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Deutsche Bank

Markets Research
Industry

China Chemicals
Tour

Date

21 March 2014
Global
Chemicals

Tim Jones
Research Analyst
(+44) 20 754-76763
tim.jones@db.com
David Begleiter
Research Analyst
(+1) 212 250-5473
david.begleiter@db.com
Martin Dunwoodie, CFA
Research Analyst
(+44) 20 754-72852
martin.dunwoodie@db.com
Virginie Boucher-Ferte
Research Analyst
(+44) 20 754-57940
virginie.boucher-ferte@db.com
Ramanan Sivalingam

F.I.T.T. for investors


The growth engine is (modestly)
returning

Research Associate
(+1 ) 212 250-8619
ramanan.sivalingam@db.com
Oliver Reiff
Research Analyst
(+44) 20 754-76663
oliver.reiff@db.com

Conclusions from Deutsche Bank's China Chemicals Tour


We recently visited 22 European, US and Chinese chemicals companies. Corporate confidence is
improved, driven not just by better demand but also by self-help. Most mgmt teams have rebased expectations for growth in China over the past two years with attention shifting more to
further self-help, local R&D and customer targeting. China's self-sufficiency desire continues, but
as the government's pollution focus is taking centre-stage, plant delays and shutdowns are
occurring - the focus is shifting to "quality", which is supporting many Western names with
differentiated products/production. Top picks for China exposure: BASF, Akzo, Linde, Air Liquide
(Europe) and Dow (US).

________________________________________________________________________________________________________________
Deutsche Bank AG/London
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013.

Deutsche Bank
Markets Research
Global

Industry

Chemicals

China Chemicals
Tour

Date

21 March 2014

FITT Research
Tim Jones

The growth engine is (modestly)


returning
Conclusions from Deutsche Bank's China Chemicals Tour
We recently visited 22 European, US and Chinese chemicals companies.
Corporate confidence is improved, driven not just by better demand but also by
self-help. Most mgmt teams have re-based expectations for growth in China
over the past two years with attention shifting more to further self-help, local
R&D and customer targeting. China's self-sufficiency desire continues, but as
the government's pollution focus is taking centre-stage, plant delays and
shutdowns are occurring - the focus is shifting to "quality", which is supporting
many Western names with differentiated products/production. Top picks for
China exposure: BASF, Akzo, Linde, Air Liquide (Europe) and Dow (US).
Demand recovering (a bit), pollution focus increasing (a lot)
We have provided within this note an in-depth assessment of the prospects for
the chemical and industrial gas industry in the region, with a focus on the
exposures of various Western companies. Demand is recovering from CNY at a
more robust rate than seen in 2012 and 2013 most believe that China can
actually grow at 7% in 2014 (2012/2013 for many were years of 4-5% GDP
growth). The government is now finally acting on pollution (in addition to the
clearly flagged crack-down on corruption) with stronger enforcement and
industry shutdowns. It may take some time to see material benefits from these
efforts, but the commitment in this area is clear and should provide further
support to Western names with differentiated product offerings
Profit leverage improving, signs of industry discipline improving
The mantra for Western names in China used to be volumes, volumes,
volumes, but over the past few years it has shifted to differentiated
products, self-help, capital discipline. In the past two years sub-optimal
growth has driven many Western names to re-base their plans for cost and
capex and re-think customer targeting. With underlying demand modestly
improving, this greater cost/capex discipline should allow many Western
names to deliver stronger profit leverage in 2014 (and onwards) compared to
the past two years, albeit a return to very high profit growth rates is unlikely.
The countrys drive for regional self-sufficiency in some basic chemicals
continues (and some coal-based investments are going ahead) but we are now
beginning to see the states drive towards sustainability overriding this and
result in plant delays and closures not all planned expansions will go ahead.
Five changes compared to last years tour
This is the 10th tour we have hosted in the region; compared to last years trip
we note the following changes: 1) modest improvement in the rate of demand
growth over that seen last year, 2) a lack of confidence in the publicly reported
GDP data, 3) greater mgmt conviction in their own corporate cost control, 4)
signs of improving discipline from locals with delays to new investments, 5)
the governments pollution focus starting to result in forced plant shutdowns.
Many European (and US) names are well positioned in China
Numerous names have built strong bases in China and anticipating the
maturing economy have shifted product focus, tailored offerings and managed
cost. Of those we met with, BASF, Linde, Air Liquide and Akzo offer the best
ways to benefit from China in Europe. In the US, Dow looks well placed. Those
that stand to lose most from the trends that we see in the region are some of
the non-Chinese high-cost North East Asian chemical names alongside
inefficient/high-cost locals (often privately owned). We value companies using
DCF/SOTP. Risks include GDP, FX and oil.

