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DB Chemicals

DB Chemicals

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8 April 2011
Global Chemicals Weekly
News, views and valuation
Deutsche Bank AG/LondonAll prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from localexchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. DeutscheBank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firmmay have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a singlefactor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.MICA(P) 007/05/2010
Table of contents
Global Valuation ................................................Page 02Europe: News & valuation ................................Page 03US: News & valuation ...................................... Page 08Asia/Japan: News & valuation ..........................Page 10Event calendar ..................................................Page 13
Top picks
BASF (BASFn.DE),EUR63.11 BuyLinde (LING.DE),EUR114.25 BuyArkema (AKE.PA),EUR66.16 BuyLanxess (LXSG.DE),EUR57.07 BuySyngenta (SYNN.VX),CHF303.00Buy
Research Team
Tim Jones
 Research Analyst(+44) 20 754-76763tim.jones@db.com
Martin Dunwoodie, CFA
 Research Analyst(+44) 20 754-72852martin.dunwoodie@db.com
Virginie Boucher-Ferte
 Research Analyst(+44) 20 754-57940virginie.boucher-ferte@db.com
David Begleiter, CFA
 Research Analyst(+1) 212 250-5473david.begleiter@db.com
Takato Watabe, CMA
 Research Analyst(+81) 3 5156-6686takato.watabe@db.com
James Kan
 Research Analyst(+886) 2 2192 2821james.kan@db.com
   C  o  m  p  a  n  y
   G   l  o   b  a   l   M  a  r   k  e   t  s   R  e  s  e  a  r  c   h
Solvay (SOLB.BR, HOLD)
Solvay is planning to acquire Rhodia for E6.6bn in cash. We think Rhodia is a goodstrategic fit for Solvay, increasing the group's exposure to emerging markets andmore specialty, less cyclical businesses. We also welcome that Rhodia's CEO(good track record) is set to eventually become CEO of Solvay as we believe italso reduces the integration risk. Post this deal (expected to close end Aug 11),we believe Solvay should trade on 5.3x 12E EV/EBITDA (ex CERs) vs. peers on5.1x. With no valuation advantage and the usual integration risk, we retain HOLD.
Monsanto (MON.N, HOLD)
Monsanto shares fell 6% following its Q2 release due to the lack of earningsupside in Q2 and likely '11 (guidance < consensus) despite record commodityprices. In addition, upside to '12 also looks limited as Monsanto reaffirmed that itsprimary focus next year will remain driving adoption of its next generation seeds.As a result seed pricing will be up "moderately" in '12 (10-15% est.) vs the 15-20%-plus that could be justified given current commodity prices. With valuationalready 24x '11E EPS, we believe upside in the shares, in the near-term, is limited.
Mitsubishi Chem. Holdings (4188.T, BUY)
The 2 Apr Nikkei reported on damage to Mitsubishi Chemical's Kashima complex.The article says the company incurred more damage than other general chemicalsmakers; we also have the same view. While it is difficult to assess the quake'searnings impact at present, we think OP could be depressed by ¥15-20bnpremised on a three-month shutdown. This is based on the typical effect of regularmaintenance and the impact of a fire at the plant's No. 2 ethylene facility in late2007. The actual impact could be lower, as 1) fixed costs incurred during theshutdown could be booked as non-operating expenses or extraordinary losses,and 2) insurance will cover some of the impact (the plant has earthquakeinsurance). We intend to review our forecasts to reflect this as well as the declinein automobile production. While we expect the quake to have the negative impactoutlined above, we also note that spreads on PTA and other products are runningwell ahead of our expectations.
