,428 31,520 1,879 600 1,261 5,637 23,688

2,818 477 1,772 5,067 (1,241) 456 (785) (191) (1,971) (2,162) 2,120 4,282

2,199 612 686 3,497 (2,767) 41 (2,726) 546 (866) (320) 451 771

2,862 204 (2,537) 529 (1,000) (215) (1,215) 1,831 (520) 1,311 625 (686)

3,426 1,015 (180) 4,262 (700) 46 (654) (347) (1,431) (1,778) 1,829 3,607

3,994 883 (69) 4,808 (721) 45 (676) (1,500) (1,713) (3,213) 918 4,131

-3.8 39.4 41.5 22.8 8.5 Net cash 18.4 19.7

-1.3 29.8 34.0 18.0 11.0 Net cash 13.4 13.4

8.7 33.5 36.2 21.6 19.1 Net cash 15.7 14.9

12.5 35.9 38.0 23.0 15.7 Net cash 16.8 16.4

5.6 37.8 39.4 25.4 7.9 Net cash 17.7 17.9

Key assumptions Avg RM/US$ Oil price assumption (US$/bbl) Utilisation rate: Olefins& polymer (%) Utilisation rate: urea & methanol (%) HDPE-naphtha spread (US$/t) PX-naphtha spread (US$/t) Urea price (US$/t) Methanol prices (US$/t) Profit and loss (RM mn) Sales Gross profit EBITDA EBIT Recurring profit Core EPS (RM/sh) Reported profit Reported EPS (RM/sh) Balance sheet (RM mn) Cash and cash equivalents Trade and other receivables Property, plant and equipment Total assets Trade and other payables Short-term borrowing Long-term borrowings Total liabilities Shareholders' equity Cash flow (RM mn) Net income Non-cash items Changes in working capitals Cash from operations PPE Investments and others Cash flow investments Changes in debts Other cash flow from financing Cash flow from financing Change in cash Free cash flow Key ratios (%) Sales growth Gross margin EBITDA margin Net income margin Debt to equity Net debt to equity ROE ROA Source: Company data, Credit Suisse estimates

Petronas Chemicals Group (PCGB.KL / PCHEM MK)

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15 February 2011

Most leveraged to oil prices compared to peers PCG’s core strengths rely on its access to the relatively fixed price ethane from Petronas. With its existing feedstock cost structure, PCG’s profitability is higher and more leveraged to oil prices compared to other listed firms in the oil and gas sector in SEA. Its low ethane price has put PCG’s cost in the ethylene chain at a similar level to that of the Middle East producers. PCG also has access to feedstock at a discount to market price for methane, propane and butane. However, costs of these feedstock are higher than its ethane cost and not fixed but linked to end-product prices or global price indices. We estimate that for every US$10/bbl increase in oil price, its earnings will rise by 16%, compared to its peers of between 10% and 12%. Figure 6: Feedstock pricing mechanism Gas

Pricing mechanism

Ethane

Two main contracts for two crackers with expiration in 2016 and 2023 Pricing between US$1.5 and US$2/mmbtu (similar level with M/E, lower than US gas cost of US$4/mmbtu, PTTCH's cost of US$5/mmbtu) Fixed price at Ethylene Malaysia and with 2% annual escalation cost at Optimal Olefins

Methane

Core strengths rely on cheap gas feedstock, especially ethane

For urea, linked to urea price. Actual price is close to SEA prices For methanol, linked to basket of fuel and petrochemical indices

Butane, propane

Linked to Saudi Aramco announced price

Source: Company data, Credit Suisse estimates

Fixed ethane cost: Core to PCG’s strengths With an attractive ethane feedstock cost, PCG is one of the most competitive players in Asia in the ethylene chain. According to Nexant, PCG’s ethane costs are in line with those paid by the average Middle Eastern petrochemicals producers. As such, its ethane plants have cost advantage over other players in Asia which are mostly naphtha-based. According to a study by Nexant, the cost advantage between leading ethylene producers in the Middle East (similar cost to PCG’s) and a conventional naphtha producer is the approximately US$600/t of ethylene produced over the period between 2004 and 2008, with the peak at US$1,200/t in 2Q08 and trough at US$230/t in 4Q08.

Cost advantage to naphthabased producers is estimated at around US$600/t

With a lower ethylene cost, PCG is also more competitive than its peers in ethylene derivative products including HDPE, LDPE, PVC and EG. These products account for 35% of our sales revenue forecast for PCG in FY12. This explains the higher profit contribution of olefins and polymer group (5.3 mn t capacity) against other segments of urea and methanol combined (5.8 mn t capacity) (Figure 7, Figure 8)

Lower ethane cost means cost advantage for ethylene derivatives which is ~35% of PCG’s revenue in FY12

Petronas Chemicals Group (PCGB.KL / PCHEM MK)

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15 February 2011

Figure 7: Olefins and polymer group* contributed over

Figure 8: Revenue breakdown in 4M10 ending July –

70% of PCG’s profit

Olefins and polymer group accounted for over 70% of PCG’s sales revenue

(%) 100

2%

90

22%

80

3% 10%

5%

11%

24%

39%

N-butane

70

PP 2%

60

3%

Urea

16%

10% Methanol 9%

MTBE

50 40

Others

79%

76%

30

59%

71%

Ammonia

6%

3% PE

20

Ethy lene

9%

10 0

9%

EG 2008

2009

Olefin s and polymers

2010 Fertilisers and methanol

4M10 Others

* Olefins and polymer division included olefins and derivatives, PX, BZ, MTBE, PVC, and others. Year end March. Source: Company data, Credit Suisse estimates

Propy lene

6% Benzene 3%

8% Parax y lene

PVC & VCM

9%

7%

Source: Company data, Credit Suisse estimates

PCG’s ethane cost is lower than that of PTT Chemical (PTTC.BK, Bt138.5, O [V], TP Bt185), which is the closet comparable gas-based company to PCG. We estimate that PCG’s ethane cost is less than US$200/t compared to PTTCH’s US$450/t. PTTCH has net back pricing formula for its ethane cost paid to PTT (PTT.BK, Bt316, N, TP Bt346). Conceptually, the selling price of ethane should give both PTT and PTTCH enough returns to cover their variable and investment costs before the extra profit is split between the two with the majority of profit going to PTTCH. With the profit sharing formula, PTTCH’s ethane costs are rising with end product prices and always higher than that of PCG.

PCG’s ethane cost lower than PTTCH’s gas-based cracker

Costs at discount to market for non-ethane feedstock Unlike ethane prices which are relatively fixed, prices under other feedstock such as methane (for methanol and urea), propane (for propylene) and butane (for MTBE) are determined through an undisclosed formula that are linked to prices quoted in published industry benchmarks. Though it is linked to international prices, we believe that PCG’s cost of gas purchased from Petronas is still at a discount to market prices. For example, PCG pays lower prices for propane and butane, than the published Saudi Aramco delivered propane and butane contract prices. This should result in cost advantage for PP and MTBE.

