More upside from strong polyester growth - Nomura … chemicals: Dawn of the synthetic age More...

Asia chemicals: Dawn of the synthetic age

More upside from strong polyester growth

We project above-consensus polyester demand growth over the next five years, leading to tightening MEG and PX balances.

Near term, we are most bullish on PVC and caustic soda due to strong demand and constrained production.

Stock picks: FPC and LGC are our top ST picks. LT, we like Honam and NYP. We upgrade PTTCH to BUY.

Key analysis in this anchor report includes:

• In-depth analysis of cotton/polyester demand-supply dynamics.

• Assessing product balances along the polyester chain.

• Updates on margin outlook of key chemicals.

EQUITY RESEARCH

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See Appendix A-1 for analyst certification and important disclosures. Analysts employed by non-US affiliates are not registered or qualified as research analysts with FINRA in the US.

May 6, 2011

Research analysts

Asia Oil & Gas/Chemicals

Yong Liang Por [email protected] +852 2252 6220

Cindy Park [email protected] +82 2 3783 2324

Cheng Khoo [email protected] +852 2252 6180

Rating: See report end for details of Nomura’s rating system.

Asia Chemicals

Oil & Gas/Chemicals

EQUITY RESEARCH

Dawn of the synthetic age

More upside from strong polyester growth

May 6, 2011

Action: Top picks -- LGC & FPC in ST; HPC & NYP for LT We believe LGC and FPC will perform the best over the next 3-6 months due to PVC and caustic soda strength. Longer term, we believe HPC and NYP could benefit from strengthening MEG margins. We continue to like gas-based producers – PCG and PTTCH (upgraded to BUY).

Catalysts: The future is synthetic We believe the future growth of textile fibres is likely to be met by polyester due to constraints on cotton production from issues such as declining arable land in China, competition from food crops, biofuel mandates and a lack of new technologies to boost yields.

PX and MEG the key beneficiaries We forecast global polyester demand to grow at an average of 7% pa for 2011-15F, faster than the average 5% pa growth over the last decade. As a result, we expect PX and particularly MEG to remain tight over the next five years.

General chemical margin uptrend intact Despite the recent downtrend in chemical margins, we note that overall levels are still high (with the exception of PE) and supportive on continued y-y earnings growth, in our view. In the short term, margins of PVC and caustic soda have the strongest momentum. We believe polyester chain margins could soften in 2Q11 but strengthen from 4Q11 onwards.

Fig. 1: Stocks for action

As of 29 April 2011.

Source: Bloomberg, Nomura estimates

Anchor themes

While we expect crude oil fundamentals to remain sound in 2012-13, liquidity could dry up with tighter monetary policies. A potential rise in investments in the oil sector could threaten supply-demand dynamics beyond 2013. Oil price could be capped in LT.

Nomura vs consensus

Even though consensus is raising LT oil price forecasts, we maintain our LT oil price at USD75/bbl based on the cost of reserve replacement & prod.

Research analysts


Yong Liang Por - NIHK [email protected] +852 2252 6220

Cindy Park - NFIK [email protected] +82 2 3783 2324

Cheng Khoo - NIHK [email protected] +852 2252 6180

Stock Ticker Rating Local price Price targetFormosa Plastics 1301 TT BUY 117 136LG Chem 051910 KS BUY 530,000 700,000Honam PC 011170 KS BUY 378,000 480,000Nan Ya Plastics 1303 TT BUY 87.8 105PTT Chemical PTTCH TB BUY 160 200Petronas Chemicals PCHEM MK BUY 7.23 8.40Formosa Chemicals 1326 TT BUY 115.5 134Hanwha Chemical 009830 KS BUY 47,700 69,000

See Appendix A-1 for analyst certification and important disclosures. Analysts employed by non US affiliates are not registered or qualified as research analysts with FINRA in the US.

Nomura | AEJ Asia Chemicals May 6, 2011

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Contents

4 Executive Summary

6 Historical valuations

7 Investment risks

8 The future is synthetic

8 Polyester market share has grown steadily

9 Future cotton production growth may be limited

12 Fibre demand expected to remain strong

15 Synthetic fibres to fill the gap

17 Assessing demand/supply of the polyester chain

19 Healthy prognosis for overall products

19 Hitting a speed bump

20 Analysis of individual products

23 Price & margin trend forecasts

23 Key changes to price and margin forecast

26 Price & margin trends

28 Appendix

28 Major cotton-producing areas

29 Key cotton production statistics

31 Fabric and Polyester chain

32 Formosa Plastics

37 LG Chem

42 Honam Petrochemical

47 Nan Ya Plastics


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52 PTT Chemical

56 Petronas Chemicals Group

61 Formosa Chem & Fibre

66 Hanwha Chemical Corp

72 Appendix A-1


4

Executive Summary Asian chemical margins rose strongly from October 2010 – March 2011, as global demand revived, absorbing the large capacity additions that started up in April – May 2010. We believe demand was stimulated by a sharp rise in prices of natural materials such as cotton and rubber, which boosted demand for their synthetic substitutes.

Since the end of March 2010, margins of most chemicals have deteriorated owing to:

• A spike in crude prices (Brent has risen from US$100/bbl in the beginning of February 2011 to the current level of >US$120/bbl) as a result of MENA unrest.

• Slowing demand in China, which we attribute to tightening monetary conditions following a 50bp interest rate hike and 200bp reserve requirement ratio (RRR) hike so far this year.

In spite of this adverse margin trend, we remain optimistic on the sector, as we note that overall margins are still at high levels, with the exception of PE. Margins of products such as BD, AN and PVC have continued to rise. Overall, we believe that the current levels of margins still imply y-y earnings growth for most sector stocks in 2Q11.

From our detailed analysis of polyester demand in this report, we emerge with higher conviction that margins of PX, and particularly MEG, are likely to be strong for the next five years on a tightening supply/demand balance. To summarise, we believe that synthetic fibre demand is likely to fulfil future demand growth of textile fibre due to constrained production of cotton.

In the near term, we are most bullish on the chlor-alkali chain as we believe that production is likely to be curtailed this summer due to electricity shortages in China and Japan, while demand continues to grow briskly. Conversely, we believe that polyester margins are likely to remain subdued in 2Q11, but could pick up from 4Q11 onwards.

Our top BUYs are FPC and LG Chem for their exposure to strengthening chlor-alkali margins. FPC has the benefit of improving contributions from FPCC due to stronger refining margins, while its core carbon fibre business is also turning around. LGC should also benefit from rising butadiene and acrylics margins, while a potential recovery in its tech segments have not yet been priced in.

Our other top picks include NYP and Honam due to their strong exposure to MEG, whose margins we expect to stay strong for the next five years. We believe their share prices are likely to perform better from 3Q11 onwards, in anticipation of improving MEG margins in 4Q11.

We like gas-based producers, PCG and PTTCH, although our flat oil price projections mean that we do not see their advantage further widening. We upgrade PTTCH to BUY as we raise earnings and base our target price on the merged PTTCH-PTTAR.

Longer term, we are bullish on the sector, as we project strong Chinese demand growth, with rising income growth to outweigh higher product prices. It is not unusual to witness periods of weak margins in the aftermath of exceptionally strong periods. The key risk to our investment view is a further spike in oil prices or more severe-than-expected tightening measures in China.

Fig. 2: Key changes to price targets, ratings and earnings

As of 29 April 2011. Source: Bloomberg, Nomura estimates

Stock Share Potential Company Curr code Old New Old New price upside (%) 10F 11FFormosa Plastics NT$ 1301 TT Buy BUY 118 136 117.0 16.2 20 19LG Chem W 051910 KS Buy BUY 500,000 700,000 530,000 32.1 0 2Honam PC W 011170 KS Buy BUY 330,000 480,000 378,000 27.0 11 8Nan Ya Plastics NT$ 1303 TT Buy BUY 96 105 87.8 19.6 6 18PTT Chemicals Bt PTTCH TB Neutral BUY 150 200 160.0 25.0 14 19Petronas Chemicals RM PCHEM MK Buy BUY 7.3 8.4 7.2 16.2 11 8Formosa Chemicals NT$ 1326 TT Buy BUY 120 134 115.5 16.0 14 6Hanwha Chem W 009830 KS Buy BUY 40,000 69,000 47,700 44.7 2 6

Rating Price target NP chg (%) (new/old)

Hitting a speed bump

Long-term outlook remains healthy

FPC & LGC are top near-term picks


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Fig. 3: Regional chemicals – valuation comparison

As of 29 April 2011. Source: Bloomberg, Nomura estimates

Fig. 4: EPS estimates vs consensus


Fig. 5: Absolute and relative share price performance of our universe of chemical stocks

As of 29 April 2011. Source: Bloomberg

Mark cap Sh price Pr targetCompany Bbg Rating (US$ m) (loc curr) (loc curr) 11F 12F 11F 12F 11F 12F 11F 12FLG Chem 051910 KS Buy 32,972 530,000 700,000 12.9 11.5 3.4 2.9 30.1 27.6 0.8 0.8Formosa Plastics 1301 TT Buy 25,006 117.0 136.0 12.0 11.0 2.6 2.5 22.1 22.8 7.7 8.3Nan Ya Plastics 1303 TT Buy 24,074 87.8 105.0 13.2 11.1 2.3 2.2 17.9 20.3 6.8 8.1Formosa Chemicals 1326 TT Buy 22,950 115.5 134.0 11.0 11.2 2.3 2.2 21.3 20.1 8.2 8.0Petronas Chemicals PCHEM MK Buy 19,524 7.23 8.40 15.1 13.8 2.6 2.4 18.3 18.0 3.3 3.6Honam PC 011170 KS Buy 11,305 378,000 480,000 10.9 9.8 2.2 1.8 22.1 20.1 0.5 0.5PTT Chemical PTTCH TB 8,137 160.0 200.0 11.8 9.8 1.9 1.7 18.2 19.2 3.7 4.5Hanwha Chemical 009830 KS Buy 6,282 47,700 69,000 11.0 9.5 1.9 1.6 18.7 18.1 1.0 1.0

Average 12.2 11.0 2.4 2.2 21.1 20.8 4.0 4.4

PE (x) PB (x) ROE (%) Net yield (%)

Buy

Unit 2010 2011F 2012F 2013F 2011F 2012F 2013F 2011F 2012F 2013FFPC NT$ 7.4 9.9 10.6 10.7 8.6 8.9 9.9 15% 19% 8%YoY (%) 65 33 7 0FCFC NT$ 8.3 10.5 10.2 9.3 9.6 9.9 9.4 9% 3% -1%YoY (%) 61 26 -2 -9NYP NT$ 5.2 6.6 7.9 8.6 6.5 7.2 7.4 2% 10% 16%YoY (%) 150 27 19 8Honam W 24,616 34,539 38,383 43,619 37,161 41,784 46,415 -7% -8% -6%YoY (%) -2 40 11 14Hanwha Chem W 2,845 4,351 5,010 5,240 4,437 5,017 5,680 -2% 0% -8%YoY (%) 16 53 15 5LG Chem W 32,727 40,993 46,017 48,030 36,312 41,311 46,564 13% 11% 3%YoY (%) 40 25 12 4PTT Chem Bt 7 14 16 16 13.2 16.1 18.5 2% 1% -12%YoY (%) 51 99 21 -1Petronas Chem RM 0.39 0.48 0.52 0.55 0.49 0.55 na -2% -5% naYoY (%) 30 23 9 6

Consensus NMR/Consensus NMR estimates

Company -1w -1m -3m -6m -1y -1w -1m -3m -6m -1yFormosa Plastics 5.9 12.5 17.8 31.5 67.1 5.2 8.7 19.6 21.8 48.5Formosa Chemicals 2.7 3.6 9.0 29.8 45.3 2.0 0.1 10.6 20.2 29.1Nan Ya Plastics 1.7 0.9 9.1 25.1 32.6 1.1 (2.5) 10.7 15.9 17.9LG Chem (5.2) 15.7 28.5 41.0 87.3 (4.2) 12.0 21.4 23.3 48.8Honam PC (13.1) (2.5) 6.5 46.8 160.7 (12.2) (5.6) 0.6 28.4 107.1Hanwha Chem (12.2) 10.7 20.6 47.2 182.3 (11.2) 7.1 14.0 28.8 124.2PTT Chemical (2.7) 1.9 9.6 3.9 54.6 (1.7) (0.8) (2.0) (4.5) 7.9Petronas Chemicals (0.3) (1.9) 17.6 na na (1.0) (0.6) 17.3 na na

% change % change rel to underlying market


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Historical valuations

Fig. 6: FPC- forward P/BV


Fig. 7: NYP – forward P/BV


Fig. 8: FCFC – forward P/BV


Fig. 9: LG Chem – forward P/BV


Fig. 10: Honam PC – forward P/BV


Fig. 11: Hanwha Chem – forward P/BV


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Fig. 12: PTT Chemical – forward P/BV


Investment risks

• Volatile crude prices can impact earnings, as feedstock and product prices are linked to crude prices. For example, the sharp decline in crude prices in 4Q08 led to large losses amongst chemical companies. On the other hand, rising crude prices may directly benefit companies that are integrated into refining, such as the Formosa group.

• Uncertain economic outlook. Our positive view on chemical demand is based on an improving global and Asian economic outlook. Nomura is forecasting global economic growth of 4.4% in 2011 and 4.6% in 2012. Nomura’s China economic growth forecasts are 9.8% for 2011 and 9.5% for 2012. Any changes in these forecasts could have a significant impact on our sector outlook.

• Chinese policy has a major impact on demand patterns. For example, a discontinuation of incentives in the autos and appliance sector could lead to a significant decline in plastics demand.

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The future is synthetic

Polyester market share has grown steadily

Over the past 30 years, synthetic fibres have increased their market share of the global textile market, rising from 48% in 1980 to 63% in 2009. During that period, synthetic fibre volumes have grown from 14.3mn t to 44.1mn t, a 30-year CAGR of 4%. In contrast, natural fibre volumes have grown from 15.2mn t to 26.4mn t, a 30-year CAGR of 1.9%.

Synthetic fibres have gained market share at the expense of natural fibres due to the increased availability of synthetic fibres, as their production is easily scalable due to the rapid expansion of the petrochemical sector. While natural fibres have the advantage of being more comfortable and water absorbant, synthetic fibres have the advantage of fulfilling the needs of modern spinning equipment for strength and uniformity.

Fig. 13: Global synthetic fibre market share

Source: Oerlikon

Fig. 14: Synthetic market share as % of global fibres

Source: Oerlikon

Amongst synthetic fibres, polyester has gained the most market share against its main competitors – nylon and acrylic fibres. From a market share of 47% in 1980, polyester’s market share has grown to 79% in 2009.

We attribute this primarily to the significant cost advantage that polyester enjoys – over the past 30 years, polyester prices have been cheaper than nylon by an average of 55%. Polyester is also becoming increasingly versatile and is making gradual inroads into areas once dominated by nylon such as underwear, sportswear and ladies’ stockings.

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Fig. 15: Polyester market share as % of synthetic fibres

Source: Oerlikon

Fig. 16: Polyester vs nylon prices

Source: Thomson Reuters Datastream

Future cotton production growth may be limited

Over the past 44 years, global cotton production has grown at a CAGR of 1.3%, from 12.4mn t in 1966 to 22mn t in 2010. Over the same period, the global cotton harvested area has fluctuated between 29 – 36mn ha. The main driver of increased production has been rising yields, which have increased from 370kg/ha in 1966 to 730kg/ha in 2010.

According to the International Cotton Advisory Committee (ICAC), this considerable increase was driven by improved biotechnology, expanded use of existing techniques and development of cotton production in high-yielding regions of Xinjiang (China), Central Brazil and Eastern Turkey.

Global production peaked in 2007 at 26.5mn t and declined for the next three consecutive years due primarily to declining US and China cotton production. Adverse weather conditions played a significant part in 2010, as heavy flooding in Pakistan and Australia damaged the cotton crop, with the resulting high cotton prices causing the Indian government to impose exports restrictions. The current cotton price of US$1.6/lb is down 18% from its peak in early April.

Fig. 17: Global cotton production

Source: USDA

Fig. 18: Global cotton harvested area and production yield

Source: USDA

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In the short term, the ICAC expects record-high cotton prices to stimulate increased plantings and for production to recover to 27.4mn t in 2012 from 22mn t in 2010. Even if production were to recover so strongly, we believe that the stock-to-use ratio at end-2012 would still be 45%, below the ten-year average of 50%. We note that the futures market is currently pricing in December 2011 cotton at US$1.38/lb or US$3,000/t, still a significant premium to polyester prices of US$2,000/t.

Fig. 19: Global cotton stock-to-use ratio

Source: ICAC

Fig. 20: Cotton price forward curve

Source: Bloomberg

Over the long run, the ICAC believes that world production may return to the plateau in 2006-08, but they note that there may be constraints beyond this level due to the following factors:

• Prices of grains and oilseeds may outpace cotton because food crops have no synthetic competitors while cotton must compete with polyester for market share.

• With global inventories of food crops at low levels, we believe governments may prioritise food production over cotton, as food inflation is likely to be less tolerated.

Fig. 21: Price trends of major crops


Fig. 22: Global inventories (stock-to-use) of major crops

Source: FAO

• China is the largest producer of cotton globally with a 30% global market share in 2010, but we note that China’s production has been falling over the past few years, which coincides with a decline in the harvested area of cotton in China, as well as a decline in total arable land in China.

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Fig. 23: Arable land: World vs China

Source: FAO

Fig. 24: China cotton – harvested area vs production

Source: FAO

• Mandates by governments to expand biofuel production have created a new demand driver for corn. For example, in 2010, the US produced 13bn gallons of ethanol, equivalent to around 30% of its corn production and about 8% of total US arable land. In the global context, the US ethanol industry’s market share of the total grain supply (corn, wheat, rice, etc) is 3%. With the recent approval of the E15 blend (15% ethanol, 85% gasoline), US ethanol demand could rise further from the current blending level of 10%.

• Over the next few years, there are no breakthrough technologies ready for commercial applications that could give a boost to the world yield. For example, there is no equivalent of the 1996 introduction of the genetically modified pest-resistant Bt cotton strain.

Consequently, the ICAC projects only a gentle increase in global cotton yields in the coming decade. The ICAC forecasts a strong rebound in production in 2011 and 2012, but for production to fall to a more stable level of around 26mn tpa for the remainder of the decade.

Fig. 25: Projected world cotton yields

Source: ICAC

Fig. 26: Projected world cotton production

Source: ICAC

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Fibre demand expected to remain strong

Over the coming decade, we forecast global textile fibre demand to grow by 3.4% pa, the same rate as in the previous decade and slightly higher than the historical 30-year CAGR of 3%.

We derive our 3.4% pa growth rate from the following relationship:

Fibre demand growth = Population growth + (per capita GDP change * income elasticity of fibre demand).

The key assumptions we have used for the variables are as follows:

• Population growth – we have assumed a 1% pa growth rate for the forecast period based on US Census estimates.

• Per capita GDP change of 4.0-4.5% pa globally based on estimates by the IMF.

• Income elasticity of 0.6x, the historical 30-year average.

Based on our projected 3.4% pa growth rate, we project global fibre demand to rise to 102mn t by 2020 from 70.5mn t in 2009. This would result in global consumption per capita rising to 13.5kg in 2020 from 10.4kg in 2009.

Fig. 27: Global demand – total fibres

Source: Oerlikon, Nomura estimates

Fig. 28: Global consumption per capita – total fibres


We believe our projections are reasonable, as in our view there remains considerable growth to come from developing economies, primarily China and India, whose economies are expected to grow at a faster rate than the world economy. As the combined economies of China and India become an increasingly important component of global GDP, we believe their impact is likely to become more significant.

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Fig. 29: Fibre consumption vs income per capita (2010)

Source: Oerlikon

Fig. 30: China growth rate & Chindia GDP as % of global

Source: IMF

China’s consumption is key In the case of China, we believe that the key to increased consumption of fibres lies in stimulating demand in rural areas. Based on data by the National Bureau of Statistics, rural spending on clothes was only 3% of income in 2010 vs 8% in urban areas. While rural spending on clothes has been increasing at double-digit rates in recent years, it is still coming off a low base (Rmb 263 per capita in 2010).

Fig. 31: China – clothes spending as % of income per capita

Source: CEIC

Fig. 32: China – per capita spending on clothes

Source: CEIC

We believe there is a convincing case for rural consumption to grow, as we expect rural disposable incomes to continue to grow strongly. For example, in 2011, government spending on agriculture, farmers and rural areas is targeted to rise to Rmb988bn, +15% y-y. The government is also expected to deepen healthcare reform with government subsidies for the rural healthcare system. In 2010, rural income per capita grew at 15% y-y, faster than the 12% increase in urban income per capita.