Research Analyst
(+44) 20 754-76763
tim.jones@db.com
David Begleiter
Research Analyst
(+1) 212 250-5473
david.begleiter@db.com
Martin Dunwoodie, CFA
Research Analyst
(+44) 20 754-72852
martin.dunwoodie@db.com
Virginie Boucher-Ferte
Research Analyst
(+44) 20 754-57940
virginie.boucher-ferte@db.com
Ramanan Sivalingam
Research Associate
(+1 ) 212 250-8619
ramanan.sivalingam@db.com
Oliver Reiff
Research Analyst
(+44) 20 754-76663
oliver.reiff@db.com

________________________________________________________________________________________________________________
Deutsche Bank AG/London
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013.

21 March 2014
Chemicals
China Chemicals Tour

Table Of Contents

Investment thesis ........................................................................... 3


Key differences from last year ...................................................... 10
M&A increasing in China .............................................................. 11
Petrochemicals in China ............................................................... 12
Industrial gases summary ............................................................ 17
China agriculture outlook ............................................................. 21
China automotive outlook ............................................................ 30
European companies .................................................................... 35
Air Liquide (BUY, Target: Euro 115): Further developing the strong platform ................ 36
AkzoNobel (Buy, Target: Euro 67): well positioned for growth ....................................... 40
BASF (Buy, Target: Euro 94). Realistic about the region ................................................. 44
Clariant (Hold, Target: CHF 12): Looking to increase scale in the region and helping
customers move up the value chain ................................................................................ 50
Croda (Buy, Target: 2850p): Increasing focus on China .................................................. 53
DSM (Hold, Target: Euro 47): Focusing on consumer growth ........................................ 56
Kemira (Hold, Target Euro 12) China focus increasing ................................................. 59
Lanxess (Hold, Target Euro 49): Growth strategy for China ............................................ 61
Linde (Buy, Target: Euro 170): Leading position in China ................................................ 64
Solvay (Hold, Target Euro 108): Investing for growth...................................................... 69
Syngenta (Buy, Target: CHF 400): A leading position in a fragmented market with strong
growth potential ............................................................................................................... 76
Symrise (Buy, Target: Euro 39): Well positioned for growth ........................................... 80

Chinese companies ...................................................................... 83


ChemChina (China National Chemical Corporation) ........................................................ 84
Yantai Wanhua (N/R, 600309:CH). Bold plans for MDI polyurethane expansion and PDH
.......................................................................................................................................... 86
Yingde Gases (BUY, HKD 8.8, 2168.HK) .......................................................................... 88

US companies .............................................................................. 91
Dow Chemical (Hold, Target: $48): Coal-to-olefins a next decade project .................. 92
DuPont (Buy, Target: $70). Strength through diversity.................................................... 95
Praxair (Buy, Target: $145). Targeting a doubling of sales by 2017 .............................. 101
Air Products (Buy, Target: $121). Large on-site projects drive China growth .............. 106
Celanese (Buy, TP: $60). Acetic acid profitability challenged in China ......................... 112
Eastman (Buy, Target: $95). Off to a Good Start in China/Asia in 2014 ........................ 117

Appendix A: China Economic Review ........................................ 120


Appendix B: Global valuation ..................................................... 133