The cost of non-ethane feedstock is linked, but with a discount, to international indices

As for methane, prices are linked to the average of a basket of global urea prices (for urea production) and to a basket of fuel and petrochemical indices (for methanol production). According to Nexant, PCG’s urea production cost is slightly higher than Indonesian producers, and both Malaysian and Indonesian producers have higher costs than those in the Middle East. As for methanol, competitiveness depends mostly on feedstock and shipping costs. PCG is believed to have lower costs than other producers outside Indonesia and the Middle East.

PCG’s methanol and urea – at the low end of cost curve

Petronas Chemicals Group (PCGB.KL / PCHEM MK)

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15 February 2011

More leveraged to oil prices than regional peers Higher leverage to oil prices due to relatively fixed ethane costs More leveraged to rising oil price than PTTCH because of relatively fixed ethane costs

With relatively fixed ethane prices, PCG’s earnings are more leveraged to rising oil prices than other oil-exposed companies in the region, including PTTCH (Figure 9). PTTCH’s ethane gas costs are linked to HDPE prices under the net back gas pricing formula, which means that its ethane cost would rise (though at a slower rate) with oil prices. According to our estimate, PCG’s HDPE spread against ethane costs would expand much faster than PTTCH’s. Assuming a US$20/bbl rise in oil price from US$90 to US$110/bbl, PCG’s margins would expand by US$176/t, compared to only US$123/t in at PTTCH (Figure 10). Figure 9: PCG’s cost is close to M/E average but lower

Figure 10: PCG is more leveraged to rising oil price than

than PTTCH’s gas-based plants and other naphtha-based

PTTCH as PCG’s PE – ethane spread expanded faster

plants in Asia

with fixed ethane costs 1,200 1,100 1,000 900

$440

800 700 600 500 400 300 200 100

$170 30

50

70

90

PTTCH

Source: CMAI

110

130

PCG

Source: Credit Suisse estimates

Compared to other listed O&G companies in the region, PCG’s leverage to oil price is even higher than PTT Exploration & Production (PTTE.BK, Bt167.50, U, TP Bt183), the listed E&P in Thailand. We estimate that for every US$10/bbl increase in oil price, PCG’s EPS will rise by 16% in FY12 (end-March 2012) compared to 11.8% for PTTEP in FY11 (Figure 11). PTTEP’s lower leverage to oil prices is explained by its high portion of gas versus oil and the fact that gas prices are lagging and have only a 30% linkage to oil prices.

PCG is more leveraged to oil price than PTTCH and PTTEP

Figure 11: Earnings sensitivities to changes in oil prices Oil price (US$/bbl) PCG PTTCH PTTEP

75 (%)

85 (base case) (%)

95 (%)

105 (%)

-16.1 -11.7 -11.8

0.0 0.0 0.0

16.1 11.7 11.8

32.3 23.4 23.6

PCG’s profit increases by 16% for every US$10/bbl rise in oil price

Source: Credit Suisse estimates

PCG has more diversified products but is smaller in olefins compared to PTTCH PCG’s scale is much smaller than the Thai companies including PTTCH and Siam Cement (SCC.BK, Bt298, OUTPERFORM, TP Bt374). PCG has 1 mn t of ethylene compared to PTTCH’s 2.3 mn t and SCC’s 1.7 mn t. (Figure 12) PCG has exposure to wider range of products including PX, BZ, MTBE, and PVC while PTTCH is more concentrated in downstream polyolefins chain. (Figure 13)

PCG is smaller in size for olefins products but has wider product exposure

Despite PCG’s smaller size, PCG is more profitable than PTTCH and PCG’s earnings are also less volatile than its Thai counterparts. This would be more true after the merger of

PCG’s earnings are also less volatile

Petronas Chemicals Group (PCGB.KL / PCHEM MK)

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15 February 2011

PTTCH and PTTAR is completed, as PTTAR’s earnings are more volatile due to its large exposure to paraxylene (PX) and the refinery business. (Figure 14, Figure 15) PCG is one of the biggest players in the region for certain products despite being a medium-sized player in ethylene. Here is the snapshot comparison of its capacity against peers.

■

Largest producer of methanol by volume in SEA, fourth largest in the world.

■

Largest producer of ethylene glycols in SEA.

■

Largest producer of LDPE in SEA based on installed capacity.

■

Third-largest producer of urea in SEA by volume.

Largest producer of methanol, EG, and urea in SEA

Figure 12: PCG’s capacities are smaller than PTTCH and

Figure 13: Operating margins comparison: PCG is more

SCC (‘000 tonnes) – the main difference is PCG’s

profitable and less volatile

exposure to urea and methanol (%)

2,500

35

2,000

30 25

1,500

20 15

1,000

10 5

500

0 -5

PCG

PTTCH

PVC

PE

PX

BZ

PP

MEG

Propylene

Ethylene

-

PCG

SCC

PTTCH

PTTAR

Year-end Mar 08

Year-end Mar 09

Year-end Mar 10

6-mnths to Sep 10

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

Figure 14: Olefins and polymers net profit (US$ mn) –

Figure 15: Net profit comparison (US$ mn)

PCG more profitable in ethylene chain and has more varieties of products outside olefins group 1,200

1,200

1,000

1,000

800 600

800

400

600

200 0

400

-200

200

-400 PCG

Year-end Mar 08 PCG

Year-end Mar 09 PTTCH

SCC's petrochemical

Source: Company data, Credit Suisse estimates

PTTCH

PTTAR

Year-end Mar 10 Year-end Mar 08

Year-end Mar 09

Year-end Mar 10

6 mth to Sep 10

Source: Company data, Credit Suisse estimates

Petronas Chemicals Group (PCGB.KL / PCHEM MK)

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15 February 2011

Steady growth path PCG is planning to pursue a steady growth strategy. In FY11-12, when the petrochemical cycle is expected to trough, PCG is expected to achieve earnings growth by reaping benefits from the recent reorganisation. Prior to the listing, PCG bought out minority shareholders in its various ventures in the olefins chain and effectively gained control in those operations. Those plants have since been operated as a single resource starting in FY11. This will allow for revenue maximisation by improving plants utilisation (through central planning) and cost reduction by consolidating administrative functions. In the medium term, PCG has a plan to expand its existing facility by increasing output or enhancing efficiency by making changes to the configuration of its production process. From FY13 onwards, we expect margin improvement to drive PCG’s profitability, as margins for all of its product in olefins, methanol and urea are currently at a cyclical low. Longer term, greenfield projects will also be considered.