Over the longer term, we believe there remain strong growth prospects for China’s fibre demand due to the following factors:

• Increased urbanisation – the 12th FYP targets the urbanisation ratio to rise to 51.5% over the next five years, from 47.5% currently.

• Significant wage hikes in the past few years, which were aimed at lower-income groups. For example, the minimum wage was raised by an average of more than 20% in 2009.

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• The possibility of major tax reform at the beginning of the 12th FYP, which could result in the lowering of tax rates and increase in taxable income threshold, which are measures that could increase disposable income.

For full details of the ramifications of China’s 12th FYP, please refer to the report published by our China Strategy team entitled Making it happen, published on 9 March 2011.

Will higher clothes prices hurt demand? A concern is the possibility that the end demand for garments could be negatively impacted by higher prices due to the increase in the prices of raw materials, notably cotton, which has risen by 160% since January 2010.

We believe this is an issue of concern, but the effect could be limited as the typical component of raw materials in an article of clothing is only around 10% of the retail price. Therefore, even if raw materials were to double, the increase in retail prices (assuming full pass-through) would only be around 10-15%.

Fig. 33: Cost breakdown of Men’s woven cotton shirt in the US market

Source: infoDev

Overall, we believe that income growth is a more important factor than price increases. For example, if Chinese urban income per capita were to grow at the 7% pa, (as targeted by the Chinese government under the 12th FYP), this would translate into absolute income growth of around Rmb1,500 pa. If retail clothes prices were to rise by 15%, the increased spending on clothes would only rise by Rmb200. Therefore, we believe there remains scope for continued growth in garment volume sales, as long as income continues to grow strongly.

US$ % of total cost

Fabric 3.0 9.8CMT (Cut-make-trim) 2.0 6.5Quota Category 1.8 5.9FOB price (for completed garment) 6.8 22.2Duty (19.8%) 1.3 4.4Greight 0.3 1.0Clearance & inland transport 0.1 0.5LDP (landed-duty-paid) 8.6 28.0Private label importer price mark-up 3.7 12.0Wholesale price 12.3 40.0Retail price mark-up 18.4 60.0Retail price 30.7 100.0

Income growth more important than price increases


15

Synthetic fibres to fill the gap

With constrained production of natural fibres (1.1% pa growth from 2010-2020F) and rising demand of all fibres (3.4% pa growth over the same period), we believe that the gap is likely to be filled by synthetic substitutes, which we project to grow by 4.4% pa over the same period.

We believe that the pace of synthetic fibre market share gains is likely to be the highest in 2010 and 2011 owing to the cotton premium to synthetics. Historically, periods of significant cotton premium have resulted in synthetics gaining market share, and we believe this is likely to be the case given the exceptional premium that cotton commands at present.

According to our projections, the volume of synthetic fibres will reach 74mn t in 2020, from 44mn t in 2009. In this scenario, we project that the market share of synthetic fibres to reach 72% in 2020 compared to 63% in 2009.

Fig. 34: Cotton market share vs relative cotton prices

Source: Oerlikon, Thomson Reuters Datastream

Fig. 35: Synthetic fibre volume sales projection to 2020F


Polyester to dominate synthetic market share Amongst synthetic fibres, we believe that polyester will be the biggest beneficiary due to its cheaper price, versatility and expansion of key polyester intermediate production capacities, which should allow polyester producers to ramp up production. We project the polyester market share of synthetic fibres to rise to 90% by 2020 from 79% in 2009. This will result in polyester fibre demand rising to 62mn t in 2020, from 32mn t in 2009.

Fig. 36: Synthetic fibre and polyester fibre market share


Fig. 37: Synthetic fibres breakdown by product


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High cotton prices to accelerate shift to synthetics


16

PET volumes also expected to rise In addition to robust growth of polyester fibres, we believe that there is also robust growth ahead for polyethylene terephthalate (PET), which is primarily used to make soda bottles. PET is significant, as it constitutes around 30% of global polyester demand.

In the past decade, global PET demand has grown at an average rate of 8% pa due to rising demand for soda bottles. Going forward, we believe that China is likely to remain the key growth story, as consumption per capita remains at low levels, while retail sales growth of beverages continues to accelerate, with growth of 30% y-y in 2010.

In the coming decade, we project a lower growth rate of 6% pa, which will be primarily driven by rising demand from developing countries, particularly China. We project that this will result in global PET demand rising to 28mn t in 2020, from 15mn t in 2009.

Fig. 38: Y-Y chg in China retail sales of beverages

Source: CEIC

Fig. 39: Per capita consumption of PET

Source: CMAI

Aggregate polyester demand to reach 90mn t in 2020 In conclusion, we project global polyester demand growth of 6% pa from 2010-2020. We believe growth will be fastest in the 2010-2012 period (we forecast 8% pa growth) due to high cotton prices. We project growth to slow to 6% pa for the 2013-2015 period, slowing further to 4.5% pa for the 2016-2020 period. In total, we project total polyester demand to grow to 90mn t in 2020, from 47mn t in 2009.

Fig. 40: Global polyester demand

Source: Nexant, CMAI, Nomura estimates

Fig. 41: Global polyester demand per capita

Source: CMAI, Nomura estimates

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PET demand growth to be driven by China growth


17

Assessing demand/supply of the polyester chain

Why the polyester chain is critical We believe that the polyester chain is critical for the outlook for chemical companies, as these products are amongst the largest products by volume and revenue. For instance, MEG is around 25% of revenue for Nan Ya Plastics and Honam. PTA is around 25% of Formosa Chemical’s revenue and 11% of Honam’s.

PX is less significant for chemical companies, but is highly significant for Asian refineries – even though PX is less than 5% of production volume of oil refineries, we estimate that it contributes around 22-60% of net profits of refineries under our coverage.

PX and MEG have the brightest outlook Based on our polyester demand projections and forthcoming capacity additions, we proceed to model individual product supply/demand balance. We summarise our key conclusions below:

• Polyester – we estimate that current polyester tightness could ease toward the end of 2011 and the market could become increasingly oversupplied in 2012, when we estimate around 7.5mn tpa of new polyester capacity is expected to start up. We expect operating rates to subsequently stabilise due to slower capacity additions.

• PTA – we believe the current strong PTA-PX spread is sustainable this year, but is likely to worsen from 2012-2013 due to the large new PTA capacity additions of a combined 12mn tpa in those two years. The supply/demand is expected to tighten slightly in 2014-2015 due to a slower pace of capacity additions.

• PX – we believe PX could be tight for the next four years due to large PTA capacity additions. We project PX to be the tightest in 2011-2012, and to loosen slightly in 2013-2014. We believe that PX margins will pick up in 2H11 when Zhejiang Yisheng’s 1.5mn tpa PTA plant starts up.

• MEG – with limited capacity additions over the next few years, we believe MEG has the best prospects for continued margin strength over the next five years, where we project average demand growth of 6.4% pa vs supply growth of 2.1% pa. We believe the current downward adjustment in MEG reflects a more sensible level of margins vs the exceptional levels in 1Q11, as we project that global operating rates of MEG are only around 82% this year.

Fig. 42: Supply/demand balance of polyester and polyester intermediates

Source: PCI, Nomura estimates

(k tpa) Polyester PTA PX MEG Polyester PTA PX MEG Polyester PTA PX MEG2008 (414) (352) (236) (145) 2,320 1,205 290 1,290 2,735 1,557 526 1,4352009 1,519 1,291 865 532 2,152 2,862 2,303 545 634 1,571 1,438 132010 4,821 4,098 2,746 1,687 2,959 315 3,544 2,377 (1,862) (3,783) 798 6902011F 4,038 3,433 2,300 1,413 5,967 2,467 1,903 700 1,929 (966) (397) (713)2012F 3,433 2,918 1,955 1,202 7,507 5,353 1,212 450 4,074 2,435 (744) (752)2013F 4,334 3,684 2,468 1,517 5,409 7,305 2,606 500 1,076 3,621 138 (1,017)2014F 4,385 3,727 2,497 1,535 5,773 3,168 3,243 400 1,388 (559) 745 (1,135)2015F 4,060 3,451 2,312 1,421 2,135 313 600 733 (1,925) (3,138) (1,712) (688)

Incremental demand New capacity Surplus/(Deficit)

PX and MEG to be tightest


18

Fig. 43: Polyester – global demand/supply


Fig. 44: PTA – global demand/supply


Fig. 45: PX – global demand/supply


Fig. 46: MEG – global demand/supply

Source: CMAI, Nomura estimates

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19

Healthy prognosis for overall products

Hitting a speed bump

Over the past two months, margins of most chemicals have fallen from their peaks in January-February 2011. We attribute the deterioration in these product margins to the following factors:

• A sharp increase in crude prices, with Brent rising from US$100/bbl in the beginning of February 2011 to the current level of> US$120/bbl, as a result of MENA unrest.

• Slowing demand in China, which we attribute to tightening monetary conditions following the 50bp interest rate hike and 200bp reserve requirement ratio (RRR) hike so far this year. This has restricted downstream plastic processors that face rising working capital requirements due to the significant increase in prices of raw materials.

While we are concerned about this downwards trend, we are not particularly alarmed, as despite the recent fall, margins for the majority of products remain higher or are in line with our average full-year forecasts. The only products that are significantly weaker than our forecasts are HDPE and SM.

We also note that margins of major products remain significantly stronger on a y-y basis, which should result in continued strong earnings momentum. The only major products that have shown significant margin deterioration on a y-y basis are HDPE and SM, but these are not significant products for the companies we cover.

Fig. 47: Margin trends of key products


Fig. 48: Company product gearing matrix

Source: Company data, Nomura research

US$/t 22-04-11 -1W -1M -3M -6M -12M -1W -1M -3M -6M -12MPSF-MEG-PTA 379 340 518 254 187 170 11 (27) 49 102 122MEG - Ethylene 281 316 425 436 186 136 (11) (34) (35) 51 107PX - Naph 540 549 797 754 324 292 (2) (32) (28) 67 85Butadiene - Naph 2,315 2,054 1,565 1,294 1,017 1,362 13 48 79 128 70PVC - Ethylene 568 560 435 383 445 350 1 30 48 28 62AE - Prop 1,628 1,615 1,626 1,858 1,628 1,211 1 0 (12) 0 34PTA - Naph 305 364 545 509 227 227 (16) (44) (40) 34 34Phenol - Naph 940 954 825 829 1,107 857 (1) 14 13 (15) 10AN - Propylene 1,215 1,218 1,125 1,050 833 1,115 (0) 8 16 46 9ABS - Naph 1,210 1,259 1,375 1,409 1,282 1,232 (4) (12) (14) (6) (2)PP - Naph 560 579 645 649 592 577 (3) (13) (14) (5) (3)Propylene - Naph 475 501 590 479 484 542 (5) (20) (1) (2) (12)ECH - Prop 817 809 791 854 671 961 1 3 (4) 22 (15)LDPE - Naph 570 619 720 844 697 682 (8) (21) (32) (18) (16)2-EH - Prop 375 378 420 510 463 480 (1) (11) (26) (19) (22)SM - Naph 360 399 435 539 447 502 (10) (17) (33) (19) (28)HDPE - Naph 255 294 365 419 427 457 (13) (30) (39) (40) (44)Benzene - Naph 132 136 225 251 187 245 (3) (41) (47) (29) (46)Ethylene - Naph 280 304 315 374 337 522 (8) (11) (25) (17) (46)

Spreads Change (%)

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FPC 7 12 13 4 4 25 10 24FCFC 8 4 8 27 5 10 8 9 6 9 7

NYP 17 27 7 15 16 19

LGC 3 3 2 3 5 5 3 19 4 18 6 3 21 4

Honam 4 25 11 12 2 19 22 5Hanwha 16 30 4 5 26 19

PTTC 28 18 10 42

PCG 2 7 4 13 4 13 2 8 9 4 14 9

OtherUpstream Mid-stream Downstream Fibers


20

Analysis of individual products

Fig. 49: Summary of recent trends and outlook for product margins (part 1)

Source: Thomson Reuters Datastream, Nomura estimates

Current YTD 2Q11 Recent margin trend Margin outlookProduct spread spread Min Max Direction Comments CommentsUpstream

Ethylene (less naphtha)

280 355 106 824

Ethylene margins have declined in spite of a heavy cracker maintenance schedule due to poor PE demand, higher Middle East production and new capacity startups in Asia.

Ethylene margins could pickup later this year and rise throughout the next few years as we expect limited capacity expansions amidst steady demand growth.

Propylene (less naphtha)

475 521 69 724

Propylene margins remain strong due to steady demand for propylene derivatives and ongoing refinery maintenance that has reduced supply.

Propylene margins are expected to remain strong over the next few years due to the shift towards ethane cracking and continued strong demand for propylene derivatives.

Butadiene (less naphtha)

2315 1572 (45) 2248 BD margins have been rising strongly due to reduced supply from cracker shutdowns and rising SBR demand.

We expect BD to remain structurally short for the next few years due to limited capacity expansion and strong end demand from ABS and SBR.

Benzene (less naphtha)

132 217 (56) 766

Benzene margins have weakened significantly owing to poor demand for SM while supply has increased due to the exceptional profitablity of PX, a co-product of benzene.

We expect Benzene margins to gradually improve on rising SM demand and slowing Benzene capacity additions, although significant spare capacity is likely to limit margin gains.

Paraxylene (less naphtha)

540 688 126 894

PX margins appear to have peaked in Feb - Mar 11 at >US$700/t due to the Japan earthquake and unplanned closures. The current startup of S-Oil's new plant has led to lower but still attractive level of margins.

We believe margins are likely to stabilise at the US$450-500/t level for the next few months, and pickup in 2H11 due to the startup of large new PTA plants. We project PX margins to tighten further in 2012.

Caustic soda (price)

400 368 45 600

Caustic soda margins have benefited from the earthquake due to the estimated loss of around 10% of Japanese capacity for around 6 months.

We see margins as being relatively stable at US$300-400/t over the next few years as demand/supply remains well balanced. Restriction on production in China (electricity shortages) could keep supply snug.

Methanol (price)

345 347 111 600

Methanol prices have fallen around 10% from their peak in Jan due to reduced Chinese imports and startup of new plants in Malaysia and Egypt.

We believe methanol prices will remain rangebound as there remains significant overcapacity in China. Volatile energy prices are likely to be the key uncertainty.

Midstream

Acrylonitrile (less propylene)

1215 1112 76 1259

AN margins have risen strongly due to significant unplanned shutdowns in the US and Asia. The resolution of these shutdowns could see margins ease in 2H11.

We believe AN is likely to remain tight until 2013, when we expect new supply equivalent to 6% of capacity to start up.

2-EH (less propylene)

375 445 75 790

2-EH margins have declined as producers have been unable to pass on higher propylene costs while demand remains weak owing to Chinese tightening measures.

We expect margins to improve over the coming years as we expect global capacity growth of 2.6% pa (2011-2015) to trail demand growth of around 4.5% pa.

MEG (less ethylene)

280 405 31 861

MEG margins declined in April from very high levels in 1Q11 due to high inventories and tightening measures, although margins are still at attractive levels.

The outlook for MEG is strong as we see the supply/demand tightening every year for the next 5 years owing to limited global capacity growth of 2.1% pa vs demand growth of 6.4% pa.

Styrene (less naphtha)

360 468 179 1008

SM margins weakened significantly in April due to more stringent new EPS regulations in China that local producers were unable to comply with. These new rules have been reversed, and SM margins appear to have recovered.

We believe SM margins could gradually improve over the next few years as we expect capacity growth of only 1% pa while demand could grow by 3% pa.

10 year


21

Fig. 50: Summary of recent trends and outlook for product margins (part 2)


Current YTD 2Q11 Recent margin trend Margin outlookProduct spread spread Min Max Direction Comments CommentsMidstream

Phenol (less naphtha)

940 869 39 1108 Phenol margins have risen due to reduced supply from Japan following the earthquake and robust end demand from BPA.

We believe phenol margins are likely to remain strong until 2013, when large new capacities, equivalent to 8% of global supply starts up.

PTA (less naphtha)

305 488 (58) 602

PTA margins have corrected in April following record levels reached in Feb - Mar 11 due to increased availablity of PX supply. Weaker polyester demand over the next few months could keep margins under pressure.

We believe PTA margins are likely to peak this year and decline significantly in 2013 due to large capacity additions. PTA producers integrated into PX are likely to continue to enjoy reasonable margins due as we expect PX to remain tight.

BPA (less phenol)

414 475 16 577 BPA margins have been strong due to loss of Japanese capacity and startup of new PC plants in China.

BPA margins are projected to be strong for 2011-12 due to PC capacity expansions, but are expected to soften from 2013-2015 due to the lack of new PC expansions.

Downstream

HDPE (less naphtha)

255 367 245 772

HDPE margins have declined to below US$300/t, below the break-even level due to oversupply from increased production in the Middle East and startup of PTT Chemical's new plant in 1Q11.

HDPE margins have likely bottomed as producers have announced plans to cut production. We believe HDPE margins are likely to gradually improve as global operating rates slowly tighten to 88% by 2015 from 83% in 2011.

LDPE (less naphtha)

570 743 304 989

LDPE margins have declined to US$600/t, below the recent peak of US$800/t as end-users have increasingly switched to cheaper HDPE and LLDPE grades.

As we project global LDPE utilisation rates of 90% for 2012-13 from 87% in 2011, we believe that LDPE margins are likely to recover in 2H11 and throughout the next few years.

PP (less naphtha)

560 633 261 817

PP margins have declined due to weaker demand in China and increased exports from the Middle East. We believe that margins are likely to have bottomed as the current PP-propylene spread is loss making.

We project a meaningful PP recovery next year as the pace of capacity additions slows down to 3% pa in 2012-13 while we project demand to grow at around 5% pa.

PVC (less ethylene)

568 437 200 518

PVC margins are benefiting from reconstruction demand in Japan and reduced exports from Japan owing to plant damage. A series of unplanned plant shutdowns in Asia and US have further tightened supply.

We believe that PVC margins could ease from high levels in 2Q11, but should remain on an relatively high level as Chinese demand remains robust while carbide production is expected to be capped by anti-polluting measures.

ABS (less naphtha)

1210 1370 436 1411

ABS margins have weakened due to slowing demand growth for autos, while auto production has also slowed as the earthquake has caused temporary shortages of key components.

We believe ABS margins will be remain stable at a high level over the next few years as supply/demand should remain balanced. The shortage of AN and BD feedstocks are likely to help maintain margins at a high level.

Carbon fiber 12k (price)

36k 32k 22k 42k Carbon fiber margins have been improving steadily owing to a recovery in demand from the aerospace and industrial segments.

We believe that margins are likely to gradually improve over the next few years on increasing demand for new aircraft models and slowing capacity additions.

10 year


22

Based on our forecast of stable crude prices at US$110/bbl for 2011-13 and continued strong global demand, we maintain our average chemical demand growth forecast of 4-5% for major products. As capacity additions have remained largely unchanged, we maintain our view of tightening margins over the next few years.

Fig. 51: Global supply less demand growth (2011)

Source: Nomura estimates





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23

Price & margin trend forecasts

Key changes to price and margin forecast

Upwards revisions • Naphtha. To factor in our higher oil price forecast for 2011, we raise our naphtha price

forecast to US$990/t for 2011. As we forecast stable oil prices for 2011-2013, our naphtha price forecast is also stable at around US$1000/t.

• Ethylene. We lift our ethylene price forecast by 11% in 2011 to take into account higher feedstock prices in that year, but are leaving our margin forecasts unchanged.

• LDPE. We raise our LDPE margin forecasts by 22%/12% for 2011/12, respectively, to reflect a tighter-than-expected supply/demand balance. We introduce 2013 margins of US$810/t, as we expect the supply/demand balance to further tighten.

• Propylene. We raise our propylene margins by 20%/9% for 2011/12F, respectively, to take into account the continued strong demand for propylene derivatives and reduced supply due to the increased use of ethane cracking.

• Butadiene. We raise our butadiene margins by 25%/28% for 2011/12F, respectively, to take into account the stronger-than-expected demand from synthetic rubber that has benefited from the sharp rise in natural rubber. We expect butadiene to be amongst the tightest products in our universe of chemicals.

• Phenol. We raise our phenol margins by 13%/10% for 2011/12F, respectively, as demand/supply has tightened following outages in Japan due to the earthquake. We believe that margins could decline in 2013 due to large new capacity expansions.

• Paraxylene. We raise our PX margins by 20%/20% for 2011/12F, respectively, to factor in the impact of outages in Japan due to the earthquake and increased demand from PTA due to the accelerated construction of PTA plants in China.

• PVC. We raise our PVC margins by 5%/7% for 2011/12F, respectively, to factor in the impact of outages in Japan due to the earthquake, increased demand due to reconstruction activity and strong Chinese demand.

