qatar - gulfbase...the history of iq began with the establishment of qafco in 1969. the inception of...

Global Research Equity

Industries Qatar

Qatar

A Well Diversified Story October 2008

Global Investment House KSCCSharq, Global TowerP.O. Box 28807 Safat13149 KuwaitTel: (965) 2295 1000Fax: (965) 2295 1005Email: [email protected]://www.globalinv.net

Global Investment House stock market indices can be accessedfrom the Bloomberg page GLOHand from Reuters Page GLOB

Omar M. El-Quqa, CFAExecutive Vice [email protected] No:(965) 2295 1110

Faisal Hasan, CFAHead of [email protected] No:(965) 2295 1270

Chandresh BhattAssistant Vice [email protected] No:(965) 2295 1282

Syed Taimure AkhtarFinancial [email protected] No:(965) 2295 1278

Global Research - Qatar Global Investment House

�Industries QatarOctober 2008

BUY

Industries QatarTickers:

IQCD QD (Bloomberg)

IQCD .DSM (Reuters)

Listing:

Doha Securities Market

Current Price:QR107.0 (as on 30th October 2008)

October 2008

Investment Summary

• Industries Qatar (IQ) is a shareholding Company which was incorporated in April 2003 for a 50-year term under resolution number ‘33’, 2003, Ministry of Economy and Commerce of the State of Qatar. The operating structure of the Company is based on four leading downstream and industrial companies which were previously held by Qatar Petroleum prior to 2003. Furthermore, these leading downstream and industrial companies are referred as a ‘subsidiary / affiliates’ on an individual basis, while collectively as a ‘group’. The Company acts as a holding Company to its subsidiaries / affiliates, which are involved in the manufacturing of (i) petrochemical products, (ii) fertilizers and (iii) different grades of steel. Thus, IQ is indirectly involved in the production of industrial products.

• IQ group comprises four leading industrial affiliates / subsidiaries, namely (i) Qatar Petrochemicals Company-QAPCO with 80% stakes, (ii) Qatar Fuel Additive Company-QAFAC with 50%, (iii) Qatar Fertilizer Company-QAFCO with 75% stakes, and (iv) Qatar Steel Company-QASCO with 100% stakes. The principle activity of QAPCO includes the production of olefin products i.e. ethylene and its polymers with, 80% stakes held by IQ, while QAFAC, where the Company holds 50% stakes, is engaged in the production of oxygenate products i.e. methanol and Methyl Tertiary Butyl Ether (MTBE). Furthermore, the Company holds 75% shares in QAFCO, which is currently involved in the production of ammonia and urea. The activity of QASCO, wholly owned by IQ, is to produce different grades of steel products.

• In 2007, IQ, through QAPCO and QAFAC, owned 1.42mn tons capacity to produce petrochemical and related polymers, along with the two production lines of Low Density Polyethylene (LDPE). Furthermore, the designed capacity of the petrochemical affiliates of the Company is mainly dedicated to produce olefins and oxygenate products, which is accounted for 79.8% of the total petrochemical production capacity.

• QAFCO added 4.0mn tons of capacity during 2007 to produce fertilizer products, which include (i) production capacity of 2.3mn tons to produce urea and (ii) 1.6mn tons to produce ammonia. However, most of the ammonia is utilized with in QAFCO as a feed stock for urea. QASCO is currently producing 1.9mn tons of steels of different types.

• Based on the given production capacity expansion plan, the production of ethylene from QAPCO is expected to increase at a CAGR of 20.2% during 2007-11. This will allow the


Industries Qatar October 20082

Company to nurture the Ras Laffan Olefins Cracker (RLOC) project, where IQ has a net working interest of 23.0%, wherefrom the Company is expected to add a new production line of Low Linear Density Polyethylene-LLDPE and High Density Polyethylene-HDPE by the end of 2008, with the capacity to produce 450,000 tons and 750,000 tons respectively. Furthermore, the Qatofin Polyethylene project, where IQ has a net-working interest of 52.0%, is expected to commence in 1Q2009 and will further increase the production of LLDPE. In addition, QAPCO is expected to make an additional production of 250,000 in LDPE. Hence, the overall production capacity of QAPCO is expected to increase at a CAGR of 27.5%.

• The overall gross production capacity from the fertilizer-wing of IQ is expected to increase at a CAGR of 12.9%, during 2007-11 to reach 6.5mn tons (including 3.1mn tons of ammonia, 3.4mn tons of urea and 45,000 tons of melamine). The increase in production capacity from the fertilizer segment is mainly attributable to the additional production capacity of ammonia and urea due to the completion of QAFCO V project, in 1Q2011. However, the QAFCO-melamine project is expected to add a new production line of melamine in 1Q2009.

• Based on the expansion plans of the Company’s subsidiaries / affiliates, the overall consolidated production capacity (excluding polymers production capacity) of the Company is expected to increase at a CAGR of 7.2% during 2007-11 to reach a production capacity of 1.6mn tons of basic petrochemicals, 3.4mn tons of fertilizers and 2.1mn tons of different grades of steel products.

• Availability of huge gas reserves in the State of Qatar helps the country to make undisrupted supply of feedstock gas at highly subsidized rates, especially to the petrochemical and other gas base industries. This has led the government of Qatar to make expansions in the petrochemical sector. According to the given expansion plan, the government has a plan to make an investment of US$ 14.9bn (QR 54.4bn) by the end of 2012. However, out of total expansion costs, the country has allocated 77.3% for non-fertilizer petrochemicals, while 22.7% has been allocated for the fertilizer expansion. Furthermore, based on the given expansion plan of the State of Qatar, the production capacity is expected to increase at a CAGR of 6.6%, during 2007-11, to reach at 12.4mn tons.

• The overall petrochemical production capacity of Qatar is distributed among two state owned entities, which are (i) Qatar Petroleum, which holds a 47.2% stakes and (ii) Industries Qatar, which hold a 58.2% stakes. By the end of 2007, Qatar’s petrochemical production capacity was recorded at 9.6mn tons, which is 11.3% of the total MENA region capacity of 84.6mn tons.

• Based on the given expansion plans, we expect the consolidated sales revenue of the Company will increase at a CAGR of 21.5% during 2007-11. However, the profitability of the Company is expected to increase at a CAGR of 22.8%. While year-on-year basis, we forecast a growth of 89.7% in 2008 over profitability in 2007. This is mainly due to higher production on account of (i) completion of a new ethylene production line in 4Q2007 and (ii) completion of Qatofin and RLCO projects in 4Q2008. Furthermore, the expected relaxation in crude oil price will cause the Company to exhibit a growth of 4.3% in 2009.


October 2008 Industries Qatar �

• We have valued IQ using the weighted average valuation approach, with an 80% weight to the SOTP-DCF technique and 20% to value derived from the relative valuation technique. Based on the weighted average valuation approach, our fair value for IQ arrived at QR189.3 which offers a potential upside of 76.9% over the current market price of QR107.0 as of 30th October 2008. We, therefore, initiate our coverage of IQ with a “BUY” recommendation.

Table 01: Investment Indicators

CMP (QR) Share in issue (mn) Market Cap (QRmn) 52-Week Price Range

107.0 550 58,850 189.5 / 99.2

YearRevenues Net Profit EPS BVPS ROE P/E P/BV(QR Mn) (QR Mn) (QR) (QR) (%) (x) (x)

2009E 17,707 9,860 17.9 47.1 42.2% 6.0 2.3

2008E 17,052 9,454 17.2 37.7 54.9% 6.2 2.8

2007A 9,326 4,985 9.1 27.4 40.2% 13.9 4.6

2006A 7,778 3,622 6.6 22.2 35.4% 10.7 3.2 Source: Annual Reports & Global Research

* Historical P/E & P/B multiples pertain to respective year-end prices, while those for future years are based on

closing price as at 30th October, 2008.

Chart 01: Share Price Performance Chart

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IQ Share Price Global Qatari Index

Source: Zawya & Global Research


Industries Qatar October 2008�

Company Overview

Background

IQ is a shareholding Company which was incorporated in April 2003 for a 50-year term, under the resolution number 33 of 2003 of the State of Qatar’s Ministry of Economics and Commerce. Before the establishment of IQ, Qatar Petroleum-QP, the national oil company of the country, held major stakes in all of the present group companies of IQ, with the exception of Qatar Steel, which was state-controlled. Therefore, the operating structure of the Company is based on those four leading downstream and industrial companies which were previously held by Qatar Petroleum prior to 2003. Furthermore, these leading downstream and industrial companies of IQ are referred as a ‘subsidiary / affiliates’ on an individual basis, and collectively as a ‘group’. The Company is acting as a holding Company to its subsidiaries / affiliates, which are involved in the manufacturing of (i) petrochemical products, (ii) fertilizers and (iii) different grades of steel. Thus, IQ is indirectly involved in the production of industrial products.

The history of IQ began with the establishment of QAFCO in 1969. The inception of QAFCO marked the first significant step in the long road of Qatar’s industrial diversification program. It is worth mentioning that the first fertilizer plant was inaugurated after 5 years of its inception in 1973. Furthermore, in 1974, the other two affiliates of the Company i.e. QAPCO and QASCO were incorporated. QASCO commenced production in 1978, with QAPCO starting 3 years later, in 1981, while QAFAC was incorporated in 1991, with the start of commercial operation after 8 years of incorporation.

Figure 01: Industries Qatar Timeline

1969QAFCO

incorporation 1974QASCO

incorporation

April 2003QP

Reorganisation

Nov 2003QASCO Dubai

Aqusisation 2004QAFCO IVinaugurated

2005-IQ postsrecord sales & profits1974

QAPCOincorporation

1991QAFAO

incorporation

2010Capital investmentproject completed

April 2003IQ

incorporation

2003IQ

listed on DSM

1970 1975 1990 2005 2010

Source: Industries Qatar

Management

The board of directors (BoD) of the Company is led by H.E Abdullah Bin Hamad Al-Attiyah. H.E Abdullah Bin Hamad Al Attiyah is the Minister of Energy and Industry of Qatar. Mr. Al Attiyah’s career began in the Ministry of Finance and Petroleum in 1972. One year later, he became the Head of the Department of International and Public Affairs at the Ministry of Finance and Petroleum. He moved on in 1986 to become the Director of the Office of the Minister of Finance and Petroleum for three years. From 1989 and until 1992, Mr. Al Attiyah was the Director of the Office of the Minister of Interior and the Acting Minister of Finance and Petroleum. In 1987, he was appointed Vice Chairman of Qatar Telecom-Qtel



and remained at that post until 1995. In September 1992, he became the Minister of Energy and Industry and in January 1999, he became the Minister of Electricity as well. On Sept 16, 2003, Mr. Al Attiyah was assigned the role of Second Deputy Prime Minister while retaining his position as Minister of Energy and Industry. Mr. Al Attiyah also heads the Development and Economization Association and the Al Sadd Sports Club.

Table 02: Name & Position of BoD Members

Names Position

H.E Abdullah Bin Hamad Al-Attiyah Chairman

H.E. Yousef Hussain Kamal Vice Chairman

Mr. Abdullah Hussain Salatt Director

Dr. Ibrahim Al-Ibrahim Director

Mr. Faisal Mohammed Al-Suwaidi Director

Mr. Hamad Rashid Al-Mohannadi Director

Mr. Fahad Hamad Al-Mohannadi DirectorSource: Industries Qatar

Senior ManagementThe senior management of the Company is comprised of well-qualified personnel who have a vast experience in their respective fields. The management of the Company is led by H.E Abdullah Bin Hamad Al-Attiyah, he who also chairman of board of directors. Moreover, Mr. Mohammed S.M. Al-Sherawi is responsible for the entire groups’ coordination. Mr. Al-Sherawi joined Qatar General Petroleum Corporation (later called “Qatar Petroleum”) in 1982 after successfully completing numerous development programs within a variety of major international oil companies. He progressively held key positions, culminating in his appointment as Finance Manager of QGPC Offshore in 1990. In 1992, when the two operations of Onshore and Offshore were merged, he continued with increased responsibility as Finance Manager of oil and gas operations. Following the establishment of the Ministry of Energy & Industry and the unification of QGPC, he became Manager of Financial Accounting, a position he held up until he was appointed as Finance Director in 1996.

Table 03: Senior Management

Names Position

H.E Abdullah Bin Hamad Al-Attiyah Managing Director

Mr. Mohammed S. M. Al-Sherawi Chief Coordinator, IQ

Sheikh Nasser Bin Hamad Al-Thani Director & General Manger QASCO

Mr. Khalifa Abdullah Al-Suwaidi Director of the Board & Managing Director QAFCO

Mr. Rashid Misfer Al-Hajri General Manager, QAFAC

Dr. Mohamed Yousef Al-Mulla General Manager QAPCOSource: Industries Qatar

IQ Group Companies (Subsidiaries / Affiliates)IQ group comprises of 4 leading industrial affiliates / subsidiaries, which include (i) QAPCO with an 80% stakes, (ii) QAFAC with a 50% stakes, (iii) QAFCO with a 75% stakes and (iv) QASCO with a 100% stakes. The principle activity of QAPCO includes the production of olefin products i.e. ethylene and its polymers with 80% stakes held by IQ, while QAFAC, where the Company has 50% stakes is engaged in the production of oxygenate products



i.e. Methanol and Methyl Tertiary Butyl Ether (MTBE). Furthermore, the Company holds 75.0% shares in QAFCO, which is currently involved in the production of ammonia and urea. Finally, the activity of QASCO, wholly owned by IQ, is to produce different grades of steels.

Figure 02: Industries Qatar Operational Structure

Source: Industries Qatar

- Qatar Petrochemical Company – QAPCO was established in 1974 in accordance with Emiri Decree No. 109 as a joint venture between Qatar Petroleum with an 80% stake and Total Petrochemicals with a 20% stake. Later on, as a result of a re-organization of Qatar Petroleum in 2003, the shares in QAPCO were taken over by Industries Qatar. The affiliate / subsidiary have two joint ventures, Qatofin Company Limited and Ras Laffan Olefins Cracker Company (RLCO) and two associated companies, Qatar Vinyl Company Limited and Qatar Plastic Products Company. At present, QAPCO is engaged in the production of (i) Ethylene and (ii) LDPE. QAPCO’s products are marketed in the GCC and the Middle East, the Far East, South East Asia, the Indian Sub-continent, Europe, Africa and Oceania.

- Qatar Fertilizer Company – QAFCO was established pursuant to Special Decree No. 44 of 1969 and was incorporated in 1975 as a joint venture agreement between the Government of the State of Qatar and two foreign shareholders. The re-organization of Qatar Petroleum led the government to transfer the shares of QAFCO to Industries Qatar. At present, major products of this affiliate / subsidiary include ammonia and urea.

- Qatar Steel Company – QASCO was incorporated in 1974, by way of Emiri Decree No. 130. It was formed as a joint venture between the Government of Qatar holding a 70% stake and two Japanese companies, Kobe Steel and Tokyo Boeki, to establish an integrated steel plant. However, later on, the share of Kobe Steel and Tokyo Boeki were acquired by the Government that was transferred to Qatar Petroleum and later, to IQ during a reorganization process during 2003. By the end of 2007, QASCO was producing steel billets, steel bars and coil.

- Qatar Fuel Additive Company – QAFAC was incorporated in accordance with Emiri Decree No. 20 in 1991. It was formed as a joint venture for the construction and operation of a methanol and MTBE production facility. The company was then transferred to IQ with the prior approval of QAFAC’s shareholders. Major products of the company are methanol and MTBE.



IQ Shareholding & Stock Liquidity

The Company is traded on the Doha Securities Market (DSM). The Company was begun with the paid-up capital of QR5.0bn (500mn shares @ face value of QR10 each), which has increased to QR5.5bn after the issuance of 10.0% bonus shares in 2007.