Reorganisation: Integrating different parts into one Prior to the listing, PCG consolidated its ownership in various affiliates (Figure 16). This included purchasing a stake in companies in the Optimal group from its partner Dow Chemical (DOW, $38.38, O [V], TP $44.00) in October 2009. The transactions increased its stake in Optimal Olefins to 88% and in Optimal Glycols and Optimal Chemicals to 100%. In September 2010, PCG also bought out BP (BP.L, 475.75p, O, TP 585.00p, MARKET WEIGHT), which was a minority shareholder in Ethylene Malaysia, and effectively increased its stake from 72.5% to 87.5%. PCG also bought a 60% stake in Polyethylene Malaysia from BP and increased its stake to 100% in September 2010.

The reorganisation – consolidating different operations under one firm

Figure 16: Reorganisation transactions prior to the listing Dates

Transactions

Oct-09

Acquired stake in Optimal from Dow and bring all three entities (OPTIMAL olefins, OPTIMAL Glycols, and OPTIMAL chemicals) under PCG control Acquired minority stake in Ethylene Malaysia from BP and increase control from 72.5% to 87.5%. Also acquired 60% stake of Polyethylene Malaysia to become a wholly-owned subsidiary. Started trading in the Bursa Malaysia

Sep-10

26-Nov-10

Buying stakes from foreign partners

Source: Company data, Credit Suisse estimates

Following the reorganisation, PCG hopes to maximise its revenue and increase flexibility through the integration of operations and management. Unlike before, the plants are now centrally managed, allowing for optimal coordination of operations of all product facilities. Feedstock and other resources allocation are now better coordinated among PCG’s facilities. In order to minimise disruptions, plans of different units are synchronised to schedule to manage plant turnarounds, capacity improvement and maintenance projects.

Revenue enhancement ...

After the reorganisation, the two IPCs have been integrated and operate as a single resource. The admin functions have been consolidated in one centralised corporate head office and economy of scale achieved in procurement through bulk purchases. Management expects to see SG&A reduction of 20% from the successful implementation of the plan.

... and cost reduction

Petronas Chemicals Group (PCGB.KL / PCHEM MK)

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15 February 2011

Growth beyond the reorganisation Figure 17: PCG’s growth strategy summary Time frame

Strategies

Short term

To achieve overall utilisation rate of 90% with biggest potential increase at Labuan methanol plant Cost reduction from the Reorganisation

Medium term

Capacity increase through efficiency improvement Acquisition opportunity evaluated

Long term

Studying a plan to build greenfield ammonia and urea facility in East Malaysia

From the short-term plan of raising utilisation rates to a long-term plan of building a new complex

New petrochemical complex if Petronas Group decides to invest in greenfield refinery complex in Malaysia Source: Company data, Credit Suisse estimates

Short-term plan: Higher utilisation PCG plans to ramp up utilisation rates. This is also one of the benefits of business reorganisation. Management believes that the integration would improve the integrated planning and overall run rates for its plants, as these plants were previously run under different joint venture partners and shareholders. Management has set the overall utilisation target at 90% and expects to achieve its target from FY11 onwards. In our assumptions, we assume the overall utilisation rates of all of its plants at 93% (Figure 18).

Improving utilisation rate with better integrated planning

PCG has started its new 1.66 mn t methanol plant in Labuan, the largest plant in Asia, in January 2009. The plan is to ramp up production to over 90% in FY11-12. As such, its methanol plant at Labuan would be the source of growth in FY11-12 (Figure 19).

Ramping up the methanol plant at Labuan

Figure 18: Utilisations at PCG’s key plants

Figure 19: Methanol production (‘000 tonnes)

(%)

2,500

100 2,000

95 90

1,500

85 1,000 80 500

75 FY08

FY09

FY10

FY11E

FY12E

FY13E

FY14E -

Olefins and poly mer group

Urea and methanol

The decline in operating rates at methanol plants reflect the startup of a new 1.66 mn t plant which is yet to run at full capacity Source: Credit Suisse estimates

FY08

FY09

FY10

FY11E

FY12E

Source: Credit Suisse estimates

Medium and long-term growth plans: Capacity expansion PCG has set medium and long-term growth plans through capacity expansions either by organic growth or acquisition. As for organic growth, PCG has a plan to increase output or enhance efficiency at its existing plants by making changes to the configuration of its production process. This would include growth horizontally by expanding the product portfolio. Also, PCG is seeking acquisition opportunities where appropriate.

Increasing capacity through efficiency improvement and, potentially, acquisitions

PCG is also studying the possibility of developing a world-scale, greenfield ammonia and urea production facility that would be supplied with natural gas feedstock off the coast of

Studying a plan to build greenfield ammonia and urea facility in East Malaysia

Petronas Chemicals Group (PCGB.KL / PCHEM MK)

10

15 February 2011

East Malaysia. The project is now in the pre-feasibility study phase and PCG expects to make a final decision on this in FY12. Petronas Group is studying a greenfield project to develop an integrated refinery and petrochemical complex in Malaysia with international partners. Naphtha output would be used for petrochemical production. If the project gets a go-ahead, PCG is expected to invest in the naphtha-based petrochemical complex. The timing of the project is still unclear. We estimate that if the decision is made today, completion would be in 2015 at the earliest.

Brand new opportunity if Petronas Group builds a new refinery and petrochemical complex

Petronas Chemicals Group (PCGB.KL / PCHEM MK)

11

15 February 2011

Initiate with OUTPERFORM Our forecast of PCG’s average annual growth rate of earnings during FY11-13 of 18.1% is above the expected growth of its regional peers of between 0.6% and 8.5%. Its earnings growth is expected to be driven by improving efficiency during FY11-12, while the recovery of ethylene cycle is expected to drive its earnings beyond 2012. On valuation, though PCG’s current valuation is at par with its regional peers, we see upside bias to its share price. Relative to the Malaysian market, PCG looks attractively valued based on its premium ROE and a higher prospective dividend yield. Our target price of RM7.50 is based on DCF which assumes ethane prices are doubled after the agreements expire in 2016 and 2023. Our RM7.50 target price implies P/B and P/E of 2.8x and 17.5x on FY12E, respectively. We initiate coverage on PCG with an OUTPERFORM rating.

Superior earnings growth profile Our forecast of PCG’s average annual growth rate of earnings during FY11-13 of 18% is above the expected growth of its regional peers by between 0.6% and 8.5%. Its earnings growth is expected to be driven by improving efficiency during FY11-12, while the recovery of the ethylene cycle is expected to drive its earnings beyond 2012. PCG’s earnings growth could be achieved with relatively small capex as it will be driven by efficiency improvement in the initial stages before the recovery of petrochemical cycle. PCG is guiding a maintenance capex of RM700 mn annually.