Downwards revisions • HDPE. We lower our HDPE margins by 10%/11% for 2011/12F, respectively, to reflect

the higher-than-expected supply coming from the Middle East, and weaker-than-expected demand in China due to tightening measures.

• SM. We lower our SM margins by 7%/10% for 2011/12, respectively, to reflect the weaker-than-expected demand in China as a result of stricter rules regarding fire-proof materials in China that have resulted in lower production of EPS.


24

Fig. 54: Key changes to price forecasts


Fig. 55: Key changes to margin forecasts


US$/t, US$/bbl New Old % chg New Old % chg New Old % chgBrent 110 95 16 110 110 0 110 - -Naphtha 990 858 15 1000 978 2 1010 - -Ethylene 1350 1218 11 1420 1398 2 1490 - -HDPE 1360 1268 7 1480 1518 (2) 1570 - -LDPE 1650 1398 18 1740 1638 6 1820 - -MEG 1140 1051 8 1212 1179 3 1284 - -PVC 1135 1049 8 1150 1109 4 1175 - -Propylene 1470 1258 17 1500 1438 4 1540 - -AN 2570 2178 18 2650 2398 11 2530 - -Butadiene 2490 2058 21 2600 2228 17 2630 - -SM 1510 1418 7 1560 1598 (2) 1610 - -Phenol 1840 1608 14 1860 1758 6 1560 - -Paraxylene 1540 1318 17 1600 1478 8 1570 - -PTA 1390 1238 12 1360 1338 2 1310 - -

2011 2012 2013

US$/t New Old % chg New Old % chg New Old % chgHDPE-Naphtha 370 410 (10) 480 540 (11) 560 - -LDPE-Naphtha 660 540 22 740 660 12 810 - -MEG-Ethylene 330 320 3 360 340 6 390 - -PVC-Ethylene 460 440 5 440 410 7 430 - -Propylene-Naphtha 480 400 20 500 460 9 530 - -AN-Propylene 1100 920 20 1150 960 20 990 - -Butadiene-Naphtha 1500 1200 25 1600 1250 28 1620 - -SM-Naphtha 520 560 (7) 560 620 (10) 600 - -Phenol-Naphtha 850 750 13 860 780 10 550 - -PX-Naphtha 550 460 20 600 500 20 560 - -PTA - Naphtha 400 380 5 360 360 0 300 - -

2011 2012 2013


25

Fig. 56: Asian spot chemical prices


Fig. 57: Asian spot chemical spreads


US$/tonne US$/bbl 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F

Brent 24.5 25.0 28.9 38.2 54.0 65.6 73.1 97.7 62.0 80.0 110.0 110.0 110.0

Naphtha 204 236 284 388 487 582 701 858 558 727 990 1,000 1,010

Ethylene 445 413 470 900 906 1,136 1,153 1,204 845 1,114 1,350 1,420 1,490

LDPE 615 587 677 1,106 1,118 1,227 1,434 1,598 1,142 1,421 1,650 1,740 1,820

HDPE 571 521 609 943 1,022 1,211 1,304 1,440 1,079 1,173 1,360 1,480 1,570

Propylene 405 455 563 822 943 1,100 1,093 1,229 901 1,201 1,470 1,500 1,540

PP 522 567 698 958 1,055 1,223 1,317 1,451 1,039 1,288 1,530 1,590 1,660

AN 664 634 857 1,123 1,344 1,505 1,763 1,862 1,237 2,174 2,570 2,650 2,530

Butadiene 367 560 707 954 1,220 1,352 1,068 2,132 1,003 1,913 2,490 2,600 2,630

Benzene 296 350 455 833 825 885 1,038 1,025 694 927 1,190 1,220 1,250

SM 494 613 699 1,048 1,133 1,192 1,279 1,327 954 1,194 1,510 1,560 1,610

PS 605 676 793 1,186 1,172 1,248 1,435 1,421 1,051 1,337 1,610 1,670 1,720

ABS 849 799 928 1,291 1,409 1,528 1,703 1,872 1,354 1,961 2,140 2,080 2,150

Phenol 513 568 693 1,140 1,046 1,179 1,570 1,416 858 1,586 1,840 1,860 1,560

BPA 1,028 795 963 1,365 1,571 1,414 1,748 1,698 1,276 1,918 2,280 2,235 1,980

PVC 497 544 617 882 815 814 936 1,030 777 962 1,135 1,150 1,175

MEG 441 424 656 920 862 851 1,113 975 632 880 1,140 1,212 1,284

PX 432 422 620 819 906 1,159 1,141 1,198 990 1,056 1,540 1,600 1,570

PTA 450 488 577 776 812 899 883 913 833 968 1,390 1,360 1,310

US$/tonne 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F

Ethylene-Naphtha 242 177 186 512 419 554 452 346 287 387 360 420 480

LDPE-Naphtha 412 351 393 718 631 645 733 740 584 694 660 740 810

LDPE-Ethylene 170 174 207 206 212 91 281 394 297 307 300 320 330

HDPE-Naphtha 368 285 325 555 535 629 603 582 521 446 370 480 560

HDPE-Ethylene 126 108 139 43 116 75 151 236 234 59 10 60 80

Propylene-Naphtha 201 219 279 434 456 518 392 371 343 474 480 500 530

PP-Naphtha 319 331 414 570 568 641 616 593 481 561 540 590 650

PP-Propylene 117 112 135 136 112 123 224 222 138 87 60 90 120

AN-Propylene 259 179 294 301 401 405 670 633 336 973 1,100 1,150 990

Butadiene-Naphtha 164 324 423 566 733 770 367 1,274 445 1,186 1,500 1,600 1,620

Benzene-Naphtha 93 114 171 445 338 303 337 167 136 200 200 220 240

SM-Naphtha 291 377 415 660 646 610 578 469 396 467 520 560 600

PS-SM 111 63 94 138 39 56 156 94 97 143 100 110 110

ABS-Naphtha 645 563 644 903 922 946 1,002 1,014 796 1,234 1,150 1,080 1,140

Phenol-Naphtha 310 332 409 752 559 597 869 558 300 859 850 860 550

BPA-Phenol 515 227 270 225 525 235 178 282 418 332 440 375 420

PVC-Ethylene 274 338 382 432 362 246 360 428 355 405 460 440 430

MEG-Ethylene 174 176 374 380 318 169 421 252 125 212 330 360 390

PX-Naphtha 228 186 336 431 419 577 440 340 432 329 550 600 560

PTA - Naphtha 247 252 293 388 325 317 182 55 275 241 400 360 300


26

Price & margin trends

Fig. 58: Price trend of major chemicals


US$/t 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11Naphtha 417 517 611 687 723 711 666 807 918 1,037Ethylene 645 764 969 1,013 1,273 1,143 942 1,099 1,283 1,356HDPE 899 1,102 1,164 1,147 1,242 1,164 1,065 1,221 1,306 1,350LDPE 936 1,112 1,224 1,292 1,459 1,370 1,288 1,568 1,699 1,683LLDPE 943 1,112 1,230 1,232 1,370 1,258 1,141 1,335 1,416 1,405MEG 490 550 699 788 965 822 757 976 1,206 1,121PVC 646 729 884 858 990 964 917 976 1,040 1,211Caustic soda 770 267 92 190 193 227 248 389 367 371Propylene 658 846 1,044 1,059 1,226 1,205 1,133 1,239 1,430 1,562PP 840 1,060 1,130 1,127 1,273 1,278 1,214 1,386 1,558 1,641AN 854 1,155 1,337 1,610 2,104 2,406 2,053 2,134 2,505 2,7442-EH 861 1,023 1,189 1,235 1,616 1,775 1,601 1,783 1,914 1,932ECH 1,002 1,303 1,421 1,522 2,180 2,207 1,856 2,251 2,285 2,356Butyl acrylate 1,474 1,571 1,661 1,894 2,250 2,720 2,661 3,174 3,336 3,313Butadiene 476 701 1,408 1,458 1,868 2,107 1,739 1,939 2,359 2,893ABS 1,111 1,378 1,441 1,493 1,804 1,975 1,927 2,138 2,318 2,317SBR 1,535 1,704 1,901 1,985 2,520 2,339 2,439 3,068 3,670 3,959Benzene 413 668 837 862 970 923 846 971 1,153 1,187SM 711 956 1,075 1,064 1,282 1,163 1,067 1,265 1,421 1,407PS 803 1,029 1,193 1,184 1,399 1,354 1,211 1,385 1,522 1,553Phenol 558 799 957 1,118 1,337 1,547 1,694 1,751 1,770 1,960BPA 919 1,202 1,525 1,458 1,643 1,868 1,945 2,217 2,352 2,500PC 1,850 2,050 2,167 2,317 2,683 2,983 3,025 3,043 3,040 3,075Epoxy resin 2,637 2,087 2,065 2,087 2,563 3,260 3,370 3,267 3,443 3,678Acetone 721 870 850 1,033 1,276 1,111 900 1,070 1,193 1,313MMA 1,767 1,610 1,667 1,700 1,883 2,160 2,400 2,400 2,393 2,420Paraxylene 848 1,074 1,027 1,011 1,052 988 928 1,255 1,626 1,637PTA 715 854 878 891 959 910 880 1,124 1,446 1,433Polyester (PSF) 959 1,071 1,145 1,188 1,304 1,323 1,290 1,783 2,083 2,060Orthoxylene 936 1,045 1,040 1,101 1,320 1,248 1,106 1,331 1,459 1,496Caprolactam 1,230 1,626 2,037 1,999 2,330 2,563 2,470 2,763 3,384 3,550Nylon 1,923 2,355 2,738 2,817 3,153 3,423 3,363 3,763 4,528 4,750Methanol 184 209 242 274 309 261 261 355 350 338Acetic acid 373 415 383 386 405 380 377 455 420 547Urea 281 246 271 279 311 259 299 365 367 320


27

Fig. 59: Margin trend of major chemicals


US$/t 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11Ethylene - Naphtha 228 247 358 299 536 431 276 292 360 319HDPE - Naphtha 482 585 553 464 510 453 399 414 385 313LDPE - Naphtha 520 595 613 601 725 659 622 761 779 646LLDPE- Naphtha 526 595 619 544 647 547 475 528 498 368EG - Ethylene 103 92 118 185 205 136 192 317 432 307PVC - Ethylene 324 348 399 360 351 392 446 427 399 533Propylene - Naphtha 241 329 433 369 498 493 467 432 506 524PP - Naphtha 424 543 518 436 539 567 549 579 634 604AN - Propylene 196 309 292 552 833 1,201 921 895 1,068 1,1822-EH - Propylene 190 169 143 173 386 582 461 540 469 371ECH - Propylene 344 457 377 464 954 1,002 723 1,012 840 795Butyl acrylate - Propylene 751 641 513 729 902 1,395 1,415 1,811 1,747 1,596Butadiene - Naphtha 51 1,002 774 775 1,143 1,395 1,073 1,132 1,441 1,856ABS - Naphtha 611 758 707 667 916 1,122 1,129 1,169 1,213 1,072SBR - BD - SM 1,000 949 680 738 950 668 1,023 1,461 1,757 1,731Benzene - Naphtha -3 151 226 177 254 211 180 164 229 150Styrene - Naphtha 290 435 461 382 558 453 400 457 501 370PS - Naphtha 386 512 582 497 676 643 545 578 604 516Phenol - Naphtha 141 282 346 430 614 835 1,028 944 852 923BPA - Phenol 307 337 494 271 179 265 236 411 495 447PC - BPA 931 848 642 858 1,040 1,115 1,080 827 688 575Epoxy resin - BPA 1,447 534 210 232 241 755 983 479 537 625Acetone - Naphtha 304 353 239 346 553 400 234 263 273 277MMA - Acetone 968 685 638 601 633 956 1,271 1,116 1,025 972PX - Naphtha 431 557 416 328 339 277 262 448 690 600PTA - Naphtha 294 326 264 194 233 201 214 316 526 397PSF - PTA - MEG 151 138 127 134 112 212 239 454 341 490OX - Naphtha 520 528 429 414 597 537 441 524 538 460Nylon - Caprolactam 693 729 701 818 823 860 893 999 1,144 1,200Acetic acid - Methanol 272 300 250 235 236 236 234 260 227 361


28

Appendix

Major cotton-producing areas

Fig. 60: China

Source: USDA

Fig. 61: US

Source: USDA


29

Fig. 62: India

Source: USDA

Key cotton production statistics

Fig. 63: Global top 10 cotton producers (2010)

Source: USDA

Fig. 64: Global top 5 cotton importers (2010)

Source: USDA

Fig. 65: Global top 5 cotton exporters (2010)

Source: USDA

Punjab12%

Haryana12%

Gujarat28%

Maharashtra20%

Andhra Pradesh13%

(mn t) Production % of globalChina 6.4 28.4India 5.4 24.0US 4.0 17.6Brazil 1.9 8.5Pakistan 1.9 8.5Uzbekistan 1.0 4.5Australia 1.0 4.3Turkey 0.5 2.2Turkmenistan 0.3 1.4Mexico 0.1 0.6

(mn t) Imports % of globalChina 3.4 49.3Bangladesh 0.8 12.2Turkey 0.7 9.9Indonesia 0.4 6.1Thailand 0.4 5.2

(mn t) Exports % of globalUS 3.4 49.9India 1.0 15.2Uzbekistan 0.8 11.1Australia 0.7 9.5Brazil 0.6 8.5


30

Fig. 66: Quantity of cotton per article of clothing

Source: National Cotton Council of America

Fig. 67: World cotton supply & demand – USDA estimates

Source: USDA

kgJeans 1.0Bed sheet 0.9Sports shirt 0.5Terry bath towel 0.3Men's dress shirt 0.3T-shirt 0.2Boxer shorts 0.1

(mn t)

Begin-ning

Stocks

Area Harvested

(mn ha)Produc-

tion ImportsTotal

Supply Exports Use Loss

Total Dom. Cons.

Ending Stocks

Stock to Use %

1990 6.8 31.7 17.4 7.1 31.2 6.8 18.9 0.1 19.0 5.4 291991 5.4 33.2 19.0 6.7 31.1 6.4 18.6 0.0 18.7 6.0 321992 6.0 34.8 20.7 6.3 33.0 6.2 18.8 0.1 18.8 8.0 431993 8.0 32.7 17.9 5.9 31.9 5.5 18.8 0.0 18.8 7.5 401994 7.5 30.7 16.9 6.1 30.5 5.8 18.6 0.0 18.7 6.1 321995 6.1 32.3 18.8 6.6 31.4 6.1 18.4 -0.1 18.4 7.0 381996 7.0 35.9 20.4 5.9 33.3 6.0 18.7 -0.1 18.6 8.7 471997 8.7 33.8 19.6 6.2 34.6 5.8 19.1 -0.1 19.0 9.7 511998 9.7 33.8 20.1 5.6 35.4 5.8 19.0 -0.1 18.9 10.8 571999 10.8 32.9 18.7 5.3 34.8 5.1 18.5 -0.2 18.2 11.5 622000 11.5 32.4 19.2 6.1 36.7 5.9 19.8 -0.1 19.7 11.1 562001 11.1 32.0 19.4 5.7 36.2 5.7 20.1 -0.3 19.8 10.8 542002 10.8 33.7 21.5 6.4 38.6 6.3 20.6 -0.2 20.4 11.9 582003 11.9 30.8 19.8 6.6 38.3 6.6 21.4 -0.2 21.3 10.4 482004 10.4 32.3 21.1 7.4 38.9 7.2 21.4 -0.2 21.2 10.5 492005 10.5 35.7 26.5 7.4 44.3 7.6 23.7 -0.3 23.5 13.2 562006 13.2 34.7 25.4 9.7 48.3 9.8 25.4 -0.4 25.0 13.5 532007 13.5 34.6 26.5 8.3 48.3 8.2 27.0 -0.4 26.6 13.6 502008 13.6 32.9 26.1 8.5 48.1 8.5 26.9 -0.5 26.4 13.2 492009 13.2 30.6 23.3 6.5 43.1 6.5 23.9 -0.6 23.4 13.2 552010 13.2 30.1 22.1 7.8 43.1 7.8 25.8 0.0 25.8 9.5 372011 9.6 33.5 24.9 8.3 42.8 8.3 25.5 0.0 25.5 9.0 35


31

Fabric and Polyester chain

Fig. 68: Textile manufacturing process

Source: USDA

Fig. 69: Polyester value chain

Source: SRI Consulting

Fibres

NaturalMan-made

Yarn

GinningCardingCombingSpinningDyeing

Fabric

WeavingKnitting

BleachingDyeing

Finishing

Finished Product

ClothingFurnishingIndustry

Polyester

MEG

PTA

Filament(40%)

Staple Fiber(28%)

PET(29%)

Ethylene

PX

• Tires• Rope• Seat Belt

• Carpets• Apparel• Fiberfill• Upholstery

• Bottles• Food packaging

Film(4%)

• X-Ray film• Packaging

0.6

0.67

0.35

0.85

High tenacityyarn

Regular tenacity yarn

• Apparel• Home fashions

Key company data: See page 2 for company data, and detailed price/index chart. Rating: See report end for details of Nomura’s rating system.

Formosa Plastics 1301.TW 1301 TT

OIL & GAS/CHEMICALS

EQUITY RESEARCH

Top pick in the Formosa group

Riding the strength in chlor-alkali

May 6, 2011

Rating Remains

Buy

Target price Increased from 118.0

TWD 136.0

Closing price April 29, 2011

TWD 117.0

Potential upside +16.2%

Action: Raising product margins and operating earnings estimates To factor in our higher margin assumptions for PVC, caustic and carbon fiber, as well as higher investment income contributions from FPCC and FPC USA, we are raising our net profit estimates by 20%/19%/13% for FY11/12/13F, respectively. Among the Formosa group, we believe FPC will be the only company to generate q-q operating earnings growth in 2Q11.

Catalyst: Strengthening PVC & caustic margins PVC and caustic margins have strengthened due to the earthquake in Japan, and we think margins could further improve in the coming months due to potentially worsening electricity shortages in China. We note that our revised FY11F NPAT forecast is 15% above consensus estimates, and we believe that forthcoming street upgrades could be a key catalyst

Carbon fiber turnaround Carbon fiber prices appear to have troughed late last year and returned to profitability in April. We believe this turnaround is sustainable based on rising demand from the aerospace and industrial sectors. We estimate this could reverse FPC’s carbon fiber operating losses of TWD1bn last year to operating profits of TWD300-400m this year.

Valuation: Reiterating BUY, lifting TP to TWD136 We raise our TP to TWD136 (based on a sum-of-the-parts methodology) and reaffirm our BUY rating.

31 Dec FY10 FY11F FY12F FY13F

Currency (TWD) Actual Old New Old New Old New

Revenue (mn) 194,446 207,798 226,806 230,307 241,922 244,537 253,466

Reported net profit (mn) 45,547 50,479 60,569 54,464 64,984 57,977 65,244

Normalised net profit (mn) 46,001 50,479 59,769 54,464 64,984 57,977 65,244

Normalised EPS 7.5 8.2 9.8 8.9 10.6 9.5 10.7

Norm. EPS growth (%) 66.7 10.3 29.9 7.9 8.7 6.5 0.4

Norm. P/E (x) 15.6 N/A 12.0 N/A 11.0 N/A 11.0

EV/EBITDA 12.3 N/A 10.0 N/A 9.4 N/A 9.5

Price/book (x) 2.7 N/A 2.6 N/A 2.5 N/A 2.4

Dividend yield (%) 5.8 N/A 7.7 N/A 8.3 N/A 8.3

ROE (%) 18.7 20.4 22.4 21.2 22.8 21.8 22.3

Net debt/equity (%) 16.6 12.0 14.2 11.2 13.5 10.7 14.4


Anchor themes

We believe the chemical sector is poised to enter a Golden Age, benefiting from rising demand and restrained capacity additions over the next two years.

Nomura vs consensus

We believe that our FY11F earnings estimates are 15% higher than consensus.

