ta securities holdings berhad(14948-m) A member of the ta group Institutional Price: RM 5.20 Retail Price: RM5.05 Target Price: RM5.

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1 ta securities holdings berhad(14948-m) A member of the ta group NEW LISTING Monday, November 08, 2010 Sector: Industrial MENARA TA ONE, 22 JALAN P. RAMLEE, KUALA LUMPUR, MALAYSIA TEL: / FAX: worth Petronas Chemicals Group Bhd Institutional Price: RM 5.20 A Giant Emerges Retail Price: RM5.05 Target Price: RM5.70 THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* TA Research Team Coverage ext:1612 kevink@ta.com.my The largest IPO in Southeast Asia is set to take stage on the 26 th November Petronas Chemicals Group Bhd (PCG) is a consolidation of 22 subsidiaries from the Petronas Group as a whole. PCG contributes to approximately 6% of revenue to the Petronas Group. The indicative price of the IPO for retail investors is RM5.05 and RM5.20 for institutional investors. To derive a fair value, we use PCG s closest peers as a benchmark comparison, namely Saudi Basic Industries Corporation (SABIC) and PTT Chemicals (PTTCH) both of which trade at CY11E EV/EBITDA of 8.6x. We reach a fair value of RM5.70 by further attaching a premium of 5% to take into account the group s stronger EBITDA margins. At RM5.70, this translates to a CY11E PER of 16x. This in turn is in line with our CY11 target FBM KLCI of 16.3x. Our valuation is based on the following factors: i. PCG is one of the lowest cost producers globally for Ethylene, Polyethylene, Urea and Methanol. The group is the second lowest cost producer for Ethylene in the world. As long as the price of oil stays above USD25 USD30/per barrel, gas feedstock players would still enjoy a cost advantage over non gas feedstock players. ii. iii. iv. Reliable supply of gas feedstock pursuant to a long term agreement with the Petronas Group at attractive prices. The feedstock covered by these agreements, principally, methane, ethane, propane and butane, is delivered to PCG s facilities through a PGU pipeline network, also operated by the Petronas Group. This provides a full intergration from feedstock to downstream products. PCG currently has two supply contracts with Petronas Group for the supply of ethane ( ) and propane ( ). Stronger margins than its competitors. As a result of its lower gas feedstock from its parent Petronas, PCG has been able to achieve higher margins than most of its regional peers. PCG is one of only 3 ethane/propane based cracker in Asia which equips the group with a distinct advantage. Largest regional player by market cap. Assuming the listed price RM5.20, the market capitalisation of PCG would be approximately RM41.6bn double the size its closest peer PTTCH. PCG will also be one of the top five companies on the FBM KLCI. v. The beginning of an upward cycle in Asian economies will be evident in PCG s results going forward. As Asian economies move towards the expansion phase in the economic activity, demand for petrochemicals will inevitably rise in tandem with growth. Share Info Stock Code NA Listing Main Market Enlarged Share Capital (mn) 8,000 Market Cap RM ,600 Par Value (sen) 0.10 Issue Price (RM) Oversubscription rate NA Estimated free float (%) 35.6 Tentative Listing Dates Event Opening of the IPO Tentative Date 26 Oct 10 Closing of Retail Offering 9 Nov 10 Closing of Institutional Offering 12 Nov 10 Price Determination 12 Nov 10 Balloting of Applications 12 Nov 10 Allotment of Shares 26 Nov 10 Ratio & Analysis NTA per share (post IPO) 2.0 Price to NTA (x) 2.6 Proforma ROE (%) 14.3 Proforma ROA (%) 9.4 Proforma Net Gearing (x) Net Cash Proforma Current Ratio (x) 3.3 Utilisation of Proceeds RMmn % Expansion 2, Working Capital 1, Estimated Listing Expenses TOTAL 3, Risk in the business are; i) an upward revision in gas pricing by the Petronas Group, ii) shut down of the groups Mega Methanol plant in Labuan due to a water shortage as experienced in 2009, iii) a drastic fall in crude oil prices leading to the group losing its competitive advantage to naphtha based producers. Page 1 of 21