Earnings growth higher than peers

Figure 20: Impact of changes in earnings assumptions to PCG’s FY12 earnings Current Units assumptions Base case RM (5% appreciation) RM/US$ Oil price (+ US$10/bbl) US$/bbl Ethane cost (+ 10%) US$/t HDPE-naphtha spread (+ US$100/t) US$/t PX-naphtha spread (+ US$100/t) US$/t EG-ethylene spread (+ US$100/t) US$/t PP-naphtha spread (+ US$100/t) US$/t Methanol price (+ US$100/t) US$/t Urea price (+ US$100/t) US$/t

3.06 85 161 466 500 350 566 306 377

Net profit % change (RM mn) from base 3,426 3,126 3,980 3,390 3,526 3,535 3,505 3,441 3,628 3,631

-8.8 16.1 -1.1 2.9 3.2 2.3 0.4 5.9 6.0

EPS (RM)

P/E (x)

0.43 0.39 0.50 0.42 0.44 0.44 0.44 0.43 0.45 0.45

14.2 15.6 12.3 14.4 13.8 13.8 13.9 14.2 13.5 13.4

PCG’s earnings are sensitive to oil price due to its relatively fixed ethane costs

Source: Credit Suisse estimates

We expect margins of all of PCG’s products to improve from the current level with the exception of paraxylene, which may see a short-term correction. Margins in ethylene and its derivatives are expected to stay at a cyclical low for the next 6-9 months before peaking in 2014-15 as global capacity expansion is limited over the next few years. Margins in the propylene chain are holding up well in 2010-11 and should also expand as demand improves and capacity addition is limited. Nexant, a petrochemical consultant, expects margins of urea and methanol to also recover to peak levels in 2015.

Margins of almost all of PCG’s products are on a recovery trend

Petronas Chemicals Group (PCGB.KL / PCHEM MK)

12

15 February 2011

Figure 21: Margin outlook by products Ethylene Propylene PVC & VCM Paraxylene Benzene EG PE Urea Methanol

FY12E

FY13E-15E

!" !" !" $ !" # !" # #

# # !" !" !" # # # #

Margins of ethylene and its derivative products are likely to trough in 2011 and expected to peak in 2015

Source: Credit Suisse estimates

Figure 22:Urea price FOB M/E spot (US$/t) – margins

Figure 23: Methanol CFR China (US$/t) – Nexant expects

should start to improve

margins to peak in 2015

800

500

700

450

600

400 350

500

300

400

250

300

200

200 150

100

100

1Q11 QTD

2Q10

3Q09

4Q08

1Q08

2Q07

3Q06

4Q05

1Q05

0

Source: Bloomberg, Credit Suisse estimates

50 0 2Q04

1Q05

4Q05

3Q06

2Q07

1Q08

4Q08

3Q09

2Q10

1Q11

Source: Bloomberg, Credit Suisse estimates

Figure 24: HDPE-naphtha spread (US$/t) – at the trough of

Figure 25: Polypropylene (PP)-naphtha spread (US$/t) –

cycle and expected to recover in 2012 to peak at closer to

holding up stronger than PE spread as limited PP supply

US$700/t in 2015

addition globally 900

700

800

600

700 500 600 400

500 400

300 1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11* 300

HDPE-naphtha

Source: Thompson Reuters, Credit Suisse estimates

1Q07

4Q07

3Q08

2Q09

1Q10

4Q10

Source: Thompson Reuters, Credit Suisse estimates

Petronas Chemicals Group (PCGB.KL / PCHEM MK)

13

15 February 2011

Figure 26: MEG spread with ethylene (US$/t) – recent

Figure 27: Paraxylene and benzene margins vs naphtha

recovery driven by strong demand in polyester chain

(US$/t) – PX prices may have short-term downside

800

750

700

650

600

550

500

450

400

350 250

300

150

200

50 100 -50 -

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11*

-100 1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

Source: Thompson Reuters, Credit Suisse estimates

Benzene-naphtha

3Q10 1Q11QTD

PX-naphtha

Source: Thompson Reuters, Credit Suisse estimates

Biggest and most liquid oil exposure in Malaysia Though PCG’s current valuation is at par with its regional peers, we see upside bias to its share price. PCG’s earnings growth momentum is expected to be superior to its regional peers. PCG’s two-year earnings CAGR is 18% compared to 0.6-8.5% for its peers. Improvement is expected to be due to higher utilisation and better planning efficiency after consolidation. Beyond FY12, we expect growth to be driven by recovery of the ethylene cycle.

PCG’s valuation at par with regional peers but with upside bias

Within the Malaysian market, PCG is the largest and most liquid stock with exposure to the oil and gas sector, which is pivotal to the government’s Economic Transformation Programme (ETP). The ETP appears to be gaining momentum preparing for PM Najib to win a convincing mandate in the next General Elections. The government has announced incentives for the oil and gas sector, providing positive news flow to continue driving up share prices, which should kick-start more investments in the sector. Though we do not see direct benefits from these incentives to PCG, we expect that growing interest of investors in the oil and gas sector would warrant share price rerating given PCG’s size and liquidity.

The biggest and the most liquid stock in Malaysia that has exposure to the oil and gas sector

Relative to the Malaysian market, PCG is attractively valued based on its premium ROE and higher dividend yield. We estimate PCG to generate ROE of 16.8% compared to the market average of 13.9%. Based on a stated dividend policy of 50%, PCG’s dividend yield is 3.5% compared to the market average of 2.8%. PCG is also trading at a discount to the market on P/E. On P/B, PCG is valued at par with the market.

Attractive valuation based on Malaysian peers

Petronas Chemicals Group (PCGB.KL / PCHEM MK)

14

15 February 2011

Figure 28: PCG remains attractive on P/E against its two-

Figure 29: PCG’s valuation and return are attractive

year earnings CAGR

against Malaysian stock market 25

P/E 24.0

19.7

FPCC

20

22.0

15.3 15

20.0 Far Eastern

18.0 16.0

12.0

5

Nan Ya

10.0 0.0

0

PCG

5.0 10.0 2-year CAGR (%)

2.8 3.6

2.2 2.2

Honam FCFC LG Chem

Hanwha

-5.0

13.9

10

Reliance Formosa Industries Plastics

14.0

16.8

15.8 14.0

P/E (x )

EPS grow th

P/B (x )

ROE (%)

Div idend y ield

(%)

15.0

20.0

(%) Malay sia market

PCG*

* PTTCH is excluded due to the planned merger deal. Source: Credit Suisse estimates

* PCG’s valuation is based on FY12E which ends in March 2012 while market is based on FY11E. Source: Credit Suisse estimates

Figure 30: One of the most liquid stocks in Malaysia with

Figure 31: Among top-five largest companies in Malaysia

average daily turnover of over US$30 mn

by market cap (US$ bn) 25 20.5

35

19.9 18.3

20

15.8

30

23.8

25

22.5

21.6

15.0

15 19.6

13.7

13.2

12.4

12.1

12.0

MISC

33.7

IOI

37.0

Genting

40

38.2

Maxis

45

19.0

20

15.7

10

12.7

15 10

5

5 -

Source: Bloomberg, Credit Suisse estimates

Axiata

Public Bank

PCG

Sime Darby

CIMB

Malayan Banking

Public Bank

Tenaga Nasional

AMMB

IOI

Genting

Axiata

Malayan Banking

PCG

Sime Darby

CIMB

-

Source: Bloomberg, Credit Suisse estimates

After the planned merger of PTTCH and PTTAR is completed, PCG would hold a unique position as the only listed gas-based petrochemical company in Asia with better leverage to oil price and superior ROE. Relative to PCG, the merged company between PTTCH and PTTAR is expected to be more diversified. Also, earnings volatility of the consolidated entity is expected to be higher than the standalone operation of PTTCH, which has pure exposure to the gas-based business. PCG’s premium ROE to PTTCH should also expand as the consolidation of PTTCH and PTTAR is expected to dampen the consolidated ROE, with higher amortisation expense and lower ROE of PTTAR.