Figure 1: European stock performance (% change absolute)
Best Performer over the last week 1-week 1-month YTD 12-months
RHODIA 51.7 51.126.791.6SOLVAY 9.4 7.814.617.7
Worst Performer over the last week 1-week 1-month YTD 12-months
AZ ELECTRONIC MATS.(DI) -1.0 -10.4-11.9NABAYER -0.5 -2.5-0.810.2
Source: DataStream
Figure 2: US stock performance (% change absolute)
Best Performer over the last week 1-week 1-month YTD 12-months
WESTLAKE CHEMICAL 5.2 20.736.0113.0CELANESE 'A' 4.7 12.312.841.0
Worst Performer over the last week 1-week 1-month YTD 12-months
MONSANTO -5.9 -5.1-2.4-0.2POTASH CORP -1.3 -1.89.748.5
Source: DataStream
8 April 2011 Chemicals Global Chemicals WeeklyPage 2 Deutsche Bank AG/London
Global sector valuation
Figure 3: Global sector valuations
Price TargetEst. EarningsP/E^EV/EBITDAMkt CapRatingCur. 07/04/2011PriceFY11EFY12EFY11EFY12E FY11E FY12E(US$ m)EUROPE: MAJORS
Arkema BuyEUR 66.2 5.3 4.65,814BASF BuyEUR 63.1 5.7 5.282,835Lanxess BuyEUR 57.1 6.5 5.96,786Rhodia HoldEUR 31.4 6.1 5.84,550
Solvay HoldEUR 91.4 8.4 5.310,516
Air Liquide HoldEUR 95.2 8.8 8.038,629Linde BuyEUR 114.3 7.7 6.827,804
AkzoNobel BuyEUR 49.9 6.1 5.516,652AZ Electronic Materials BuyGBp 273.2 340.00.30.412.711.1 8.2 7.12,769Clariant SellCHF 17.1 6.7 5.64,772Croda BuyGBP 1723.01980.0113.7126.615.113.6 9.7 8.53,732DSM HoldEUR 43.7 5.6 5.010,147Givaudan HoldCHF 924.0 920.055.364.116.714.4 10.5 9.49,298Johnson Matthey BuyGBP 1925.02250.0133.9149.814.412.9 8.6 7.76,645Kemira HoldEUR 11.8 7.4 6.72,558Sika BuyCHF 2241.02600.0139.3166.616.113.5 9.1 7.66,204Symrise BuyEUR 21.1 9.2 8.42,718Umicore BuyEUR 36.1 8.2 7.35,834ictrex HoldGBP 1439.01250.079.787.418.016.5 11.2 9.91,300Wacker HoldEUR 166.6 135.010.512.615.813.2 7.5 6.311,823
ICL HoldUSD 59.9 10.5 9.621,925K+S SellEUR 54.8 8.8 8.014,995MA Industries HoldUSD 18.4 9.6 7.22,287Syngenta BuyUSD 303.0 380.021.023.715.013.3 9.4 8.530,579ara HoldNOK 287.3 340.031.327.29.210.6 6.0 6.215,159
Bayer BuyEUR 54.5 65.04.815.4211.310.1 7.8 6.964,429
Celanese Buy$ 46.4 7.5 6.97,221Dow Hold$ 38.3 7.3 6.743,428PPG Hold$ 96.1 9.1 8.915,179
Agrium Buy$ 92.4 9.0 8.814,499Mosaic Hold$ 79.1 10.4 7.935,291Monsanto Hold$ 68.0 11.8 10.536,473Potash Corp. Hold$ 59.0 12.8 11.950,402
 Air Products Buy$ 91.4 8.7 8.219,238Praxair Buy$ 102.5 11.1 10.331,371Airgas Hold$ 66.9 9.3 8.55,607
Albemarle Buy$ 60.2 9.4 8.75,561Cytec Buy$ 56.4 7.3 6.72,756
Asahi Kasei BuyJPY 533 63052.256.510.29.4 3.7 3.28,741Formosa Plastics BuyTWD 106 11.1 9.422,369Nan Ya Plastics BuyTWD 88.1 11.8 10.323,851Sumitomo Chemical BuyJPY 398 50040.653.99.87.4 6.0 5.27,706
JSR BuyJPY 1,510 2,000129.0141.311.710.7 4.4 3.74,325LG Chem BuyKRW 47100049000037066.340829.212.711.5 8.2 7.528,722Nitto Denko BuyJPY 4,180 6,000408.1432.510.29.7 3.5 3.08,048Shin-Etsu Chemical HoldJPY 4,065 3,600242.6261.416.815.5 6.0 5.520,242
Source: Datastream, Capital IQ & Deutsche Bank estimates. Syngenta Share price is in Swiss Francs but reporting is in US dollars, ICL and MA Industries report in US$ while the stock price are in ILS. *For Johnson Matthey 2011E is March ending 2012. For additional information on all stocks mentioned here please refer to our website at: http://gm.db.com 
8 April 2011 Chemicals Global Chemicals WeeklyDeutsche Bank AG/London Page 3
Europe: valuation & newsflow
Givaudan (GIVN.VX, HOLD):
Q1 sales rose by 3.1% ex FX which we view asdisappointing given Givaudan’s leading position. Q1 10 comps were admittedly tough butwe believe this was mostly a return to a normal situation. This performance reflects thelumpiness of F&F sales and we anticipate some improvement from Q2. H1 should beweak however due to severe raw material & FX headwinds whilst pricing will only startrising in Q2 with a full annual benefit only expected in 2012 (we forecast a 5% EBITDAdecline in 2011). At 14.6x 12E P/E we see better value elsewhere. HOLD. Our DCF basedTP is based on a WACC of 8.0% (COE 8.7%, COD 3.7%) and a 2.5% TGR. Key risks:higher/lower sales growth (volume/pricing), higher/slower customer innovation, rawmaterial cost decrease/increase.