Page 2

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Investment thesis
Outlook and feedback from China Chemicals Tour
We spent a week visiting 22 companies in China. We met with BASF, Solvay, Yantai,
Yingde, Linde, Air Liquide, DSM, Clariant, Symrise, Croda, Kemira, Akzo, Air Products,
Syngenta, Celanese, Praxair, DuPont, Dow, IHS, ChemChina, Eastman and Lanxess.
Feedback from each meeting is provided in the report, but we have detailed below a
summary of the key issues that arose, split into five areas (macro, government, doing
business, social and industry trends):
Macro:

China chemicals a sub-GDP growth rate. For most companies (ex gases) 2012
and 2013 were disappointing years with volume growth at sub-GDP rates. 2012
was weakest with softness exacerbated by net customer de-stocking, with 2013
better albeit still not great. Going forward most names target sub-GDP sales
growth with a stronger focus on the better quality products and away from the
very basic chemical products (where raw material access is key globally).

Underlying demand is recovering from CNY clear signs of optimism. Most


companies noted that the start to the year (albeit volatile) was quite robust
clearly stronger than seen at the start of either 2013 or 2012 but below the
recoveries of 2009, 2010 and 2011. Our view remains that this provides some
cause for optimism although assuming a hockey-stick recovery would not be
appropriate.

Few have confidence in the reported China GDP numbers. Almost universal from
companies is a lack of understanding of the public reported GDP numbers and a
lack of correlation to what they see. Many names see the actual GDP rate in China
for the past 2 years as being more like the 4-5% level. Interestingly most feel that
2014 will be a year where the 7% GDP number is actually achieved but also feel
that the regions ability to achieve anything more than this (i.e. 8-9%) is severely
constrained for the next few years by the much needed pollution control.

Autos expected to remain a strong driver for chemicals demand, construction


improving modestly. Most teams note the strong current demand from the auto
sector and expect the end-user to remain a key driver of demand growth in the
coming 12-24m. The upgrading of car quality provides added opportunities for
Western names with higher-value offerings to also gain market share. Construction
improvement is also expected, albeit the growth seen in 2009-2001 supported by
the fixed asset investment programme is not expected to recur.

Improved management confidence underpinned by self-help. The increased


level of confidence for most local management teams is also underpinned by a
much greater conviction in self-help efforts. In the past 2 years the softer-thanexpected macro has resulted in a stronger focus on cost cutting, capital efficiency
and best practices, which are now starting to harvest results and combating the
underlying cost inflation issues present in many areas. Many management teams
appear to be accepting that while Chinese GDP will likely remain at the 7-7.5%
level as inflation continues and competition pressures grow (from Western and
local names alike), delivering very strong profit leverage can no longer be taken for
granted. We note a much greater focus now on cost control and M&A to
support profit growth.

Deutsche Bank AG/London

Page 3

21 March 2014
Chemicals
China Chemicals Tour

Limited concern over customer credit access or currency movements. Selected


examples of credit pressure have been evident over the past two years (generally
smaller customers, some steel examples); most names are exposed to larger
customers and/or customers with strong financing in place. The selective
strategy that many names have undertaken in expanding into the region has
helped. Moving forward the acceptance by many of growth at a sub-GDP rate (but
targeting the best customers) should mitigate any future impact on credit
tightening or customer rationalisation. Companies appear to be assuming some
modest currency movements (some think devaluation, some think revaluation) but
no-one sees this as a concern for business.

Long-term confidence remains high but realism from last year persists. Most
management teams felt that China continues to offer strong growth opportunities
longer-term even accepting of the issues around pollution, oversupply and cost
inflation. However, the rebasing of management expectations seen in the past 2
years seems to have worked with most teams seeing more realism in what can
be achieved in the region annually. We still expect many names to deliver robust
profit growth, but a return to 20%+ annual EBITDA growth is unlikely.