PCG would be less diversified than the merged entity between PTTCH and PTTAR

Petronas Chemicals Group (PCGB.KL / PCHEM MK)

15

15 February 2011

Figure 32: Third largest by market cap compared to other

Figure 33: PCG would give clearer exposure to oil price

major listed O&G and chemical stocks in Thailand (US$

than the merged company between PTTCH+PTTAR which

bn)

gives mix exposure of ethylene/aromatics/refinery 2,500

35 29.6 30

2,000

25

1,500 17.7

1,000

15.7 15

500

10.4

PTT

PTTEP

PCG PTTTCH+PTTARPTTCH

PCG

PTTAR

Source: Thompson Reuters, Bloomberg, Credit Suisse estimates

Refinery*

PVC

PE

PX

BZ

PP

3.6

5

MEG

-

6.8

Propylene

10

Ethylene

20

PTTCH + PTTAR

* Refinery in kbd. Source: Company data, Credit Suisse estimates

We set our target price at RM7.50, implying 25% upside from the current share price. Our target price is based on DCF valuation assuming that ethane cost is doubled due to price adjustment with Petronas once the agreements expire in 2016 and 2023. Our estimate of PCG’s WACC is 9.6% based on cost of equity of 11.8% and long-term debt to total capital of 25%. At our target price of RM7.50, PCG would be valued at P/B and P/E on FY12E of 2.8x and 17.5x, respectively, compared to regional peers’ P/B of 2.2x and P/E of 14x during the same period. We initiate on PCG with an OUTPERFORM rating.

DCF target of RM7.50 assumes ethane price doubled at contract expirations

Figure 34: PCG's DCF valuation DCF (RM mn)

2013E

2014E

2015E

2016E

2017E

2018E

2019E

2020E

EBITDA Less tax on EBIT Less capex

6,210 1,257 721

6,353 1,295 743

6,879 1,425 765

6,863 1,424 788

6,567 1,354 811

6,547 1,351 836

6,527 1,347 861

6,077 1,240 887

Free cash flow

4,233

4,315

4,690

4,652

4,401

4,360

4,319

3,951

Sum of PV Terminal value EV Less FY12E net debt (cash) Equity value Equity value per share

21,834 31,714 53,548 (6,625) 60,173 7.5

Source: Credit Suisse estimates

Petronas Chemicals Group (PCGB.KL / PCHEM MK)

16

Petronas Chemicals Group

Regional valuation table Figure 35: Regional valuations comparison table Up side

Rat

FX

Price (local)

TP (local)

1301.TW 1303.TW 1326.TW 6505.TW 1402.TW

N O O U N

TWD TWD TWD TWD TWD

101.0 79.7 102.0 91.0 47.5

91.1 94.8 126.2 76.0 41.7

-10 18.9 24 -16 -12

Hanwha Chemical

009830.KS

U

KRW

35,000.0

26,000.0

Honam Petrochem LG Chem

011170.KS 051910.KS

N O

KRW KRW

335,000.0 310,000.0 370,000.0 450,000.0

Reliance Industries

RELI.BO

O

INR

910.8

PTTCH

PTTC.BK

O

THB

Petronas Chemical** PCGB.KL

O

MYR

Company

Ticker

Formosa Plastics Nan Ya Plastics FCFC FPCC Far Eastern

Mkt cap

(%) US$ mn

EPS growth (%)

P/E (x)

P/B (x)

Div. yield (%)

11E

12E

11E

12E

11E

21,089 21,600 19,800 29,571 7,704

-4 37.6 14 -9 0

5 1.8 0 15 -2

14.0 11.1 10.7 23.1 18.4

13.3 10.9 10.7 20.1 18.8

2.4 2.1 2.2 3.6 2.2

2.3 2.0 2.1 3.4 2.2

5.7 7.6 7.9 3.5 4.1

6.0 7.8 8.0 4.0 4.0

3

4

16.0

15.2

2.5

2.4

-26

4,358

-4

11

11.4

10.2

1.4

1.3

-7 22

9,473 21,764

11 15

6 8

11.9 10.5

11.2 9.7

2.0 2.6

7

9

11.2

10.4

1,181.0

30

65,345

-17

22

14.7

12.0

138.5

185.0

34

6,812

75

12

11.9

6.0

7.5

25

15,748

20

17

10

9

Average Taiwan

Average Korea

Average Asia

12E 11E 12E

EV/EBITDA (x)

ROIC (%)

ROE (%)

11E

12E

11E

12E

11E

12E

17.3 14.5 12.0 13.1 68.8

16.7 15.7 12.6 11.7 99.1

10 9.9 13 9 1

9 8.5 11 10 1

18 19.6 21 16 12

18 18.9 20 17 12

5.5

5.7 15.7* 15.5*

8

7

17

17

1.3

1.3

11.2

10.9

9

9

13

13

1.7 2.1

0.5 0.9

0.6 0.9

10.6 7.2

9.6 6.5

11 23

11 22

18 28

17 24

2.0

1.7

0.9

0.9

9.7

9.0

14

14

20

18

2.0

1.8

1.0

1.7

9.3

7.1

9

17

14

16

10.6

1.8

1.6

4.2

4.7

8.5

7.6

13

14

16

16

14.0

12.0

2.2

2.0

3.6

4.2

7.3

6.3

23

27

17

18

14.0

12.9

2.2

2.1

3.5

3.8

16.9

19.0

12

12

17

17

* EBITDA calculation excluding Far Eastern **Based on 2012E and 2013E numbers as its fiscal year ends in March. Source: Credit Suisse estimates

15 February 2011

15 February 2011

Risks Ethane price renegotiation PCG’s feedstock supply contracts with the Petronas Group companies contain clauses providing that if there is a substantial change in circumstances that seriously prejudices or is expected to seriously prejudice either party, either party can require both parties to consult together to determine whether and what revision to the terms and conditions of the contract is necessary. We understand that the last time that ethane price (sold to Ethylene Malaysia) was adjusted is in September 2001

Legally, prices could be adjusted even before the contracts expire

Risk of cost increase for PCG is at its two ethane feedstock agreements which are due to expire in 2016 and 2023. Prices of other gas feedstock including methane, propane, and butane have been raised earlier. Ethane is the most important feedstock for PCG as products from the ethylene value chain are the largest contributor to PCG’s revenue and profit. Ethane prices sold to PCG by the Petronas Group companies are close to cost of producers in the Middle East but lower than the price PTTCH paid to PTT. We estimate the cost of ethane for PTTCH of around US$450/t, at least US$250/t higher than PCG’s of less than US$200/t.