2 Figure 1: Earnings Projection FYE 31 March (RMmn) E 2012E Revenue 12, , , , ,276.4 Cost of Revenue (6,499.0) (7,500.0) (8,561.0) (9,034.8) (8,762.4) Gross Profit 6, , , , ,514.0 EBITDA 6, , , , ,496.1 EBITDA Margin (%) Depreciation Profit Before Tax 6, , , , ,429.4 PBT Margin (%) Tax Expenses (1,491.0) (962.0) (774.0) (869.4) (1,018.8) Minority Interest (704.0) (631.0) (395.0) (395.0) (450.0) Net Profit 3, , , , ,960.6 EPS (sen) PER GDPS Gross Dividend Yield (%) ROE (%) Figure 2: 4 Months ended 31 July MFY10 1Q10FY11 Revenue 3,252 4,218 Cost of Revenue (2,395) (3,010) Gross Profit 857 1,208 EBITDA 1,010 1,582 EBITDA Margin (%) Profit Before Tax 740 1,218 Tax Expenses (153) (280) Minority Interest (82) (124) Net Profit Core Net Profit EPS (Sen) 6 10 Figure 3: FY11E EV/EBITDA Peer Comparison Company EV/EBITDA Sinopec 12.3 Honam 7.8 Reliance 8.7 Formosa 18.2 PTTCH 8.8 SABIC 7.5 PCG 7.9 AVG of PTTCH and SABIC 8.2 Page 2 of 21

3 Figure 4: FY10 Revenue Breakdown by Business Segment Fertilisers and Methanol 24% Olefins and Polymers 76% Figure 5: FY10 Revenue Breakdown by Geography Rest of the World 3% Malaysia 45% Other Asia 38% China 14% Valuation We use PTTCH and SABIC as a comparison Both companies utilise gas feedstock as their crackers rather than other peers who use naphtha as a cracker. We also opine that EV/EBITDA is a more appropriate measure to value PCG as both of its closest peers are based in different jurisdictions. The difference in interest rates, tax rates and depreciation rate will not be reflected in PER. Figure 6: Combination of non gas and gas based feedstock peer comparison Company FYE Market Cap(mn) Currency Market Cap (mn) Price PER ROE (%) CY10 CY11 CY12 CY10 CY11 CY12 Sinopec Dec 55,969 HKD 21, PTTCH Dec 233,171 THB 23, SABIC Dec 296,250 SAR 242, Reliance Mar 3,517 INR Formosa Dec 824,948 TWD 82, PCG Mar 41,600 MYR 41, Figure 7: Gas Based Feedstock Peers Comparison Company FYE Market Cap (mn) Currency Market Cap (MYRmn) Price PER ROE(%) CY10 CY11 CY12 CY10 CY11 CY12 PTTCH Dec THB SABIC Dec SAR PCG Mar MYR Page 3 of 21