Table 04: IQ Shareholders

Shareholder Holding

Qatar Petroleum 70.0%

Government of Qatar 4.2%

Private Companies & Charities 11.5%

Public 14.3%Source: Zawya

The Company completed its initial public offering-IPO on Doha Securities Market-DSM by the end of 2Q2003, while trading in IQ shares was started by the end of June 2003. Under the IPO, in June 2003, the Company had offered 75.0mn shares, which was 15% of the initial issued shares of 500mn, at QR16 each. In addition, all the offering were sold by Qatar Petroleum and over the period of time Qatar Petroleum further divested its shareholding to 70.0% by the end of 2007 from 85.0% in 2003.

Table 05: Stock Liquidity

Year Avg. Daily Volume Market Price (yr end) Market Cap (QR mn)

2006 250,795 70.7 38,882

2007 347,803 126.1 69,345

2008* 440,246 107.0 58,850Source: Zawya & Global Research * till 30th October 2008

Over the last three years, the Company’s market capitalization has reached QR58.8bn, based on the closing market price of 30th October 2008. However, the average daily trading volume remained in the range of 250mn – 350mn shares.



Feedstock Prices

Basic feedstock for the production of chemicals and fertilizer products is natural gas. However, some basic chemicals are mostly derived from naphtha, so it is also considered as a primary feedstock for some products.

Crude oil pricesOver the period of the last 6 years, the basket price of OPEC crude oil has surged by 192.5% from US$23.01 per barrel in 2002 to US$67.31 per barrel in 2007. The increase in crude oil prices over the period of 5 years are mainly due to the following reasons:

• Global political uncertainty• High global economic growth• Lack of refining capacity which caused a shortage of refined products.

Chart 02: OPEC Historical Crude Oil Prices (US$ per barrel)

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The average basket prices of OPEC crude oil prices were recorded at US$113.5 per barrel, in 3Q2008. The recent upward rally in the price of crude oil, which was started in the 4Q2007, has ended during the 3Q2008, which is mainly due to the ongoing global financial crisis. Going forward, we expect crude oil prices to ease down from the current level (3Q2008) to US$80.8 per barrel in 2011. This assumption is based on the following factors:

• Recovery of the financial market from the ongoing financial crisis.• Slowdown in economic development and shifting towards gas base industries• New refining capacity will come online by 2011, which will fulfill the shortage of refined

products.

Chart 03: Forecasted OPEC Crude Oil Prices (US$ per barrels)

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Naphtha is a major feedstock for ethylene and propylene production. Natural gases, mainly ethane and propane, are also used in the manufacturing of these petrochemicals, despite the fact that the main component of the natural gas is the methane, which is primarily used for energy. Naphtha is a direct outcome of crude oil refining, hence the price of naphtha correlated to the prices of crude oil.

Gas pricesCrude oil prices are used as a benchmark to set gas-well head price in the international markets. However, gas prices are highly subsidized in certain regions of the world, mainly the Middle-East, North Africa, and South Asia. The gas-well head prices in these regions are subject to have pre-determined discounts. At the same time, gas well head prices in international markets have shot up by 44.2% from US$4.4 per mmbtu in 2001 to US$6.3 per mmbtu in 2007. However, based on the forecasted crude oil prices, we expect the gas price will range in between the levels of US$7.0-6.5 per mmbtu, going forward.

Chart 04: Prices of Gas (US$ per mmbtu)

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Source: EIA & Global Research


Industries Qatar October 2008�0

Petrochemical Industry Overview

Petrochemical Production FlowThe production process of petrochemical products starts from the cracking of liquid petroleum (naphtha) or natural gas, the feedstock. The outcome of the cracking is a production of various petrochemical products like ethylene, propylene, benzene and so on, which are used as feedstock for producing intermediates. Intermediate chemicals are petrochemical products which are use to produce polymers and other industrial products.

Figure 03: Production Flow Diagram

Primary Feed Stock

Secondary Feed Stock

Processing Unit

Basic Chemical

Intermediates

Polymers, raw material for industries

Crude Oil

Gas

Gasoline

Gas Oil (Desiel)

Naphhta

Kerosene

Naphtha

Benzene

Ethane

Propane

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Methane

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Processing Unit

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Styrene

Benzene

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Oxygenates

Methanol

Methyl Tertiary Butyl Ether

(MTBE)

Crude Industrial Ethanol

Gasoline

Intermediates

Polymers

Industrial

Uses

Source: Global Research

Prices of Basic Chemicals

EthyleneThe production of ethylene is mainly based on the cracking of naphtha, so the price trend of ethylene should be similar to the price of naphtha. On account of an expected relaxation in crude oil prices, the price of naphtha is expected to ease down, which will lead the price of ethylene at US$1,365.8 per ton in 2009 and down to US$1,342.2 per ton in 2011.

Chart 05: Ethylene Price Trend (US$ per ton)

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October 2008 Industries Qatar ��

ImplicationAccording to ICIS data, most of the demand for ethylene is for the production of polyethylene, which accounts for 59% of the world’s ethylene demand. While the remainder of production of ethylene is consumed in the production of ethylene oxide and glycol accounts (13%), ethylene dichloride and vinyl chloride monomer (13%) and ethyl benzene & styrene (6%).

PropyleneThe production of propylene is also based on naphtha, so similar to ethylene; the price trend of propylene should follow the price of naphtha. The expected relaxation in crude oil prices will force propylene prices to settle at US$1,219.6 per ton in 2011.

Chart 06: Propylene Price Trend (US$ per ton)

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ImplicationAccording to ICIS, polypropylene accounts for 60% of global consumption of propylene. However, the rest of the propylene is consumed in the production of acrylonitrile, oxo-alcohols, propylene oxide, cumene and acrylic acid. The consumption of polypropylene is mainly in textile and small scale manufacturing industries.

MethanolThe price of methanol had surged by 191.7% to US$472.6 per ton in 2007 as compared to US$162 per ton in 2001. The increase in the price of methanol during the period of 2001-07 is mainly because of higher gas prices, which have been increased due to higher crude oil prices. Moreover, methanol is derived from methane which is mainly obtained from the cracking of natural gas and occasionally from naphtha. The availability of natural gas at a high subsidize price of US$1.0-1.25 per mmbtu has further strengthened the margin of Qatar petrochemical units.

Chart 07: Historical Average Prices of Methanol (US$ per ton)

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Source: Methanex

Goring forward, the expected future prices of methanol is based on the movement of our expected crude oil prices, which will also affect the price of natural gas in international market. Based on our expectations, the price of methanol will surge by 11.1% in 2008 to



reach US$525.1 per ton as compared to the average prices in 2007. However, we expect a gradual decline in the average prices of methanol to US$304.1 per ton in 2011, in line with our expected prices of crude oil.

Chart 08: Forecasted Average Prices of Methanol (US$ per ton)

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ImplicationsMethanol is used in manufacturing a wide variety of chemical products, such as Formaldehyde and Acetic Acid. Methanol as a hydrogen carrier is being considered for fuel cell application and as an alternate fuel. Methanol was known as wood alcohol, because it was originally produced as a by-product of the distillation of wood.

Butene & MTBE Butene prices are also based on the price of petroleum feedstock, so the price trend of Butene will be the same as the price trend of ethylene and propylene. The average price of Butene for 2008 is expected at US$607.6 per ton and expected to fall to US$475.4 per ton in 2011.

Chart 09: Butene Price Trend (US$ per ton)

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MTBE is an outcome of Methanol and Isobutylene. In our calculations, the price of MTBE is expected to reach at US$452.4 per ton in 2011. The major implication of MTBE is to obtain an octane booster and oxygenate in gasoline.

Chart 10: MTBE Price Trend (US$ per ton)

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World Petrochemical Industry

Ease in capacity expansionGlobal petrochemical capacity increased at a CAGR of 3.3% to 128.4mn tons, during 2002-07. The major increase in petrochemical production capacity was witnessed in 2005 and 2006. However, in 2007 the growth was limited to 2.5% due to higher feedstock prices than 2005 and 2006.

Chart 11: World Petrochemical Capacity

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Source: Global Research, Bloomberg & Industry Sources

Demand for petrochemical productsDemand is a driving force to increase capacity and improve capacity utilization, which results in an increase in production. The demand of petrochemical products has increased at a CAGR of 4% during 2002-07, with a sufficient world capacity to meet the existing demand. The rising prices of ethylene, propylene, and other basic petrochemical products have limited the demand growth between 4%-5% during the last 3-years.

Chart 12: World Petrochemical Demand (000 tons)

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Higher capacity utilization leads to an increase in productionThe world capacity utilization has reached 90.3% in 2007, which is 3.3% higher than the capacity utilization in 2002. The improvement in capacity utilization has led the world production to increase at a 5-year CAGR of 3.9% to 117.7mn tons in 2007. The year-on-year production growth, during the last 3 years, remained at an average level of 4.5%-5%, as compared to a marginal growth of 1.1% in 2003.


Industries Qatar October 2008��

Chart 13: World Petrochemical Production (000 tons)

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2.0%

3.0%

4.0%

5.0%

6.0%

World Petrochemical Production Growth


Capacity Expansion in ChinaChina, the world’s third largest petrochemicals market, is currently undergoing extensive expansions in ethylene capacities, adding almost 6.6mn tons of ethylene between 2008 and 2012. Ethylene capacities in China are planned to increase by 11.4mn to 11.6mn tons between 2008 and 2016.

China’s ethylene output will go up from 9.6mn tons in 2006 to 14 -18 mn tons by 2010. It is worth noting that most Chinese crackers will be naphtha based, which will result in a rapid growth in the heavy feedstock consumption and consequently this will exert upward pressure on the international naphtha prices.

Table 06: Chinese Ethylene Expansions

Company LocationCapacity(1,000 mt)

StartupYear

Projects UnderwayFujian Refining and Petrochemical Company Ltd(JV with Exxon)

Quangzhou 800 1Q2009

PETROCHINAPetroChina Dushanzi PetroChemical Dushanzi, Xinjiang 1,000 2008PetroChina Fushun PetroChemical Fushun, Liaoning 800 2010PetroChina Chengdu Ethylene Project (New plant) Chengdu, Sichuan 800 2012

SINOPECSinopec Zhenhai Refining & Chemical Co. Ltd Zhenhai, Zhejiang 800 - 1000 2009Sinopec Tianjin Petrochemical Tianjin 800 2010Sinopec Wuhan Co. Wuhan, Hubei 800 2012

In Early PlanningSinopec Shanghai Chemical Park Ethylene Project Shanghai 1,000 2014+Dalian Ethylene Project Dalian, Liaoning 1,000 2015+Formosa Ningbo Ethylene Project Ningbo, Zhejiang 1,000 2015+

MTO

China Shenhua Group MTO Plant *Erdos, Inner Mongolia

600 2012

Shaanxi Yulin MTO Project * Yulin, Shaanxi 1,000 2013Shenhua Dow * Shaanxi 1,000 2013+Total 11,400 – 11,600* Production will be 50% ethylene and 50% propyleneSource: The Gulf Petrochemicals and Chemicals Directory, Volume I



Alternative Feedstock Experiments in China Currently, China is undertaking extensive experiments to produce chemicals from coal in an attempt to find alternative cheap feedstock post the naphtha price surge. Coal represents almost 70% of the Chinese energy mix. Under this process, coal is converted to synthesis gas “syngas”, which can be then converted to different chemicals, among which is methanol. The methanol is converted to olefins (MTO) ethylene and propylene. Mostly in the planning stage, there are 12 to 14 MTO projects, with some under construction, that are based on coal.

World Petrochemical OutlookBased on our expectations, crude oil price will remain on the high side. Even after an expected relaxation, the average price is forecasted to remain in the range of US$80-US$90 per barrel in 2011 as compared to 3Q2008 average prices of US$113.5 per barrel. Since the prices of petroleum products and gas feedstock are derived from crude oil prices, we expect the price of international feedstock to remain high as well. The higher feedstock prices will not allow the global petrochemical industry to expand their margins, as the price of petrochemical products is subject to feedstock prices. Consequently, we expect a major expansion in petrochemical capacities will happen in those areas of the world where feedstock is available at cheap rates, including the MENA region and China. The capacity expansion in MENA and China is mainly due to the following:

• Effort of economic diversification i.e. shifts from oil based economies to industrial based economies.

• Plenty of gas reserves, which accounted for 51.9% of the world reserves. This enables these countries to supply gas at cheap rates. Moreover, the region has plenty of crude oil reserves, which enables the government to supply petroleum products with some specific discounts.

• Extraction of petrochemical products from coal has encouraged China to consider massive expansion in its petrochemical capacities. However, the effort is under process.



MENA Petrochemical Industry

Petrochemical hubAs of 2007, the MENA region’s combined petrochemical production capacity reached 84.7mn tons, which represents 65.9% of total world capacity. This indicates that the region is the largest petrochemical producer in world. Chart 14: Share of MENA in World’s Capacity 2007

Mena66%

Rest of the World34%


Saudi Arabia: The largest petrochemical playerIn 2007, Saudi Arabia occupied 52.8% of the total MENA capacity through SABIC. SABIC is not only a major player in Saudi Arabia, but has a vital position in the international market. In 2007, SABIC accounted for 53.9% of total Saudi Arabian capacity, 28.4% of MENAs and 18.7% of the world. After Saudi Arabia, Iran, through National Petrochemical Company, has claimed 20.2% and Qatar has 11.3% of MENA capacity, through Qatar Petroleum and Industries Qatar.

Table 07: Country-Wise MENA Capacity (000 tons)

Country 2007 Share

Saudi Arabia 44,686 52.8%

Iran 17,145 20.2%

Qatar 9,585 11.3%

Egypt 3,057 3.6%

Kuwait 2,133 2.5%

UAE 1,441 1.7%

Rest of MENA 6,628 7.8%Total MENA Capacity 84,675 100%Source: Zawya

Capacity Expansion in MENAMENA region has planned a massive expansion of petrochemical capacity of different grades with an estimated cost of US$93.2bn (QR342.3bn). Based on given expansion plans, the production capacity in MENA region will increase to 90.8mn tons in 2008 and 101.4mn



tons in 2009. Going forward, we expect the production capacity to increase to 113.5mn tons by 2011 at a 4-year CAGR of 7.6%. Major capacity expansion in petrochemicals of different grades is expected in Saudi Arabia, which will account for 62.3% in 2008 followed by Kuwait, which is expected to contribute by 24.3%. In addition, after 2011, production capacity in MENA region will further increase by 3.4mn tons in 2012, due to an upcoming capacity expansion in Saudi Arabia and Qatar.

Chart 15: MENA Capacity Expansion (mn tons)

11.7%

7.5%

4.1%

-

20.0

40.0

60.0

80.0

100.0

120.0

2008E 2009E 2010E 2011E0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Capacity Expansion Growth


Product-wise capacity expansionThe total expected increase of 31.2mn tons, till 2011, in the petrochemical products capacities of different grades, in the MENA region, is based on the addition of (i) 16.9mn tons of basic chemical-olefins, (ii) 5.6mn tons of basic chemical-Aromatics and (iii) 6.3mn tons of basic chemical-oxygenates.

Table 08: Grade-Wise Capacity Expansion in MENA (Tons)

2008E 2009E 2010E 2011E

Basic-Olefins 2,982,500 6,837,500 3,629,250 3,409,750

Basic-Aromatic 1,848,750 2,566,250 1,200,000 -

Basic-Oxygenate 1,339,000 1,213,000 2,788,000 1,020,000

Expected Expansion 6,170,250 10,616,750 7,617,250 4,429,750 Source: Zawya & Global Research

Country-wise capacity expansion

Saudi Arabia – Capacity expansionSaudi Arabia is expected to make an addition of 3.84mn tons of basic chemicals of different grades out of the total additions in regional capacities of 6.2mn tons in 2008. The contribution, however, will increase to 6.54mn tons in 2009 and will taper down to 4.2mn tons in 2010.