Research analysts





Nomura | ASIA Formosa Plastics May 6, 2011

33

Key data on Formosa Plastics Income statement (TWDmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FRevenue 156,970 194,446 226,806 241,922 253,466Cost of goods sold -138,243 -158,784 -183,556 -195,025 -208,313Gross profit 18,726 35,662 43,250 46,898 45,153SG&A -8,186 -9,009 -9,526 -9,435 -9,632Employee share expense 0 0 0 0 0Operating profit 10,540 26,653 33,724 37,463 35,521

EBITDA 20,853 36,016 42,323 45,304 42,710Depreciation -10,313 -9,363 -8,599 -7,841 -7,188Amortisation 0 0 0 0 0EBIT 10,540 26,653 33,724 37,463 35,521Net interest expense -1,039 -888 -635 -538 -554Associates & JCEs 19,559 25,522 32,982 35,117 36,931Other income 517 382 396 410 425Earnings before tax 29,577 51,669 66,466 72,451 72,323Income tax -1,988 -5,668 -6,697 -7,467 -7,078Net profit after tax 27,589 46,001 59,769 64,984 65,244Minority interests 0 0 0 0 0Other items 0 0 0 0 0Preferred dividends 0 0 0 0 0Normalised NPAT 27,589 46,001 59,769 64,984 65,244Extraordinary items -55 -454 800 0 0Reported NPAT 27,533 45,547 60,569 64,984 65,244Dividends -24,505 -41,630 -55,360 -59,396 -59,633Transfer to reserves 3,029 3,917 5,209 5,589 5,611

Valuation and ratio analysis

FD normalised P/E (x) 26.0 15.6 12.0 11.0 11.0FD normalised P/E at price target (x) 26.2 15.7 12.1 11.1 11.1Reported P/E (x) 26.0 15.7 11.8 11.0 11.0Dividend yield (%) 3.4 5.8 7.7 8.3 8.3Price/cashflow (x) 30.4 28.0 22.8 19.5 20.6Price/book (x) 3.2 2.7 2.6 2.5 2.4EV/EBITDA (x) 19.1 12.3 10.0 9.4 9.5EV/EBIT (x) 25.6 14.6 11.3 10.4 10.5Gross margin (%) 11.9 18.3 19.1 19.4 17.8EBITDA margin (%) 13.3 18.5 18.7 18.7 16.9EBIT margin (%) 6.7 13.7 14.9 15.5 14.0Net margin (%) 17.5 23.4 26.7 26.9 25.7Effective tax rate (%) 6.7 11.0 10.1 10.3 9.8Dividend payout (%) 89.0 91.4 91.4 91.4 91.4Capex to sales (%) 2.0 1.3 1.1 1.0 1.0Capex to depreciation (x) 0.3 0.3 0.3 0.3 0.3ROE (%) 13.6 18.7 22.4 22.8 22.3ROA (pretax %) 10.4 16.1 19.3 20.3 19.7

Growth (%)

Revenue -13.8 23.9 16.6 6.7 4.8EBITDA 15.6 72.7 17.5 7.0 -5.7EBIT 27.9 152.9 26.5 11.1 -5.2Normalised EPS 28.4 66.7 29.9 8.7 0.4Normalised FDEPS 28.4 66.7 29.9 8.7 0.4

Per share

Reported EPS (TWD) 4.50 7.44 9.90 10.62 10.66Norm EPS (TWD) 4.51 7.52 9.76 10.62 10.66Fully diluted norm EPS (TWD) 4.51 7.52 9.76 10.62 10.66Book value per share (TWD) 36.81 42.62 45.71 47.28 48.24DPS (TWD) 4.00 6.80 9.04 9.70 9.74Source: Nomura estimates

Notes

We forecast 30% y-y earnings growth in FY11F

Price and price relative chart (one year)

(%) 1M 3M 12M

Absolute (TWD) 13.6 17.8 69.1

Absolute (USD) 17.1 19.6 85.4

Relative to index 8.6 20.2 57.5

Market cap (USDmn) 25,048.8

Estimated free float (%)

73.8

52-week range (TWD)

117/61.8

3-mth avg daily turnover (USDmn)

48.71

Major shareholders (%) Wang family 13.9

Formosa Chemicals 7.7

60

80

100

120

80

100

120

140

160

Jun

10

Jul 1

0

Aug

10

Sep

10

Oct

10

Nov

10

Dec

10

Jan

11

Feb

11

Mar

11

Apr

11

May

11

PriceRel MSCI Taiwan(TWD)


34

Cashflow (TWDmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FEBITDA 20,853 36,016 42,323 45,304 42,710Change in working capital 12,392 -8,713 -4,026 -978 -759Other operating cashflow -9,688 -1,749 -6,937 -7,595 -7,208Cashflow from operations 23,558 25,554 31,361 36,730 34,743Capital expenditure -3,156 -2,491 -2,491 -2,491 -2,491Free cashflow 20,402 23,063 28,870 34,239 32,252Reduction in investments -47,138 -26,905 -16,734 -12,749 -12,564Net acquisitions 0 0 0 0 0Reduction in other LT assets -2,956 1,768 0 0 0Addition in other LT liabilities 523 2,534 0 0 0Adjustments 41,288 -7,447 11,662 10,559 10,565Cashflow after investing acts 12,118 -6,987 23,798 32,049 30,253Cash dividends -10,288 -24,505 -41,630 -55,360 -59,396Equity issue 0 0 0 0 0Debt issue -14,982 -8,494 9,556 0 0Convertible debt issue 0 0 0 0 0Others 13,393 43,486 21,455 23,892 25,701Cashflow from financial acts -11,878 10,488 -10,618 -31,468 -33,695Net cashflow 241 3,501 13,180 581 -3,442Beginning cash 1,197 1,438 4,939 18,118 18,700Ending cash 1,438 4,939 18,118 18,700 15,258Ending net debt 55,272 43,277 39,654 39,072 42,514Source: Nomura estimates

Balance sheet (TWDmn) As at 31 Dec FY09 FY10 FY11F FY12F FY13FCash & equivalents 1,438 4,939 18,118 18,700 15,258Marketable securities 59,849 76,390 76,390 76,390 76,390Accounts receivable 24,676 32,392 34,634 35,531 36,227Inventories 12,387 13,546 16,795 17,896 18,750Other current assets 2,783 3,499 3,499 3,499 3,499Total current assets 101,133 130,765 149,436 152,015 150,123LT investments 132,964 143,329 160,062 172,812 185,376Fixed assets 67,787 60,490 55,046 50,361 46,329Goodwill 0 0 0 0 0Other intangible assets 1,442 942 942 942 942Other LT assets 7,715 5,948 5,948 5,948 5,948Total assets 311,042 341,473 371,434 382,077 388,717Short-term debt 12,499 7,772 7,772 7,772 7,772Accounts payable 20,778 21,177 22,642 23,661 24,451Other current liabilities 1,186 1,664 1,664 1,664 1,664Total current liabilities 34,463 30,613 32,077 33,097 33,887Long-term debt 44,210 40,444 50,000 50,000 50,000Convertible debt 0 0 0 0 0Other LT liabilities 7,039 9,573 9,573 9,573 9,573Total liabilities 85,712 80,629 91,650 92,670 93,460Minority interest 0 0 0 0 0Preferred stock 0 0 0 0 0Common stock 61,209 61,209 61,209 61,209 61,209Retained earnings 116,927 138,003 156,942 166,566 172,415Proposed dividends 0 0 0 0 0Other equity and reserves 47,195 61,632 61,632 61,632 61,632Total shareholders' equity 225,331 260,844 279,783 289,408 295,256Total equity & liabilities 311,042 341,473 371,434 382,077 388,717

Liquidity (x)

Current ratio 2.93 4.27 4.66 4.59 4.43Interest cover 10.1 30.0 53.1 69.6 64.1

Leverage

Net debt/EBITDA (x) 2.65 1.20 0.94 0.86 1.00Net debt/equity (%) 24.5 16.6 14.2 13.5 14.4

Activity (days)

Days receivable 53.4 53.6 53.9 53.1 51.7Days inventory 43.5 29.8 30.2 32.6 32.1Days payable 43.4 48.2 43.6 43.4 42.2Cash cycle 53.5 35.1 40.5 42.2 41.6Source: Nomura estimates

Notes

Significant cash generation is mostly paid out as dividends

Notes

Net debt-to-equity levels remain low


35

Raising estimates and target price We raise our earnings estimates, as detailed in the table below, for the following reasons:

• Higher margin forecasts for key products such as PVC, caustic soda and carbon fiber,

• Higher investment income from stronger contributions from FPCC and FPC USA.

Fig. 70: Key changes to earnings estimates


We raise our TP to TWD136 (from TWD118), based on a sum-of-the-parts analysis which values FPC’s core business at 3.9x EV/IC (average FY11F-12F ROIC of 32.5%; WACC of 8.5%), investments in the Formosa group at our target prices, other listed investments at market price, and unlisted investments at 1.5x book value. The key reason for our higher PT is a higher EV/IC multiple of 3.9x (previously 3.7x) and higher valuation for FPCC. Key risks include volatile crude prices, volatile chemical margins and plant mechanical failure.

Fig. 71: Price target derivation


Fig. 72: Operating profit breakdown

Source: Company data, Nomura estimates

Unit 2011F 2012F 2013F 2011F 2012F 2013F 2011F 2012F 2013FEBIT NT$m 33,724 37,463 35,521 28,719 30,036 30,935 17.4 24.7 14.8Investment income NT$m 32,982 35,117 36,931 27,507 30,394 33,157 19.9 15.5 11.4NPAT NT$m 60,569 64,984 65,244 50,479 54,464 57,977 20.1 19.3 12.5EPS NT$ 9.8 10.6 10.7 8.2 8.9 9.5 19.2 19.3 12.2DPS NT$ 9.0 9.7 9.7 7.3 7.9 8.4 23.9 22.9 16.1

New Old % change

Value NT$/sh CommentsAverage invested capital NTD m 89,803Target EV/IC (x) 3.9Implied EV NTD m 346,790 56.7Less debt NTD m (39,654) (6.5) 2011E net debtAdd investments: Formosa Petrochem. (30%) NTD m 309,119 50.5 PT @NT$110 Nan Ya Plastic (10%) NTD m 81,374 13.3 PT@NT$105 Formosa Chemical (3%) NTD m 22,874 3.7 PT @NT$134 Formosa Sumco (30%) NTD m 13,111 2.1 Market price @NT$70 Other investments NTD m 100,880 16.5 At 1.5x book valueImplied market capitalisation NTD m 834,495Price target NTD 136

(NT$ mn) 2009 2010F 2011F 2012F 2013F

Plastics 2,185 9,237 14,960 15,485 13,933

Tairylan 2,207 9,061 9,660 10,027 9,816

Polyolefin 4,927 3,771 3,802 5,897 6,387

Others 1,221 4,583 5,302 6,054 5,384

Total 10,540 26,653 33,724 37,463 35,521


36

Fig. 73: Investment income breakdown


Fig. 74: Quarterly earnings trend and forecasts


(NT$m) Stake 2009 2010F 2011F 2012F 2013F

FPCC 30% 12,058 12,277 17,811 18,519 19,034

FPC USA 22% 1,376 3,554 3,909 3,714 3,528

Formosa Sumco 30% (194) 141 169 195 224

Mailiao Power 25% 2,209 1,877 1,784 1,819 1,856

Formosa Cayman 100% 2,809 3,412 3,582 3,762 4,326

Others - 505 508 602 606 610

Total 18,762 21,769 27,857 28,614 29,578

(NT$ m) 1Q10 2Q10 3Q10 4Q10 1Q11F 2Q11F 3Q11F 4Q11FSales 46,215 50,362 49,616 48,252 56,525 56,760 56,760 56,760EBITDA 6,629 10,216 9,931 9,240 10,387 10,633 10,652 10,651Depreciation (2,342) (2,349) (2,353) (2,319) (2,227) (2,174) (2,123) (2,074)EBIT 4,287 7,867 7,578 6,921 8,160 8,459 8,529 8,576Interest (249) (242) (220) (176) (181) (150) (109) (195)Associates & others 5,128 5,357 7,576 7,843 7,785 6,543 12,110 6,941Profit before taxes 9,166 12,982 14,933 14,588 15,764 14,852 20,529 15,322Taxes (888) (1,720) (1,460) (1,599) (1,616) (1,682) (1,704) (1,696)Post-ex net profit 8,192 11,793 13,199 12,363 14,948 13,170 18,825 13,626EPS (NT$) 1.34 1.93 2.16 2.02 2.44 2.15 3.08 2.23


LG Chem 051910.KS 051910 KS

OIL & GAS/CHEMICALS

EQUITY RESEARCH

Multi-year re-rating in place

PVC, BD, acrylates drive profit; LCD recovery not too far off, new businesses a bonus

May 6, 2011

Rating Remains

Buy

Target price From 500,000 KRW 700,000

Closing price April 28, 2011 KRW 523,000


Action: BUY for multi-year re-rating LG Chem (LGC) has rallied continuously for 2 years. We are diligently watching for potential de-rating catalysts but none seem in sight. Any traction in EV batteries should be positive. LCD substrate start-up may turn out to be timely, potentially dovetailing with the LCD cycle upturn.

Catalysts: Petrochemicals resilient, IT recovery to play catalyst Following record quarterly profit in 1Q, we think ABS/EP (sales: +10% q-q), acrylate (+28% q-q) and BR (+23% q-q) should see healthy trends in 2Q. The next 2 quarters should be backed by seasonality and tight supply of rubber and acrylates. Capacity expansion of BR is planned to be ready in Aug. We believe potential recovery in LCD/ IT has yet to be priced in.

Valuation: New TP of KRW700,000 based on SOTP We maintain BUY with a new PT of KRW700,000 (from KRW500,000) based on SOTP. Our TP reflects a more positive view of the petrochemical and car battery units. We value the auto battery and LCD glass segments at KRW29,000/share and KRW28,000/share. Risks include: 1) petrochem and LCD cycle volatility; 2) execution of car battery production.

Polysilicon: Double-edged sword LGC’s entry into polysilicon will complete vertical integration for LG Group firms: LG Chem will produce polysilicon, LG Siltron ingot/wafer, and LG Elec cells/modules. Commercial launch is set for 1H13. The polysilicon industry is becoming competitive and we think the winners will be those with scale and cost leadership. LGC targets 5,000-10,000 tpa capacity.


Currency (KRW) Actual Old New Old New Old New

Revenue (bn) 19,471 21,480 22,631 24,776 25,022 24,966

Reported net profit (bn) 2,169 2,706 2,717 2,995 3,050 3,183

Normalised net profit (bn) 2,169 2,706 2,717 2,995 3,050 3,183

Normalised EPS 32,727.2 40,829.5 40,993.3 45,195.5 46,017.1 48,030.1

Norm. EPS growth (%) 40.4 23.0 25.3 10.7 12.3 4.4

Norm. P/E (x) 16.0 N/A 12.8 N/A 11.4 N/A 10.9

EV/EBITDA 10.0 N/A 8.0 N/A 7.0 N/A 6.5



ROE (%) 31.7 33.8 30.1 31.2 27.6 24.9

Net debt/equity (%) 9.3 2.6 2.4 net cash 0.1 net cash


Anchor themes


Nomura vs consensus

Our target price is 17% above the consensus fair value.

Research analysts




Chris Chang - NFIK [email protected] +822 3783 2316


Nomura | ASIA LG Chem May 6, 2011

38

Key data on LG Chem Income statement (KRWbn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FRevenue 15,521 19,471 22,631 25,022 24,966Cost of goods sold -12,261 -15,473 -17,835 -19,696 -19,411Gross profit 3,260 3,999 4,796 5,326 5,555SG&A -1,162 -1,178 -1,263 -1,345 -1,408Employee share expense

Operating profit 2,098 2,821 3,533 3,981 4,147

EBITDA 2,683 3,493 4,305 4,866 5,163Depreciation -568 -654 -752 -865 -995Amortisation -17 -18 -19 -21 -22EBIT 2,098 2,821 3,533 3,981 4,147Net interest expense -35 -55 -46 -27 0Associates & JCEs -20 55 64 70 77Other income -28 -3 -26 -73 -101Earnings before tax 2,015 2,818 3,525 3,952 4,123Income tax -443 -619 -774 -867 -905Net profit after tax 1,572 2,200 2,751 3,084 3,218Minority interests

Other items

Preferred dividends -27 -31 -35 -35 -35Normalised NPAT 1,545 2,169 2,717 3,050 3,183Extraordinary items

Reported NPAT 1,545 2,169 2,717 3,050 3,183Dividends -253 -265 -298 -298 -298Transfer to reserves 1,292 1,904 2,418 2,751 2,885



Growth (%)

Revenue 6.6 25.5 16.2 10.6 -0.2EBITDA 40.3 30.2 23.2 13.0 6.1EBIT 58.8 34.5 25.2 12.7 4.2Normalised EPS 55.7 40.4 25.3 12.3 4.4Normalised FDEPS 55.7 40.4 25.3 12.3 4.4

Per share

Reported EPS (KRW) 23,315.30 32,727.20 40,993.30 46,017.08 48,030.14Norm EPS (KRW) 23,315.30 32,727.20 40,993.30 46,017.08 48,030.14Fully diluted norm EPS (KRW) 23,315.30 32,727.20 40,993.30 46,017.08 48,030.14Book value per share (KRW) 89,430.97 118,359.81 155,347.14 179,776.00 207,304.49DPS (KRW) 3,816.22 4,000.00 4,500.00 4,500.00 4,500.00Source: Nomura estimates

Notes

LGC’s financials are based on K-IFRS (consolidated). The company adopted this method from 1Q10


(%) 1M 3M 12M

Absolute (KRW) 21.3 30.4 91.9

Absolute (USD) 25.1 34.3 98.0




69.9

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122.03

Major shareholders (%) LG Corp 33.5

Mirae Asset 6.3

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Cashflow (KRWbn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FEBITDA 2,683 3,493 4,305 4,866 5,163Change in working capital -96 -169 -239 -289 -459Other operating cashflow -375 -818 -550 -992 -546Cashflow from operations 2,211 2,507 3,515 3,586 4,158Capital expenditure -1,099 -1,617 -2,400 -1,900 -1,900Free cashflow 1,112 890 1,115 1,686 2,258Reduction in investments -63 70 -128 -157 -564Net acquisitions 46 91 0 0 -6Reduction in other LT assets 95 -38 4 4 3Addition in other LT liabilities -58 -47 -24 -3 -2Adjustments 21 -80 -726 -867 -867Cashflow after investing acts 1,152 885 242 662 821Cash dividends -211 -280 -296 -333 -333Equity issue 0 0 0 0 0Debt issue -158 -348 -130 -120 -317Convertible debt issue

Others -192 4 0 0 0Cashflow from financial acts -560 -624 -426 -452 -650Net cashflow 592 261 -184 210 171Beginning cash 514 1,107 1,368 1,184 1,394Ending cash 1,106 1,368 1,184 1,394 1,565Ending net debt 1,304 733 242 13 -375Source: Nomura estimates

Balance sheet (KRWbn) As at 31 Dec FY09 FY10 FY11F FY12F FY13FCash & equivalents 1,107 1,368 1,184 1,394 1,565Marketable securities 0 2 0 0 0Accounts receivable 2,286 2,530 2,648 2,752 2,996Inventories 1,598 2,182 2,140 2,423 2,523Other current assets 287 209 230 380 379Total current assets 5,277 6,292 6,202 6,949 7,463LT investments 242 218 261 314 376Fixed assets 4,775 5,872 7,520 8,555 9,460Goodwill

Other intangible assets 162 180 193 206 217Other LT assets 74 112 107 104 101Total assets 10,531 12,673 14,284 16,127 17,616Short-term debt 1,833 1,621 1,024 1,014 811Accounts payable 1,775 2,124 2,140 2,364 2,329Other current liabilities 299 533 374 398 317Total current liabilities 3,907 4,277 3,538 3,776 3,457Long-term debt 578 481 402 393 378Convertible debt

Other LT liabilities 119 72 48 45 42Total liabilities 4,604 4,830 3,989 4,213 3,878Minority interest

Preferred stock 38 38 38 38 38Common stock 370 370 370 370 370Retained earnings 4,836 6,254 8,709 10,315 12,143Proposed dividends

Other equity and reserves 683 1,182 1,178 1,192 1,187Total shareholders' equity 5,927 7,844 10,295 11,914 13,738Total equity & liabilities 10,531 12,673 14,284 16,127 17,616

Liquidity (x)

Current ratio 1.35 1.47 1.75 1.84 2.16Interest cover 60.7 51.1 77.2 150.1 na

Leverage

Net debt/EBITDA (x) 0.49 0.21 0.06 0.00 net cashNet debt/equity (%) 22.0 9.3 2.4 0.1 net cash

Activity (days)


Notes

2011F capex to rise by 40%. This should be split between non-chemical: KRW1.8tr (EV battery: KRW400bn) and chemical: KRW0.6tr for chemical (2010: KRW1.0tr for non-chemical and KRW0.7tr for chemical)

Notes

Strong balance sheet, with net debt/equity of less than 10% at end 2010


40

Fig. 75: SOTP valuation

Source: Nomura

Fig. 76: PER band

Source: Bloomberg, Nomura

Valuation Methodology Our TP of KRW700,000 is based on a sum-of-the-parts methodology and reflects our positive view of the petrochemical and car battery business units. We value the auto battery and LCD glass segments at KRW29,000/share and KRW28,000/share, respectively. Risks that may impede the achievement of the target price Risks are: 1) petrochemical and LCD cycle volatility; 2) execution of car battery production.