4 Overview PCG is a petrochemicals producer in Malaysia and Southeast Asia. PCG is involved primarily in manufacturing, marketing and selling a diversified range of petrochemical products, including olefins, polymers, fertilisers, methanol and other basic chemicals and derivative products. The group has a production capacity of over 11 million metric tons per annum (mtpa). Along with Thailand s PTTCH, PCG is one of only two gas based olefin companies in Southeast Asia. PCG was established as part of the PETRONAS Group in order to maximise value from Malaysia's natural gas resources and has been in the petrochemicals industry for over 25 years. The group has two major operating business segments namely the olefins and polymers segment and the fertilizers and methanol segment. Background PCG is the largest producer of methanol by volume in Southeast Asia and the fourth largest in the world. It is also the largest producer of ethylene glycols and the third largest producer in Southeast Asia by volume for both urea and low density polyethylene (LDPE). PCG operates 2 Integrated Petrochemical Complex (IPCs) in eastern Peninsular Malaysia, one at Kertih and another at Gebeng. The group also operates three manufacturing complexes in Gurun, Bintulu and Labuan that produce fertiliser and methanol products, as well as a PVC plant in Vung Tau, Vietnam. PCG is a beneficiary of various support operations of Petronas, including those provided by Centralised Utilities Facility (CUFs), and access to ports and a railway link providing an integrated logistics system. In the past, PCG has also formed joint venture partnerships with bigger players such as Dow Chemical, BASF, BP Chemicals, Idemitsu Kosan, Mitsubishi Corporation and Sasol Limited. Low cost producer giving PCG a competitive advantage Gas based feedstock crackers have a significant advantage over non gas feedstock crackers who use naphtha. Naphtha based crackers are highly exposed to the price of crude oil (as seen in figure 8). Figure 8: Impact of crude oil pricing on ethylene production cost Source: Nexant Page 4 of 21

5 Rising oil prices an advantage to PCG Prior to 2004, before oil prices increased significantly, production cost comparisons between naphtha crackers and advantaged ethane crackers were more evenly matched. According to Nexant, the average difference in production costs between leader ethylene producers in the Middle East and a conventional naphtha producer was approximately USD190/ton of ethylene produced over the period of The average difference between leader ethylene producers in the Middle East and a conventional naphtha producer increased to approximately USD600/ton of ethylene produced over the period of The cash cost spread between leader and conventional producers peaked at approximately USD1,200/ton in 2Q08 before crashing to approximately USD230/ton in 4Q08, as oil prices declined to below USD50 per barrel. From , the ethylene production cost spread has increased gradually to over USD600/ton as oil prices have climbed to approximately USD70/barrel. Figure 9:Naphtha vs. Ethane Production Cost Year Cash Cost (USD/Ton) Oil Price (USD/Barrel) Multiple Average As seen above, PCG would enjoy a competitive advantage over its peers that are non gas based feedstock as long as oil prices are on an upward trend. As long as the price of oil stays above USD25 USD30 per barrel, gas feedstock players would still enjoy a cost advantage. We estimate oil prices to be in the range of USD85 USD95/barrel in Figure 10: Ethylene Production Costs USD per ton Net Raw Material Utility Cost Fixed Cost Axis Title Page 5 of 21

6 Figure 11: Polyethylene Production Costs USD per ton Net Raw Material Utility Cost Fixed Cost Figure 12: Methanol Production Costs USD per ton Net Raw Material Utility Cost Fixed Cost Figure 13: Urea Production Costs USD per ton Net Raw Material Utility Cost Fixed Cost Page 6 of 21

7 Malaysia is amongst the top five lowest cost producers for ethylene, polyethylene, methanol and urea in the South East Asian region, ranking second, third, fourth and fifth respectively. According to Nexant, the ethylene and polyethylene cost of PCG ranked number 2 and 3 among the world s top most competitive cost producers. Figure 14: Cost Structure RM(mn) RM(mn) RM(mn) Feedstock Cost % % % Energy and Utilities % % % Product Cost % % % Depreciation % % % Materials and Supplies % % % Staff Costs % % % Repair and Mantainance % % % Services % % % Others % % % Total % % % Figure 15: Cost Structure (4 months ended 31 July) 4 Months ended 31 July RM(mn) RM(mn) Feedstock Cost 1, % % Energy and Utilities % % Product Cost % % Depreciation % % Materials and Supplies % % Staff Costs % % Repair and Mantainance % % Services % % Others % % Total 2, % 3, % Feedstock cost makes up approximately 58% of the cost of sales. It is absolutely crucial that PCG manage the cost of their feedstock in order to maintain their current margins. Reliable supply of gas feedstock PCG obtains its feedstock namely ethane, propane, methane and butane primarily from Petronas. Petronas provides this feedstock to PCG through the PGU pipeline network from the gas production plant operated by Petronas Gas in Kertih, which process the natural gas sourced in offshore Peninsular Malaysia into methane, ethane, propane and butane. A portion of PCG s methane feedstock is sourced from off the coast of East Malaysia, and this is supplied to PCG by both Petronas and Petronas Carigali. PCG s heavy naphtha is supplied by Petronas Penapisan (Terengganu). Page 7 of 21