Risk is in ethane of which contracts are due to expire in 2016 and 2023

Effective 1 August 2008, Petronas Group adjusted the pricing terms under the supply agreement for methane, butane and propane for some of PCG’s subsidiaries. The negotiation process had started since the supply agreement expired in October 2005 but only became effective in August 2008. The changes brought the price policy to be in-line with the government of Malaysia’s overall policy of gradually phasing out the discounted gas prices available to various sectors of the economy.

Prices of methane, propane and butane have been raised earlier

Gas supply risks PCG does not purchase natural gas or processed gas feedstock from any other suppliers except Petronas, while PCG is also the only company to which the Petronas Group supplies gas feedstock for petrochemicals production. Petronas Group supplies the requirement of PCG’s ethane, propane, methane, butane and heavy naphtha feedstock. If there are material interruptions in supply from the Petronas Group, PCG’s production rate would get affected. Based on Petronas Gas (PGAS.KL, RM11.04, Not Rated) data, natural gas output from domestic gas field has been on the downtrend.

Gas availability from Petronas

Stronger Malaysian ringgit hurting PCG’s profitability PCG’s revenue and major part of its costs are denominated in USD. For FY10, 57% of PCG’s revenue was denominated in USD. Appreciation of the RM against the USD may materially and adversely affect its profitability. We estimate that for every 1% appreciation in RM, PCG’s profit would fall by 1.6% in FY12.

PCG’s profit down 1.6% for every 1% appreciation in MYR

Petronas Chemicals Group (PCGB.KL / PCHEM MK)

18

15 February 2011

Financials Figure 36: Profit and loss statement Year-end 31 Mar (RM mn)

FY09

FY10

FY11E

FY12E

FY13E

12,367

12,203

13,261

14,916

15,757

Cost of revenue Gross profit

7,500 4,867

8,561 3,642

8,817 4,443

9,558 5,358

9,796 5,961

Selling and distribution expenses Administration expenses Other expenses Other income Operating profit

335 320 111 342 4,443

351 318 127 403 3,249

435 433 110 324 3,789

492 390 111 308 4,673

520 410 112 317 5,236

Financing costs Profit before tax

57 4,386

62 3,187

108 3,681

137 4,536

101 5,135

Tax expense Equity income Profit after tax

962 25 3,449

774 181 2,594

994 429 3,116

1,089 260 3,708

1,232 410 4,313

Minority interests Recurring profit

631 2,818

395 2,199

254 2,862

281 3,426

318 3,994

Extraordinary items Reported profit

2,818

2,199

2,862

3,426

3,994

Core EPS (RM/sh) Reported EPS (RM/sh) EBITDA

2,818 2,818 5,130

2,199 2,199 4,145

0.36 0.36 4,806

0.43 0.43 5,667

0.50 0.50 6,210

Year-end 31 Mar (RM mn)

FY09

FY10

FY11E

FY12E

FY13E

Cash and cash equivalents Fund and other investments Trade and other receivables and inventories Others current assets Total current assets

7,081 139 2,186 251 9,657

7,532 25 3,468 212 11,237

8,157 25 3,222 212 11,616

9,986 25 3,573 212 13,796

10,904 25 3,731 212 14,872

2,060 55 11,121 341 13,577 23,234

929 32 12,992 1,702 15,655 26,892

1,110 30 12,975 2,500 16,615 28,231

1,374 30 12,681 2,450 16,535 30,331

1,788 30 12,428 2,402 16,648 31,520

Trade and other payables Borrowings Other current liabilities Total current liabilities

2,896 745 61 3,702

4,734 623 38 5,395

1,691 447 298 2,436

1,833 600 327 2,760

1,879 600 370 2,848

Borrowings Other long-term liabilities and provisions Other non-current liabilities Total non-current liabilities Total liabilities

586 1,101 27 1,714 5,416

1,254 1,167 28 2,449 7,844

3,261 1,500 28 4,789 7,225

2,761 1,500 28 4,289 7,049

1,261 1,500 28 2,789 5,637

2,082 15,736

1,979 17,069

1,595 19,411

1,876 21,407

2,195 23,688

Revenue

Source: Company data, Credit Suisse estimates

Figure 37: Balance sheet

Investments in associates Long-term receivables Property, plant and equipment Others non-current assets Total non-current assets Total assets

Minority interest Total shareholder's equity Source: Company data, Credit Suisse estimates

Petronas Chemicals Group (PCGB.KL / PCHEM MK)

19

15 February 2011

Figure 38: Cash flow statement Year-end 31 Mar (RM mn)

FY09

FY10

FY11E

FY12E

FY13E

Net income

2,818

2,199

2,862

3,426

3,994

Non-cash items Cash net income Changes in working capitals Cash flow from operating activities

477 3,295 1,772 5,067

612 2,811 686 3,497

204 3,066 (2,537) 529

1,015 4,442 (180) 4,262

883 4,877 (69) 4,808

Capex Investment Change in other liabilities Cash flow from investing activities Free cash flow

(1,241) 112 344 (785) 4,282

(2,767) (26) 67 (2,726) 771

(1,000) (548) 333 (1,215) (686)

(700) 46 (654) 3,607

(721) 45 (676) 4,131

Increase (decrease) in debt Capital increase Dividend payment Equity adjustment Cash flow from financing Change in cash

(191) 847 (1,962) (856) (2,162) 2,120

546 1,332 (2,196) (2) (320) 451

1,831 3,570 (2,781) (1,309) 1,311 625

(347) (1,431) (1,778) 1,829

(1,500) (1,713) (3,213) 918

FY09

FY10

FY11E

FY12E

FY13E

-3.8 -23.4 -25.1 -21.8 -28.2 39.4 35.9 41.5 22.8 0.55 0.87 19.7 18.4 0.08 Net cash 2.61 73.19

-1.3 -25.2 -26.9 -19.2 -22.0 29.8 26.6 34.0 18.0 0.49 0.78 13.4 13.4 0.11 Net cash 2.08 77.95

8.7 22.0 16.6 16.0 30.2 33.5 28.6 36.2 21.6 0.48 0.79 14.9 15.7 0.19 Net cash 4.77 52.40

12.5 20.6 23.3 17.9 19.7 35.9 31.3 38.0 23.0 0.51 0.82 16.4 16.8 0.16 Net cash 5.00 35.10

5.6 11.2 12.1 9.6 16.6 37.8 33.2 39.4 25.4 0.51 0.84 17.9 17.7 0.08 Net cash 5.22 34.20