(W bn) Remark Previous valuation

Electronic material EV (a) 15,999 11,938 EBITDA 1,333 PV of 2012F 1,194 Multiple (x) 12.0 20% premium to Korea tech average; unchanged 10.0 Petrochemical EV (b) 26,754 17,627 EBITDA 3,111 PV of 2012F 2,540 Multiple (x) 8.6 LGC's peak cycle multiple in 2010 6.9 LCD glass EV (c) 2,306 2,306 Auto battery EV (d) 2,387 2,139 EV (a)+(b)+(c)+(d) 47,446 34,010 (-) Net debt 13 2012F 232 Market cap 47,433 33,777 (-) preferred share market cap 1,377 Market cap 2 May 1,014 Fair market cap 45,990 32,697 # of shares (mn) 66.3 Common share 66 LGC fair value (W/share) 693,970 493,386

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Fig. 77: PBR band


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Honam Petrochemical 011170.KS 011170 KS

OIL & GAS/CHEMICALS

EQUITY RESEARCH

Seeking global growth platform

Timely strategy meets super cycle

May 6, 2011

Rating Remains

Buy

Target price From 330,000 KRW 480,000

Closing price April 27, 2011 KRW 396,000


BUY for the sweet spot – polyester chain Among Korean companies, HPC has the greatest exposure to the polyester chain though MEG (capacity: 1.0mn tpa), PTA (950k tpa), PX (750k tpa). MEG price and margin have seen the largest correction year-to-date, but we see an improving outlook in 2H11. We believe HPC should be one of Asia’s biggest beneficiaries of strong polyester demand growth and tight MEG supply.

Catalyst: Price pick up from end-May, expanding scale While petrochemical prices and margins may slow in May due to inactive buying demand from China, we expect demand to pick up as inventories appear thin. HPC’s CEO has reportedly (Korea Economy, 17 April) stated his interest in acquiring the remaining 48% stake in KP Chemical this year. HPC intends to complete 14% ethylene capacity expansion in 2012F and will also seek asset acquisitions in Asia to achieve targeted sales of W40tr by 2019. HPC is developing rechargeable batteries with a US energy storage system provider, with commercialisation targeted for 2015. HPC is also developing battery separator (dry-type) and electrolytes.

Valuation: new TP of W480,000 on SOTP We maintain BUY on Honam Petrochemical (HPC) with a new target price of KRW480,000 (previous: KRW330,000), based on sum-of-the parts methodology (unchanged). We have raised FY11F EBITDA by 8% and our target EV/EBITDA multiple to 9.3x (previous: 6.7x), which represents the peak multiple in 2010. Risks may come from: 1) input and product price volatility; and 2) HPC buying assets at unattractive prices.



Revenue (bn) 7,189 8,040 8,434 9,125 9,568 10,216

Reported net profit (bn) 784 996 1,100 1,135 1,223 1,390

Normalised net profit (bn) 784 996 1,100 1,135 1,223 1,390

Normalised EPS 24,616.4 31,263.2 34,538.6 35,622.5 38,382.6 43,619.0

Norm. EPS growth (%) -1.6 21.5 40.3 13.9 11.1 13.6

Norm. P/E (x) 9.4 N/A 6.7 N/A 6.0 N/A 5.3

EV/EBITDA 6.7 N/A 5.1 N/A 4.3 N/A 3.6



ROE (%) 19.2 20.0 22.1 18.9 20.1 19.4

Net debt/equity (%) 27.6 3.2 15.1 net cash 5.0 net cash


Anchor themes


Nomura vs consensus

Our FY11-12F net profit estimates are slightly below consensus, possibly owing to a more conservative view of polyethylene.

Research analysts






Nomura | ASIA Honam Petrochemical May 6, 2011

43

Key data on Honam Petrochemical Income statement (KRWbn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FRevenue 5,970 7,189 8,434 9,568 10,216Cost of goods sold -5,060 -6,082 -6,982 -7,924 -8,365Gross profit 909 1,107 1,452 1,644 1,851SG&A -192 -203 -205 -219 -232Employee share expense

Operating profit 718 904 1,247 1,425 1,619

EBITDA 952 1,107 1,445 1,652 1,880Depreciation -232 -201 -196 -225 -259Amortisation -2 -2 -2 -2 -2EBIT 718 904 1,247 1,425 1,619Net interest expense -25 -15 32 35 86Associates & JCEs 136 175 175 158 140Other income 24 -46 -43 -50 -64Earnings before tax 853 1,018 1,411 1,568 1,782Income tax -57 -234 -310 -345 -392Net profit after tax 797 784 1,100 1,223 1,390Minority interests 0 0 0 0 0Other items 0 0 0 0 0Preferred dividends 0 0 0 0 0Normalised NPAT 797 784 1,100 1,223 1,390Extraordinary items 0 0 0 0Reported NPAT 797 784 1,100 1,223 1,390Dividends -8 -48 -56 -59 -59Transfer to reserves 789 736 1,045 1,164 1,331



Growth (%)

Revenue 92.7 20.4 17.3 13.4 6.8EBITDA 481.0 16.4 30.4 14.4 13.8EBIT 694.7 26.0 37.9 14.3 13.6Normalised EPS na -1.6 40.3 11.1 13.6Normalised FDEPS na -1.6 40.3 11.1 13.6

Per share

Reported EPS (KRW) 25,006.31 24,616.42 34,538.62 38,382.57 43,618.98Norm EPS (KRW) 25,006.31 24,616.42 34,538.62 38,382.57 43,618.98Fully diluted norm EPS (KRW) 25,006.31 24,616.42 34,538.62 38,382.57 43,618.98Book value per share (KRW) 116,923.85 139,841.92 172,630.54 209,163.11 239,596.88DPS (KRW) 1,500.00 1,750.00 1,850.00 1,850.00 1,850.00Source: Nomura estimates

Notes

Although HPC has changed accounting method to K-IFRS (consolidated) as of 1Q11, the financials shown here are based on K-GAPP (parent). We will be shifting to K-IFRS when the full statements become available in mid-May


(%) 1M 3M 12M

Absolute (KRW) 19.9 43.7 162.7

Absolute (USD) 24.4 54.4 173.6




42.7

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/


45.51

Major shareholders (%) Lotte affiliates 57.3

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Cashflow (KRWbn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FEBITDA 952 1,107 1,445 1,652 1,880Change in working capital -528 184 27 -244 -147Other operating cashflow 680 -486 -192 -41 -179Cashflow from operations 1,104 805 1,279 1,367 1,554Capital expenditure -141 -332 -700 -450 -500Free cashflow 962 474 579 917 1,054Reduction in investments 458 -1,621 -175 -175 -175Net acquisitions

Reduction in other LT assets -3 -3 0 0 0Addition in other LT liabilities 61 13 8 8 -18Adjustments -1,091 400 43 -192 -296Cashflow after investing acts 387 -737 455 558 565Cash dividends -8 -48 -56 -59 -59Equity issue 0 0 0 0 0Debt issue 518 563 -182 21 -415Convertible debt issue

Others -631 -29 0 0 0Cashflow from financial acts -121 487 -238 -38 -474Net cashflow 266 -250 217 519 91Beginning cash 126 391 142 359 879Ending cash 391 142 359 879 969Ending net debt 419 1,232 832 334 -172Source: Nomura estimates

Balance sheet (KRWbn) As at 31 Dec FY09 FY10 FY11F FY12F FY13FCash & equivalents 391 142 359 879 969Marketable securities 0 0 0 0 0Accounts receivable 708 726 784 890 950Inventories 361 477 419 475 502Other current assets 846 530 544 711 769Total current assets 2,307 1,875 2,107 2,954 3,190LT investments 1,384 3,004 3,179 3,355 3,530Fixed assets 1,998 2,112 2,616 2,869 2,992Goodwill

Other intangible assets -18 -14 -13 -13 -13Other LT assets 6 9 9 9 9Total assets 5,677 6,987 7,898 9,175 9,709Short-term debt 225 426 445 465 50Accounts payable 695 496 524 594 586Other current liabilities 196 398 411 424 431Total current liabilities 1,116 1,320 1,379 1,484 1,067Long-term debt 585 947 747 747 747Convertible debt



Other equity and reserves 617 613 613 613 613Total shareholders' equity 3,725 4,455 5,500 6,664 7,634Total equity & liabilities 5,677 6,987 7,898 9,175 9,709

Liquidity (x)

Current ratio 2.07 1.42 1.53 1.99 2.99Interest cover 28.7 61.3 na na na

Leverage

Net debt/EBITDA (x) 0.44 1.11 0.58 0.20 net cashNet debt/equity (%) 11.2 27.6 15.1 5.0 net cash

Activity (days)


Notes

Capex seen peaking out in 2011F owing to 14% ethylene capacity expansion. Depending on asset acquisitions, HPC could see further cash outlay

Notes

HPC had an asset revaluation in 2010, increasing assets by W120bn. As a result of the shift to IFRS, Yeosu plant life has extended to 10 years (previous six) to match Daesan facilities. This would theoretically reduce depreciation by KRW10bn


45


Source: Nomura

Fig. 79: PER band


Fig. 80: PBR band


(W bn) Remark

EBITDA 1,445 2011F EBITDA

Multiple (x) 9.3 Honam peak cycle multiple 2010

EV 13,496

Lotte Construction 1,249 33% stake; sector average multiple (1.5x) to 4Q10

KP Chem 1,350 52% stake, market cap; 2 May

Investment asset 2,599

Net debt 832 2011F

Fair mkt cap 15,264

Fair value (W /share) 478,082

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Valuation Methodology Our target price of KRW480,000 is based on sum-of-the parts methodology. We apply a target EV/EBITDA multiple of 9.3x, which represents the peak multiple in 2010 (EV: KRW13,496bn; FY11F EBITDA: KRW1,445bn). Risks that may impede the achievement of the target price Risks may come from: 1) input and out price volatility; and 2) HPC buying assets at unattractive prices.


Nan Ya Plastics 1303.TW 1303 TT

OIL & GAS/CHEMICALS

EQUITY RESEARCH

Steady earnings growth

Second pick in the Formosa group

May 6, 2011

Rating Remains

Buy


TWD 105.0


TWD 87.8


Action: Raising product margins and operating earnings We are raising our FY11/12/13F earnings estimates by 6%/18%/21%, respectively, to take into account: 1) our higher margin forecasts for key products such as MEG and polyester; 2) stronger contribution from FPCC (due to higher refining margins); and 3) a return to breakeven levels for Nanya Tech in 2012.

Catalysts: Improving MEG and DRAM prices We expect a sequential q-q earnings decline in 2Q11 due to abnormally high MEG margins in 1Q11. We believe positive catalysts could emerge from 2H11 on improving MEG margins, while Nanya Tech’s losses could be stemmed in 2012 on a recovery in PC DRAM prices and a successful shift to the production of non-PC DRAM. We note that our current FY12F NPAT forecast is10% above consensus estimates, and we believe that the likelihood of forthcoming Street upgrades could be a key catalyst.

Valuations: Reiterate BUY and raise PT to NT$105 We use a sum-of-the-parts methodology to derive our new price target of NT$105 (up from NT$96) and maintain our BUY rating.

Key beneficiary of the synthetic age With MEG production capacity of 1.4mn tpa (17% of Asian capacity) and our bullish view on the polyester chain over the next five years, we believe NYP is well positioned to benefit. We forecast the MEG balance to tighten each year over 2011-15.



Revenue (mn) 212,249 225,113 243,811 233,049 249,786 235,136 256,598



Normalised EPS 5.4 6.3 6.6 6.7 7.9 7.1 8.6

Norm. EPS growth (%) 160.6 20.6 23.7 7.2 19.1 5.5 8.1

Norm. P/E (x) 16.4 N/A 13.2 N/A 11.1 N/A 10.3

EV/EBITDA 13.7 N/A 11.4 N/A 9.9 N/A 9.2



ROE (%) 15.4 17.4 17.9 18.0 20.3 18.5 21.0

Net debt/equity (%) 24.5 19.3 19.9 19.8 18.1 20.9 17.7


Anchor themes

We believe the chemical sector is poised to enter a golden age, benefiting from rising demand and restrained capacity additions over the next two years.

Nomura vs consensus

We believe our 2012F earnings estimates are 10% above consensus estimates.

Research analysts





Nomura | ASIA Nan Ya Plastics May 6, 2011

48

Key data on Nan Ya Plastics Income statement (TWDmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FRevenue 160,964 212,249 243,811 249,786 256,598Cost of goods sold -142,156 -173,452 -196,685 -200,339 -202,094Gross profit 18,808 38,797 47,126 49,447 54,504SG&A -10,098 -12,281 -13,653 -13,738 -14,113Employee share expense 0 0 0 0 0Operating profit 8,710 26,516 33,473 35,709 40,391

EBITDA 15,758 33,747 40,305 42,142 46,466Depreciation -7,048 -7,231 -6,832 -6,433 -6,075Amortisation 0 0 0 0 0EBIT 8,710 26,516 33,473 35,709 40,391Net interest expense -1,313 -1,246 -657 -514 -443Associates & JCEs 8,048 21,521 25,204 33,214 34,444Other income 708 844 873 903 934Earnings before tax 16,154 47,635 58,892 69,313 75,326Income tax 18 -5,489 -6,738 -7,220 -8,176Net profit after tax 16,172 42,146 52,154 62,093 67,149Minority interests 0 0 0 0 0Other items 0 0 0 0 0Preferred dividends 0 0 0 0 0Normalised NPAT 16,172 42,146 52,154 62,093 67,149Extraordinary items 232 -1,172 0 0 0Reported NPAT 16,404 40,974 52,154 62,093 67,149Dividends -14,927 -36,877 -46,939 -55,884 -60,434Transfer to reserves 1,476 4,096 5,215 6,209 6,715


FD normalised P/E (x) 42.6 16.4 13.2 11.1 10.3FD normalised P/E at price target (x) 46.6 17.9 14.5 12.1 11.2Reported P/E (x) 42.0 16.8 13.2 11.1 10.3Dividend yield (%) 2.2 5.3 6.8 8.1 8.8Price/cashflow (x) 55.7 31.4 18.6 19.8 18.0Price/book (x) 2.8 2.4 2.3 2.2 2.1EV/EBITDA (x) 32.6 13.7 11.4 9.9 9.2EV/EBIT (x) 46.3 15.8 12.8 10.8 10.0Gross margin (%) 11.7 18.3 19.3 19.8 21.2EBITDA margin (%) 9.8 15.9 16.5 16.9 18.1EBIT margin (%) 5.4 12.5 13.7 14.3 15.7Net margin (%) 10.2 19.3 21.4 24.9 26.2Effective tax rate (%) -0.1 11.5 11.4 10.4 10.9Dividend payout (%) 91.0 90.0 90.0 90.0 90.0Capex to sales (%) 2.0 2.2 1.2 1.2 1.2Capex to depreciation (x) 0.4 0.6 0.4 0.5 0.5ROE (%) 6.9 15.4 17.9 20.3 21.0ROA (pretax %) 4.7 12.5 14.7 16.7 17.6

Growth (%)

Revenue -22.9 31.9 14.9 2.5 2.7EBITDA -18.1 114.2 19.4 4.6 10.3EBIT -27.2 204.4 26.2 6.7 13.1Normalised EPS 48.3 160.6 23.7 19.1 8.1Normalised FDEPS 48.3 160.6 23.7 19.1 8.1

Per share


Notes

Strong earnings growth trend expected


(%) 1M 3M 12M

Absolute (TWD) 2.9 9.1 33.6

Absolute (USD) 6.1 10.7 46.6

Relative to index -2.0 11.5 22.1



64.0

52-week range (TWD)

89/49.6


44.46


Formosa Plastics 9.9

40

50

60

70

80

90

80

90

100

110

120

130

Jun

10

Jul 1

0

Aug

10

Sep

10

Oct

10

Nov

10

Dec

10

Jan

11

Feb

11

Mar

11

Apr

11

May

11



49

Cashflow (TWDmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FEBITDA 15,758 33,747 40,305 42,142 46,466Change in working capital 6,556 -4,722 3,305 -516 -534Other operating cashflow -9,938 -7,037 -6,522 -6,830 -7,685Cashflow from operations 12,376 21,988 37,087 34,795 38,247Capital expenditure -3,152 -4,627 -3,000 -3,000 -3,000Free cashflow 9,225 17,361 34,087 31,795 35,247Reduction in investments -26,395 -20,064 -12,503 -15,218 -14,778Net acquisitions 0 0 0 0 0Reduction in other LT assets -1,126 1,549 0 0 0Addition in other LT liabilities 755 3 -1 1 6Adjustments 17,870 10,377 15,334 15,242 15,242Cashflow after investing acts 329 9,226 36,917 31,821 35,718Cash dividends -6,097 -14,927 -36,877 -46,939 -55,884Equity issue 0 0 0 0 0Debt issue -9,288 -3,876 -17,168 2,000 0Convertible debt issue 0 0 0 0 0Others 13,538 22,218 9,871 17,971 19,195Cashflow from financial acts -1,847 3,414 -44,175 -26,968 -36,688Net cashflow -1,517 12,640 -7,258 4,853 -971Beginning cash 2,204 687 13,327 6,069 10,922Ending cash 687 13,327 6,069 10,922 9,951Ending net debt 85,875 69,359 59,448 56,596 57,567Source: Nomura estimates

Balance sheet (TWDmn) As at 31 Dec FY09 FY10 FY11F FY12F FY13FCash & equivalents 687 13,327 6,069 10,922 9,951Marketable securities 28,535 41,027 41,027 41,027 41,027Accounts receivable 45,125 51,287 55,293 55,987 56,705Inventories 19,125 21,246 21,322 21,899 22,496Other current assets 971 1,656 1,656 1,656 1,656Total current assets 94,442 128,543 125,367 131,491 131,835LT investments 196,375 203,947 216,450 231,668 246,446Fixed assets 75,162 69,831 65,999 62,566 59,491Goodwill 0 0 0 0 0Other intangible assets 640 507 507 507 507Other LT assets 5,880 4,331 4,331 4,331 4,331Total assets 372,499 407,160 412,654 430,563 442,610Short-term debt 13,797 5,518 5,518 5,518 5,518Accounts payable 18,969 23,523 30,909 31,665 32,446Other current liabilities 527 219 219 219 219Total current liabilities 33,293 29,260 36,646 37,401 38,182Long-term debt 72,765 77,168 60,000 62,000 62,000Convertible debt 0 0 0 0 0Other LT liabilities 15,845 17,653 17,653 17,653 17,653Total liabilities 121,903 124,081 114,299 117,054 117,835Minority interest 0 0 0 0 0Preferred stock 0 0 0 0 0Common stock 78,523 78,523 78,523 78,523 78,523Retained earnings 136,997 163,839 179,116 194,270 205,536Proposed dividends 0 0 0 0 0Other equity and reserves 35,076 40,716 40,716 40,716 40,716Total shareholders' equity 250,596 283,078 298,355 313,509 324,775Total equity & liabilities 372,499 407,159 412,654 430,563 442,610

Liquidity (x)


Leverage


Activity (days)


Notes

Strong cash generation largely repaid as dividends

Notes

Stable net gearing levels


50

Steadily improving earnings trend To take into account our higher MEG margin forecasts as well as a significant turnaround at Nanya Tech in 2012, we raise our earnings estimates as detailed in the table below. Our new FY12F EPS forecast of NT$7.9 is 10% above consensus estimates.



We raise our PT to NT$105, based on a sum-of-the-parts analysis, which values NYP’s core business at 2.8x EV/IC (average FY11-12F ROIC of 23.5%; WACC of 8.5%), investments in the Formosa group at our price targets, other listed investments at market price and unlisted investments at book value. The key reason for our higher price target is a higher EV/IC multiple assumption of 2.8x (previously 2.7x) and higher valuation of FPCC.

Key investment risks include volatile DRAM prices, volatile crude prices, volatile chemical margins and plant mechanical failure.