Table 09: Saudi Arabia Additional Capacity (Tons)

2008E 2009E 2010E 2011E

Basic-Olefins 2,232,500 5,437,500 3,600,000 1,900,000

Basic-Aromatic 573,750 191,250 600,000 -

Basic-Oxygenate 1,039,000 913,000 - - Expected Expansion 3,845,250 6,541,750 4,200,000 1,900,000 Total Expected Expansion 6,170,250 10,616,750 7,617,250 4,429,750 Contribution in Expansion 62.3% 61.6% 55.1% 42.9%Source: Zawya & Global Research



Kuwait – Capacity expansionBased on the given expansion plan, production capacities of basic chemicals in Kuwait will increase by 1.5mn tons in 2008 and 2.6mn tons in 2009. This will increase the country’s capacity from 2.1mn tons in 2007 to 6.3mn tons in 2009. Table 10: Kuwait Additional Capacity (Tons)

2008E 2009E

Basic-Olefins 425,000 425,000

Basic-Aromatic 775,000 1,875,000

Basic-Oxygenate 300,000 300,000 Expected Expansion 1,500,000 2,600,000 Total Expected Expansion 6,170,250 10,616,750Contribution in Expansion 24.3% 24.5Source: Zawya & Global Research

Oman – Capacity expansionThe additional capacity of Oman will come on-stream in 3Q2008 and will lead to an increase in the country’s total capacity to 2.1mn tons in 2008. The capacity is expected to increase further to reach at 2.6mn tons in 2009 and to 3.7mn tons in 2011. The increase in capacity is mainly due to the full year impact of those capacities which come online in the middle of the year and an addition of new capacities of oxygenates in 2Q2010.

Table 11: Oman Additional Capacity (Tons)

2008E 2009E 2010E 2011E

Basic-Olefins - - - -

Basic-Aromatic 500,000 500,000 - -

Basic-Oxygenate - - 810,000 270,000 Expected Expansion 500,000 500,000 810,000 270,000 Total Expected Expansion 6,170,250 10,616,750 7,617,250 4,429,750 Contribution in Expansion 8.1% 4.7% 10.6% 6.1%Source: Zawya & Global Research

Qatar – Capacity expansionQatar is expected to contribute 5.3 % in total upcoming production capacity in 2008. The contribution is expected to increase to 33.9% in 2009, which is mainly due to another additional capacity from the project of Qatar Petroleum and Shell, which is expected to commence its operation in 2011.

Table 12: Qatar Additional Capacity (Tons)

2008E 2009E 2010E 2011E

Basic-Olefins 325,000 975,000 - 1,500,000

Basic-Aromatic - - - -

Basic-Oxygenate - - - - Expected Expansion 325,000 975,000 - 1,500,000 Total Expected Expansion 6,170,250 10,616,750 7,617,250 4,429,750 Contribution in Expansion 5.3% 9.2% 0.0% 33.9%Source: Zawya & Global Research



Table 13: MENA Capacity Expansion (Tons)

Country Basic-Olefins Basic-Aromatic Basic-Oxygenate Expected Production

Saudi Arabia 252,000 2Q2008



Saudi Arabia 1,700,000 2010

Saudi Arabia 3,800,000 3Q2010

Saudi Arabia 230,000

715,000 2Q2008



Saudi Arabia

600,000 2010



Kuwait 850,000 450,000 600,000 3Q2008

Kuwait 1,100,000 3Q2008

Kuwait 1,100,000 1Q2009

UAE

600,000 2010

Egypt 350,000 4Q2009

Oman 1,080,000 2Q2010

Oman

1,000,000 3Q2008

Qatar 1,300,000 4Q2008

Qatar 1,500,000 2011

Qatar 880000 600000 2012

Qatar 1,300,000 2012

Algeria 1,000,000 4Q2010

Algeria 1,400,000 2012

Bahrain 1,728,000 2010 Source: Zawya & Global Research



Qatar Petrochemical Industry

IntroductionBy the end of 2007, the production capacity of the State of Qatar claimed 7.5% of the overall production capacity of the world. On the other hand, the State also captured 11.3% of the MENA region capacity and ranked 3rd after Saudi Arabia and Iran. A major part of Qatar’s petrochemical production is exported.

Chart 16: Qatar Shares in World 2007 Chart 17: Qatar Share in MENA 2007

Qatar 7.5%

Rest of the World92.5%

Qatar 11.3%

Rest of the MENACountries 88.7%


It is worth mentioning that the production capacity of petrochemical products in Qatar is held by the affiliates / subsidiaries of two state-owned companies i.e. Qatar Petroleum and IQ. Furthermore, a majority of the IQ stakes are held by Qatar Petroleum, which makes IQ a subsidiary of Qatar Petroleum.

Chart 18: Country Production Capacity Break-Up 2007

Industries Qatar(Subsidiaries)

52.8%

Qatar Petroleum(Subsidiaries excluding IQ)

47.2%


Feedstock a competitive edgeThe huge gas reserves in the country and developed gas infrastructure help the domestic companies to get undisrupted supply of feed stock gas. Moreover, the huge amount of reserves will also help the government of the country to provide gas at subsidized rates ranging US$1.0-1.5 per million British thermal unit (mmbtu), which help the local industries to compete with the countries outside MENA region.


October 2008 Industries Qatar 2�

Table 14: Gross Margins on Petrochemical Products in Qatar

2008E 2009E 2010E 2011E

Ethylene Average High High High

MTBE Low Low Low Low

Methanol High Low Low Low

LDPE Average Average Average Average

LLDPE Average Average Average Average

HDPE Average Average Average AverageSource: Global Research

Note: High Return = 50%, Average Return = 20%-50%, Low Return = Below 20%

Capacity expansionDue to the huge amount of gas reserves, which enable the country to provide an undisrupted supply of gas, the government of Qatar has a massive plan to increase the production capacity of petrochemical. According to the given expansion plan, the government is expected to make a total investment of US$14.9bn (QR54.4bn) till 2012. However, out of total expansion cost the country has allocated 77.3% for non-fertilizer petrochemical.

Table 15: Major capacity expansion – Company WiseProject Name Basic-Olefins Basic-Aromatic Basic-Oxygenate Expected Completion

Q-Chem II - HDPE & Alpha Olefins Plant - 4Q2008

Ras Laffin Olefins Cracker (RLOC) 1,300,000 4Q2008

QP/Shell 1,500,000 2011

QH/Honam - Qatar Petrochemical Complex 880,000 600,000 2012

QP/Exxon Mobil - Ras Laffin Petrochemical 1,300,000 2012

Total 4,980,000 636,000 2,430,000 Source: Zawya & Global Research

In addition, the country’s non-fertilizer production capacity is expected to increase at a CAGR of 6.6% during 2007-11 as compared to the increase in the MENA region petrochemical production at a CAGR of 7.6%, during 2007-11. In order to keep steady supply of feed stock gas, the government has a plan to further strengthen its gas infrastructure along with the increase in gas production from North Gas Field to 9 TCF in 2012.

Chart 19: Qatar Capacity Expansion (000 tons)

-

2,500

5,000

7,500

10,000

12,500

15,000

2008E 2009E 2010E 2011E

Source: Zawya, Company Annual Report 2007 & Global Research



IQ Non-Fertilizer Petrochemical Segment

The operations of the non-fertilizer petrochemical segment of the Company is carried out through its two subsidiaries / affiliates i.e. QAPCO & QAFAC. The Company holds an 80% stake in QAPCO and 50% stakes in QAFAC.

Qatar Petrochemical Company - QAPCOThe company was established in 1974 as a joint multinational venture, in order to utilise associated and non-associated ethane gas generated during the petroleum production process. Furthermore, the establishment of QAPC was in line with the industrialization plan of the State of Qatar. QAPCO plant is situated on the seacoast with jetty facilities and exports its entire range of products worldwide; the plant commenced its commercial production in 1981. The main products of the company are Ethylene and LDPE, while solid sulphur is generated as a by-product in the process. The required feedstock, ethane gas, is supplied by the state-owned Qatar Petroleum for the production of ethylene, a significant part of which is then used in the production of various grades of LDPE. QAPCOs’ plant is built on a solid foundation of state-of-the-art technology, which will make possible a succession of new and modified products. The manufacturing facilities consist of an ethylene plant with a designed annual capacity of 720,000 tons, two LDPE plants with a total annual capacity of 360,000 tons and a sulphur plant with an annual rated capacity of 70,000 tons.

Shareholding Pattern and ProjectsPrior to re-organization in 2003, the majority of the QAPCO shares were held by Qatar Petroleum. Later on, the entire shares of QPACO, which were held by Qatar Petroleum, were transferred to the newly established entity, i.e. IQ.

Table 16: QAPCO Shareholders

Shareholder Holding

Industries Qatar 80.0%

Total (via Total Petrochemical) 20.0%Source: Zawya

QAPCO has made its presences in number of projects, which will allow the company to increase its production capacity. The important projects of QPACO are (i) Qatofin, (ii) Qatar Vinyl Company-QVC, (iii) Qatar Plastic Products Company-QPPC, (iv) Ras Laffin Cracker, (v) Ethylene Expansion-EP2 and (vi) LDPE - 3.

Increasing Production CapacityBased on the given expansion of QAPCO, we expect the production capacity of basic olefin chemical, i.e. ethylene, to increase at a CAGR of 20.2%, during 2007-11, to reach at 1.1mn tons. This will allow the creation of additional production lines of new polymer products, which make the polymers production to increase at a CAGR of 36.3%, during 2007-11, to reach at 1.2mn tons. Subsequently, the overall capacity of QPACO is expected to increase at a CAGR of 27.5%, during 2007-11, to reach at 2.3mn tons.



Furthermore, based on the given cost of projects, we expect the company to make a total investment of US$2.4bn (QR8.8bn) till 2011. This depicts 15.3% of the country’s petrochemical investment program of US$15.7bn (QR57.3bn) till 2011.

Chart 20: QAPCO Production Capacity (000 tons)

-

500

1,000

1,500

2,000

2,500

2007 2008E 2009E 2010E 2011E

Source: Zawya, Company Report, Company Prospectus & Global Research

Table 17: QAPCO Project Cost & Production

Project Name Cost in US$ (mn) Production

QAPCO 410 Add 250,000 tons of LLDPE products

Qatofin Polyethylene Plant 1,200 Add 450,000 tons of LLDPE products.

Ras Laffin Olefins Cracker (RLOC) 800Additional production of 1.3mn tons of ethylene and 1.2mn tons of poly-olefin products

Total 2,410 Source: Zawya, Company Annual Report 2007 & Global Research

Sales CompositionQAPCOs’ sales are mainly based on polymers, since most of the ethylene production is used as a feedstock for polymer producing plant. Based on our expectations, in 2008, the company will be able to sell 650,880 tons of ethylene and related polymers, out of which 45.1% comprise of ethylene and 54.9% is the sales of ethylene related polymers. Going forward, with the addition of new polymer production lines, the contribution from ethylene in overall sales volume will restrict at 20.3% till 2011.

Chart 21 Sales Volume Composition in 2008E Chart 22: Sales Volume Composition in 2011E

Ethylene45.1%

LLDPE44.2%

LDPE4.0%

HDPE6.6% Ethylene

20.3%

LLDPE51.5%

LDPE18.6%

HDPE9.6%




Profitability & MarginsIncrease in the QAPCOs’ production will subsequently lead to an increase in the sales revenue of QAPCO at a CAGR of 28.4%, during 2007-11. The expectations of average crude oil prices to remain on higher side ranging US$95-105 per barrel, in 2008, will lead to an increase in the input cost and resulting in a squeeze of the company’s gross margins from 77.3% to 46.6%. Moreover, the limited product range is another reason for such huge impact on the gross margin, while comparing with other regional big players. However, going forward, the gross margins of QAPCO are expected to range in between 40%-41% till 2011, which is mainly due to decline in prices of petrochemical products, and gas is the major feed stock whose prices are fixed.

Chart 23: Sales Revenue (QR ‘000’) & Gross Margins

77.3%

40.2%45.9%

39.7% 40.1%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2007 2008E 2009E 2010E 2011E

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

Sales Revenue Gross Margins-Growth

Source: QAPCO Annual Report 2007 & Global Research



Qatar Fuel Additive Company - QAFAC

The company was formed in 1991, which was developed as a joint venture between Industries Qatar, OPIC Middle East Corporation, International Octane Limited and LCY Middle East Corporation. The company commenced its operation in 1999 and engaged in the production of methanol and MTBE. At present, the QAFQC has a methanol plant with a designed capacity of 830,000 tons and also has the capacity to produce 610,000 tons of MTBE. Interestingly, the company is obligated to sell 600,000 tons of methanol in the market, while the remainder is use to produce MTBE. Moreover, the methanol plant design is based on ICI technology whereas MTBE design is based on UOP technology.

The main market for QAFAC comprises the Far East, Europe, India and the Gulf. Locally, the company supplies Methanol to the newly established Gulf Urea Formaldehyde Company as a feedstock for its formaldehyde plant. Moreover, QAFAC is also supplying MTBE to Qatar Petroleum refinery.

Shareholding Pattern

Before 2003, Qatar Petroleum holds 50% stakes in QAFAC, which was transferred to IQ during the re-organization process. The remaining shareholding of the Company is distributed among OPIC Middle East Corporation, International Octane Limited, and LCY Middle East Corporation.

Table 18: QAFAC Shareholders

Shareholder Holding


OPIC Middle East Corporation 20.0%

International Octane Limited 15.0%

LCY Middle East Corporation 15.0%Source: Zawya

The sales revenue of QAFAC is expected to erode on account of decline in methanol prices which will force a decline in the profitability and lead the company to maintain net income margin of 5.8%, on average basis, till 2011. Moreover, we are not expecting any expansion in the production capacity of QAFAC so the production will remain on the constant levels.

Chart 24: QAFAC Profitability & Net Profit (QR Mn)

-

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

2008E 2009E 2010E 2011E

(50.0)

-

50.0

100.0

150.0

200.0

250.0

300.0

Sales Revenue Profitability




Non-Fertilizer Petrochemical Segment ValuationIn order to value the non-fertilizer petrochemical segment of the Company, we have determined the value of QAPCO and QAFAC on a consolidated basis, since both subsidiaries / affiliates are engaged in the production of basic olefins, basic aromatics and polyolefin products. To value both companies, we have taken the net-off cash flows, with the shares of IQ, of both companies. Moreover, we have used discounted cash flow (DCF) methodology to determine the value of IQ’s petrochemical segment. Under this valuation, we have used (net-off with IQ’s shares) 4-year (2008-11) explicit forecast period for the free cash flows (FCF) of QAPCO & QAFAC, while Constant growth Gordon Growth Model (GGM) is applied to arrive at a terminal value for the petrochemical segment of the company. The forecasted cash flow and the terminal value is then discounted at the company Weighted Average Cost of Capital (WACC).

In order to value the FCF of QAPCO & QAFAC, we have used the following assumptions:

• Risk Free Rate (RFR): We have assumed the risk free rate of 4.25% for Qatar. To arrive at risk free rate we have taken the discount rate of Kuwait, which is at 4.25%. Normally, we subtract the difference of country risk premiums from the discount rate of 4.25%. But Kuwait and Qatar have equal country risk premium of 0.75%. Therefore, we have taken a risk free rate of 4.25% for Qatar. The difference in country risk premiums have been taken from the study done by Prof. Damodaran and available on his web site www.pages.stern.nyu.edu.com.