8 Figure 16: Integration from feedstock to downstream As the plants are integrated from feedstock to upstream to downstream, this over the fence type supply works well for the efficiency of both parties. PCG currently has two supply contracts with Petronas Group for the supply of ethane ( ) and propane ( ). Figure 17: Feedstock Volume Raw Material Feedstock Volume (31 March 2010) Principal User Principal Suppliers Methane C1 69,024 mmbtu Feedstock for methanol, ammonia and urea PETRONAS; PETRONAS CARIGALI Ethane C mt Feedstock for Ethylene PETRONAS Propane C3 700 mt Feedstock for Propylene PETRONAS Butane C4 360 mt Feedstock for n butane and MTBE PETRONAS Heavy Naphtha 902mt Feedstock for paraxylene and benzene PETRONAS Penapisan (Terengganu) Financial Highlights It is worth noting that in the petrochemical margin had been historically cyclical and are subject to significant fluctuations, as it is influenced both by demand and supply. Supply is affected by significant capacity expansions by producers and if such additions are not matched by corresponding growth in demand, which is generally linked to the level of economic activity, average industry operating margins will face downward pressures. Going into the next cycle that should peak in 2015, demand growth in Asia will match supply in Asia for Methanol and Ethylene Glycol/Paraxylene. Page 8 of 21

9 In FY10, the group s revenue decreased by 1.3% to RM12.2bn compared to RM12.3bn in the previous year. The decrease in revenue was mainly due to a 22.1% decrease in revenue from the fertilizers and methanol segment, offset in part by an increase in revenue from the olefins and polymers segment, which increased by 7.7% compared to the previous year. The olefins and polymers segment is the top revenue generator accounting for 75.8% of total revenue for FY10 and 69.5% for FY09. Net profit plunged 23.5% to RM2.6bn for FY10 vs. RM3.4bn mainly due to an increase in feedstock cost namely the increase in methane and higher depreciation charges. We believe the groups revenue should increase by approximately 6% as we expect utilisation rates to increase which in turn is an indication of the Asian regions consumption growth. Figure 18: Benefit of Having a Diverse Product Range Methanol sales increaed despite downturn Olefins and Polymers Methanol Fertilisers We do acknowledge the fact that from FY08 to FY10, both revenue and net profit are in a downward trend. During this period prices for olefins and polymers fell thus leading to glut in supply. PCG was not a victim of this downturn as the prices of its methanol segment held up well as sales remained stable. Strong Margins Figure 19: Average EBITDA Margin Comparison (07A/09A) 45.0% 40.0% 35.0% 40.1% 33.1% 30.0% 25.0% 24.8% 20.0% 15.0% 10.0% 5.0% 0.0% PCG SABIC PTTCH Apart from its favorable supply gas feedstock from the Petronas Group, we note that PCG has been able to achieve strong margins due to its diversity in products unlike its peers specifically methanol. Page 9 of 21

10 Figure 20: PCG EBITDA (FY08 FY10) 60.0% 53.5% 50.0% 40.0% 42.0% 35.7% 37.5% 30.0% 20.0% 10.0% 0.0% months (FY11) PCG has enjoyed stronger margins than its competitors in the past. Going forward however we expect margins to hover at approximately the same level as The fall in margins from the peak of 54% in FY08 to 36% in FY10 was mainly due to the increase in gas tariffs. Also contributing to the decrease was the increase in feedstock cost specifically methane used by Petronas Methanol when its Mega Methanol plant commenced production in May 2009 as well as higher methane prices. Figure 21: Average Cash Conversion FY07 FY % 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 10.0% 20.0% 76.0% 33.4% PCG SABIC PTTCH 11.2% Cash Conversion = (EBITDA Capex)/EBITDA; negative cash conversion if capex larger than EBITDA Page 10 of 21