Unit 2011F 2012F 2013F 2011F 2012F 2013F 2011F 2012F 2013FEBIT NT$m 33,473 35,709 40,391 32,015 32,234 31,883 5 11 27Investments NT$m 25,204 33,214 34,444 23,441 26,736 29,943 8 24 15NPAT NT$m 52,154 62,093 67,149 49,228 52,756 55,640 6 18 21EPS NT$ 6.6 7.9 8.6 6.3 6.7 7.1 5 18 20DPS NT$ 6.0 7.1 7.7 5.7 6.1 6.4 5 17 20

New Old % change

Value NTD/sh MethodologyCore business NTD m 348,822 44.4 At 2.7x EV/ICListed investments NTD m 348,264 44.4 Non-listed investments NTD m 187,708 23.9 At 1x book valueSum-of-parts NTD m 884,794 112.7 Less: net debt NTD m (59,448) (7.6) 2011F net debtPrice target NTD 944,242 105.0

Listed investmentsFormosa Plastics (4%) NTD m 33,215 4.2 PT @NT$136/shFormosa C&F (2%) NTD m 15,935 2.0 PT@NT$134/shFormosa Petrochem (24%) NTD m 242,056 30.8 PT@NT$110/shNan Ya Tech (35%) NTD m 17,803 2.3 Market price @NT$15/shNan Ya PCB (68%) NTD m 39,255 5.0 Market price @NT$96/shTotal 348,264 44.4

NT$ mn 2009 2010 2011F 2012F 2013F

Plastics 4,250 5,884 7,930 7,776 7,897

Polyester 1,787 7,196 12,340 14,060 17,666

Electronic materials 1,777 8,501 8,154 8,244 8,481

Others 896 4,934 5,049 5,629 6,347

Total 8,710 26,516 33,473 35,709 40,391


51



Fig. 85: Quarterly earnings trend and forecasts


(NT$ m) Stake 2009 2010F 2011F 2012F 2013FFPCC 24% 9,340 9,790 14,236 14,805 15,219

Nanya PCB 68% 1,403 1,385 2,380 3,373 3,710

Nanya Tech 30% (7,804) (3,433) (5,529) (298) (298)

Nanya Plastics, USA 100% 837 2,659 2,925 3,071 3,225

Nanya Plastics, HK 100% 773 5,381 5,488 5,598 5,710

Others 2,605 2,847 2,703 2,759 2,817

Total 7,155 18,630 22,202 29,308 30,383

(NT$ m) 1Q10 2Q10 3Q10 4Q10 1Q11F 2Q11F 3Q11F 4Q11FSales 51,364 55,460 54,131 51,293 61,412 60,800 60,800 60,800EBITDA 7,332 8,290 9,250 8,876 11,234 9,737 9,597 9,737Depreciation (1,756) (1,799) (1,782) (1,894) (1,748) (1,721) (1,694) (1,669)EBIT 5,575 6,491 7,468 6,982 9,486 8,016 7,902 8,068Interest (320) (322) (316) (289) (206) (147) (100) (205)Associates & others 4,992 6,564 6,588 4,220 5,066 5,838 9,015 6,158Profit before taxes 10,248 12,734 13,740 10,914 14,346 13,707 16,817 14,022Taxes (1,148) (1,551) (1,376) (1,414) (1,900) (1,617) (1,604) (1,616)Exceptionals (93) 290 (403) (965) 0 0 0 0Post-ex Net profit 9,006 11,472 11,961 8,534 12,447 12,090 15,213 12,405EPS (NT$) 1.15 1.46 1.52 1.09 1.59 1.54 1.94 1.58


PTT Chemical PTTC.BK PTTCH TB

OIL & GAS/CHEMICALS

EQUITY RESEARCH

Upgrade to BUY

Waiting for 2H11 catalysts

May 6, 2011

Rating Up from Neutral

Buy


THB 200.00


THB 160.00

Potential upside +25%

Action: Raising estimates and upgrade to BUY To take into account our forecasts of higher prices of ethylene, PE and MEG over the next few years, we raise our FY11F/12F earnings estimates by 12%/18% respectively. Consequently, we raise our PT to Bt200 and upgrade our rating to BUY.

Catalysts: emerging in 2H11 We believe that the share price has been range-bound since late last year due to merger uncertainty and recent weakness in PE prices and margins. We identify the possible positive catalysts as: 1) improving PE margins in 4Q11 on rebounding Chinese demand; 2) an improving PX margin trend from 2H11 due to PTA start-ups; and 3) the listing of the PTTAR-PTTCH merged entity in August 2011.

Valuations: Upgrade to BUY with PT of Bt200 Our PT of Bt200 is based on PTTCH’s 2/3 stake in the PTTAR-PTTCH merged entity, which we value at US$15.2bn and derived from an EV/IC multiple of 1.7x (derived from ROIC of 15.7% and WACC of 9%).

Biggest earnings growth amongst sector stocks We forecast PTTCH to generate 99% earnings growth this year, the fastest growth rate in the chemicals sector due to the start-up of its new ethane cracker, which has increased its ethylene capacity by 72%.


Currency (THB) Actual Old New Old New Old New

Revenue (mn) 101,547 131,704 138,093 143,465 149,627 152,399

Reported net profit (mn) 10,290 18,044 20,495 20,854 24,770 24,558

Normalised net profit (mn) 8,814 18,044 20,495 20,854 24,770 24,558

Normalised EPS 5.8 12.1 13.5 13.9 16.3 16.2

Norm. EPS growth (%) 62.1 79.2 132.5 15.6 20.9 -0.9

Norm. P/E (x) 27.5 N/A 11.8 N/A 9.8 N/A 9.9

EV/EBITDA 14.9 N/A 7.6 N/A 6.5 N/A 6.5



ROE (%) 10.0 15.9 17.9 16.5 19.0 16.9

Net debt/equity (%) 28.7 8.8 7.3 net cash net cash net cash


Anchor themes


Nomura vs consensus

We believe our earnings estimates are in-line with consensus.

Research analysts





Nomura | ASIA PTT Chemical May 6, 2011

53

Key data on PTT Chemical Income statement (THBmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FRevenue 86,215 101,547 138,093 149,627 152,399Cost of goods sold -71,232 -84,129 -107,501 -115,346 -120,047Gross profit 14,984 17,418 30,592 34,281 32,352SG&A -4,913 -6,052 -6,917 -7,569 -7,716Employee share expense 0 0 0 0 0Operating profit 10,071 11,366 23,675 26,712 24,636

EBITDA 14,985 16,935 32,227 34,760 32,219Depreciation -4,914 -5,569 -8,553 -8,049 -7,584Amortisation 0 0 0 0 0EBIT 10,071 11,366 23,675 26,712 24,636Net interest expense -2,040 -2,076 -1,271 526 2,274Associates & JCEs 144 1,362 754 751 832Other income 0 0 0 0 0Earnings before tax 8,175 10,653 23,158 27,989 27,742Income tax -2,329 -1,388 -2,316 -2,799 -2,769Net profit after tax 5,847 9,264 20,842 25,190 24,973Minority interests -479 -450 -347 -420 -415Other items 0 0 0 0 0Preferred dividends 0 0 0 0 0Normalised NPAT 5,368 8,814 20,495 24,770 24,558Extraordinary items 1,434 1,476 0 0 0Reported NPAT 6,802 10,290 20,495 24,770 24,558Dividends -2,993 -3,878 -9,018 -10,899 -10,782Transfer to reserves 3,809 6,412 11,477 13,871 13,776



Growth (%)

Revenue 2.0 17.8 36.0 8.4 1.9EBITDA -28.9 13.0 90.3 7.9 -7.3EBIT -40.6 12.9 108.3 12.8 -7.8Normalised EPS -59.9 62.1 132.5 20.9 -0.9Normalised FDEPS -59.9 62.1 132.5 20.9 -0.9

Per share

Reported EPS (THB) 4.55 6.79 13.52 16.34 16.20Norm EPS (THB) 3.59 5.81 13.52 16.34 16.20Fully diluted norm EPS (THB) 3.59 5.81 13.52 16.34 16.20Book value per share (THB) 66.33 70.00 80.96 91.36 100.33DPS (THB) 2.00 2.56 5.95 7.19 7.11Source: Nomura estimates

Notes

Strong earnings growth for 2011F and 2012F.


(%) 1M 3M 12M

Absolute (THB) 7.7 13.9 56.1

Absolute (USD) 9.4 18.4 68.7




51.0

52-week range (THB) 168/87


36.27

Major shareholders (%) PTT PCL 49.0

80

100

120

140

160

180

80

90

100

110

120

130

Jun

10

Jul 1

0

Aug

10

Sep

10

Oct

10

Nov

10

Dec

10

Jan

11

Feb

11

Mar

11

Apr

11

May

11

PriceRel MSCI Thailand(THB)


54

Cashflow (THBmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FEBITDA 14,985 16,935 32,227 34,760 32,219Change in working capital -3,351 -2,980 -321 -1,411 -637Other operating cashflow -4,054 -3,451 -3,587 -2,273 -495Cashflow from operations 7,580 10,504 28,320 31,076 31,087Capital expenditure -17,369 -6,727 -2,000 -2,000 -2,000Free cashflow -9,789 3,777 26,320 29,076 29,087Reduction in investments -375 -1,366 -754 -751 -832Net acquisitions -201 0 0 0 0Reduction in other LT assets 0 0 0 0 0Addition in other LT liabilities 0 0 0 0 0Adjustments 2,635 4,988 -230 751 779Cashflow after investing acts -7,730 7,398 25,335 29,076 29,034Cash dividends -2,395 -3,611 -3,878 -9,018 -10,899Equity issue 0 0 0 0 0Debt issue 0 0 0 0 0Convertible debt issue 0 0 0 0 0Others 0 0 0 0 0Cashflow from financial acts -2,395 -3,611 -3,878 -9,018 -10,899Net cashflow -10,125 3,787 21,457 20,059 18,135Beginning cash 21,175 11,050 14,838 36,295 56,353Ending cash 11,050 14,838 36,295 56,353 74,489Ending net debt 34,193 30,429 8,972 -11,087 -29,222Source: Nomura estimates

Balance sheet (THBmn) As at 31 Dec FY09 FY10 FY11F FY12F FY13FCash & equivalents 11,050 14,838 36,295 56,353 74,489Marketable securities 0 0 0 0 0Accounts receivable 10,417 12,303 16,022 17,707 18,469Inventories 8,537 11,084 10,433 11,530 12,026Other current assets 2,410 1,430 1,430 1,430 1,430Total current assets 32,414 39,655 64,179 87,021 106,414LT investments 8,694 10,060 10,814 11,565 12,397Fixed assets 111,063 109,240 103,672 97,623 92,040Goodwill 0 0 0 0 0Other intangible assets 6,520 6,627 6,627 6,627 6,627Other LT assets 1,560 2,439 2,439 2,439 2,439Total assets 160,251 168,021 187,732 205,276 219,917Short-term debt 2,027 4,567 4,567 4,567 4,567Accounts payable 8,982 10,722 13,469 14,841 15,460Other current liabilities 3,174 1,907 1,907 1,907 1,907Total current liabilities 14,183 17,196 19,943 21,315 21,934Long-term debt 43,216 40,699 40,699 40,699 40,699Convertible debt 0 0 0 0 0Other LT liabilities 1,758 2,163 2,163 2,163 2,163Total liabilities 59,158 60,058 62,805 64,177 64,797Minority interest 1,829 1,855 2,203 2,622 3,038Preferred stock 0 0 0 0 0Common stock 15,010 15,158 15,158 15,158 15,158Retained earnings 52,973 59,221 75,838 91,590 105,196Proposed dividends 0 0 0 0 0Other equity and reserves 31,280 31,728 31,728 31,728 31,728Total shareholders' equity 99,264 106,108 122,724 138,477 152,082Total equity & liabilities 160,251 168,021 187,732 205,276 219,917

Liquidity (x)

Current ratio 2.29 2.31 3.22 4.08 4.85Interest cover 4.9 5.5 18.6 na na

Leverage

Net debt/EBITDA (x) 2.28 1.80 0.28 net cash net cashNet debt/equity (%) 34.4 28.7 7.3 net cash net cash

Activity (days)


Notes

Strong cash flow generation could spur M&A.

Notes

We project a return to net cash levels next year.


55

Upgrading to BUY and PT of Bt200 To take into account our expectations of higher oil prices this year, and higher product prices of ethylene and PE, we raise our earnings estimates as detailed in the table below.



As the PTTCH-PTTAR merger has been approved at the recent joint EGM, we believe that the PTTCH should now be valued based on the outlook of the merged entity. Our new PT of Bt200 is based on PTTCH’s 2/3 stake in the PTTAR-PTTCH merged entity, which we value at US$15.2bn and derived from an EV/IC multiple of 1.7x (derived from an ROIC of 15.7% and a WACC of 9%).

Our previous price target of Bt150 was based on 1.6x EV/IC, derived from a ROCE of 15.5% and WACC of 9.8%.



Overall, we believe that prospects for the merged entity are quite promising as we believe that it should be capable of generating strong earnings growth – 102% in 2011F and 22% in 2012F. We attribute the strong earnings growth in 2011 to large volume expansion (the start-up of PTTCH’s new ethane cracker in 1Q11), stronger PX margins (due to rising polyester demand) and high refining margins (due to the shortage of sweet crude).

Fig. 88: Pro-forma income statement and balance sheet


Unit 2011F 2012F 2013F 2011F 2012F 2013F 2011F 2012F 2013FEBIT Bt m 23,675 26,712 24,583 20,703 22,539 - 14 19 -NPAT Bt m 20,495 24,770 24,505 18,044 20,854 - 14 19 -EPS Bt 13.5 16.3 16.2 12.1 13.9 - 12 18 -DPS Bt 5.9 7.2 7.1 5.3 6.1 - 12 18 -

New Old % change

Unit ValueAverage invested capital Bt m 259,670Target EV/IC (x) 1.7Implied EV Bt m 453,545Add associates Bt m 29,706Less debt Bt m 27,893Implied market capitalisation Bt m 455,358Price target - Mergeco Bt 101.0Price target - PTTAR (33% of Mergeco) Bt 50.0Price target - PTTCH (66% of Mergeco) Bt 200.0WACC % 9.0%ROIC (2012F) % 15.7%No. of shares mn 4,494

(Bt m) 2010 2011F 2012F 2010 2011F 2012F 2010 2011F 2012FSales 101,547 138,093 149,627 273,767 314,757 382,970 375,314 452,850 532,598Operating profit 11,366 23,675 26,712 7,362 17,549 21,565 18,728 41,224 48,277NPAT 10,290 20,495 24,770 6,343 13,051 16,180 16,633 33,546 40,950EPS (Bt) 6.8 13.5 16.3 2.1 4.4 5.4 3.7 7.5 9.1DPS (Bt) 3.1 6.1 7.4 0.9 1.8 2.2 1.6 3.2 3.9No of shares 1516 1516 1516 2979 2979 2979 4494 4494 4494Net debt 30,429 8,972 (11,087) 59,703 48,116 38,980 90,132 57,087 27,893Net gearing 28% 7% -8% 95% 65% 46% 53% 29% 13%Sh equity 106,108 122,724 138,477 63,032 73,547 84,506 169,140 196,271 222,983

PTTCH PTTAR Mergeco


Petronas Chemicals Group PCGB.KL PCHEM

MK

OIL & GAS/CHEMICALS

EQUITY RESEARCH

Strong end to FY11 expected

Slow start to FY12, but strong finish expected

May 6, 2011

Rating Remains

Buy


MYR 8.40


MYR 7.23


Action: Raising estimates on higher PX, MEG, MTBE & acetic acid margins We raise our FY12/13F earnings estimates by 11%/8% respectively to take into account our higher margin forecasts for PX, MEG, MTBE and acetic acid. MTBE, a gasoline blendstock, is benefiting from high crude and stable methanol feedstock prices. Acetic acid prices have risen 30% in 1QFY12F due to significant unplanned plant shutdowns in China.

Catalysts: Further momentum later this year We believe PCG’s share price could remain range-bound until later this year, when we anticipate prices and margins of PE and polyester intermediates to rebound on recovering Chinese demand. We continue to like PCG as the most defensive play in the event of rising crude prices, but Nomura is forecasting stable crude prices of US$110/bbl for the next three years.

Valuation: Reiterate BUY; raising PT to RM8.40 We raise our PT to RM8.40 (from RM7.30) based on a target EV/CE multiple of 4.0x (derived from an average FY12-14F ROCE of 29.4% and WACC of 9%).

Expect strong 4QFY11 but weaker 1QFY12 We forecast PCG to generate strong net profit of RM1.04bn for 4QFY11 (+36% q-q) but believe that PCG’s earnings could dip 19% q-q in 1QFY12 due to the shutdown of key aromatics, VCM and MTBE plants during the quarter. Prices of polyester intermediates (MEG, PX) have also declined from their 4QFY11 peaks, while still remaining at relatively high levels.

31 Mar FY10 FY11F FY12F FY13F

Currency (MYR) Actual Old New Old New Old New

Revenue (mn) 12,203 13,566 13,811 14,541 15,212 16,146 16,477



Normalised EPS 0.3 0.4 0.4 0.4 0.5 0.5 0.5

Norm. EPS growth (%) -22.0 22.5 30.8 16.7 21.8 13.0 9.0

Norm. P/E (x) 23.9 N/A 18.3 N/A 15.0 N/A 13.8

EV/EBITDA 13.3 N/A 10.2 N/A 8.1 N/A 7.2



ROE (%) 13.4 15.3 16.3 16.7 18.3 17.1 18.0

Net debt/equity (%) net cash net cash net cash net cash net cash net cash net cash


Anchor themes


Nomura vs consensus

We believe our FY11F earnings estimates are 2% below consensus estimates.

Research analysts





Nomura | ASIA Petronas Chemicals Group May 6, 2011

57

Key data on Petronas Chemicals Group Income statement (MYRmn) Year-end 31 Mar FY09 FY10 FY11F FY12F FY13FRevenue 12,367 12,203 13,811 15,212 16,477Cost of goods sold -7,500 -8,561 -9,396 -9,740 -10,524Gross profit 4,867 3,642 4,414 5,472 5,953SG&A -766 -796 -908 -940 -960Employee share expense 0 0 0 0 0Operating profit 4,101 2,846 3,507 4,532 4,993

EBITDA 4,788 3,742 4,551 5,554 5,997Depreciation -687 -896 -1,044 -1,022 -1,004Amortisation 0 0 0 0 0EBIT 4,101 2,846 3,507 4,532 4,993Net interest expense 285 341 190 34 37Associates & JCEs 25 181 576 609 610Other income 0 0 0 0 0Earnings before tax 4,411 3,368 4,273 5,175 5,640Income tax -962 -774 -960 -1,050 -1,157Net profit after tax 3,449 2,594 3,313 4,125 4,483Minority interests -631 -395 -324 -286 -300Other items 0 0 0 0 0Preferred dividends 0 0 0 0 0Normalised NPAT 2,818 2,199 2,989 3,839 4,183Extraordinary items 5 -4 12 0 0Reported NPAT 2,823 2,195 3,001 3,839 4,183Dividends -2,340 -2,968 -1,500 -1,919 -2,092Transfer to reserves 483 -773 1,500 1,919 2,092



Growth (%)

Revenue -3.8 -1.3 13.2 10.1 8.3EBITDA -23.7 -21.8 21.6 22.0 8.0EBIT -27.4 -30.6 23.2 29.2 10.2Normalised EPS 299.6 -22.0 30.8 21.8 9.0Normalised FDEPS -28.2 -22.0 30.8 21.8 9.0

Per share

Reported EPS (MYR) 0.39 0.30 0.40 0.48 0.52Norm EPS (MYR) 0.39 0.30 0.39 0.48 0.52Fully diluted norm EPS (MYR) 0.39 0.30 0.39 0.48 0.52Book value per share (MYR) 2.16 2.34 2.47 2.76 3.05DPS (MYR) 0.32 0.41 0.19 0.24 0.26Source: Nomura estimates

Notes

We forecast 22% y-y earnings growth in FY12F


(%) 1M 3M 12M

Absolute (MYR) 3.7 18.0

Absolute (USD) 5.6 21.2

Relative to index 2.2 17.1



31.0

52-week range (MYR)

7.61/5.2


32.08

Major shareholders (%) Petronas 69.0

5

5.5

6

6.5

7

7.5

8

90

100

110

120

130

140

Dec

10

Jan

11

Feb

11

Mar

11

Apr

11

May

11

PriceRel MSCI Malaysia(MYR)


58

Cashflow (MYRmn) Year-end 31 Mar FY09 FY10 FY11F FY12F FY13FEBITDA 4,788 3,742 4,551 5,554 5,997Change in working capital 1,485 572 -2,154 -112 -66Other operating cashflow -33 1,268 -472 0 0Cashflow from operations 6,240 5,582 1,925 5,442 5,931Capital expenditure -1,239 -892 -700 -700 -700Free cashflow 5,001 4,690 1,225 4,742 5,231Reduction in investments 316 1,245 -20 -609 -610Net acquisitions

Reduction in other LT assets 79 -180 38 0 0Addition in other LT liabilities 344 67 251 0 0Adjustments -840 -3,031 -261 -407 -509Cashflow after investing acts 4,900 2,791 1,233 3,726 4,111Cash dividends -2,780 -2,340 -2,968 -1,500 -1,919Equity issue 3,439

Debt issue

Convertible debt issue

Others

Cashflow from financial acts -2,780 -2,340 471 -1,500 -1,919Net cashflow 2,120 451 1,704 2,226 2,192Beginning cash 4,961 7,081 7,532 9,236 11,462Ending cash 7,081 7,532 9,236 11,462 13,654Ending net debt -5,750 -5,655 -5,466 -7,692 -9,884Source: Nomura estimates

Balance sheet (MYRmn) As at 31 Mar FY09 FY10 FY11F FY12F FY13FCash & equivalents 7,081 7,532 9,236 11,462 13,654Marketable securities 139 25 20 20 20Accounts receivable 1,360 2,237 1,764 1,932 2,031Inventories 826 1,231 1,372 1,503 1,580Other current assets 251 212 124 124 124Total current assets 9,657 11,237 12,517 15,041 17,410LT investments 2,060 929 954 1,562 2,173Fixed assets 11,121 12,992 12,678 12,436 12,212Goodwill 53 1,211 2,052 1,972 1,892Other intangible assets 0 0 0 0 0Other LT assets 343 523 485 485 485Total assets 23,234 26,892 28,685 31,497 34,171Short-term debt 745 623 403 403 403Accounts payable 2,896 4,734 1,960 2,147 2,257Other current liabilities 61 38 238 238 238Total current liabilities 3,702 5,395 2,601 2,788 2,898Long-term debt 586 1,254 3,367 3,367 3,367Convertible debt 0 0 0 0 0Other LT liabilities 1,128 1,195 1,446 1,446 1,446Total liabilities 5,416 7,844 7,414 7,601 7,711Minority interest 2,082 1,979 1,501 1,788 2,088Preferred stock 0 0 0 0 0Common stock 730 730 800 800 800Retained earnings 15,006 16,339 18,970 21,308 23,572Proposed dividends 0 0 0 0 0Other equity and reserves 0 0 0 0 0Total shareholders' equity 15,736 17,069 19,770 22,108 24,372Total equity & liabilities 23,234 26,892 28,685 31,497 34,171

Liquidity (x)

Current ratio 2.61 2.08 4.81 5.40 6.01Interest cover na na na na na

Leverage

Net debt/EBITDA (x) net cash net cash net cash net cash net cashNet debt/equity (%) net cash net cash net cash net cash net cash

Activity (days)

Days receivable 50.7 53.8 52.9 44.5 43.9Days inventory 42.3 43.9 50.6 54.0 53.5Days payable 112.7 162.7 130.0 77.2 76.4Cash cycle -19.6 -65.0 -26.6 21.3 21.0Source: Nomura estimates

Notes

Strong cash flow generation

Notes

Cash pile is rising


59

Strong 4QFY11 expected To take into account product prices and margins that exceeded our expectations in 4QFY11, we are raising our FY11F earnings estimates by 5%. We therefore forecast PCG to report a 4QFY11 EPS of RM0.13 (+36% q-q) at the end of May 2011.