• Equity risk premium of 6.0%.• Beta for IQ stock at 1.08 • A terminal growth rate of 3.0% for the segment.• A target cost of debt of 7%.

Using the above assumptions, we have derived a cost of equity for the Company at 10.7%, by using Capital Assets Pricing Model, and a WACC of 10.3%, resulting in the segment worth at QR16.9 per share.

Table 19: DCF Calculations

2008E 2009E 2010E 2011E

FCF-Consolidated (2,807,257) 888,757 195,193 748,170

Discounted FCF - Consolidated (2,807,257) 805,526 160,346 557,044

Terminal Value 10,509,581

Discounted Terminal Value 7,824,832

Primary Value (1,284,340)

Total Enterprise Value 6,540,492

Debt (2,004,272) (50% of Total L-Term Debt at 2008E)

Cash & Investments 4,738,142 (50% of Total Cash + Investment at 2008E) Total Equity Value 9,274,362

Shares Outstanding 550,000

Per Share Value 16.9 Source: Global Research



Sensitivity AnalysisWe provide below a sensitivity analysis table, which shows the probable value given different growth rate assumption and WACC. The shaded area represents the most probable outcomes.

Table 20: Sensitivity Analysis

Terminal Growth Rates

WA

CC

1.00% 2.00% 3.00% 4.00% 5.00%

8.33% 18.2 23.5 30.9 41.7 59.0

9.33% 13.5 17.5 22.8 30.0 40.6

10.33% 9.8 12.9 16.9 22.0 29.2

11.33% 6.9 9.3 12.4 16.2 21.3

12.33% 4.5 6.4 8.8 11.8 15.6Source: Global Research



Fertilizer Industry Overview

Fertilizer Production Flow

Ammonia ProductionAmmonia is produced by combining nitrogen extracted from the air and hydrogen from hydrocarbon, such as natural gas, naphtha, coal or other heavier oil fractions. Hence, ingredients for the production of ammonia are air, natural gas and steam. However, natural gas is considered as the best and most commonly used raw material for the production of ammonia. In addition, feedstock gas in Qatar is available at US$1.0 per mmbtu to US$1.5 per mmbtu, which is far cheaper than the prices of feedstock gas in other countries of the world.

Urea ProductionUrea is produced by reacting liquid Ammonia with a carbon dioxide and then, urea is separated and purified. The urea solution from this stage is a molten urea, which is further concentrated to final granulation or prilling step.

Figure 04: Ammonia & Urea Production Process

Natural Gas

Steam

Air

Feed stock

Ammonia Process

Urea Process

Secondary Reformer CO Shift Converter

Carbon Dioxide

Co3 Absorber CO & CO

MethanatorSynthesis & Refrigerant

Section

Urea Solution &Concentration

Urea Synthesis Speration &Purification

Granulation

Prilling

Urea Storage

Shipment

AmmoniaStorage

Tank

Desulphurizer

Primary Reformer

Source: Industry Sources & Global Research

Fertilizer Product prices Over the last 2 years, international fertilizer prices has surged mainly due to higher feedstock prices in North America, Europe, and East Asia. In addition, no subsidy is given in these regions on feedstock prices. Consequently, the price of basic fertilizer chemicals in these



regions has witnessed an increase of 35.8% in phosphoric acid while sulphuric acid prices have jumped from US$75.1 per ton in 2005 to US$96.9 per ton in 2007. However, in the MENSA region the feedstock gas is available at highly subsidized rates, which is mainly due to (i) ample production and supply of gas, in MENA region, and (ii) agricultural base economy of the South Asia region. Chart 25: Historical Prices of Fertilizer Products (US$ per ton)

0

100

200

300

400

500

600

700

2005 2006 20070

100

200

300

400

500

600

Ammonia-RHS Phosphate Acid-LHS Sulphuric Acid - RHS Urea - RHS DAP-LHS

Source: Bloomberg

Going forward, the expected higher prices of gas will not allow fertilizer products prices to come down from the present high levels. As the price of feedstock gas in international market is directly linked with international prices of crude oil. However, the availability of gas (feedstock) at highly subsidized prices in the MENA region, with low local consumption, will benefit the region to earn more profits by exporting the fertilizer at international rates. Moreover, South Asian countries have also subsidized the price of gas (feedstock) but the high local consumption has caused these countries to rely on the import. Consequently, the region may not be able to reap the benefit of high fertilizer prices.

Chart 26: Forecasted Price Trend of Fertilizer Products (US$ per ton)

0

500

1000

1500

2000

2500

2007 2008E 2009E 2010E 2011E020040060080010001200140016001800

Ammonia-RHS Phosphate Acid-LHS Sulphuric Acid - RHS Urea - RHS DAP-LHS




World Fertilizer Industry

Gradual capacity expansionThe world fertilizer production capacity has increased during 2000-07 at a CAGR of 2.8% to reach at 229.5mn tons in 2007. During the span of the past 7 years, the capacity in the world fertilizer sector has witnessed a strong YoY growth of 6.1% in 2004 and 5.0% in 2007. The major reason for growth in these two years was a time-lag in between the execution of plan and commencement of production from new expansions. Generally, an expansion takes 20-24 months for completion, while the establishment of new plant takes 30-36 months. In addition, the time duration could vary, based on the availability of gas.

Chart 27: World Fertilizer Production Capacities (mn tons)

1.3%

3.2%

1.7%

5.0%

6.1%

0.0%

1.6% 1.8%

-

50.0

100.0

150.0

200.0

250.0

2000 2001 2002 2003 2004 2005 2006 2007-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

World Fertilizer Capacities Growth

Source: Global Research & IFA

Regional fertilizer capacitiesOver the period of 2000-07, North American and East Asian regions had completely dominated the world, in terms of production capacities. In 2007, according to International Fertilizer Industry Association (IFA) statistics, North American and East Asian regions were standing with the capacities of 39.6mn tons and 68.9mn tons, respectively.

Table 21: Historical Regional Fertilizer Capacities (000 tons) 2000 2001 2002 2003 2004 2005 2006 2007

North America 45,525 43,248 42,026 40,307 42,222 39,486 37,700 39,693

Latin America 8,731 9,703 10,385 10,733 11,914 12,086 12,803 11,481

South Asia 16,986 17,436 16,957 17,401 18,468 17,592 18,180 17,335

East Asia 45,109 45,748 48,148 50,794 56,265 61,864 65,990 68,906

Central Europe 7,301 6,504 5,656 6,703 7,438 7,757 7,239 7,194

West Europe 17,810 16,759 16,460 16,395 16,351 16,714 15,437 17,209

East Europe & Central Asia 25,568 25,666 26,477 27,778 29,168 30,599 31,429 37,912

Oceania 980 1,399 1,366 1,555 1,536 1,614 2,021 2,159

MENA 21,765 23,233 25,262 24,569 24,877 27,151 27,711 27,614

Total 189,775 189,695 192,738 196,234 208,238 214,862 218,511 229,503 Source: Global Research, IFA & FAO

It is worth mentioning that over the period of the past 7 years, North America is the only region that has shown a significant decline in capacity to 39.6mn tons in 2007 from 45.5mn tons in 2000. Consequently, the contribution of the region in the world overall capacity has



declined to 17.3% in 2007 from 24.0% in 2000. This decline is mainly due to (i) higher gas prices and (ii) decline in local demand. However, Y-o-Y basis, North America’s capacity has registered an increase of 5.3% in 2007, over the capacity of 2006, while in the corresponding period, East Asian capacities has shown an upward trend and increased, at a CAGR of 6.2%, raising the East Asian region’s share to 30.0% of the total world’s capacity in 2007, as compared to 23.8% in 2000.

Table 22: Regional Contribution 2000 2001 2002 2003 2004 2005 2006 2007

North America 24.0% 22.8% 21.8% 20.5% 20.3% 18.4% 17.3% 17.3%

Latin America 4.6% 5.1% 5.4% 5.5% 5.7% 5.6% 5.9% 5.0%

South Asia 9.0% 9.2% 8.8% 8.9% 8.9% 8.2% 8.3% 7.6%

East Asia 23.8% 24.1% 25.0% 25.9% 27.0% 28.8% 30.2% 30.0%

Central Europe 3.8% 3.4% 2.9% 3.4% 3.6% 3.6% 3.3% 3.1%

West Europe 9.4% 8.8% 8.5% 8.4% 7.9% 7.8% 7.1% 7.5%

East Europe & Central Asia 13.5% 13.5% 13.7% 14.2% 14.0% 14.2% 14.4% 16.5%

Oceania 0.5% 0.7% 0.7% 0.8% 0.7% 0.8% 0.9% 0.9%

MENA 11.5% 12.2% 13.1% 12.5% 11.9% 12.6% 12.7% 12.0%Source: Global Research, IFA & FAO

Fertilizer capacity expansionAccording to the Food & Agriculture Organization of the United Nations (FAO), fertilizer capacity, during 2007-11, is expected to increase at a CAGR of 5.0% to reach at 278.6mn tons in 2011. A major increase in the world capacity expansion is expected to come from the MENA region, which is expected to show 2007-11 CAGR of 19.9% to reach at 57.1mn tons in 2011 from the current level of 27.6mn tons in 2007. In addition, the contribution from MENA in total world capacity is expected to reach at 20.5% in 2011 up from 12.0% in 2007.

Chart 28: Fertilizer Capacity Growth (mn tons)

5.0%

7.2%

4.2%3.9%

4.5%

-

50.0

100.0

150.0

200.0

250.0

300.0

2007 2008E 2009E 2010E 2011E3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

World Fertilizer Capacities Growth

Source: Global Research, Zawya & FAO

Production of fertilizerThe world’s fertilizer production, by the end of 2007, stood at 232.6mn tons. During 2000-07, fertilizer production has increased at a CAGR of 2.2%. As the North American and East Asian regions have highest fertilizer capacities in the world, so these regions have also maintained their dominance in the production. However, the consumption of fertilizer remained high in the areas where agriculture is supposed to be a back bone like, South Asia and Central, East and West Africa. So, mostly these countries rely on the import of fertilizer products to fulfill their local requirement.



Chart 29: World Fertilizer Production (mn tons)

1.3%

3.2%

1.7%1.1%

1.8%1.6%

0.0%

6.1%

180.0

190.0

200.0

210.0

220.0

230.0

240.0

2000 2001 2002 2003 2004 2005 2006 2007-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

World Fertilizer Production Growth

Source: Global Research, IFA & FAO

Regional fertilizer productionAccording to IFA statistics, North American and East Asian regions are the two biggest producers of fertilizers. The combined production from these regions stood at 108.6mn tons out of the entire production of 254.5mn tons in 2007.

Table 23: Regional Fertilizer Production (000 tons) 2000 2001 2002 2003 2004 2005 2006 2007

North America 47,921 45,525 44,238 42,428 44,444 41,564 39,684 39,684

Latin America 9,191 10,214 10,931 11,298 12,541 12,722 13,477 13,477

South Asia 17,880 18,354 17,850 18,317 19,440 18,517 19,137 19,137

East Asia 47,484 48,155 50,682 53,468 59,226 65,120 69,463 69,463

Central Europe 7,685 6,846 5,954 7,055 7,829 8,165 7,620 7,620

West Europe 18,747 17,641 17,327 17,258 17,212 17,594 16,250 16,589

East Europe & Central Asia 26,914 27,016 27,870 29,240 30,703 32,209 33,083 32,831

Oceania 1,032 1,472 1,438 1,636 1,616 1,699 2,127 2,004

MENA 22,910 24,456 26,592 25,862 26,186 28,579 29,170 31,756

Total 199,763 199,679 202,882 206,562 219,198 226,170 230,012 232,562Source: Global Research & FAO

Since the production is linked with the capacity, the production from North American region has shown a decline of YoY 17.2% to 39.7mn tons in 2007 as compared to 47.9mn tons in 2000. On other hand, remarkable YoY growth of 46.3% and 38.6% has witnessed in East Asian and MENA regions, respectively, in the corresponding period. This was mainly due to (i) the intentions of Middle East governments to reduce the economic dependence on crude oil, (ii) the abundance of natural gas has encouraged the North African and Middle Eastern countries to invest in gas based industries and (iii) the high demand of fertilizer in Asian countries and ample gas in China and Indonesia has led East Asian countries to increase the production. Consequently, the contribution from the MENA region has lifted from 11.5% in 2000 to 13.7% in 2007 and East Asian region has claimed 29.9% of total production in 2007 against 23.8% in 2000.



Table 24: Regional Production Contribution 2000 2001 2002 2003 2004 2005 2006 2007

North America 24.0% 22.8% 21.8% 20.5% 20.3% 18.4% 17.3% 17.1%

Latin America 4.6% 5.1% 5.4% 5.5% 5.7% 5.6% 5.9% 5.8%

South Asia 9.0% 9.2% 8.8% 8.9% 8.9% 8.2% 8.3% 8.2%

East Asia 23.8% 24.1% 25.0% 25.9% 27.0% 28.8% 30.2% 29.9%

Central Europe 3.8% 3.4% 2.9% 3.4% 3.6% 3.6% 3.3% 3.3%

West Europe 9.4% 8.8% 8.5% 8.4% 7.9% 7.8% 7.1% 7.1%

East Europe & Central Asia 13.5% 13.5% 13.7% 14.2% 14.0% 14.2% 14.4% 14.1%

Oceania 0.5% 0.7% 0.7% 0.8% 0.7% 0.8% 0.9% 0.9%

MENA 11.5% 12.2% 13.1% 12.5% 11.9% 12.6% 12.7% 13.7%Source: Global Research, IFA & FAO

Higher capacity leads production growthAccording to FAO, the world fertilizer production is expected to increase with a CAGR of 3.1% to 262.6mn tons, during the period of 2007-11. The major production growth is expected from the MENA region, where the production is expected to increase at a CAGR of 13.5%. This will lead the region to become the 2nd largest fertilizer producer in the world by 2011.

Table 25: Production Growth (000 tons)

2007 2008E 2009E 2010E 2011E

North America 39,684 39,684 39,684 39,684 39,684

Latin America 13,477 13,477 13,477 13,477 13,477

South Asia 19,137 19,137 19,137 19,137 19,137

East Asia 69,463 69,463 69,463 69,463 69,463

Central Europe 7,620 7,620 7,620 7,620 7,620

West Europe 16,589 17,209 17,209 17,209 17,209

East Europe & Central Asia 32,831 38,397 39,242 40,329 41,050

Oceania 2,004 2,209 2,209 2,209 2,209

MENA 31,756 35,268 36,542 47,872 52,764 Total 232,562 242,465 244,584 257,001 262,614 Source: Global Research & FAO

World fertilizer consumptionThe overall consumption of fertilizer in 2007 had reached 237.4mn tons against the total production of 232.6mn tons. Among the regions, South & East Asia regions remained the largest consumer of fertilizers by consuming 52.5% of the total world consumption level. In addition, the region has produced 88.6mn tons, while it consumed 124.7mn tons in 2007. This shows that these regions rely on imports. Besides, South & East Asia regions, Latin American and West European regions have witnessed a deficit of 9.6mn tons and 5.5mn tons, respectively, in 2007, which were fulfilled through imports.



Chart 30: Regional Consumption in 2007

Africa3%

Oceania2%

North America15%

Latin America10%

West-Asia-ME3%

South Asia16%

East Asia37%

Central Europe2%

West Europe9%

East Europe & Central Aisa3%

Source: Global Research & FAO

Based on FAO statistics, despite the shortage in fertilizer in Latin America, South Asia, and East Asia regions, the global utilization rate is expected to come down from the present rate of 101.3%, in 2007, to 94.3% by 2011. This is mainly due to the higher increase in production capacities at a CAGR of 5.0%, as compared to the demand CAGR of 2.4%, during 2007-11. However, keeping the utilization rate at 100%, it will probably create an excess supply situation by 2010.