Source: Company data, Credit Suisse estimates

Figure 39: Key ratios (%, unless indicated otherwise) Sale growth Gross profit growth Operating profit growth EBITDA growth Net profit growth Gross profit margin Operating profit margin EBITDA margin Net profit margin Asset turnover (x) EBIT/EBITDA (x) ROA ROE Debt/equity (x) Net debt/equity (x) Current ratio (x) Interest coverage (x) Source: Credit Suisse estimates

Petronas Chemicals Group (PCGB.KL / PCHEM MK)

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15 February 2011

Appendix 1: Production facilities PCG operates plants in five facilities in Malaysia including Kertih (focus on ethane-related products), Gebeng (focus on propane and butane-related products, and other three locations in Labuan, Gurun and Bintulu for methanol and urea products. Separately, PCG also owns and operates a PVC plant in Vung Tau, Vietnam. Its total capacity in olefins and polymers is 5.3 mn t and in fertilisers and methanol is 5.8 mn t. PGU pipeline network supplying gas to olefins facilities in Kertih and Gebeng Petronas Gas has processed natural gas sourced at the offshore Terengganu fields and processing and transmitting piped gas to end-users in various sectors in Peninsular Malaysia via its PGU pipeline system. The system has combined capacity of 2,060 mmscfd. PGS’s facilities in Peninsular Malaysia at Kertih and Gebang receives their gas feedstock through the PGU pipeline system. The Kertih Integrated Petrochemical Complex (IPC) focuses mainly on ethane-related products including ethylene, HDPE, LLDPE , LDPE, VCM, PVC, and MEG. There is also an aromatics plant in the Kertih IPC that producers benzene and paraxylene by using heavy naphtha feeding through another dedicated pipeline directly from the oil refinery operated by Petronas Penapisan. In the same complex, Petronas operates 6 GPPs and one oil refinery. As for supporting infrastructure at Kertih IPC, PCS owns port on site. Utilities are managed/owned/operated by Petronas Gas under a long-term contract. Water is supplied by another Petronas’s subsidiary. The Gebeng IPC, located further south from Kertih, focuses mainly on propane and butane-related products, including propylene, polypropylene and MTBE. The Gebeng IPC also includes production facilities operated by JV with BASF that produce acrylic acids, oxo-alcohols, and butanediol products. Both IPCS linked to the Kuantan port by a railway line owned and operation by Petronas group. As for supporting infrastructure at Gebeng IPC, utilities are managed/owned/operated by Petronas Gas under long term contract. Water is managed by local water authority based on applicable tariffs rates For methane-related products including methanol, ammonia, and urea, the facilities are located in Gurun in Peninsular Malaysia and Labuan and Bintulu in Eastern Malaysia. The plants at Labuan, the biggest 2.3 mn t methanol plant, receives its natural gas feedstock from several gas fields off the coast of Sabah. Its plants at Gurun receives natural gas from Kertih and MTJDA while plants at Bintulu receives gas off the coast in Borneo.

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Figure 40: Capacity at Kertih IPC

Plant

Company

Product

Ethane/propane cracker

Optimal Olefins

Ethane cracker

Ethylene Malaysia

Ethylene Propylene Ethylene

Nameplate capacity ('000 tpa) Shareholders

Ethylene 600.0 PCG (88%), Sasol (12%) 84.7 400.0 PCG (87.5%, Idemitsu Kosan (12.5%)

Ethylene derivatives VCM PVC Ammonia/oxogas

Ethylene oxide, ethylene glycol Ethylene derivatives

Low density polyethylene Polyethylene

Vinyl Chloride (Malaysia) VCM Vinyl Chloride (Malaysia) PVC Petronas Ammonia Ammonia Oxogas Carbon monoxide Optimal Glycols Ethylene oxide Ethylene glycols Optimal Chemicals Ethoxylates Ethanolamines Glycol ethers Butanol Butyl acetate Nonylphenol ethoxylates Polyethylene glycol Polyalkaline glycol Petlin LDPE Polyethylene Malaysia HDPE/LLDPE

400.0 180.0 450.0 435.7 246.7 385.0 380.0 30.0 75.0 60.0 140.0 50.0 30.0 15.0 10.0 255.0 240.0

PCG (100%) PCG (100%) PCG (100%)

PCG (100%) PCG (100%)

PCG (60%), Sasol (40%) PCG (100%)

Aromatics Aromatics (paraxylene and benzene) Aromatic Malaysia

Acetic acid

BP, Petronas, Acetyls

Paraxylene Benzene Pipe-grade compound Acetic Acid

500.0 PCG (70%), MJPX (30%) 187.7 60.0 500.0 PCG (30%), BP Holdings (70%)

Source: Company data, Credit Suisse estimates

Figure 41: Gebeng IPC

Plant

Company

Product

MTBE

MTBE Malaysia

Propate dehydrogenation Polypropylene Acrylics complex

MTBE Malaysia Polypropylene Malaysia BASF, Petronas Chemical

Oxo-alcohols/syngas complex

BASF, Petronas Chemical

Butanediol complex

BASF, Petronas Chemical

MTBE Propylene N-Butane Propylene Polypropylene Crude acrylic acid Glacial acrylic acid Butyl acrylate 2-ethyl hexyl acrylate 2-ethythexanol Phthalic anhydride Palatinol AH Butanols Butanediol

Nameplate capacity ('000 tpa) Shareholders 300.0 80.0 135.0 300.0 80.0 160.0 40.0 100.0 70.0 135.0 40.0 100.0 165.0 100.0

PCG (100%)

PCG (100%) PCG (100%) PCG (40%), BASF Nederland (60%)

PCG (40%), BASF Nederland (60%) PCG (40%), BASF Nederland (60%)

PCG (40%), BASF Nederland (60%)

Source: Company data, Credit Suisse estimates

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Figure 42: Other facilities in Labuan, Bintulu, Gurun, and others

Plant

Company

Product

Petronas Methanol Petronas Methanol

Methanol Methanol

Bintulu Urea/Ammonia Complex

ASEAN Bintulu Fertilizer

Urea

Gurun Urea/Ammonia Complex

Petronas Fertilizer

Vung Tau PVC Plant in Vietnam

Phu My

Nameplate capacity ('000 tpa) Shareholders

Labuan Methanol complex Labuan Methanol Plant 1 Labuan Methanol Plant 2

666.0 PCG (100%) 1,665.0 PCG (100%)

Other Petrochemical Operations

Ammonia Methanol Ammonia Urea

750.0 PCG (63.47%), Ministry of Finance Thailand (13%), The Republic of Indonesia (13%), National Development Company of the Philippines (9.53%), Temasek (1%) 450.0 66.7 PCG (100%) 400.0 683.0

PVC

100.0 PCG (93.1%), Vung Tau Shipyard (6.89%)

Pasir Gudang styrene monomer plant Idemitsu SM

Styrene monomer

240.0

NPK Fertilizer plant

NPK

310.0 PETRONAS Fertilizer (20%), National Farmers Organisation (80%)

Malaysia NPK Fertilizer

Source: Company data, Credit Suisse estimates

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Figure 43: Production facilities Phu My: - PVC

Gurun: -Methanol -Ammonia -Urea

Kertih IPC: Ethane focused - Ethylene - Benzene & Paraxylene - VCM & PVC - Propylene - Ammonia, Carbon Monoxide & Oxogas - Ethylene Glycols - Acetic Acid Butanol, Ethanolamines, etc.