We are also raising FY12/13F earnings estimates by 11%/8% respectively to take into account our higher margin assumptions of PX, MEG and PVC and higher prices of MTBE (we now forecast US$1100-1200/t for FY12-13F from US$950/t previously). The magnitude of our earnings upgrade is higher in FY12 as we have revised up our crude price forecast to US$110/bbl (from US$95/bbl) but are leaving our FY13F crude forecast unchanged.

Fig. 89: Changes to earnings estimates


In the near term, we believe that earnings momentum is likely to decelerate as we expect 1QFY12 net profits to fall 19% from 4QFY11 levels for two reasons:

• Significant plant shutdowns in 1QFY12 as detailed in the table below. Most notably, we note the unplanned shutdown of the VCM plant is contributing to the regional tightness in PVC at present.

• Margins of key products such as PX and MEG have declined q-q in1QFY12 as margins in the preceding quarter were exceptionally good. PE prices have also failed to rise, so PCG has not benefited from rising crude prices.

• Prices of MTBE and acetic acid have been the major positive surprises in 1QFY12. MTBE prices are rising on higher gasoline values, while acetic acid prices have benefited from significant unplanned shutdowns in China.

Fig. 90: Recent plant shutdowns

Source: ICIS

Fig. 91: Price trend of key products


(RM m) FY11F FY12F FY13F FY11F FY12F FY13F FY11F FY12F FY13FEBIT 3,507 4,532 4,993 3,238 4,011 4,624 8.3 13.0 8.0Investment income 576 609 610 575 580 582 0.1 5.0 4.8NPAT 2,989 3,839 4,183 2,799 3,445 3,893 6.8 11.4 7.5EPS (RM) 0.39 0.48 0.52 0.37 0.43 0.49 5.3 11.6 6.7

New Old % change

Product Capacity (kt) From DurationMTBE 300 18-Apr 1 monthMethanol 1700 29-Mar 2 weeksVCM 400 15-Mar 1-3 monthsPX 500 8-Apr 1.5 months

1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 Q-Q (%) Y-Y (%)Naphtha 711 666 807 918 1,048 14 47Ethylene 1,143 942 1,099 1,283 1,358 6 19HDPE 1,164 1,065 1,221 1,306 1,349 3 16LDPE 1,370 1,288 1,568 1,699 1,679 (1) 23LLDPE 1,258 1,141 1,335 1,416 1,397 (1) 11MEG 822 757 976 1,206 1,120 (7) 36PVC 964 917 976 1,040 1,221 17 27Propylene 1,205 1,133 1,239 1,430 1,561 9 30PP 1,278 1,214 1,386 1,558 1,641 5 282-EH 1,775 1,601 1,783 1,914 1,933 1 9Butyl acrylate 2,720 2,661 3,174 3,336 3,313 (1) 22Benzene 923 846 971 1,153 1,192 3 29SM 1,163 1,067 1,265 1,421 1,425 0 23Paraxylene 988 928 1,255 1,626 1,630 0 65MTBE 811 777 884 1,036 1,274 23 57Methanol 261 261 355 350 340 (3) 30Acetic acid 380 377 455 420 577 37 52Urea 259 299 365 367 322 (12) 24


60

Fig. 92: Margin trend of key products


To take into account our higher earnings estimates, we raise our PT to RM8.40 (from RM7.30) based on a target EV/CE multiple of 4.0x (derived from an average FY12-14F ROCE of 29% and WACC of 9%). The key reason for our higher PT is a higher ROE assumption of 29% vs 26% previously. Key risks include volatile crude prices, volatile chemical margins and plant mechanical failure.



1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 Q-Q (%) Y-Y (%)Ethylene - Ethane 1,053 852 1,009 1,193 1,268 6 20HDPE - Ethane 1,074 975 1,131 1,216 1,259 4 17LDPE - Ethane 1,280 1,198 1,478 1,609 1,589 (1) 24LLDPE- Ethane 1,168 1,051 1,245 1,326 1,307 (1) 12EG - Ethylene 136 192 317 432 306 (29) 125PVC - Ethylene 392 446 427 399 542 36 38Propylene - Propane 845 773 879 1,070 1,201 12 42PP - Propane 918 854 1,026 1,198 1,281 7 402-EH - Propylene 582 461 540 469 372 (21) (36)Butyl acrylate - Propylene 1,395 1,415 1,811 1,747 1,596 (9) 14Benzene - Naphtha 211 180 164 229 144 (37) (32)Styrene - Naphtha 453 400 457 501 376 (25) (17)PX - Naphtha 277 262 448 690 582 (16) 110Acetic acid - Methanol 236 234 260 227 390 72 65

Value RM/shAverage capital employed RM m 15,047Target EV/CE (x) 4.0Implied EV RM m 59,483 7.4Add net cash RM m 7,712 1.0Implied market capitalisation RM m 67,195

Price target RM 8.40


Formosa Chem & Fibre 1326.TW 1326 TT

OIL & GAS/CHEMICALS

EQUITY RESEARCH

LT fundamentals intact

Margin recovery from 4Q11F onwards

May 6, 2011

Rating Remains

Buy


TWD 134.0


TWD 115.5

Potential upside +16%

Action: PX strength to buoy PTA margins We raise our FY11/12/13F earnings estimates by 14%/6%/12%, respectively, to take into account our higher PTA margin assumptions and increased contributions from FPCC. Despite the industry adding large PTA capacity additions over the next two years, we believe FCFC’s integrated PX-PTA model will enable FCFC to generate a reasonable integrated margin.

Catalysts: Earnings deceleration post the 1Q11 peak We believe FCFC could face the sharpest q-q earnings decline in 2Q11F amongst the Formosa group due to exceptionally strong PTA margins in 1Q11, which have since declined sharply. We believe that earnings momentum could recover later this year, when we anticipate the polyester market to strengthen after a weak 2Q11.

Valuation: Reaffirm BUY and raise price target to NT$134 We use a sum-of-the-parts methodology to derive our new price target of NT$134 (up from NT$120) and maintain our BUY rating. We note that our revised FY11F EPS forecast is 9% above consensus estimates, and forthcoming Street upgrades could serve as a key catalyst.

Phenol & SM could provide support Despite the current weakness in PTA, we believe that FCFC’s earnings should be supported by ongoing strength in phenol and gradually strengthening SM margins as we forecast the supply/demand balance for these two products will tighten in 2011-12.



Revenue (mn) 283,121 292,712 322,544 319,973 331,475 319,628 334,302



Normalised EPS 8.4 9.2 10.5 9.7 10.2 8.3 9.3

Norm. EPS growth (%) 63.9 9.5 24.2 5.1 -2.4 -14.0 -9.1

Norm. P/E (x) 13.7 N/A 11.0 N/A 11.3 N/A 12.4

EV/EBITDA 11.4 N/A 9.7 N/A 10.0 N/A 11.1



ROE (%) 18.8 20.6 21.3 21.0 20.1 17.9 18.1

Net debt/equity (%) 23.5 20.7 21.0 20.9 22.1 24.4 24.1


Anchor themes


Nomura vs consensus

We believe our 2011F earnings estimates are 9% above consensus.

Research analysts





Nomura | ASIA Formosa Chem & Fibre May 6, 2011

62

Key data on Formosa Chem & Fibre Income statement (TWDmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FRevenue 219,729 283,121 322,544 331,475 334,302Cost of goods sold -202,891 -250,265 -279,615 -292,563 -301,440Gross profit 16,839 32,856 42,929 38,911 32,862SG&A -6,597 -7,379 -8,386 -8,287 -8,358Employee share expense 0 0 0 0 0Operating profit 10,242 25,478 34,543 30,624 24,505

EBITDA 24,166 37,204 42,886 38,630 32,205Depreciation -13,924 -11,726 -8,343 -8,006 -7,701Amortisation 0 0 0 0 0EBIT 10,242 25,478 34,543 30,624 24,505Net interest expense -1,429 -1,140 -825 -817 -928Associates & JCEs 19,759 25,775 31,198 33,560 33,251Other income 757 1,033 1,043 1,052 1,062Earnings before tax 29,329 51,146 65,958 64,420 57,889Income tax 0 -3,090 -6,257 -6,172 -4,926Net profit after tax 29,329 48,056 59,701 58,248 52,964Minority interests 0 0 0 0 0Other items 0 0 0 0 0Preferred dividends 0 0 0 0 0Normalised NPAT 29,329 48,056 59,701 58,248 52,964Extraordinary items 159 -781 0 0 0Reported NPAT 29,489 47,275 59,701 58,248 52,964Dividends -25,621 -42,689 -53,910 -52,598 -47,817Transfer to reserves 3,868 4,586 5,791 5,650 5,146



Growth (%)

Revenue -12.0 28.8 13.9 2.8 0.9EBITDA 233.1 54.0 15.3 -9.9 -16.6EBIT na 148.8 35.6 -11.3 -20.0Normalised EPS 250.3 63.9 24.2 -2.4 -9.1Normalised FDEPS 250.3 63.9 24.2 -2.4 -9.1

Per share


Notes

24% y-y net profit growth for 2011F.


(%) 1M 3M 12M

Absolute (TWD) 4.1 9.0 47.7

Absolute (USD) 7.3 10.6 62.0

Relative to index -0.9 11.4 36.2



60.0

52-week range (TWD)

119/67.5


56.40


Formosa Plastics 3.4

60

80

100

120

90

100

110

120

130

140

Jun

10

Jul 1

0

Aug

10

Sep

10

Oct

10

Nov

10

Dec

10

Jan

11

Feb

11

Mar

11

Apr

11

May

11



63

Cashflow (TWDmn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FEBITDA 24,166 37,204 42,886 38,630 32,205Change in working capital -10,076 -8,373 -2,471 -467 -235Other operating cashflow -7,235 -3,970 -6,190 -6,097 -4,962Cashflow from operations 6,854 24,861 34,225 32,067 27,008Capital expenditure -3,446 -601 -4,000 -4,000 -4,000Free cashflow 3,408 24,260 30,225 28,067 23,008Reduction in investments -47,998 -33,489 -15,687 -12,050 -9,894Net acquisitions 0 0 0 0 0Reduction in other LT assets 4,347 2,701 0 0 0Addition in other LT liabilities -755 398 0 0 0Adjustments 45,512 7,293 -463 11,767 11,767Cashflow after investing acts 4,514 1,162 14,075 27,784 24,881Cash dividends -4,970 -25,621 -42,689 -53,910 -52,598Equity issue 0 0 0 0 0Debt issue -4,495 -5,461 -8,203 0 8,000Convertible debt issue 0 0 0 0 0Others 4,360 35,345 31,811 25,954 21,644Cashflow from financial acts -5,106 4,263 -19,081 -27,956 -22,954Net cashflow -591 5,426 -5,006 -172 1,928Beginning cash 1,247 655 6,081 1,075 902Ending cash 655 6,081 1,075 903 2,830Ending net debt 74,543 63,657 60,460 64,632 70,705Source: Nomura estimates

Balance sheet (TWDmn) As at 31 Dec FY09 FY10 FY11F FY12F FY13FCash & equivalents 655 6,081 1,075 902 2,830Marketable securities 56,218 75,780 75,780 75,780 75,780Accounts receivable 30,320 34,390 36,831 37,292 37,525Inventories 20,761 25,346 27,884 28,364 28,606Other current assets 3,648 4,958 4,958 4,958 4,958Total current assets 111,602 146,554 146,528 147,296 149,698LT investments 131,949 145,876 161,563 173,613 183,507Fixed assets 88,217 79,348 75,005 70,999 67,298Goodwill 0 0 0 0 0Other intangible assets 0 0 0 0 0Other LT assets 8,703 6,002 6,002 6,002 6,002Total assets 340,470 377,780 389,098 397,910 406,505Short-term debt 19,394 9,535 9,535 9,535 9,535Accounts payable 27,685 29,059 31,568 32,042 32,281Other current liabilities 1,344 1,563 1,563 1,563 1,563Total current liabilities 48,424 40,156 42,665 43,139 43,378Long-term debt 55,805 60,203 52,000 56,000 64,000Convertible debt 0 0 0 0 0Other LT liabilities 5,775 6,173 6,173 6,173 6,173Total liabilities 110,003 106,532 100,838 105,312 113,551Minority interest 0 0 0 0 0Preferred stock 0 0 0 0 0Common stock 56,905 56,905 56,905 56,905 56,905Retained earnings 117,585 139,278 156,290 160,628 160,984Proposed dividends 0 0 0 0 0Other equity and reserves 55,977 75,065 75,065 75,065 75,065Total shareholders' equity 230,466 271,248 288,260 292,598 292,954Total equity & liabilities 340,470 377,780 389,098 397,910 406,505

Liquidity (x)


Leverage


Activity (days)


Notes

Strong cash generation largely repaid as dividends.

Notes

Net gearing remains low.


64

Raising estimates and PT; maintain BUY To take into account our higher margin forecasts for PTA and phenol, which are somewhat offset by lower SM margin forecasts, we are raising our EBIT forecasts by 10%/11% for 2011/13F, although we are lowering our EBIT forecasts by 4% for 2012F. To take into account the stronger contributions from FPCC, we are raising our 2011/12/13F investment income by 16%/15%/13%, respectively. In aggregate, this leads us to raise our net profit estimates for 2011/12/13F by 14%/6%/12%, respectively.

Fig. 94: Key changes to our earnings estimates


Consequently, we are raising our price target to NT$134 (from NT$120), based on a sum-of-the-parts analysis which values FCFC’s core business at 3.0x EV/IC (average 2011F-12F ROIC of 24.5%; WACC of 8.5%), investments in the Formosa group at our price targets, other listed investments at market price, and unlisted investments at 1.5x book value. The key reason for our higher price target is a higher EV/IC assumption of 3.0x (previously 2.4x), as well as a higher valuation of FPCC.

Key risks include volatile crude prices, volatile aromatic margins and plant mechanical failure.





Unit 2011F 2012F 2013F 2011F 2012F 2013F 2011F 2012F 2013FEBIT NT$m 34,543 30,624 24,505 31,431 31,942 22,059 10 -4 11Investments NT$m 31,198 33,560 33,251 26,944 29,217 29,483 16 15 13NPAT NT$m 59,701 58,248 52,954 52,255 54,931 47,221 14 6 12EPS NT$ 10.5 10.2 9.3 9.2 9.7 8.3 14 6 12DPS NT$ 9.5 9.2 8.4 8.3 8.7 7.5 14 6 12

New Old % change

Unit 2010F NT/sh Remarks

Average invested capital NTD m 109,088

Target EV/IC (x) 3.0

Implied EV NTD m 324,379 57.0

Less debt NTD m (50,460) (8.9)

Add associates:

FPCC (25%) NTD m 260,917 45.9 PT@ NT$110/sh

NYP (5%) NTD m 41,223 7.2 PT NT$105/sh

FPC (8%) NTD m 66,596 11.7 PT NT$136/sh

FTC (37%) NTD m 19,323 3.4 Mkt price@NT$31/sh

Other investments NTD m 101,847 17.9 At 1.5x 2011 BV

Implied market capitalisation NTD m 763,825

Implied price target NTD 134.0

NT$ mn 2009 2010 2011F 2012F 2013F

Textiles 943 5,003 6,419 7,105 6,519

Aromatics 8,198 18,385 25,841 21,257 15,835

Others 1,102 2,090 2,283 2,262 2,150

Total 10,242 25,478 34,543 30,624 24,505


65



Fig. 98: Quarterly earnings trend and forecast


(NT$m) Stake 2009 2010 2011F 2012F 2013F

FPCC 26% 9,597 10,680 15,494 16,111 16,559

Formosa Taffeta 37% 29 1,197 1,221 1,245 1,058

Formosa Cayman 100% 5,217 6,972 6,900 6,969 5,575

Mailiao Power 25% 2,209 1,771 1,683 1,716 1,751

Vietnam JV 43% 175 254 267 280 294

Others - 1,054 942 942 942 942

Total 18,282 21,816 26,507 27,264 26,180

(NT$ m) 1Q10 2Q10 3Q10 4Q10 1Q11F 2Q11F 3Q11F 4Q11FSales 70,990 71,739 66,341 74,051 80,900 80,088 80,088 81,468EBITDA 9,196 9,681 7,653 10,675 13,203 9,701 9,565 10,417Depreciation (2,996) (2,850) (2,900) (2,980) (2,119) (2,097) (2,074) (2,053)EBIT 6,200 6,831 4,753 7,695 11,083 7,605 7,491 8,364Interest (298) (290) (280) (271) (225) (193) (159) (248)Associates & others 5,472 5,420 8,260 7,656 8,721 6,140 11,192 6,187Profit before taxes 11,373 11,960 12,733 15,080 19,579 13,552 18,523 14,304Taxes 0 (1,024) (947) (1,119) (2,001) (1,381) (1,367) (1,508)Exceptionals (17) 142 (168) (739) 0 0 0 0Net profit 11,357 11,078 11,618 13,222 17,578 12,171 17,157 12,796EPS (NT$) 2.00 1.95 2.04 2.32 3.09 2.14 3.01 2.25


Hanwha Chemical Corp 009830.KS 009830 KS

OIL & GAS/CHEMICALS

EQUITY RESEARCH

Core earnings to drive share rally

PVC, caustic soda, aggressive solar capex to drive momentum

May 6, 2011

Rating Remains

Buy

Target price Increased from 40,000

KRW 69,000

Closing price May 4, 2011

KRW 46,450


Action: BUY as we see more to share upside, new PT W69,000 We maintain BUY on Hanwha Chem (HCC), with a TP of KRW69,000 (previous: KRW40,000), based on SOTP (unchanged). We have raised FY11F EBITDA by 3% and our target EV/EBITDA multiple to 10.8x (previous: 6.7x), which represents the peak multiple seen in 2010. We believe the industry upturn will be sustainable over the next 20 months. Risks: 1) petrochem price volatility; 2) execution risks on new businesses.

Catalysts: PVC and caustic soda have strongest momentum We believe HCC’s chlor-alkali business should see strong earnings in FY11F, on caustic soda strength and potential recovery in PVC. PVC prices are up 30% YTD, and we think pricing will rise further on strong demand, production outages in Japan, and electricity shortages in China.