Chart 31: World Fertilizer Consumption Growth (mn tons)

101.3%

94.3%

101.7%

98.4%

96.4%

225.00

230.00

235.00

240.00

245.00

250.00

255.00

260.00

265.00

2007 2008E 2009E 2010E 2011E90.0%

92.0%

94.0%

96.0%

98.0%

100.0%

102.0%

104.0%

Fertilizer Consumption Utilization Rate




MENA Fertilizer Industry

Fertilizer production capacitiesThe production capacities in MENA during the past 7 years have increased at a CAGR of 3.5%, against the world CAGR of 2.8%, during 2000-07, resulting in an increase in the region’s share in the world’s total capacities to reach at 12.0%. The major reasons for the increase in the MENA region capacity, during the last 7 years, were (i) the ample availability of gas in the region and (ii) the high demand of fertilizer in South & East Asian regions.

Chart 32: MENA Historical Fertilizer Capacities (mn tons)

9.1%

2.1%

-0.4%-2.7%

8.7%

6.7%

1.3%-0.5%

-

5.0

10.0

15.0

20.0

25.0

30.0

2000 2001 2002 2003 2004 2005 2006 2007-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Fertilizer Production Capacitities Growth


Among the MENA region countries, in 2007, Egypt has the largest capacity of 10mn tons of fertilizers per annum, which accounted for 36.4% of the total MENA capacity. Next to Egypt, Saudi Arabia ranked as 2nd largest, with a designed capacity of 6.8mn tons (24.6%), followed by Qatar with a production capacity of 5.3mn tons (19.4%). It is worth mentioning that these countries are among the major gas countries in the world and have ample supply of gas.

Chart 33: Country-Wise MENA Capacity

Saudi Arabia25%

Qatar19%

UAE12%

Oaman7%

Egypt36%

Jordan1%

Source: Global Research & Zawya



Increase in productionMENA region has witnessed capacity utilization of more than 100% during the last 7 years, which has led the regional production to increase at a CAGR of 4.8%. Major reasons for higher capacity utilization are the rising demand for fertilizers in the South & East Asian region, for the proximity of the Middle Eastern imports

Chart 34: MENA Historical Production (mn tons)

9.1%

2.1%

8.9%

-0.5%1.3%

6.7%

8.7%

-2.7%

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2000 2001 2002 2003 2004 2005 2006 2007-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

MENA Region Production Growth


Low consumption support exportsThe MENA region is the largest importer of fertilizer in the world. According to FAO, in 2007, the region has imported 56.4% of the world imports of different fertilizer products, which include Ammonia, Phosphate, Potash, and Urea. In addition, the region has imported 56.4% of its total production.

Chart 35: Fertilizers Imports from MENA

Local Consumption44%

Export56%


Capacity Expansion in MENAMENA region has planned for a massive expansion in fertilizers capacity of different types with an estimated cost of US$19.6 (QR71.3bn). Based on the given expansion plans, the production capacity in MENA region will increase to 30.7mn tons in 2008 and 34.9mn tons in 2009. Moreover, the capacity is expected to increase further to 57.1mn tons in 2011 at a CAGR of 19.9%, during 2007-11.



Chart 36: MENA Capacity Expansion (mn tons)

34.8%

13.9%11.1%

21.3%

-0.4%

-

10.0

20.0

30.0

40.0

50.0

60.0

2007 2008E 2009E 2010E 2011E-5.0%0.0%5.0%10.0%15.0%20.0%25.0%30.0%35.0%40.0%

MENA Capacity Growth


The major capacity expansions in fertilizer products are expected from Saudi Arabia, Egypt and Algeria, which will come online during 2010 and 2011. The expected commissioning of fertilizer production facility during 2011 and 2012 will force the regional capacity to touch 59.5mn tons by 2012.

Table 26: MENA Fertilizer Capacity Expansion-Country Wise (000 tons)

Country Fertilizer Capacities

Saudi Arabia 13,300

Algeria 7,620

Egypt 3,965

Oman 3,680

Qatar 3,396

UAE 385Total 32,346Source: Global Research & Zawya

Product-wise capacity expansionThe MENA region is expected to have a major increase in the capacity of ammonia, which will lead to increase the capacity of urea. Moreover, the region is expected to commence production of Di Ammonium Phosphate (DAP) and phosphate, while a massive expansion is expected in sulphuric acid.

Table 27: Product-Wise Capacity Expansion (000 tons)

2007 2008E 2009E 2010E 2011E 2012E

Ammonia 11,063 12,467 12,956 15,636 20,308 21,581

DAP - - - 2,900 2,900 2,900

Urea 14,677 16,456 16,782 20,658 25,993 26,961

Phosphate - - - 1,500 1,500 1,500

Sulphuric acid 130 130 3,505 4,630 4,630 4,630

Others 1,745 1,745 1,817 1,889 1,889 1,889 Total 27,614 30,797 35,059 47,212 57,220 59,460 Source: Global Research & Zawya

MENA Fertilizer Production GrowthThe MENA region has posted the capacity utilization rate of 115% in 2007, which was mainly due to an increase of 52.5%, as compared to 2006, in demand of fertilizers in South



& East Asia, which has raised the region imports by 24.9%, as compared to 2006. Utilization rate, in 2008, is expected to remain at the same level of 115%, as new capacities in South & East Asian regions will remain under process. Consequently, the production in the MENA region will show a YoY increase of 11.1% in 2008.

The expected commencement of massive expansion in the capacity of MENA will lead to huge production of fertilizer, which will lead the region to lower down its capacity utilization from to 106.1% in 2009 to 94.7% by 2011. Based on the expected capacity utilization rate, we expect an improvement in export to local consumption ratio of the region from 56.4% in 2007 to 71.4% 2011.

Chart 37: MENA Fertilizer Sector Outlook (mn tons)

71.4%69.0%60.2%59.5%56.4%

115.0% 115.0%104.6% 101.7%

92.4%

-

10.0

20.0

30.0

40.0

50.0

60.0

2007 2008E 2009E 2010E 2011E

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

MENA Consumption MENA Production MENA Import Capacity Utilization




Qatar Fertilizer Industry

IntroductionBy the end of 2007, Qatar had a designed capacity to produce 5.3mn tons of fertilizer products, which indicates the country holds 19.0% of MENA capacity and 2.0% of global capacity. It is worth mentioning that Qatar Fertilizer Company-QAFCO holds 100% capacity of the country, since there is no other fertilizer plant. Furthermore, most of the country production is exported to India, Jordan, US, South East Asia and Australia.

Chart 38: Qatar Share in the World 2007 Chart 39: Qatar Share in MENA 2007

Qatar2%

Rest of the World98%

Qatar19%

Rest of the MENARegion

81%

Source: Global Research & FAO Source: Global Research & FAO

Capacity breakdown by productThe production capacity in Qatar is based on only two products of fertilizers i.e. ammonia and urea, which are sharing almost equally the country’s overall production capacity. By the end of 2007, 58.6% of the overall designed capacity of fertilizer is allocated for the production of urea, while remaining is allocated for ammonia. Furthermore, most of the production from ammonia plant is used as a feed stock for urea production.

Chart 40: Capacity Breakdown by Product 2007

Ammonia41%

Urea59%




Qatar Capacity Expansion Based on the given country’s fertilizer production capacity expansion plan, we expect that the fertilizer production will increase at a CAGR of 12.9%, during 2007-11. The expected increase in the fertilizer production capacity is mainly due to (i) the completion of QAFCO melamine project and (ii) commissioning of QFACO-V in 2011.

Chart 41: Qatar Fertilizer Capacity Expansion (000 tons)

-1,0002,0003,0004,0005,0006,0007,0008,0009,000

10,000

2005 2006 2007 2008E 2009E 2010E 2011E

Source: Global Research & Zawya

Based on the given expansion plans, the production capacity of ammonia and urea is expected increase by 2.0mn tons and 1.4mn tons, respectively, by the end of 2011. However, in 1Q2009, a new melamine production facility is expected to commission with a designed capacity of 60,000 tons per annum.

Higher Capacity Leads to Higher ProductionBy the end of 2007, the overall production of QAFCO had reached 5.4mn tons, out of which ammonia production recorded at 2.2mn tons and urea production at 3.1mn tons. This indicates overall capacity utilization rate at 100.4%, which is expected to increase and reach 118.0% in 2008. However, the capacity utilization rate is expected to come down to 90.0% in 2011, which is mainly due to an expected over supply as the world production capacities are expected to increase at a CAGR of 5.0% as compared to the demand CAGR of 2.4%, during 2007-11.

Chart 42: Qatar Fertilizer Production (000 tons) & Utilization Ratio

103.0%

110.0%

118.0%

90.0%

100.4%

-1,0002,0003,0004,0005,0006,0007,0008,0009,000

2007 2008E 2009E 2010E 2011E

80.0%

85.0%

90.0%

95.0%

100.0%

105.0%

110.0%

115.0%

120.0%

Total Production Utilization Ratio

Source: QAFCO, Zawya & Global Research

It is worth mentioning that most of the ammonia (60.0%) production of the country is used as a feedstock for urea production facility. Hence, urea is a major form fertilizer that is exported from Qatar.



IQ Fertilizer Segment

The fertilizer business of the Company is held by Qatar Fertilizer Company-QAFCO. It is the only fertilizer producing company in Qatar. Moreover, 75.0% of the QAFCO shareholding is held by IQ.

Qatar Fertilizer Company – QAFCO

In order to utilize the country’s abundant gas reserves, QAFCO was formed in 1969 as a joint venture between the State of Qatar, Norsk Hydro Norway, Davy Power Gas and Hambros Bank, to produce ammonia & urea. The establishment of QAFCO is considered as the first step of the Qatari government towards the industrial diversification program. Since then QAFCO has steered its way successfully, responding adequately to the world market demand for fertilizers.

The first production plant of QAFCO was inaugurated in 1973 with a designed capacity to produce 324,000 tons of ammonia and 360,000 tons of urea. Over a period of time, a growing demand in the world fertilizer market has led the company to go for expansions. QAFCO undertook total 4 expansions and now the complex comprises of four completely integrated trains QAFCO-1 (commissioned in 1973), QAFCO-2 (commissioned in 1979), QAFCO-3 (commissioned in 1997) and QAFCO-4 (commissioned in 2004). It is worth mentioning that each train has a capacity to produce ammonia & urea.

Table 28: QAFCO Production Facilities (‘000’ tons)

Completion Ammonia Capacity Urea Capacity

QAFCO – I 1973 324 360

QAFCO – II 1979 324 360

QAFCO – III 1997 540 720

QAFCO – IV 2004 720 1,152Source: Qatar Fertilizer Company

Shareholding Pattern and ProjectsIQ is the largest shareholder of QAFCO and acquired a 75.0% stake in it, which were subsequently transferred to IQ after the re-organization of Qatar Petroleum. The remaining 10.0% stakes are held by Fertilizer Holding and 15.0% stakes are held by Yara Netherlands.

Table 29: QAFCO Shareholders

Shareholder Holding


Yara Netherlands BV 15.0%

Fertilizer Holdings AS 10.0%Source: Qatar Fertilizer Company Financial Statements 2007

At present, the company is expanding its production capacity and plans to invest US$3.4bn (QR12.4bn) by the end of 2011. Major projects of the company include (i) the addition of 1.7mn tons and 1.4mn tons of the designed capacity to produce ammonia & urea, respectively and (ii) the addition new production line of 60,000 tons of melamine.



Table 30: Expansion Cost

Project Name Cost US$ mn

QAFCO-Melamine Project 250.0

QAFCO-V Project 3,200.0

Total 3,450.0Source: Zawya & Global Research

Based on the given expansion plan, the production capacity of the company is expected to increase at a CAGR of 12.9%, during 2007-11. This will lead the profitability of QAFCO to increase at a CAGR of 31.0% with the average gross margins at 66.1%, during 2007-11.

Chart 43: QAFCO Profitability (QR mn)

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2007 2008E 2009E 2010E 2011E

Source: QAFCO Financial Statements 2007 & Global Research



Fertilizer Segment Valuation

IQ’s fertilizer segment is based on QAFCO, as the fertilizer activities of the Company are carried out through this affiliate / subsidiary. To value QAFCO, we have taken the net-off cash flows, with the shares of IQ, of the affiliate / subsidiary and then employ discounted cash flow-DCF methodology to determine the fair worth of IQ’s fertilizer segment. Under DCF valuation methodology, we have used (net-off with IQ’s shares) 4-year (2008-11) explicit forecast period for the free cash flows (FCF) of QAFCO, while constant growth Gordon Growth Model (GGM) is applied to arrive at a terminal value for the fertilizer segment of the company. The forecasted cash flow and the terminal value is then discounted at the company Weighted Average Cost of Capital (WACC).

In order to value the FCF of QAFCO, we have used the following assumptions:• Risk Free Rate (RFR): We have assumed the risk free rate of 4.25% for Qatar. To arrive

at risk free rate we have taken the discount rate of Kuwait, which is at 4.25%. Normally, we subtract the difference of country risk premiums from the discount rate of 4.25%. But Kuwait and Qatar have equal country risk premium of 0.75%. Therefore, we have taken a risk free rate of 4.25% for Qatar. The difference in country risk premiums have been taken from the study done by Prof. Damodaran and available on his web site www.pages.stern.nyu.edu.com.




2008E 2009E 2010E 2011E

FCF 1,287,077 3,029,471 (5,096,794) 5,001,883

Discounted FCF 1,287,077 2,745,765 (4,186,877) 3,724,116



Primary Value 3,570,081


Debt (1,002,136) (25% of Total L-Term Debt at 2008E)


Shares Outstanding 550,000 Per Share Value 104.1 Source: Global Research






WA

CC

1.00% 2.00% 3.00% 4.00% 5.00%

8.33% 107.7 124.4 147.3 180.9 234.5

9.33% 93.4 105.9 122.3 144.8 177.7

10.33% 82.3 91.9 104.1 120.2 142.3

11.33% 73.3 80.9 90.4 102.4 118.2




World Steel Sector Overview

Production GrowthAccording to International Iron & Steel Institute (IISI), the production of crude steel had increased at a CAGR of 6.6% during 2000-07 and reached 1,322mn tons by 2007. The increase in production of steel is mainly attributable towards the rapid expansion in China, where the production of steel has increased at a CAGR of 21.2%, during the same time period. Moreover, after China, Egypt has registered an increase in production at a CAGR of 12.5% followed by India, which has posted a production CAGR of 10.1%. The production from Iran and Saudi Arabia had increased at a CAGR of 6.2% and 6.4%, respectively, during 2000-07.

Chart 44: Historical Steel Production (mn tons)

-

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

2000 2001 2002 2003 2004 2005 2006 2007-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Steel Production Historical Growth in China Historical Growth in India

Historical Growth in Suadi Arabia Historical Growth in Iran

Source: International Iron & Steel Institute

Furthermore, China is the largest producer of steel in the world and accounted for 36.9% of the total world’s production in 2007. Next to China, Japan has produced 120.2mn tons followed by United States which has claimed 7.4% of the world production.

