Global Chemicals FITT Research Company Company 24 March 2010 Fundamental, Industry, Thematic, Thought Leading Deutsche Bank's Product Committee China Chemicals deems this report F.I.T.T for investors. We recently visited 16 European, US and Chinese chemical companies in China. Short-term trading is strong and Tour confidence in the stimulus programme and management of the economy remain high. State support for petrochemicals is the long-term risk, but doing business in China is easier. Companies best positioned for growth have a growing consumer focus and/or orientation increasingly inland. Top picks for China The growth engine continues are Linde, BASF & Bayer (Europe), Celanese & DuPont (US). to deliver Fundamental: In-depth review of prospects for Western companies in Global Markets Research China Industry: Growing confidence over doing business in China Thematic: Stimulus efforts shift inland and increasingly consumer focused Thought leading: Many European (and US) names well positioned in China Tim Jones David Begleiter, CFA Martin Dunwoodie, CFA Virginie Boucher-Ferte Research Analyst Research Analyst Research Analyst Research Analyst (+44) 20 754-76763 (+1) 212 250-5473 (+44) 20 754-72852 (+44) 20 754-57940 [email protected] [email protected] [email protected] [email protected] Deutsche Bank AG/London All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 106/05/2009 Global Chemicals 24 March 2010 FITT Research China Chemicals Tour Companies featured Air Liquide (AIRP.PA),EUR88.08 Hold 2009A 2010E 2011E The growth engine continues DB EPS (EUR) 4.70 5.39 5.99 P/E (x) 14.8 16.3 14.7 EV/EBITDA (x) 7.7 8.5 7.7 to deliver AkzoNobel (AKZO.AS),EUR41.45 Hold 2009A 2010E 2011E Tim Jones David Begleiter, CFA Martin Dunwoodie, CFA Virginie Boucher-Ferte DB EPS (EUR) 2.36 3.31 3.85 Research Analyst Research Analyst Research Analyst Research Analyst P/E (x) 15.2 12.5 10.8 (+44) 20 754-76763 (+1) 212 250-5473 (+44) 20 754-72852 (+44) 20 754-57940 EV/EBITA (x) 13.0 10.0 8.4 [email protected] [email protected] [email protected] [email protected] BASF (BASF.DE),EUR44.94 Buy 2009A 2010E 2011E Fundamental, Industry, Thematic, Thought Leading DB EPS (EUR) 3.01 3.80 4.31 P/E (x) 10.5 11.8 10.4 Deutsche Bank's Product Committee deems this report F.I.T.T for investors. We EV/EBITA (x) 12.4 9.2 8.0 recently visited 16 European, US and Chinese chemical companies in China. Short- Bayer AG (BAYGn.DE),EUR50.10 Buy term trading is strong and confidence in the stimulus programme and 2009A 2010E 2011E management of the economy remain high. State support for petrochemicals is the DB EPS (EUR) 3.64 4.45 4.77 P/E (x) 11.9 11.3 10.5 long-term risk, but doing business in China is easier. Companies best positioned EV/EBITA (x) 17.1 9.8 8.9 for growth have a growing consumer focus and/or orientation increasingly inland. DSM NV (DSMN.AS),EUR32.19 Hold Top picks for China are Linde, BASF & Bayer (Europe), Celanese & DuPont (US). 2009A 2010E 2011E DB EPS (EUR) 1.44 2.47 3.09 Fundamental: In-depth review of prospects for Western companies in China P/E (x) 17.3 13.0 10.4 Following our recent China Chemicals Tour we have provided an in-depth EV/EBITA (x) 8.8 9.8 7.9 Linde (LING.DE),EUR88.68 Buy assessment of the prospects of the chemical and industrial gas industry in the 2009A 2010E 2011E region, with a focus on the exposures of various Western chemical companies DB EPS (EUR) 4.55 6.38 7.62 under our coverage to identify short- and long-term growth prospects. In P/E (x) 14.3 13.9 11.6 conclusion, most companies are currently experiencing record levels of demand EV/EBITDA (x) 7.2 7.5 6.6 Syngenta (SYNN.VX),CHF296.50 Buy and are also displaying continued confidence over the long-term growth prospects 2009A 2010E 2011E for the region. The differential between domestic demand (strong) and export DB EPS (USD) 16.61 19.75 22.53 markets (still weak) is noticeable and should continue to support those names P/E (x) 13.8 14.2 12.5 building platforms to serve the growing domestic market. There are long-term EV/EBITA (x) 12.7 11.6 9.9 issues for China (such as pollution control) which should actually create Umicore (UMI.BR),EUR24.62 Sell 2009A 2010E 2011E opportunities for Western