New PVC plant in China increases capacity by 54% In early February, HCC started commercial operation of its new PVC plant in Ningbo, China. With this, HCC’s total PVC capacity rises to 860,000 tpa (+54%). We expect additional sales of KRW375bn and operating profit of KRW49bn from this EDC integrated plant in 2011F.

Aiming for an integrated solar business HCC announced that it will enter the polysilicon business under capex of KRW1.0tr (USD955mn), with a completion target of July 2013. This completes HCC’s vertical integration, as it is already producing solar cells, modules, ingots, and wafers via 50%-owned Hanwha SolarOne – the world’s 4th -largest solar module producer.



Revenue (bn) 3,628 4,004 4,151 4,288 4,447 4,486

Reported net profit (bn) 399 596 610 665 703 735

Normalised net profit (bn) 399 596 610 665 703 735

Normalised EPS 2,845.4 4,249.3 4,351.5 4,740.3 5,009.8 5,239.9

Norm. EPS growth (%) 16.2 19.2 52.9 11.6 15.1 4.6

Norm. P/E (x) 16.8 N/A 11.0 N/A 9.5 N/A 9.1

EV/EBITDA 9.5 N/A 7.6 N/A 7.1 N/A 6.9



ROE (%) 14.1 18.5 18.7 17.4 18.1 16.0

Net debt/equity (%) 52.2 34.7 36.8 24.9 35.4 29.6


Anchor themes


Nomura vs consensus

Our FY11-12F net profit estimates are broadly in line with consensus.

Research analysts






Nomura | ASIA Hanwha Chemical Corp May 6, 2011

67

Key data on Hanwha Chemical Corp Income statement (KRWbn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FRevenue 3,034 3,628 4,151 4,447 4,486Cost of goods sold -2,369 -2,858 -3,173 -3,373 -3,298Gross profit 665 771 977 1,074 1,188SG&A -254 -285 -305 -326 -349Employee share expense

Operating profit 411 486 672 748 839

EBITDA 519 607 797 875 970Depreciation -107 -120 -124 -127 -131Amortisation -1 0 0 0 0EBIT 411 486 672 748 839Net interest expense -62 -62 -62 -72 -68Associates & JCEs 156 271 261 286 219Other income -87 -186 -93 -64 -52Earnings before tax 418 510 779 897 938Income tax -74 -110 -169 -194 -203Net profit after tax 343 399 610 703 735Minority interests

Other items

Preferred dividends

Normalised NPAT 343 399 610 703 735Extraordinary items 0 0 0 0 0Reported NPAT 343 399 610 703 735Dividends -64 -64 -64 -64 -57Transfer to reserves 280 335 546 638 678



Growth (%)

Revenue -0.1 19.6 14.4 7.1 0.9EBITDA 42.2 17.0 31.3 9.9 10.8EBIT 59.3 18.3 38.4 11.2 12.2Normalised EPS 727.6 16.2 52.9 15.1 4.6Normalised FDEPS 727.6 16.2 52.9 15.1 4.6

Per share

Reported EPS (KRW) 2,447.97 2,845.41 4,351.46 5,009.78 5,239.95Norm EPS (KRW) 2,447.97 2,845.41 4,351.46 5,009.78 5,239.95Fully diluted norm EPS (KRW) 2,447.97 2,845.41 4,351.46 5,009.78 5,239.95Book value per share (KRW) 19,022.86 21,367.65 25,210.93 30,173.91 35,369.41DPS (KRW) 454.01 454.01 458.94 458.94 409.06Source: Nomura estimates

Notes

Although HCC will be changing accounting method to K-IFRS (consolidated) from 1Q11, the financials shown here are based on K-GAPP (parent). We will be shifting to K-IFRS when the full statements become available in mid-May


(%) 1M 3M 12M

Absolute (KRW) 7.7 16.5 183.9

Absolute (USD) 12.0 21.4 195.1




57.3

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75.82

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Cashflow (KRWbn) Year-end 31 Dec FY09 FY10 FY11F FY12F FY13FEBITDA 519 607 797 875 970Change in working capital 466 26 -30 -45 34Other operating cashflow -288 -167 -242 -199 -260Cashflow from operations 697 466 525 631 745Capital expenditure -287 -179 -229 -679 -700Free cashflow 410 287 295 -49 45Reduction in investments -706 -572 -193 -298 -164Net acquisitions -484 -628 -503 -402 -402Reduction in other LT assets -108 109 49 0 0Addition in other LT liabilities -2 -6 3 2 2Adjustments 852 699 675 614 608Cashflow after investing acts -38 -111 327 -132 90Cash dividends -64 -64 -64 -64 -57Equity issue

Debt issue -46 157 -86 256 -98Convertible debt issue

Others -112 12 0 0 0Cashflow from financial acts -222 106 -150 192 -155Net cashflow -260 -6 177 59 -65Beginning cash 297 36 31 208 267Ending cash 36 31 208 267 202Ending net debt 1,402 1,564 1,302 1,499 1,466Source: Nomura estimates

Balance sheet (KRWbn) As at 31 Dec FY09 FY10 FY11F FY12F FY13FCash & equivalents 36 31 208 267 202Marketable securities 0 0 0 0 0Accounts receivable 300 360 394 422 426Inventories 215 256 285 304 297Other current assets 62 57 65 70 70Total current assets 612 703 951 1,063 995LT investments 2,229 2,801 2,994 3,292 3,456Fixed assets 1,809 1,858 1,964 2,516 3,085Goodwill

Other intangible assets 8 9 9 9 9Other LT assets 158 49 0 0 0Total assets 4,817 5,421 5,918 6,879 7,545Short-term debt 743 410 336 399 364Accounts payable 413 436 444 472 462Other current liabilities 96 196 229 207 250Total current liabilities 1,252 1,042 1,009 1,079 1,075Long-term debt 695 1,186 1,173 1,367 1,304Convertible debt



Other equity and reserves 655 649 642 635 629Total shareholders' equity 2,669 2,998 3,537 4,233 4,962Total equity & liabilities 4,817 5,421 5,918 6,879 7,545

Liquidity (x)


Leverage


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Notes

Capex and net debt rise in 2012-13F owing to polysilicon investment

Notes

Land revaluation added W272bn on assets


69


Source: Nomura

Fig. 100: PER band


Valuation Methodology Our PT of KRW69,000 is based on SOTP. We use a target EV/EBITDA multiple of 10.8x, which represents the peak multiple in 2010 (EV: KRW8,605bn ; FY11F EBITDA: KRW797bn). We believe the industry upturn will be sustainable over the next 20 months.

Risks that may impede the achievement of the target price Risks include: 1) petrochemical price volatility; 2) execution risks on new businesses.

(W bn) Remark

EBITDA 797 2011F EBITDA

Multiple (x) 10.8 Hanwha peak cycle multiple 2010

EV 8,605

Hanwha Galleria 1,575 100% stake, Korea retail avg FY10 P/BV

Yeochun NCC 979 50% stake, Korea petrochem avg FY10 P/BV

Investment asset 2,554

Net debt 1,302 2011F

Fair mkt cap 9,857

Fair value (W /share) 69,409

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72

Appendix A-1

Analyst Certification

We, Yong Liang Por, Cindy Park and Chiew Cheng Khoo, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures Mentioned companies Issuer name Ticker Price Price date Stock rating Sector rating Disclosures Formosa Chem & Fibre 1326 TT 110.0 TWD 05-May-2011 Buy Not rated Formosa Plastics 1301 TT 112.5 TWD 05-May-2011 Buy Not rated

Hanwha Chemical Corp 009830 KS 46,450 KRW 05-May-2011 Buy Not rated

Honam Petrochemical 011170 KS 377,000 KRW 05-May-2011 Buy Not rated

LG Chem 051910 KS 502,000 KRW 05-May-2011 Buy Not rated 4,112

Nan Ya Plastics 1303 TT 85.0 TWD 05-May-2011 Buy Not rated

PTT Chemical PTTCH TB 157.00 THB 04-May-2011 Neutral Not rated

Petronas Chemicals Group PCHEM MK 7.18 MYR 04-May-2011 Buy Not rated

Disclosures required in the European Union

4 Market maker Nomura International plc or an affiliate in the global Nomura group is a market maker or liquidity provider in the securities / related derivatives of the issuer.

Disclosures required in Korea

112 Liquidity Provider for Equity Linked Warrant Nomura Financial Investment (Korea) Co., Ltd. is a liquidity provider (LP) or LP & issuer for ELW which the underlying is LG Chem (051910.KS), and holds 21,037,520 warrants as of 04-May-2011.

Previous Rating Issuer name Previous Rating Date of change Formosa Chem & Fibre Reduce 04-Sep-2009 Formosa Plastics Neutral 04-Sep-2009 Hanwha Chemical Corp Neutral 03-Nov-2010 Honam Petrochemical Neutral 03-Nov-2010 LG Chem Neutral 09-Sep-2009 Nan Ya Plastics Neutral 02-Mar-2010 PTT Chemical Reduce 03-Nov-2010 Petronas Chemicals Group Not Rated 10-Dec-2010


Formosa Chem & Fibre (1326 TT) 110.0 (05-May-2011)

Rating and target price chart (three year history)

Buy (Sector rating: Not rated)

Date Rating Target price Closing price 28-Jan-2011 120.00 106.00 03-Nov-2010 106.00 88.60 12-Oct-2010 92.00 75.50 24-Aug-2010 88.00 70.50 06-Jul-2010 87.00 77.50 29-Apr-2010 90.00 78.20 22-Feb-2010 80.00 69.80 26-Oct-2009 73.00 64.90 04-Sep-2009 70.00 57.30 04-Sep-2009 Buy 57.30 30-Apr-2009 32.00 51.07 27-Mar-2009 30.00 40.15 10-Feb-2009 28.00 37.72 14-Nov-2008 41.00 51.07 01-Jul-2008 53.00 57.77 01-Jul-2008 Reduce 57.77

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology Our PT of TWD134 is based on sum-of-the-parts analysis, which values FCFC’s core business at 3.0 EV/IC (average FY11F-12F ROIC of 24.5%; WACC of 8.5%), investments in the Formosa group at our price targets, other listed investments at market price and unlisted investments at 1.5x book value. Risks that may impede the achievement of the target price Key risks include volatile crude prices, volatile aromatic margins and plant mechanical failure.

Formosa Plastics (1301 TT) 112.5 (05-May-2011)



Date Rating Target price Closing price 28-Jan-2011 118.00 99.30 03-Nov-2010 106.00 89.50 12-Oct-2010 90.00 75.70 30-Aug-2010 84.00 71.00 06-Jul-2010 82.00 69.70 24-Feb-2010 79.00 68.30 26-Oct-2009 75.00 66.30 04-Sep-2009 70.00 60.00 04-Sep-2009 Buy 60.00 30-Apr-2009 52.00 54.49 10-Feb-2009 45.00 45.14 14-Nov-2008 53.00 49.81 14-Nov-2008 Neutral 49.81


Valuation Methodology Our price target of TWD136 is based on sum-of-the-parts analysis, which values FPC’s core business at 3.9x EV/IC (average FY11F-12F ROIC of 32.5%; WACC of 8.5%), investments in the Formosa group at our price targets, other listed investments at market price and unlisted investments, at 1.5x book value. Risks that may impede the achievement of the target price Key risks include volatile crude prices, volatile chemical margins and plant mechanical failure.

73


Hanwha Chemical Corp (009830 KS) 46,450 (05-May-2011)



Date Rating Target price Closing price 03-Nov-2010 40000.00 32150.00 03-Nov-2010 Buy 32150.00 06-Sep-2010 25000.00 25750.00 06-Jul-2010 20000.00 17500.00 04-Sep-2009 14000.00 13300.00 04-Sep-2009 Neutral 13300.00 01-Jul-2009 9400.00 10500.00 14-Apr-2009 7100.00 12050.00 14-Nov-2008 4000.00 4960.00 14-Nov-2008 Reduce 4960.00 01-Jul-2008 12000.00 11450.00 01-Jul-2008 Neutral 11450.00 25-Apr-2008 13500.00 14220.78 25-Apr-2008 Reduce 14220.78 22-Apr-2008 24000.00 16129.00


Valuation Methodology Our PT of KRW69,000 is based on SOTP. We use a target EV/EBITDA multiple of 10.8x, which represents the peak multiple in 2010 (EV: KRW8,605bn ; FY11F EBITDA: KRW797bn). We believe the industry upturn will be sustainable over the next 20 months. Risks that may impede the achievement of the target price Risks include: 1) petrochemical price volatility; 2) execution risks on new businesses.

Honam Petrochemical (011170 KS) 377,000 (05-May-2011)



Date Rating Target price Closing price 03-Nov-2010 330000.00 268000.00 03-Nov-2010 Buy 268000.00 06-Jul-2010 160000.00 147000.00 06-Jul-2010 Neutral 147000.00 17-Dec-2009 82000.00 106500.00 04-Sep-2009 81000.00 91000.00 01-Jul-2009 70000.00 79100.00 14-Apr-2009 49000.00 72500.00 14-Nov-2008 37000.00 45900.00 01-Jul-2008 65000.00 72600.00 01-Jul-2008 Reduce 72600.00


Valuation Methodology Our target price of KRW480,000 is based on sum-of-the parts methodology. We apply a target EV/EBITDA multiple of 9.3x, which represents the peak multiple in 2010 (EV: KRW13,496bn; FY11F EBITDA: KRW1,445bn). Risks that may impede the achievement of the target price Risks may come from: 1) input and out price volatility; and 2) HPC buying assets at unattractive prices.

74


LG Chem (051910 KS) 502,000 (05-May-2011)



Date Rating Target price Closing price 03-Nov-2010 500000.00 382000.00 06-Jul-2010 430000.00 290500.00 09-Sep-2009 270000.00 212000.00 09-Sep-2009 Buy 212000.00 24-Jul-2009 150000.00 138000.00 24-Jul-2009 Neutral 138000.00 28-Apr-2009 120000.00 128000.00 17-Mar-2009 66000.00 99226.80 17-Mar-2009 Reduce 99226.80 13-Jan-2009 71000.00 89463.06 14-Nov-2008 71000.00 79585.80 16-Oct-2008 Neutral 85943.58 16-Oct-2008 77000.00 85943.58 09-Sep-2008 75000.00 101383.90 09-Sep-2008 Reduce 101383.90 01-Jul-2008 107000.00 116937.76 01-Jul-2008 Neutral 116937.76


Valuation Methodology Our TP of KRW700,000 is based on a sum-of-the-parts methodology and reflects our positive view of the petrochemical and car battery business units. We value the auto battery and LCD glass segments at KRW29,000/share and KRW28,000/share, respectively. Risks that may impede the achievement of the target price Risks are: 1) petrochemical and LCD cycle volatility; 2) execution of car battery production.

Nan Ya Plastics (1303 TT) 85.0 (05-May-2011)



Date Rating Target price Closing price 28-Jan-2011 96.00 80.50 03-Nov-2010 84.00 70.00 06-Jul-2010 72.00 53.70 02-Mar-2010 76.00 63.80 02-Mar-2010 Buy 63.80 26-Oct-2009 57.00 56.70 04-Sep-2009 45.00 44.80 04-Sep-2009 Neutral 44.80 30-Apr-2009 27.00 42.52 10-Feb-2009 25.00 33.35 14-Nov-2008 36.00 41.75 14-Nov-2008 Reduce 41.75


Valuation Methodology Our PT of TWD105 is based on sum-of-the-parts analysis, which values NYP’s core business at 2.8x EV/IC (average FY11F-12F ROIC of 23.5%; WACC of 8.5%), investments in the Formosa group at our price targets, other listed investments at market price and unlisted investments at book value. Risks that may impede the achievement of the target price The key risk remains earnings volatility of Nanya Tech, volatile DRAM prices, volatile crude prices, volatile chemical margins and plant mechanical failure.

75


PTT Chemical (PTTCH TB) 157.00 (04-May-2011)


Neutral (Sector rating: Not rated)

Date Rating Target price Closing price 03-Nov-2010 150.00 159.00 03-Nov-2010 Neutral 159.00 06-Jul-2010 88.00 104.50 22-Feb-2010 62.00 75.00 04-Sep-2009 45.00 70.75 15-May-2009 33.00 49.50 15-May-2009 Reduce 49.50 20-Feb-2009 31.00 29.75 12-Nov-2008 33.80 36.00 05-Aug-2008 77.00 71.50 05-Aug-2008 Neutral 71.50


Valuation Methodology Our PT of THB200 is based on PTTCH’s two-third stake in the PTTAR-PTTCH merged entity, which we value at USD15.2bn, derived from a EV/IC multiple of 1.7x (ROIC of 15.7% and WACC of 9%). Risks that may impede the achievement of the target price Downside risks to our price target include weaker-than-expected olefin margins, plant mechanical failure, and declining crude prices.

Petronas Chemicals Group (PCHEM MK) 7.18 (04-May-2011)



Date Rating Target price Closing price 25-Feb-2011 7.30 6.30 10-Dec-2010 6.60 5.58 10-Dec-2010 Buy 5.58


Valuation Methodology We value PCG at RM8.40 based on a target EV/CE multiple of 4.0x that is derived from an average FY12-14F ROCE of 29% and WACC of 9%. Risks that may impede the achievement of the target price Key risks include volatile crude prices, volatile chemical margins and plant mechanical failure.

The views, opinions and ratings in respect of PTT Chemical covered by this research do not reflect the views, opinions and ratings of research published by Capital Nomura Securities Public Co, Ltd.

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Important Disclosures Conflict-of-interest disclosures Important disclosures may be accessed through the following website: http://www.nomura.com/research/pages/disclosures/disclosures.aspx . If you have difficulty with this site or you do not have a password, please contact your Nomura Securities International, Inc. salesperson (1-877-865-5752) or email [email protected] for assistance. Online availability of research and additional conflict-of-interest disclosures Nomura Japanese Equity Research is available electronically for clients in the US on NOMURA.COM, REUTERS, BLOOMBERG and THOMSON ONE ANALYTICS. For clients in Europe, Japan and elsewhere in Asia it is available on NOMURA.COM, REUTERS and BLOOMBERG. Important disclosures may be accessed through the left hand side of the Nomura Disclosure web page http://www.nomura.com/research or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] for technical assistance. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear. Marketing Analysts identified in some Nomura research reports are research analysts employed by Nomura International plc who are primarily responsible for marketing Nomura’s Equity Research product in the sector for which they have coverage. Marketing Analysts may also contribute to research reports in which their names appear and publish research on their sector. Distribution of ratings (US) The distribution of all ratings published by Nomura US Equity Research is as follows: 38% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 4% of companies with this rating are investment banking clients of the Nomura Group*. 55% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 1% of companies with this rating are investment banking clients of the Nomura Group*. 7% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 0% of companies with this rating are investment banking clients of the Nomura Group*. As at 31 March 2011. *The Nomura Group as defined in the Disclaimer section at the end of this report. Distribution of ratings (Global) The distribution of all ratings published by Nomura Global Equity Research is as follows: 49% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 37% of companies with this rating are investment banking clients of the Nomura Group*. 40% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 46% of companies with this rating are investment banking clients of the Nomura Group*. 11% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 16% of companies with this rating are investment banking clients of the Nomura Group*. As at 31 March 2011. *The Nomura Group as defined in the Disclaimer section at the end of this report. Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for ratings published from 27 October 2008 The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks (accessible through the left hand side of the Nomura Disclosure web page: http://www.nomura.com/research);Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia.

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Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from 30 October 2008 and in Japan from 6 January 2009 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008) STOCKS A rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six months. A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six months. A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '5' or 'Sell', indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months. Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additional research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other information contained herein. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months. Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector - Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe; Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia. Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior to 30 October 2008 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price, subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside implied by the recommendation. A 'Strong buy' recommendation indicates that upside is more than 20%. A 'Buy' recommendation indicates that upside is between 10% and 20%. A 'Neutral' recommendation indicates that upside or downside is less than 10%. A 'Reduce' recommendation indicates that downside is between 10% and 20%. A 'Sell' recommendation indicates that downside is more than 20%. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.

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Target Price A Target Price, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates. Disclaimers This publication contains material that has been prepared by the Nomura entity identified at the top or bottom of page 1 herein, if any, and/or, with the sole or joint contributions of one or more Nomura entities whose employees and their respective affiliations are specified on page 1 herein or elsewhere identified in the publication. Affiliates and subsidiaries of Nomura Holdings, Inc. (collectively, the 'Nomura Group'), include: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura International plc ('NIplc'), United Kingdom; Nomura Securities International, Inc. ('NSI'), New York, NY; Nomura International (Hong Kong) Ltd. 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