Chart 45: Steel Production-Country Wise (2007)

China 36.9%

Japan 9.1%

US 7.4%Russia 5.5%

Korea 3.9%

Germany 3.7%

India 4.0%

Ukarine 3.2%

Italy 2.4%

Brazil 2.6%

Rest of the World 21.3%




Steel ConsumptionAccording to IISI, the consumption of crude iron had increased at a CAGR of 6.8% during 2000-07, to reach 1,201mn tons by 2007. Furthermore, demand of crude steel from the Middle East region has increased with a CAGR of 12.8%, which is mainly because of infrastructure development of industrial sector. Next to Middle East region, Asia & Oceania region has depicted an increase in demand at a CAGR of 10.7%, during 2000-07, followed by African region, where the demand has increased at a CAGR of 8.3%. The major reasons for the higher consumption of steel in these regions are (i) economic development in China & India and (ii) development of gas infrastructure in Egypt.

Chart 46: Historical Steel Consumption

0

200

400

600

800

1000

1200

1400

2000 2001 2002 2003 2004 2005 2006 2007-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Steel Consumption Africa Middle East Asia & Oceania


Asia & Oceania region remained the largest consumer of crude steel during 2000-07. The region has claimed 55.8% of total world consumption in 2007 with, major demand from China. Moreover, European region and North American region claimed 16% and 11.8% of total world consumption of crude steel during 2007.

Chart 47: Steel Consumption-Region Wise (2007)

European union (25)16.0%

Other Europe 2.6%

CIS 4.6%

NAFTA 11.8%

Central and South America 3.4%Africa 2.1%

Middle East 3.7%

Asia & Oceania 55.8%


OutlookAccording to IISI estimates, the demand of crude steel will increase by 6.7% in 2008 over the 2007 consumption level, which will further rise by 6.3% in 2009. However, based on our



expectations the demand of crude steel will increase at a CAGR of 5.9%, during 2007-11, to reach at 1,513mn tons in 2011, while Asia & Oceania region will be the largest consumers of crude steel. The expected demand in Asia & Oceania region is mainly based on the huge demand of crude steel in China, India and Russia, while the growing demand in the Middle East region can not be ruled out. Furthermore, the production of crude steel is expected to increase at a CAGR of 5.4%, during 2007-11, to reach at 1,634mn tons. The expectations of slightly slow production growth than consumption will lead the consumption / production ratio at 92.6% in 2011 from 90.9% in 2007.

Chart 48: Expected Production & Consumption (‘000’ tons)

90.9%

91.5%

92.1%

92.6% 92.6%

-200.0400.0600.0800.0

1,000.01,200.01,400.01,600.01,800.0

2007 2008E 2009E 2010E 2011E90.0%

90.5%

91.0%

91.5%

92.0%

92.5%

93.0%

Production Consumption Consumption / Prodouction Ratio

Source: International Iron & Steel Institute & Global Research



IQ’s Steel Segment

The Company’s steel segment is based on the operation of Qatar Steel Company, which is a 100% subsidiary of IQ. Moreover, QASCO is the sole steel producer in the State of Qatar.

Qatar Steel Company - QASCOThe foundation of the company was laid in 1974 as the first integrated steel plant in the Arabian Gulf. It was established as a joint venture between the government of Qatar (70% stakes) and two Japanese companies. The company started its commercial production in 1978 and later on, the company was wholly acquired by the Government of Qatar in 1997. Over a period of time the company has expanded its presence in the other Gulf countries and now operates a UAE based subsidiary - Qatar Steel Company FZE.

The company started its commercial activities with its MIDREX process DR Module-DR1, which was built and commissioned in 1978 with a capacity of 400,000 tons. Moreover, the company has adopted gas based direct reduction process technology in its integrated steel complex for iron-making.

Over the period of time, since 1974, the overall steel production capacity of the company has increased and from 2004 onwards exceeded 800,000 tons annually. The company has recently completed its expansion, which was commissioned in 2007 with the design capacity to produce 1.5mn tons of steel. Moreover, the new plant is very well equipped with new technologies and facilities.

Sales RevenueBased on our forecast, the sales revenue of QASCO is expected to show a decline and reach QR5.5bn in 2011, as compared to our forecasted 2008 sales revenue of QR6.5bn for 2008. The decline in sales revenue is mainly based on a 12.4% decline in the average prices of different grades of steel to reach US$709.5 per ton in 2011 from US$809.7 per ton in 2008. The rationale behind the decline steel prices is an expected decline of crude oil prices which will lead to reduce the prices of gas, in international market

Chart 49: Sales Revenue (QR mn)

4,000.0

5,000.0

6,000.0

7,000.0

2008E 2009E 2010E 2011E


QASCO is expected to maintain its gross profit margins at the average level of 66.4% during 2008-11. However, the profitability of the company is expected to show a decline and reach QR3.4bn in 2011 as compared to our forecasted profitability at QR4.6bn in 2008.



This estimation is based on the slower than expected growth in large scale manufacturing companies, worldwide, which will lead to a decline in steel demand and hence reducing the margins.

Chart 50: QASCO Profitability (QR mn), Gross Margins

62.8%

65.3%65.7%

71.7%

-

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

2008E 2009E 2010E 2011E

58.0%

60.0%

62.0%

64.0%

66.0%

68.0%

70.0%

72.0%

74.0%

Profitability Gross Margin




Steel Segment Valuation

To valuate QASCO, we have used discounted cash flow-DCF methodology, which has helped us to determine the fair worth of IQ’s steel segment. Under DCF valuation methodology, we have used the 4-year (2008-11) explicit forecast period for free cash flows (FCF) of QASCO, while constant growth Gordon Growth Model (GGM) is applied to arrive at a terminal value for the fertilizer segment of the company. The forecasted cash flow and the terminal value is then discounted at the company’s Weighted Average Cost of Capital (WACC).

In order to value the FCF of QASCO, we have used the following assumptions:





QR‘000’ 2008E 2009E 2010E 2011E

FCF 3,760,684 3,099,683 3,262,331 2,825,395

Discounted FCF 3,760,684 2,809,402 2,679,915 2,103,627





Debt -1,002,136 (25% of Total L-Term Debt at 2008E)


Shares Outstanding 550,000 Per Share Value 76.9 Source: Global Research





Terminal Growth RatesW

AC

C

1.00% 2.00% 3.00% 4.00% 5.00%

8.33% 79.3 88.7 101.7 120.6 150.9

9.33% 71.0 78.0 87.3 100.0 118.6

10.33% 64.5 69.9 76.9 85.9 98.4

11.33% 59.3 63.6 68.9 75.7 84.6




Competitors’ ProfileWe have identified potential regional and international competitors for IQ. Moreover, based on its operating structure, the Company is competing on the basis of its affiliates / subsidiaries in different segmental markets:

- Dow Chemical Company - DOW- BASF Group-The Chemical Company - BASF- Saudi Basic Industries Corporation - SABIC- Ruwais Fertilizer Industries - FERTIL- Gulf Petrochemical Industries Company - GPIC- Sino Arab Chemical Fertilizer - SACF- Koch Nitrogen Company - KOCH- Reliance Industries - Reliance- Air Liquide

Dow Chemical Company - DOWDow is a diversified chemical company and delivers a broad range of products and services to customers in around 160 countries, connecting chemistry and innovation with the principles of sustainability to help provide everything from fresh water, food and pharmaceuticals to paints, packaging and personal care products.

BASF-The Chemical CompanyBASF was formed in 1865 by Badische Anilin & Soda Fabrik (BASF) for the production of coal tar dyes and preliminary products. However, over a period of time, BASF has evolved as one of the most prominent companies in the world, having different segments to produce chemicals, plastics, performance products, agriculture solution and oil and gas. The chemical segment of the company combines the operating divisions i.e. in-organics, basic chemicals and intermediates. These operating divisions sell their products to customers in the pharmaceutical, construction, textile and automotive industries and supply other BASF segments with chemicals for the manufacture of higher value products.

The in-organics portfolio ranges from inorganic basic chemicals to glues and specialties such as electronic chemicals for the semiconductor and flat screen industries. However, the broad range of basic chemicals has enabled the petrochemicals division to form the basis of our value-adding chains. In addition, it produces solvents and plasticizers for the chemical and plastics industries. In addition, the intermediates segment comprises products that are used as starting materials for products such as detergents, plastics, textile fibre, paints and coatings as well as pharmaceuticals.

The Plastics segment includes the operating divisions Performance Polymers and Polyurethanes. The Performance Polymers division develops engineering plastics, polyamides, polyamide intermediates, as well as specialty styrenic polymers and foam precursors. They are used in packaging, and in the construction, automotive and the electrical industries. The Polyurethanes division’s products are highly versatile: as soft foams, they can be found in car seats for example, and as rigid foams in household appliances.

Saudi Basic Industries Corporation – SABICSABIC was established by the Saudi government in 1976 in furtherance of a government policy to diversify the Saudi industrial base outside the oil sector, and in order to make use of crude



oil-associated gases at well-heads which had, until that point, been flared off. The intention was to build a chain of basic, large-scale industries located close to or with easy access to gas resources, and to develop export-oriented non-oil businesses of strategic importance to Saudi Arabia, including hydrocarbon-based chemicals and basic metal industries.

Now SABIC has a total of 21 petrochemical affiliates and YANSAB is one of them. The affiliates of SABIC are distinguished in six strategic business units (SBUs), organized by product. These are: Basic Chemicals, Intermediates, Polymers, Specialized Products, Fertilizers, and Metals. Each of these is headed by a Vice-President. These six business units make four different kinds of products:

1 Chemicals – Basic Chemicals, Intermediates and Specialized Products (three SBUs)2 Plastics – Polymers (one SBU)3 Fertilizers (one SBU)4 Metals (one SBU)

Ruwais Fertilizer Industries - FERTILFERTIL is a member of ADNOC Group of companies and was established in October 1980 as a joint venture between Abu Dhabi National Oil Company (ADNOC) and TOTAL, with a shareholding ratio of 2:1 respectively. Construction of a processing plant began in 1980 and production started in December 1983. The prime objective behind establishing the company was to utilize the lean gas supplied from the onshore fields of BAB, ASAB and Thammama-C, to manufacture fertilizers and to market them locally and internationally. The plant is located in Ruwais Industrial Zone, near the city of Abu Dhabi. It comprises of ammonia and urea processing plants which are fully integrated with storage facilities. The company has been continuously improving its technology and productivity and at present ammonia production stands at 1,310 tons per day and urea 1,850 tons per day.

The ammonia plant was designed and constructed by Chiyoda Engineering Corporation of Japan, with the process license from M/s. Haldor Topsoe, Denmark. The process license for the carbon dioxide recovery unit is from Ben Field Corporation of U.S.A. The Plant was commissioned in December 1983 and the hydrogen recovery unit, licensed by M/s. Costain, U.K was later added to the Plant in 1988, which enhanced the Plant design capacity to 1,050 tons per day. The Urea Plant was designed and constructed by Chiyoda Corporation of Japan with process license from M/s. Stamicarbon of Netherlands for producing 1500MTPD.

Gulf Petrochemical Industries Company - GPICGulf Petrochemical Industries Company was established in December 1979 as a joint venture between GCC member states for the manufacture of fertilizers and petrochemicals. The joint venture is equally owned by the Government of the Kingdom of Bahrain, Saudi Basic Industries Corporation, and Petrochemical Industries Company, Kuwait.

GPIC uses natural gas, which is readily available in Bahrain as a feedstock for the production of 1,200 tons per day of ammonia (400,000 tons per annum), 1,700 ton per day of urea (600,000 ton per annum) and 1,200 ton of methanol (400,000 ton per annum). In addition to the production plants, the GPIC Complex, which was built in Sitra on a reclaimed area of 60 hectares, comprises utilities plants, maintenance workshops, offices, stores and laboratories. The company employs 474 people of whom 80% are Bahrainis.



Sino Arab Chemical Fertilizer - SACFSACF established in 1985, is a US$58mn joint venture between China, Tunisia, and Kuwait. The company’s large-scale compound fertilizer production plant is located in China. The production line was put into production in Jan 1991.The present production capacity is 1.2mn tons per year. SACF is one of the biggest compound fertilizers production bases in Asia.

Koch Nitrogen Company - KOCHKoch Nitrogen Company and its affiliates are collectively one of the world’s largest producers and marketers of nitrogen fertilizers. The company and its affiliates have interests in North America and international production and terminal capabilities strategically located to serve customers. Since 1989, these companies have grown and expanded their global capabilities to meet the demand of ammonia, urea and UAN. As KOCH has grown through acquisitions, the company has worked to position its production facilities to best respond to the global market and worked to make its production facilities more efficient and reliable. Together, with its affiliates, Koch Nitrogen has a consolidated capacity to produce 8mn tons of nitrogen products per year. Moreover, the company is also engaged in the marketing and distribution of these products. As one of the world’s largest and most advanced group of fertilizer companies, KOCH and its affiliates offer a vast array of production, research and marketing capabilities worldwide, from North America to South America, Europe to China. KOCH Company has grown from a single ammonia production facility and import terminal in the United States to become one of the world’s largest producers and marketers of nitrogen fertilizers.

Reliance Industries Limited – RelianceThe Reliance Group, founded by Dhirubhai H. Ambani, is India’s largest private sector enterprise, with businesses in the energy and materials value chain in India. The group’s annual revenues are in excess of US$34bn. The Backward vertical integration has been the cornerstone of the evolution and growth of Reliance. Starting with textiles in the late seventies, Reliance pursued a strategy of backward vertical integration - in polyester, fibre intermediates, plastics, petrochemicals, petroleum refining and oil and gas exploration and production - to be fully integrated along the materials and energy value chain. The Group’s activities span exploration and production of oil and gas, petroleum refining and marketing, petrochemicals (polyester, fibre intermediates, plastics and chemicals), textiles and retail. Reliance enjoys global leadership in its businesses, being the largest polyester yarn and fibre producer in the world and among the top five to ten producers in the world in major petrochemical products. The Group exports products in excess of US$20bn to the world. Major Group Companies are Reliance Industries Limited (including main subsidiaries Reliance Petroleum Limited and Reliance Retail limited) and Reliance Industrial Infrastructure Limited.

Air LiquideAir Liquide was founded in 1902. The company has developed around a core business activity which includes industrial and medical gases. The group has more than 40,000 employees in 75 countries.



Consolidated Financial Overview

Overall Production Capacity By the end of 2007, the Company’s overall production capacity remained at 7.4mn tons. This includes the capacity to produce 1.4mn tons of different grades of petrochemical products, 4.0mn tons capacity to ammonia and urea and 1.9mn tons of steel. However, it is worth mentioning that the Company’s overall production capacity remained at the same level over the period of last 3 years, i.e. after the completion of the QAFCO-IV project. The project had jacked-up the capacity to produce fertilizer by 68.4% in 2005, having an overall impact of 24.1%.

Chart 51: Overall Historical Production Capacity (000 tons)

24.1%

-

1,000

2,000

3,000

4,000

5,000

6,000

2004 2005 2006 2007

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Overall Production Capacity Growth

Source: Company Prospectus, QAFCO, IQ Annual Report 2007 & Global Research

Production Capacity Break UpMajority of the Company’s production capacity by the end of 2007 was allocated for the production of fertilizer products, accounting for 54.3% of the production capacity. The increase in fertilizer contribution in the Company’s overall production capacity is mainly due to the completion of the QAFCO-IV project, while the other capacities are under expansion phases.

Chart 52: Production Capacity Break-Up 2007

Basic-OlefinsPetrochemical Capacity 5.7%

Basic-OxygenatesPetrochemical Capacity 9.8%

Ploymers 3.9%

Fertilizer ProductionCapacity 54.3%

Steel ProductionCapacity 26.3%

Source: Company Prospectus, QAFCO, IQ Annual Report 2007 & Global Research

Completion ofQAFCO-IV Project



Rising Sales RevenueDespite of same production capacity over the period of last 3 years, the Company’s sales revenue increased at a CAGR of 21.0% during 2004-07, which is mainly due to the increase in prices of crude oil prices. Subsequently, the average prices of gas remained on higher side, which has led an increase in feedstock prices on an international level and as a result, the average sales prices of fertilizer and petrochemical products remained on the higher side.