11 Figure 22: Dividend Payout Estimate (% of Net Income) 60% 50% 40% 50% 41% 30% 30% 20% 10% 0% PCG SABIC PTTCH PCG has incorporated a dividend policy of paying out 50% of its earnings going forward, ranking the group the highest in terms of percentage of earnings paid out. We estimate a dividend yield of 3% and 3.6% for FY11E and FY12E assuming the price of RM5.20. Figure 23: Return on equity peer comparison 25% 20% 18% 16% 20% 20% 17% 15% 13% 12% 14% 10% 10% 5% 0% FY10 FY11 FY12 PTTCH SABIC PCG Figure 24: PCG ROE is falling 30.0% 26.7% 25.0% 20.0% 18.2% 15.0% 13.1% 12.4% 13.6% 10.0% 5.0% 0.0% E 2012E Page 11 of 21

12 We believe that the groups ROE could average approximately 15% and above in the longer term. This would come from PCG improving its operations and a higher utilisation rate of its methanol division. In the near term however, the lower return on equity would be compensated by the group s dividend policy of paying out 50% of its earnings in dividends, higher than both its peers. Figure 25: Malaysia a strategic location (shipping days) Source: World Map Distances Another of PCG s competitive edge over its middle eastern peers is that the group has lesser shipping days to key growth market. Middle eastern competitors take on average approximately 3 to 4 times longer to ship its products, incurring higher cost in the process. Page 12 of 21

13 Utilisation Figure 26: Average Utilisation Rates 92.0% 90.0% 89.9% 90.3% 88.0% 86.0% 84.0% 83.7% 84% 82.0% 80.0% FY08 FY09 FY10 4 Months FY11 Source: Prospectus, TA Securities PCG s average capacity utilisation rate for FY08, FY09 and FY10 was 89.9%, 90.3% and 83.7% respectively. During the first 4 months of FY11, on a YoY basis, average utilisation rates olefins and polymers segment increased from 67% to 71% and fertilisers up from 75% to 79% indicating an upward trend. Figure 27: Utilisation Rates for Olefins and Polymers 92.0% 91.0% 90.7% 90.0% 89.0% 88.6% 88.0% 87.0% 86.5% 86.0% 85.0% 84.0% FY08 FY09 FY10 Source: Prospectus, TA Securities Page 13 of 21

14 Figure 28: Utilisation Rates for Methanol 120.0% 100.0% 95.3% 106.3% 80.0% 60.0% 55.0% 40.0% 20.0% 0.0% FY08 FY09 FY10 Source: Prospectus, TA Securities Capacity utilisation is affected by the number of lost days of production due to unscheduled plant shutdowns. Capacity utilization at the methanol plant 1 in Labuan was adversely impacted during FY10 due to management s decision to shut down the plant in light of water supply shortage in connection with the Mega Methanol plant 2 coming into operation. Management expects the water supply issue to be resolved by early Figure 29: Utilisation Rates for Fertilisers 120.0% 100.0% 95.3% 106.3% 80.0% 60.0% 55.0% 40.0% 20.0% 0.0% FY08 FY09 FY10 Source: Prospectus, TA Securities We believe that utilisation rates should improve for FY11 and FY12 on the grounds that demand will increase as the industry outlook in the region is positive. We forecast that with the water supply issue being resolved, utilisation rates will increase to approximately 90% in FY12. Page 14 of 21