Government:

More government influence in chemicals. Most company management teams


accept that the government is keen to improve the quality of chemicals (and other
industrial) production within the region. This year we note that the government has
implemented more rules to discourage investment in certain areas (through
increases in raw material costs gas price inflation of 60% for unapproved
chemical investments was mentioned by a few management teams). Strong
enforcement of regulations by local states is also supporting some plant
shutdowns. The desire to become self-sufficient in all areas of chemicals at any
cost (in respect of pollution) has clearly subsided materially over the past few years
with the last 12 months seeing a sharp acceleration.

Another increase in pollution and energy awareness, but public tension rising in
this regard due to a lack of perceived commitment. Increasing the focus on
pollution control is a theme we have flagged many times before and one that really
gained traction ahead of the Beijing Olympics in 2008. Returning from this trip we
have noticed another step-change but this time more the tension from middleclass locals on the lack of government effort to resolve the air pollution issue in
the major cities (Beijing, Shanghai). The feeling now is that the government is
acutely aware of this pressure many liken it to the tension around food price
inflation in 2007-2008) and the resolve is very high to sort this out. We note clear
examples of the government using energy supply to control polluting industries
and stronger enforcement of pollution regulations in more remote regions. All of
this will take time but it is slowly moving in the right direction. There remain huge
opportunities within catalysis, water treatment, energy efficiency, etc. for Western
names with the right technology.

Chinas desire to stay independent remains high, but they need help in many
areas. The country wants to reduce its reliance on other countries for products and
raw materials it continues to look favourably on local manufacturing/investment
in the country where new technologies can be used. Inland state investments are
to increase in petrochemicals, particularly in coal, and this may reduce returns
from basic petrochemical investments, although specialist investment in technical
plastics can continue to provide opportunities for Western names (technology still
offers substantial energy savings). In addition to direct state investment, some
favourable financing of local companies is supporting expansion in some areas
(polyurethanes an example).

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Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Social trends

Ex-pats leaving, locals becoming unhappy. We came across numerous examples


of ex-pats leaving the major cities of Shanghai/Beijing due to concerns over
pollution (to Hong Kong and overseas). The recurring theme of growing pressure
apparent within the middle-class locals remains evident as wage inflation for
white collar workers is running at lower rates than for blue collar workers (1015%+) and with property regulations having tightened, product price inflation on
top of the growing concerns over healthcare suggest to us that the government
will likely act quickly.

Wage inflation still running high but the rate is clearly moderating. This is the
fourth year in a row in which companies are discussing the migration of some
customers to even lower-cost labour regions (India, Vietnam and Bangladesh most
commonly mentioned), particularly in the areas of textiles and basic
manufacturing. Wage inflation is high but appears to be moderating with lowerskilled workers inflation moderating from 15%+ a year closer to 10% and white
collar inflation below that. It is also interesting to note that as most businesses
have not performed in line with expectations over the past 2 years the employee
base appears more aware that it needs to earn its wage inflation through
efficiency efforts rather than just receive it. Most Western names continue to
have staff turnover levels in the low-single-digit percentages (below the highsingle-digit average).

Food inflation no longer heavily mentioned. An interesting point from our trip was
the relative lack of commentary around food inflation. The underlying need to
produce more food is clear (self-sufficiency, population growth) but the irritation
level around the absolute cost of food appears to have subsided.

Land consolidation starting to happen. Visits and discussions with farmers


highlight to us that the governments efforts to better the quality of agriculture are
beginning to improve. The big project to encourage land consolidation creating
large and more efficient farms is beginning. This will take time but this will
support easier migration of rural workers to cities whilst at the same time
supporting higher crop yields from the land. The government is promoting
consolidation by increasing entry barriers (product registration, higher capital
requirements, license management) while raising energy prices and applying
pollution taxes. This will make the operating environment of local Chinese generics
more difficult whilst providing more opportunities for the global branded
multinationals. Branded agchem companies have been enjoying strong growth
(above market) and appear confident that technology adoption will happen fast.
The desire of farmers to use the best agchems and seeds is growing strongly,
supported by robust corporate advertising and education.