Chart 53: Historical Sales Revenue (QR mn) & Segment-Wise Growth

-1,000.02,000.03,000.04,000.05,000.06,000.07,000.08,000.09,000.0

10,000.0

2005 2006 2007

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

Total Sales Revenue Growth in Sales from PetrochemicalsGrowth in Sales from Fuel Additives Growth in Sales from SteelGrowth in Sales from Fertilizers

Source: Company Annual Reports

Sales Revenue Break - UpThough fertilizer production capacity covered 54.3% of the Company’s overall production capacity in 2007, the contribution in overall sales of the Company has been restricted to 36.8%. This is mainly because of the fact that most of the ammonia produced is used as a feed stock for urea production. However, the petrochemical segment utilizes most of the ethylene production to produce related polymers, whose prices are relatively higher than fertilizer and basic chemicals. Thus, despite having 19.4% in overall production capacity in 2007, petrochemical (petrochemicals + fuel additive) generated 33.9% of the total revenues.

Chart 54: Sales Revenue Contribution 2007

Petrochemicals23.1%

Fuel Additives10.8%

Steel 29.3%

Fertilizers 36.8%

Source: Company Annual Report 2007



Production Capacity ExpansionThe Company’s consolidated production capacity is expected to increase at a CAGR of 7.2%, during 2007-11 to reach 7.2mn tons in 2011. This includes the capacity to produce basic olefins, oxygenates, urea & melamine fertilizer and steel. Moreover, the expected increase in overall production capacity is based on the given expansion plans of the Company’s subsidiaries / affiliates.

Chart 55: Expected Consolidated Production Capacity (‘000’ tons)

17.0%

6.4%6.0%

-

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

8,000.0

2008E 2009E 2010E 2011E

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Production Capacity Growth

Source: Company Annual Report 2007, Zawya & Global Research

Future Expansion Benefiting the Petrochemical SegmentThe expected future plan of the Company shows an increase of 20.3% in the basic petrochemical production capacity in 2008, which will lead the production capacity of the polymers to increase by 24.0%. Thus, overall production capacity of non-fertilizer petrochemical (including polymers’ capacity) is expected to increase at a CAGR of 11.2%, during 2007-11 and will lead to the contribution of petrochemical products to 22.9% in 2011 as compared to 19.4% in 2007.

Chart 56: Expected Capacity Break – Up 2011

Basic-OlefinsPetrochemicalCapacity 7.8%

Basic-OxygenatesPetrochemicalCapacity 6.4%

Ploymers 8.8%

Fertilizer ProductionCapacity 57.7 %

Steel ProductionCapacity 18.9%

Source: Company Annual Report 2007, Zawya & Global Research



Growth in Sales RevenueThe expected increase in the Company’s total consolidated production capacity will cause the overall sales revenue of the Company to increase at a CAGR of 21.5%, during 2007-11. In addition, during 2007-11, the consolidated revenues from the non-fertilizer petrochemical segment (basic petrochemical & fuel additive) is expected to increase at a CAGR of 20.4%, while sales revenue from steel and fertilizer segments is expected to increase at a CAGR of 19.2% and 24.2%, respectively.

Chart 57: Expected Sales Revenue (QR mn)

19.9%

82.8%

12.6%2.0%3.8%

-

5,000.0

10,000.0

15,000.0

20,000.0

25,000.0

2007 2008E 2009E 2010E 2011E0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

Total Sales Revenue Growth

Source: Company Annual Report 2007 & Global Research

Based on our calculations, we expect the contribution in sales from the non-fertilizer petrochemical segment (basic petrochemicals, polymers and fuel additive) will remain constant at 32.7% in 2011 as compared to 33.9% in 2007, which is mainly due to decline in prices of these products. Moreover, the contribution from fertilizer is expected to increase from 36.8% in 2007 to 40.2% in 2011.

Chart 58: Expected Sales Revenue Composition – 2011E

Petrochemicals28.8%

Fuel Additives3.9%

Steel27.1%

Fertilizers40.2 %


Expansion Leads to Higher CAPEX The Company has registered an increase in gross assets at a CAGR of 17.4%, during 2005-07. However, going forward based on the given expansion costs, the gross assets of the Company are expected to increase at a CAGR of 22.6% during 2007-11 to reach QR37.7bn in 2011. The higher CAPEX will lead at higher depreciation cost, which is expected to reach QR1.3bn in 2011 from QR0.4bn in 2007.



Chart 59: Growth in Gross Asset Base (QR mn)

17.2%

7.0%

49.7%

9.0%

29.5%

17.6%

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2006 2007 2008E 2009E 2010E 2011E

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Total CAPEX Growth

Source: Company Reports, Global Research

It is worth mentioning that the increase in gross assets is mainly due to the expected massive expansion in the fertilizer segment of the Company, which is expected to contribute 53.7% in the total expected CAPEX of the Company.

Chart 60: Segment-Wise Contribution in Future CAPEX

Petrochemical-CAPEX, 37.4%

Fertilizer - CAPEX53.7%

Steel - CAPEX8.9%


Profitability Break-UpBy the end of 2008, the Company’s bottom line will be mainly driven from the profitability of QASCO as the subsidiary is expected to contribute 49.3%. Going forward, upon the completion of QAFCO-V in 2011 and a decline in the prices of steel products, the dominance of the steel segment in the Company’s consolidated profitability is expected to dilute to 30.4% in 2011. Subsequently, the contribution from QAFCO in the Company’s consolidated profitability is expected to reach 49.6% in 2011 from 30.2% in 2008.



Chart 61: Profitability Break-Up (QR per Share)

3.5 4.3 4.1 4.1

5.26.7 6.7

10.2

8.56.9 6.6

6.3

-

5.0

10.0

15.0

20.0

25.0

2008E 2009E 2010E 2011E

Non-Fertilizerl Petrochemical Segment FertilizerSegment Steel Segment


Improving ProfitabilityThe Company is expected to report a profit after tax of QR9.4bn in 2008, a growth of 89.7% over QR4.9bn in 2007. Furthermore, based on expansion plans, the profitability of the Company is expected to increase at a CAGR of 22.8%, during 2007-11. Consequently, the return on average assets (ROAA) is expected to increase to 22.9% in 2008 as compared to 18.1% in 2007, while return on average equity (ROAE), are expected to increase and will reach 51.5% in 2008. However, going forward, due to a higher CAPEX base and stabilizing in the bottom-line, we forecast a decline in ROAE and ROAA.

Chart 62: Profitability (QR Mn) & ROAA

16.0%15.1%

18.8%22.9%

18.1%17.3%18.7%

-

2,000

4,000

6,000

8,000

10,000

12,000

2005 2006 2007 2008E 2009E 2010E 2011E

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Profitability ROAA


Chart 63: Profitability (QR Mn) & ROE

37.4% 35.4%40.3%

55.0%

42.3%

33.8% 33.9%

-

2,000

4,000

6,000

8,000

10,000

12,000

2005 2006 2007 2008E 2009E 2010E 2011E

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Profitability ROAE




9M-2008 Financial Results

IQ has reported a consolidated net profit of QR7.1bn (translating into EPS of QR13.06) in 3M-2008, against QR3.4bn (translating into diluted EPS of QR6.2) during the corresponding period last year. The higher profitability, during the period under review, is mainly due to (i) growth of 88.1% in sales revenue and (ii) improvement in gross profit margins to reach at 56.4%. Furthermore, the improvement in gross margins is mainly due to an increase in the price of non-fertilizer petrochemical products, on account of an increase in crude oil prices, while the feed stock gas prices are highly subsidized and frozen in Qatar.

Table 35: 9M-2008 Income Statement

QR’000’ 9M-2007 9M-2008

Sales 6,779,981 12,750,477

Cost of Sales (3,259,168) (5,560,240)Gross Profit 3,520,813 7,190,237

Income from Associates 29,820 228,888

Other Income 265,860 385,537

Selling Expenses (9,5091) (156,872)

General & Administrative Expenses (266,413) (393,632)

Finance Cost (52,888) (71,261)Net Profit for the Period 3,402,101 7,182,897Source: 3M-2008 Financial Statements

The balance sheet size of the Company, during the period under review, has shown a growth of 35.2% from the reported size of QR20.1bn by the end of 2007. The cash reserves of the Company have shown a slight increase of 27.9% during the 9M-2008 and reached QR7.8bn, which is mainly due to (i) increase in debt of the Company to support its expansion plans and (ii) higher petrochemical prices. Furthermore, the current ratio of the Company has improved and reached 3.3x against 2.5x by the end of 2007.

Table 36: 1H2008 Balance Sheet

QR in ‘000’ 2007 9M-2008

Assets

Total Current Assets 9,553,371 14,925,849

Total Fixed and Non-Current Assets 10,588,724 12,307,497Total Assets 20,142,095 27,233,346

Liabilities & Equity

Total Current Liabilities 3,848,890 4,442,172

Total Non-Current Liabilities and provisions 2,615,119 4,055,886Total Liabilities 6,464,009 8,498,058

Shareholders’ Equity

Share Capital 5,000,000 5,500,000

Statutory Reserve 141,309 141,309

Investment Revaluation Reserve 309,585 197,412

Hedging Reserve (103,412) -115,808



Retained Earnings 5,819,558 13,001,572

Proposed Dividend / Bonuses Issue 2,500,000 -

Minority Interest 11,046 10,803Total Shareholders’ Equity 13,678,086 18,735,288

Total Liabilities & Shareholders’ Equity 20,142,095 27,233,346Source: 9M- 2008 Financial Statements



Valuation and Recommendation

In valuing the Company, we have used the sum of the parts discounted cash flow-SOTPDCF valuation technique. Under this valuation technique, we have combined the Free Cash Flow-FCF of each subsidiary / affiliates, in accordance with the stakes of IQ, into a single entity. We have used the constant growth Gordon Growth Model (GGM) to arrive at a terminal value for the Company. The forecasted consolidated cash flows and the terminal value is then discounted at the Company Weighted Average Cost of Capital (WACC).

In order to value the consolidated FCF of IQ, we have used the following assumptions:





(QR 000) 2008 (E) 2009 (E) 2010 (E) 2011 (E)

FCF 2,240,504 7,017,911 (1,639,270) 8,575,448

Discounted Cash Flow 2,240,504 6,360,693 (1,346,615) 6,384,787



Terminal Value (discounted) 89,687,429


Debt (4,008,544) (As of 2008E)

Add: Investments & cash equivalents 9,476,284 (As of 2008E) Total Equity Value 108,794,538

Shares Outstanding (‘000) 550,000 Fair Value Per Share 197.8 Source: Global Research

Sensitivity Analysis

We provide below a sensitivity analysis table, which shows the probable value given different growth rate assumptions and WACC. The shaded area represents the most probable outcomes.





WA

CC

1.00% 2.00% 3.00% 4.00% 5.00%

8.33% 204.4 233.1 272.4 329.9 421.9

9.33% 179.7 201.1 229.2 267.8 324.3

10.33% 160.4 176.8 197.8 225.4 263.3

11.33% 144.8 157.9 174.0 194.6 221.7


Relative Valuation

For relative valuation, we have conducted a comparison of IQ with selected regional and international players. Furthermore, the players are selected on the basis of their respective market capitalization. For relative valuation purpose, we have made a comparison of IQ and other players on different parameters i.e. (i) price to book, (ii) return on equity and (iii) EV/EBITDA. Furthermore, we have preferred EV/EBITDA to arrive at the relative value for the Company.

Table 39: Relative Comparison

Company Name Country EV / EBITDA 2008

Saudi Basic Industries Corp SAUDI ARABIA 9.9

Reliance Industries INDIA 1.9

SAFCO SAUDI ARABIA 12.2

Yanbu National Petrochemicals SAUDI ARABIA 3.2

EI Du Pont de Nemours & Co UNITED STATES 7.7

Dow Chemical Co/The UNITED STATES 7.3

Praxair Inc UNITED STATES 12.5

Air Products & Chemicals Inc UNITED STATES 6.7

Huntsman Corp UNITED STATES 7.2

Celanese Corp UNITED STATES 5.4

Westlake Chemical Corp UNITED STATES 7.0

Georgia Gulf Corp UNITED STATES 7.0

Nova Chemicals Corp CANADA 5.3

Methanex Corp CANADA 6.5Source: Bloomberg & Global Research

Under the relative valuation technique, we have used sector EV/EBITDA of 2008 at 8.6x, which results to arrive at a fair value of QR155.4.

Consolidated Fair Value

In order to arrive at a consolidated fair value for the Company, we have assigned 80% weightage to the value arrived from DCF base valuation and 20% to the relative value. On the basis of this, our consolidated value for the Company comes at QR189.3.



Table 40: Consolidated Fair Value

Valuation Techniques Value per Share (QR) Weights Weighted Fair Value (QR)

DCF 197.8 80% 158.2

Relative 155.4 20% 31.1Consolidated Fair Vale 189.3Source: Global Research

Based on our consolidated SOTP valuation technique, the stock offers a potential upside of 189.3% over the current market price of QR107.0 per share. We, therefore, initiate our coverage of IQ with a ‘BUY’ recommendation.