15 Industry Overview Petrochemicals industry margins have historically been cyclical. Changes in supply and demand and industry utilization levels are key factors that influence the cycle and margins. Currently the industry has exhibited improved demand through the first half of This improvement has been driven by a faster pace of recovery in the Asia Pacific markets. Additionally a level of inventory restocking has also been taking place as buyers look to replenish previously depleted stock levels. Figure 30: Petrochemicals Industry Cyclicality Source: Nexant According to Nexant estimates, recent cycle lengths were between 6 and 11 years (peak to peak). Due to the global nature of the industry, the profitability of all commodity petrochemicals tends to correlate with economic cycles through its peak and trough levels. Nexant forecast the petrochemical industry profitability to start a sustainable recovery in 2011 as fewer capacity start ups are scheduled. Industry margins are forecasted to climb to a new peak around 2015, with returns comparable to those seen in the last major peak in 2006/07. Figure 31: Ethylene Price Spread over Naphtha (USD per ton) Ethylene Delta Over Net Raw Material Cost Global Utilisation Rates Forecast price is based on Brent Crude Oil at USD70 per barrel Source: Nexant Page 15 of 21

16 Figure 32: Forecast Net Imports of Major Petrochemical Products Asia Net Imports China Net Import Source: Nexant A large portion of theses imports will be for ethylene derivatives such as ethylene glycol, polyethylene and styrene for the Chinese market. Key drivers and trends for the global petrochemical demand (2010 to 2017F) are: Figure 33: Petrochemical growth over GDP Olefins/polyolefins in line with GDP Ethylene glycol and Paraxylene above global GDP Methanol above GDP type growth Urea below GDP Source: Nexant The sales of olefins, polyolefines, ethylene glycol and paraxylene are crucial to PCG s growth going forward. The olefins and its derivative segment alone contribute approximately 75% to PCG s top line. The growth area on the other hand would likely be in the methanol segment. Figure 34: Petrochemical Applications Building Block Derivative Application Ethylene Polyethylene Packaging, agriculture, automotive, construction EG Textiles, packaging & automotive Styrene Packaging, electronics, automotive, construction PVC Construction, packaging Propylene Polypropylene Packaging, textile, submotive, construction Acrylic Acid Personal care, automotive, construction Methanol Formaldehyde Construction (plywood and chipboards/particle board) Acetic acid Packaging, textile, adhesive and coating MTBE Gasoline blending Ammonia Urea Agriculture (fertilisers), construction (resins) Olefins Consumption of base olefins/propylene is forecast to grow at a CAGR of 4% 5% over 2010 to Supply growth for olefins is expected to decline to approximately 3%. Average utilization rates are expected to begin a recovery gradually from 2011 as access supply is gradually utilized, and forecast to peak in We expect PCG to enjoy a stable revenue stream from this segment. Page 16 of 21

17 Figure 35: Olefins top ten capacity producer (capacity basis 2009) Source: Prospectus, TA Securities Figure 36: Olefins Top Ten South East Asia Producers Source: Prospectus, TA Securities Consumption growth of petrochemicals can be measured by total olefins (ethylene and propylene) demand. However most olefins are consumed for captive consumption to produce other olefin derivative onsite. Therefore actual consumption growth of olefins by region does not provide a clear overview of end user demand. Polyolefins Polyolefins are commodity thermoplastics polymers are used in segments such as consumer, automotive, construction, packaging and agriculture. Global demand for polyolefins is forecasted to grow at a CAGR of 5% over the period While consumption grew in 2009, utilisation rates came down further as new capacity came on stream predominantly from the Middle East and China. Utilisation rates are expected to mark a low point in the cycle at 80% in 2010 and slowly starting to rise to the peak in 2015, according to Nexant. Page 17 of 21