Victrex (VCTX.L, HOLD):
1) Volumes up 23% YoY. H1 sales volumes were approximately1,434 tonnes, up 23% YoY, 1.5% below our forecast of 1456 tonnes. Following the updatein February when tonnage of approximately 682 tonnes for Q1 11 was reported, thisimplies average tonnage of 752 tonnes for Q2 11 indicating an improvement of 10% both YoY and QoQ. The strength appears to have been stable through Q2, with all months fromJan to March being strong and April appearing to have started off strongly. The company isnot seeing any slowdown (yet) from Japan (9% of sales) or auto customers. By region,Europe and Asia/Pacific were strong whilst US was lagging slightly but showed somerecovery in March. By end-use industries, management indicated that the strength hasbeen broad-based. 2) Invibio revenues up 10% YoY but materially below our forecast.Invibio revenues in H1 11 were £24.3m, up 10% YoY but 15% below our estimates, mainlybecause of adverse market conditions in US. The US represents 75% of the Invibio marketand is currently experiencing pressures from changes in the regulatory environment andreimbursement system. The company, however, sees strong growth opportunities in newmarket areas and geographies 3) No outlook given; full half-year results on 24 May. Mgmthas not provided any guidance with this IMS, other than highlighting (already flagged)continuing challenging conditions for Invibio in the US. We expect more details with the fullhalf year results on 24 May. Victrex's strong volume growth momentum is encouraging,but the with the stock already trading on 18.2x 2011E P/E and 11.2x 2011E EV/ EBITDA,we see it as fully valued. 4) Read-across supportive for engineering plastics/Q1 chemicalresults. This IMS highlights the continuing robust demand levels for Engineering Plasticsacross the sector and we believe these encouraging demand levels will help companies touse their pricing power and offset the raw material pressure. We expect to see similartrends in BASF (B, EUR 63.43) Plastics, DSM (H, EUR44.06) Performance Materials andRhodia (H, EUR31.33) plastics business which have similar end markets to Victrex PolymerSolutions. As highlighted recently in our Q1 chemical preview book, we expect the sectorto report a strong Q1 in general.
Bayer AG (BAYGn.DE, BUY):
Data from the MAGELLAN PhIII study Xarelto in preventionof venous thromboembolism (VTE) in hospitalized patients with acute medical illness hasbeen presented at the 60th American College of Cardiology (ACC) Annual ScientificSession. Key points are as follows: (1) Xarelto met its primary efficacy endpoints,demonstrating non-inferiority to Lovenox in short-term use (c. 10 days) and superiority overLovenox/placebo in long-term use (c. 35 days). (2) Xarelto was associated with increasedclinically relevant bleeding (2.8% vs 1.2% at 10 days and 4.1% vs 1.7% at 35 days) in thestudy. (3) Although the numbers of bleeds were small, the overall low number of VTEevents (2.7%-5.7%) meant there was a net clinical disbenefit for treatment of Xareltoversus Lovenox. <2% negative impact on 2016E EPS; little read-through to other settings.The VTE prevention in the medically ill setting contributed to c. 5% of our 2016E salesforecast for Xarelto (currently €4.8bn) and <2% of our 2016E EPS forecast. The observationof higher rate of bleeding with Xarelto versus Lovenox is somewhat of a surprise given that

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