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6,83

0

3,

664,

087

6

,899

,636

9,

963,

522

6,89

3,80

3

7,

732,

991

Dep

osits

Mat

urin

g in

90

Day

s

1,2

70,5

74

1

,499

,559

2,5

07,3

40

-

-

-

-

A

ccou

nt R

/A &

PP

87

5,50

6

1,

149,

975

1,26

6,74

3

3,0

74,2

37

3,33

7,17

6

3,

541,

469

3,96

6,73

2 In

vent

orie

s

1,

022,

951

1,14

1,84

1

1,

373,

226

3,3

65,7

10

3

,643

,761

3,3

87,3

38

3

,608

,035

D

ues

to R

elat

ed P

artie

s

471,

203

54

3,28

4

639,

107

1,1

39,1

07

1

,389

,107

1,6

39,1

07

1

,889

,107

In

vest

men

ts H

eld

for

Tra

ding

2

3,98

2

27,

061

10

2,86

8

352

,868

4

52,8

68

552

,868

6

52,8

68

Tot

al C

urre

nt A

sset

s

6,3

43,7

54

7

,488

,550

9,5

53,3

71

14,

831,

558

18,

786,

434

16,

014,

585

17,

849,

734

Inve

stm

ents

in A

ssoc

iate

s

339,

041

35

9,05

9

1,

171,

186

1

,671

,186

1,

921,

186

2,17

1,18

6

2,

421,

186

Inve

stm

ents

in A

vaila

ble

for

Sale

s

394,

312

29

3,85

0

452,

594

552

,594

602,

594

65

2,59

4

702,

594

Inta

ngib

le A

sset

s

71,

707

7

1,70

7

72,

313

75

,929

79,

725

8

1,32

0

82,

946

Inve

stm

ent P

rope

rty

-

118,

426

14

8,03

2

1

55,4

34

16

3,20

5

166,

469

16

9,79

9 Pr

oper

ty, P

lant

& E

quip

men

t

4,

827,

490

6,38

5,67

9

8,

494,

318

12

,662

,604

13,

783,

040

2

4,24

5,74

5

25,

393,

148

Oth

er A

sset

s

111,

936

16

3,19

5

250,

281

1

,250

,281

1,

375,

309

1,51

2,84

0

1,

664,

124

Tot

al N

on-C

urre

nt &

Fix

ed A

sset

s

5,7

44,4

86

7

,391

,916

1

0,58

8,72

4 1

6,36

8,02

7 1

7,92

5,06

0 2

8,83

0,15

4 3

0,43

3,79

7 T

otal

Ass

ets

12,

088,

240

14,

880,

466

20,

142,

095

31,

199,

585

36,

711,

494

44,

844,

739

48,

283,

531

Shor

t Ter

m L

oans

55

5,81

0

205,

458

1,08

3,81

9

1,4

08,9

65

1,47

9,41

3

1,

849,

266

2,77

3,89

9 A

ccou

nts

P/A

& A

ccru

als

64

2,96

9

1,

047,

475

2,01

9,38

8

3,7

39,6

77

3,84

6,19

2

4,

022,

463

4,14

9,24

1 D

ue to

rel

ated

par

ties

37

0,92

2

422,

460

74

5,68

3

9

95,6

83

1,09

5,68

3

1,

195,

683

1,29

5,68

3 T

otal

Cur

rent

Lia

bilit

ies

1

,569

,701

1,6

75,3

93

3

,848

,890

6,14

4,32

5

6,4

21,2

88

7

,067

,413

8,2

18,8

23

Lon

g-T

erm

Loa

ns

1,

057,

558

1,96

1,62

3

2,

357,

967

4

,008

,544

4,

008,

544

6,81

4,52

5

3,

407,

262

Subo

rdin

ate

Loa

ns

-

-

-

-

-

-

-

Prov

isio

n fo

r E

mpl

oyee

s’ E

nd o

f Se

rvic

e

95,

689

11

8,72

8

153,

740

184

,488

202,

937

22

3,23

0

245,

554

Inte

rest

Rat

e Sw

aps

-

40,

544

10

3,41

2

1

44,7

77

15

2,01

6

159,

616

16

7,59

7 T

otal

Non

-Cur

rent

Lia

bilit

ies

1

,153

,247

2,1

20,8

95

2

,615

,119

4,33

7,80

9

4,3

63,4

96

7

,197

,372

3,8

20,4

13

Tot

al L

iabi

litie

s

2,7

22,9

48

3

,796

,288

6,4

64,0

09

10,

482,

134

10,

784,

784

14,

264,

784

12,

039,

236

Shar

e C

apita

l

5,

000,

000

5,00

0,00

0

5,

000,

000

5

,500

,000

5,

500,

000

5,50

0,00

0

5,

500,

000

Leg

al R

eser

ves

10

3,97

5

104,

813

14

1,30

9

1

41,3

09

14

1,30

9

141,

309

14

1,30

9 In

vest

men

t Rev

alua

tion

Res

erve

s

264,

936

13

2,20

4

309,

585

402

,461

482,

953

53

1,24

8

584,

373

Hed

ging

Res

erve

s

-

(3

7,62

3)

(

103,

412)

(108

,583

)

(

111,

297)

(11

4,08

0)

(

116,

932)

Ret

aine

d E

arni

ngs

2,23

4,65

4

3,

372,

795

5,81

9,55

8

10,0

44,4

43

1

4,97

2,58

5

18,

786,

579

2

2,75

3,37

7 Pr

opos

ed D

ivid

ends

/ B

onus

Iss

ue

1,

750,

000

2,50

0,00

0

2,

500,

000

4

,726

,775

4,

930,

115

5,72

3,85

2

7,

371,

122

Equ

ity to

Par

ents

9

,353

,565

1

1,07

2,18

9 1

3,66

7,04

0 20

,706

,405

25,

915,

664

30,

568,

909

36,

233,

249

Min

ority

Int

eres

t

11,

727

1

1,98

9

11,

046

11

,046

11,

046

1

1,04

6

11,

046

Tot

al E

quit

y

9,3

65,2

92

11,

084,

178

13,

678,

086

20,

717,

451

25,

926,

710

30,

579,

955

36,

244,

295

Tot

al L

iabi

litie

s &

Equ

ity

12,

088,

240

14,

880,

466

20,

142,

095

31,

199,

585

36,

711,

494

44,

844,

739

48,

283,

531

Sour

ce:

IQ A

nnua

l Rep

orts

& G

loba

l Res

earc

h



CO

NSO

LID

AT

ED

IN

CO

ME

ST

AT

EM

EN

T

QR

in ‘

000’

Indu

stri

es Q

atar

2005

2006

2007

2008

E20

09E

2010

E20

11E

Sale

s

6,5

78,0

39

7,7

78,0

65

9,3

25,9

32

17,0

51,7

47

17,7

07,1

99

18,

060,

483

20,

329,

922

Cos

t of

Sale

s

(3,

097,

784)

(4,0

91,9

28)

(4,3

94,6

26)

(7,4

79,3

55)

(8,0

97,2

46)

(8

,468

,344

)

(9,0

20,0

88)

Gro

ss P

rofi

t

3,48

0,25

5

3,

686,

137

4,93

1,30

6

9,

572,

393

9,60

9,95

3

9

,592

,139

11

,309

,834

Selli

ng E

xpen

ses

(106

,431

)

(117

,871

)

(137

,580

)

(227

,420

)

(287

,058

)

(26

2,76

5)

(29

0,44

8)

Gen

eral

& A

dmin

istr

ativ

e E

xpen

ses

(268

,560

)

(296

,118

)

(318

,341

)

(602

,880

)

(596

,274

)

(58

2,74

7)

(62

5,72

4)

Inco

me

from

Ass

ocia

tes

50

,942

20

,117

52

,254

309

,048

374

,090

3

89,2

80

405

,086

Inco

me

from

Inv

estm

ent

10

,996

173

,975

244

,730

11

,059

-

-

-

Oth

er G

ains

/ L

osse

s

1

04,1

62

1

99,6

94

2

92,1

30

4

96,4

71

8

96,7

17

620

,442

6

95,9

69

Fina

ncia

l Cha

rges

(55

,531

)

(44

,204

)

(79

,933

)

(105

,120

)

(137

,199

)

(21

6,59

5)

(15

4,52

9)P

rofi

t F

or t

he Y

ear

3,

215,

833

3,62

1,73

0

4,

984,

566

9,45

3,55

1

9,

860,

229

9,5

39,7

54

11,3

40,1

88

Attr

ibut

able

to

Equ

ity h

olde

rs o

f th

e pa

rent

3

,213

,564

3

,619

,218

4

,983

,259

9

,451

,660

9

,858

,257

9,5

37,8

46

11,

337,

920

Min

ority

Int

eres

t

2,2

69

2,5

12

1,3

07

1,8

91

1,9

72

1

,908

2,2

68

P&

L A

ppro

pria

tion

Acc

ount

Ope

ning

Bal

ance

771,

846

2,23

4,65

4

3,

372,

795

5,81

9,55

8

10,

044,

443

14,9

72,5

85

18,7

86,5

79

Net

Pro

fit f

or th

e Y

ear

3

,213

,564

3

,619

,218

4

,983

,259

9

,451

,660

9

,858

,257

9,5

37,8

46

11,

337,

920

Cha

nge

in F

air

Val

ue o

f In

vest

men

ts

-

-

-

-

-

-

-

Div

iden

d Pa

id

-

-

-

-

-

-

-

Tra

nsfe

r to

Leg

al R

eser

ve

(7

56)

(8

38)

(

36,4

96)

-

-

-

-

Div

iden

d Pr

opos

ed

(1,

750,

000)

(2,5

00,0

00)

(2,5

00,0

00)

(4,7

26,7

75)

(4,9

30,1

15)

(5

,723

,852

)

(7,3

71,1

22)

Bon

us I

ssue

-

-

-

(500

,000

)

-

-

-

Prio

r Y

ear

Adj

ustm

ent

-

19

,761

-

-

-

-

-

End

ing

Bal

ance

2,

234,

654

3,37

2,79

5

5,

819,

558

1

0,04

4,44

3

14,

972,

585

18,7

86,5

79

22,7

53,3

77

Sour

ce:

IQ A

nnua

l Rep

orts

& G

loba

l Res

earc

h



CO

NSO

LID

AT

ED

CA

SH F

LO

W S

TA

TE

ME

NT

QR

‘00

0’In

dust

ries

Qat

ar20

0520

0620

0720

08E

2009

E20

10E

2011

E

Prof

it fo

r th

e ye

ar

3,21

5,83

3

3,6

21,7

30

4,98

4,56

6

9,

453,

551

9,86

0,22

9

9,

539,

754

1

1,34

0,18

8

Dep

reci

atio

n &

Am

ortiz

atio

n

5

56,9

30

524

,250

3

99,4

30

756

,322

8

24,3

91

1,23

3,76

7

1,

320,

131

Inco

me

from

Ass

ocia

tes

(5

0,94

2)

(

20,1

17)

(5

2,25

4)

(

309,

048)

(37

4,09

0)

(

389,

280)

(40

5,08

6)

Inco

me

from

Inv

estm

ent

(1

0,99

6)

(1

73,9

75)

(24

4,73

0)

(11,

059)

-

-

-

Oth

er G

ains

/ L

osse

s

(

104,

162)

(199

,694

)

(

292,

130)

(49

6,47

1)

(

896,

717)

(62

0,44

2)

(

695,

969)

Fina

ncia

l Cha

rges

5

5,53

1

44,2

04

7

9,93

3

1

05,1

20

137

,199

216,

595

15

4,52

9

Cha

nge

in W

orki

ng C

apita

l

(

171,

936)

(9

,396

)

8

51,1

60

(

2,32

9,68

8)

(

584,

476)

7

8,40

2

(

669,

184)

Net

Cas

h fr

om o

pera

ting

act

ivit

ies

3

,490

,258

3

,787

,002

5,7

25,9

75

7

,168

,727

8,9

66,5

35

10,

058,

796

11,

044,

608

INV

EST

ING

AC

TIV

ITIE

S

Plan

t & P

rope

rty

(87

2,71

1)

(2,0

82,4

39)

(

2,50

8,67

5)

(4,

928,

223)

(

1,94

8,62

4)

(11,

698,

066)

(

2,46

9,16

1)

Inve

stm

ents

Hel

d fo

r T

radi

ng

(23,

982)

(3

,079

)

(75,

807)

(25

0,00

0)

(

100,

000)

(10

0,00

0)

(

100,

000)

Inve

stm

ents

in A

ssoc

iate

s

(

127,

669)

(20

,018

)

(

812,

127)

(50

0,00

0)

(

250,

000)

(25

0,00

0)

(

250,

000)

Inve

stm

ents

in A

vaila

ble

for

Sale

s

(

128,

430)

100

,462

(

158,

744)

(10

0,00

0)

(50,

000)

(5

0,00

0)

(50,

000)

Inve

stm

ent P

rope

rty

-

(1

18,4

26)

(2

9,60

6)

(7,

402)

(

7,77

2)

(3,

264)

(

3,32

9)

Oth

er I

nves

tmen

t Act

iviti

es

1

43,0

65

342

,527

5

02,0

28

(18

3,42

2)

1,

145,

779

87

2,19

1

949,

771

Cas

h F

low

s fr

om I

nves

ting

Act

ivit

ies

(1,

009,

727)

(1,

780,

973)

(3,

082,

931)

(5,

969,

047)

(1,

210,

616)

(11

,229

,139

)

(1,9

22,7

19)

FIN

AN

CIN

G A

CT

IVIT

IES

Shor

t Ter

m L

oans

157

,477

(3

50,3

52)

878

,361

3

25,1

46

7

0,44

8

369,

853

92

4,63

3

Lon

g-T

erm

Loa

ns

(

146,

655)

904

,065

3

96,3

44

1,65

0,57

7

-

2,80

5,98

1

(3,

407,

262)

Subo

rdin

ate

Loa

ns

-

-

-

-

-

-

-

Fina

ncia

l Cha

rges

(5

5,53

1)

(

44,2

04)

(7

9,93

3)

(

105,

120)

(13

7,19

9)

(

216,

595)

(15

4,52

9)

Div

iden

d Pa

id

(1,

750,

000)

(1

,750

,000

)

(2,

500,

000)

(

2,50

0,00

0)

(4,

726,

775)

(

4,93

0,11

5)

(5,

723,

852)

Oth

er F

inan

cing

Act

iviti

es

46,

509

(89

,261

)

2

07,2

22

157

,927

1

01,4

93

7

1,49

9

78,

309

Cas

h F

low

s fr

om F

inan

cing

Act

ivit

ies

(1,

748,

200)

(1,

329,

752)

(1,

098,

006)

(

471,

471)

(4,

692,

033)

(1

,899

,376

)

(8,2

82,7

02)

Incr

ease

/Dec

reas

e in

Cas

h

7

32,3

31

6

76,2

77

1

,545

,038

7

28,2

09

3

,063

,886

(3,0

69,7

19)

839

,187

Cas

h B

egin

ning

Bal

ance

3,

217,

781

3

,950

,112

4,

626,

389

6,17

1,42

7

6,

899,

636

9,96

3,52

2

6,

893,

803

Cas

h E

ndin

g B

alan

ce

3

,950

,112

4

,626

,389

6,1

71,4

27

6

,899

,636

9,9

63,5

22

6

,893

,803

7,7

32,9

91

Sour

ce:

IQ A

nnua

l Rep

orts

& G

loba

l Res

earc

h



FA

CT

SH

EE

TIn

dust

ries

Qat

ar

20

0520

0620

0720

08E

2009

E20

10E

2011

E

Liq

uidi

ty R

atio

s

Cur

rent

Rat

io

4.0

4

.5

2.5

2

.4

2.9

2

.3

2.2

Cas

h R

atio

1

.7

1.9

1

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This page is left blank intentionally

Company

Industries Qatar

Disclosure

1,10

Disclosure Checklist

The following is a comprehensive list of disclosures which may or may not apply to all our researches.

Only the relevant disclosures which apply to this particular research has been mentioned in the table

below under the heading of disclosure.

Recommendation

Buy

Tickers

IQCD.DSM (Reuters)IQCD QD (Bloomberg)

Price

QR107.0

This material was produced by Global Investment House KSCC (‘Global’),a firm regulated by the Central Bank ofKuwait. This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy anysecurities. Global may, from time to time,to the extent permitted by law, participate or invest in other financingtransactions with the issuers of the securities (‘securities’), perform services for or solicit business from such issuer,and/or have a position or effect transactions in the securities or options thereof. Global may, to the extent permittedby applicable Kuwaiti law or other applicable laws or regulations, effect transactions in the securities before thismaterial is published to recipients.Information and opinions contained herein have been compiled or arrived by Global from sources believed tobe reliable, but Global has not independently verified the contents of this document. Accordingly, no representationor warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy,completeness or correctness of the information and opinions contained in this document. Global accepts no liabilityfor any loss arising from the use of this document or its contents or otherwise arising in connection therewith.This document is not to be relied upon or used in substitution for the exercise of independent judgement. Globalshall have no responsibility or liability whatsoever in respect of any inac curacy in or ommission from this orany other document prepared by Global for, or sent by Global to any person and any such person shall beresponsible for conducting his own investigation and analysis of the information contained or referred to in thisdocument and of evaluating the merits and risks involved in the securities forming the subject matter of this orother such document.Opinions and estimates constitute our judgment and are subject to change without prior notice.Past performanceis not indicative of future results. This document does not constitute an offer or invitation to subscribe for orpurchase any securities, and neither this document nor anything contained herein shall form the basis of anycontract or commitment what so ever. It is being furnished to you solely for your information and may not bereproduced or redistributed to any other person.Neither this report nor any copy hereof may be distributed in any jurisdiction outside Kuwait where its distributionmay be restricted by law. Persons who receive this report should make themselves aware of and adhere to anysuch restrictions. By accepting this report you agree to be bound by the foregoing limitations.

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Global Research: Equity Ratings Definitions

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