18 Figure 37 : Polyolefins consumption by region Source: Nexant Ethylene Glycol (EG) EG, a raw material used in the production of polyester fibre and resin, is expected to grow in demand at 4% 5% CAGR over the period of According to Nexant, the EG spread over naphtha is expected to bottom in 2011 before recovering meaningfully in PCG would still be a beneficiary here as the group procures low cost ethane gas rates. Figure 38 : Ethylene Glycol Southeast Asia Producers Source: Nexant Methanol Global methanol demand is expected to experience relatively high growth in the near term at approximately 9% CAGR over the period The principal driver to the demand is new and emerging applications such as methanol to olefins (MTO) and dimethyl ether (DME), a possible substitute for LPG. According to nexant the spread is expected to recover from a bottom in 2009 to peak in2015. This segment would be the largest growth area for PCG going forward as we expect the water issue in Labuan to be settled in With its new Mega Methanol plant, the group s total production capacity would reach 1.7mtpa. Page 18 of 21

19 Figure 39 : Methanol Southeast Asia Producers (Capacity basis 2009) Source: Nexant Urea Ammonia demand is primarily driven by urea consumption, indirectly from fertiliser consumption. This in turn is linked to food consumption through GDP and population growth. According to Nexant, global urea demand is forecast to grow 2.7% CAGR from The low growth in demand and spread in this segment will result in minimal earnings for the group growing forward. As a whole we expect PCG to benefit from the strong consumption growth in the Asian region. The increasing trend in oil prices would be an added advantage to the group. The methanol segment is set to drive the group s growth going into the expansion phase of the economic cycle. This will be reflected in the groups bottom line earnings growth of 13% in FY11. Figure 40 : Urea Southeast Asia Producers(Capacity basis 2009) Source: Nexant Page 19 of 21

20 Figure 41: Overview of Malaysian Sales Industry Demand Growth Products Capacity 2009 Demand 2009 CAGR ( )F CAGR ( )F Ethylene Propylene Polythylene Polypropylene VCM PVC EO EG Styrene Acrylic Acid Methanol MTBE Ammonia Urea Para Xylene Benzene Whilst growth in Malaysia lags the growth in the region, we expect it to be a stable revenue generator for PCG going forward. We expect sales in the region to increase as in comparison to sales locally going forward. Strategy and expansion plans In the near term, management has noted that the group is looking to reduce selling general and administrative expenses (SG&A) expenses by approximately 20% of current expenses. We estimate the amount to be in the region of RM80mn to RM100mn. If the said plans are implemented efficiently, this could translate to approximately a 2% contribution to EBITDA. PCG also plans to increase its production capacity via: Expanding product portfolio This will be done through a Greenfield integrated refinery and petrochemical complex in Peninsular Malaysia being considered by Petronas. With a petrochemical complex the group can focus on high value derivative products. Management noted that the proposed plans would allow PCG to focus on products with higher margins. The expansion plan is currently in a pre feasibility study phase. Leverage on natural gas availability in East Malaysia PCG plans to build a world scale Greenfield ammonia and urea production facility. The idea is to position itself as a key ammonia and urea producer in Southeast Asia. The focus would likely be put on increasing its methanol methanol production capacity. According to our estimates, the cost of such a project could be in the region of RM3bn. As the project is under a prefeasibility study, we have not factored this into our estimates. Page 20 of 21

21 Investment SWOT Strengths Reliable and attractively priced feedstock Leadership position in Southeast Asia Fully integrated petrochemical operations Strategic location close to key growth markets High barriers of entry Weaknesses High dependability on the Petronas Group for supply on natural gas and processed gas as feedstock Dependability on a few key suppliers to provide the electricity and water Significant CAPEX and financing requirements Controlled by Petronas, whose interests may not be aligned with those of the other shareholders of the company Outlook Sustainable recovery in 2011 as fewer capacity start ups are scheduled Asia Pacific, led by China, to become a major consuming region for petrochemicals Threats Significant competition when demand is strong The increase in feedstock. Supply contract with Petronas Industry could become more capital intensive Longer term recovery in the business cycle Strengthening of the RM against the USD as 57% of revenue is denominated in USD Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. for TA SECURITIES HOLDINGS BERHAD(14948-M) (A Participating Organisation of Bursa Malaysia Securities Berhad) Kaladher Govindan Head of Research Page 21 of 21