chemical companies. Agriculture is another but the DB EPS (EUR) 0.73 1.27 1.64 potential here is very long-term. P/E (x) 24.5 19.5 15.0 EV/EBITA (x) 13.2 13.4 10.5 Industry: Growing confidence over doing business in China Air Products & Chemicals (APD.N),USD75.54 Hold Compared to our last two visits (2007, 2009) it is noticeable that Western 2009A 2010E 2011E companies are finding it easier to do business in the region. A greater confidence EPS (USD) 4.06 4.85 5.40 over intellectual property recognition is a noticeable shift and most companies are P/E (x) 14.9 15.6 14.0 EV/EBITDA (x) 7.5 7.9 7.4 increasing local R&D – something the state is keen to encourage – with a view to Celanese Corp (CE.N),USD32.01 Buy tailoring product to the local market. A better understanding of governmental 2009A 2010E 2011E procedure is noted alongside a stronger focus from the state on environmental EPS (USD) 1.70 2.90 3.40 issues (and energy efficiency) which appears key in providing some Western P/E (x) 12.7 11.0 9.4 EV/EBITDA (x) 5.2 6.3 5.3 players with on-going competitive edge over locals. What is clear is that DuPont (DD.N),USD38.31 Buy companies with early strategies in China continue to leverage their advantage. 2009A 2010E 2011E EPS (USD) 2.04 2.30 2.65 Thematic: Stimulus efforts shift inland and increasingly consumer focused P/E (x) 13.9 16.7 14.5 All companies felt that the stimulus package should continue to deliver support EV/EBITDA (x) 7.1 8.5 7.7 although the focus is shifting more towards stimulating consumer spending with Praxair (PX.N),USD82.67 Buy the remainder of the fixed asset investment programme heavily weighted towards 2009A 2010E 2011E EPS (USD) 3.99 4.55 5.10 the inland regions (in an effort to bridge the inland/seaboard wealth gap in the P/E (x) 18.3 18.2 16.2 country). Nearly all companies we met with felt that management of the economy EV/EBITDA (x) 10.1 10.1 9.2 is strong and expect only a modest slowdown in growth in H2 10 and 2011 Sinofert Holdings Ltd (0297.HK),HKD4.54 Buy (slowing bank lending, modest RMB appreciation). One long-term negative is the 2008A 2009E 2010E government’s desire to increase self sufficiency coupled with investment support P/E (x) 17.6 – 24.0 EV/EBITDA (x) 13.1 – 10.5 which are increasing basic petrochemicals investment (not always with economic Price/book (x) 1.7 2.1 1.9 logic) although it is more Japanese/Korean names that are exposed to this. Thought leading: Many European (and US) names well positioned in China Of the companies we met with, Linde, BASF and Bayer offer the best ways to play China in Europe while DSM, Umicore and increasingly Air Liquide are only just behind. In the US, Celanese and DuPont offer the best access China. We value companies using DCF or SOTP. Risks include global GDP slowdown, FX, oil. Deutsche Bank AG/London All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 106/05/2009 24 March 2010 Chemicals China Chemicals Tour Table of Contents Investment thesis .............................................................................. 3 Outlook and feedback from China Chemicals Tour...................................................................3 Valuation ...................................................................................................................................6 Risks .........................................................................................................................................6 China: Economic review.................................................................... 7 Chinese economy: A modest slowdown of growth expected..................................................7 Stimulus plan – shifting the focus inland and to the consumer...............................................11 Other issues............................................................................................................................12 Petrochemicals in China.................................................................. 13 Capacity growth set to continue in China ...............................................................................13 Industrial gases summary..............................................................