Gebeng IPC: Propane and Butane focused -MTBE & Propylene - Polypropylene - Acrylics, Oxo-alcohols, Butanediol Labuan

Pasir Gudang: Styrene monomer Bintulu

East Malaysia: Methane Focused -Methanol -Ammonia -Urea

Source: Company data

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Appendix 2: Company background Corporate structure Figure 44: Corporate structure PETRONAS Other subsidiaries and associates

69%

PCG Group Fertilisers and methanol

Olefins and polymers business segment

business segment

100%

100%

MTBE Malaysia

60%

100%

Polypropylene Malaysia

(1)

PETLIN

87.5%

100%

Vinyl Chloride (Malaysia)

(1)

Ethylene Malaysia

70%

100%

OPTIMAL Chemicals

(1)

Aromatics Malaysia

93.11%

Polyethylene Malaysia

OPTIMAL Gl ycols

(1)

100%

100%

88%

63.47%

(1)

40%

(2)

BASF PETRONAS Chemicals

100%

100%

PETRONAS Ammonia

PETRONAS Fertilizer

(3)

20%

MITCO

100%

Kertih Port

(1)

ASEAN Bintulu Fertilizer

OPTIMAL Olefins

Phu My

PETRONAS Methanol

100%

30%

(2)

BASF PETRONAS Chemicals

30%

BP PETRONAS Acetyls

(2)

Malaysian NPK Fertilizer

40%

(2)

Kertih Terminals

(1) Partly owned subsidiaries (2) Associates (3) Jointly controlled entity. Source: Company data

History Figure 45: Major events Year

Events

1985 1995 2002 2009

Started producing 0.5 mn t of fertiliser products Began first ethylene production under 72.5%-owned Ethylene Malaysia Optimal companies commenced operations as JV with Dow Chemical Acquired stake in Optimal from Dow and bring all three entities (OPTIMAL olefins, OPTIMAL Glycols, and OPTIMAL chemicals) under PCG control 1.665 mn t methanol plant in Labuan commenced operations Acquired minority stake in Ethylene Malaysia from BP and increased control from 72.5% to 87.5% Started trading in the Bursa Malaysia

2009 Sep-10 26-Nov-10

Source: Company data, Credit Suisse estimates

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Companies Mentioned (Price as of 11 Feb 11) BP (BP.L, 475.75 p, OUTPERFORM, TP 585.00 p, MARKET WEIGHT) Dow Chemical Company (DOW, $38.38, OUTPERFORM [V], TP $44.00) Far Eastern New Century Corporation (1402.TW, NT$47.50, NEUTRAL, TP NT$41.70) Formosa Chemical & Fibre (1326.TW, NT$102.00, OUTPERFORM, TP NT$126.20) Formosa Petrochemical (6505.TW, NT$91.00, UNDERPERFORM, TP NT$76.00) Formosa Plastics (1301.TW, NT$101.00, NEUTRAL, TP NT$91.10) Hanwha Chemical (009830.KS, W35,000, UNDERPERFORM [V], TP W26,000) Honam Petrochemical (011170.KS, W335,000, NEUTRAL [V], TP W310,000) LG Chem Ltd. (051910.KS, W370,000, OUTPERFORM, TP W450,000) Nan Ya Plastics (1303.TW, NT$79.70, OUTPERFORM, TP NT$94.80) Petronas Chemicals Group BHD (PCGB.KL, RM6.01, OUTPERFORM, TP RM7.5) Petronas Gas (PGAS.KL, RM11.04) PTT Chemical PLC (PTTC.BK, Bt138.50, OUTPERFORM [V], TP Bt185.00) PTT Exploration & Production (PTTE.BK, Bt167.50, UNDERPERFORM, TP Bt183.00) PTT Public Company Limited (PTT.BK, Bt316.00, NEUTRAL, TP Bt346.00) Reliance Industries (RELI.BO, Rs910.75, OUTPERFORM, TP Rs1181.00) Siam Cement (SCC.BK, Bt298.00, OUTPERFORM, TP Bt374.00)

Disclosure Appendix Important Global Disclosures Paworamon (Poom) Suvarnatemee, CFA & Puchong Kometsopha each certify, with respect to the companies or securities that he or she analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. See the Companies Mentioned section for full company names. 3-Year Price, Target Price and Rating Change History Chart for PCGB.KL PCGB.KL Date

Closing Price (RM)

Target Price Initiation/ (RM) Rating Assumption

8 7 6 5 4 3 2 1

8 ec -0 8 16 -F eb -0 9 16 -A pr -0 9 16 -Ju n-0 9 16 -A ug -0 9 16 -O ct -0 9 16 -D ec -0 9 16 -F eb -1 0 16 -A pr10 16 -Ju n -1 0 16 -A ug -1 0 16 -O c t1 6 10 -D ec -10

8

Closing Price

16 -D

ct0

16 -O

g-0

n-0

-A u

16 -Ju

16

08 Ap r-

eb -0

16 -

16 -F

8

0 8

RM

Target Price

Initiatio n/Assumption

Rating

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts’ stock ratings are defined as follows: Outperform (O): The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock’s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock’s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock’s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks a 22% and a 12% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively, subject to analysts’ perceived risk. The 22% and 12% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively, subject to analysts’ perceived risk. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector.

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Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ coverage universe weightings are distinct from analysts’ stock ratings and are based on the expected performance of an analyst’s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst’s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisse’s distribution of stock ratings (and banking clients) is: Global Ratings Distribution Outperform/Buy* 45% (62% banking clients) Neutral/Hold* 41% (60% banking clients) Underperform/Sell* 11% (54% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. • Paworamon (Poom) Suvarnatemee, CFA, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (Thailand) Limited. • Puchong Kometsopha, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (Thailand) Limited. For Thai listed companies mentioned in this report, the independent 2008 Corporate Governance Report survey results published by the Thai Institute of Directors Association are being disclosed pursuant to the policy of the Office of the Securities and Exchange Commission: PTT Chemical PLC(Excellent), PTT Exploration & Production(Excellent), PTT Public Company Limited(Excellent), Siam Cement(N/A). Where this research report is about a non-Taiwanese company, written by a Taiwan-based analyst, it is not a recommendation to buy or sell securities For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.creditsuisse.com/researchdisclosures or call +1 (877) 291-2683. Disclaimers continue on next page.

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