Doing business

Western names offering quality continue to benefit. For many Western names
the further focus on Chinas pollution and energy management is providing
additional opportunities to sell products, but many local manufacturers are starting
to source better-quality raw materials. The phrase quality over quantity is being
echoed by most chemical companies we met with in China.

Western names keen to do local M&A. A big change this year was that many
companies we met with are now targeting local M&A to supplement growth.
Many of these flagged last year that M&A was not a priority. What has changed
appears to be a mixture of companies strong balance sheets, increasing
confidence over managements ability to assess local companies and perhaps the
fear that annual double-digit Chinese profit growth will no longer be easy to
achieve organically are the key themes. We discuss this theme in more detail later
in this report and in the company sections.

Deutsche Bank AG/London

Page 5

21 March 2014
Chemicals
China Chemicals Tour

China waiting for the chance to have an increasing role in international M&A.
We have seen some limited M&A by Chinese chemical companies as the
preference has been to invest organically. However, some entities now seem keen
to look to acquire distribution power in Western markets and/or technologies. We
expect China to become much more active in chemicals M&A in Western markets
over the medium term, looking to acquire technologies and distribution power, not
just manufacturing capacity. Please see our feedback section on ChemChina for
more details. Many cite low cultural acceptance (of European and North American
entities) of Chinese companies buying assets in North America and Europe as a
continued barrier but note that this is slowly changing as the historic opaqueness
of some Chinese entities lowers.

Increasing the focus on local R&D. What is very noticeable for most companies is
the development of local R&D centres over the past few years. In part this seems
to be companies demonstrating a strong commitment to the Chinese market, but
also this is a step in the direction of producing local market solutions for China.
While these investments tend to be more focused on development and not pure
research, it is clear that companies are feeling more confident in doing research in
China often through university collaborations given the strong education
platform in China and pro-active government support. Most companies believe
that intellectual property protection has improved materially, which is supporting
more confident R&D investment geared towards local markets. Confidence
regarding the ability to catch offenders remains the barrier towards pure
research in the region, although this attitude is steadily softening

RoCE still improving. The bear case on China for many companies has been the
very high capex spent in the region and the drag on group RoCE as a result. With
more realism over future profit growth potential, capex budgets are under more
control and we note numerous names being more flexible in the timing of bringing
plants on-stream (i.e. modest delays). Many companies despite the subdued
demand environment saw ROCE improve in 2012 and 2013 and expect it to
further improve in 2014 onwards despite relatively high capex.

Industry trends

Coal investments starting, shale gas focus for longer term. Coal remains a big
area of focus and offers lots of opportunities for Western names to be involved
through chemicals and industrial gases. However, it is clear that there are often
very large (Euro 3-5bn+) investments, often in remote regions, implying the risks
associated are high. While many investments will be postponed there is a clear
sense that investments are beginning to move forward in some areas which will
create large capacity additions in some very basic areas of chemicals in the
coming 3-5 years (e.g. methanol). Shale gas remains a feature for the coming
decade but the governments desire to use shale gas for energy and not chemicals
means chemicals investment on the back of shale gas may be 15+ years away

Further capacity growth planned in petrochemicals, but some evidence of


greater discipline within local companies. The investment in coal to chemicals
plants is part of wider capacity expansion in petrochemicals in China. With Chinas
desire to become more self-sufficient, further significant capacity is due to come
on stream in many products in the next five years. In the more basic chains (C1
and some C2 chains) some high-cost importers will likely be displaced by domestic
growth (such as those in Japan, Korea, Taiwan). Many local names are showing
better discipline in timing new investment start-ups in part due to low current
levels of profitability for some chains and in part due to higher energy costs and
softer-than-expected demand in the past two years. Capacity additions in China
continue to be overstated and the culture of many to announce big projects and
then slowly get delayed appears to continue.

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Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Inventory levels not that high within basic chemicals. Visibility of customer
inventory levels remains quite low but from discussions with companies the destocking in many chains through 2012 and parts of 2013 alongside the tighter
access to credit has resulted in a reduction of through-the-chain inventory levels in
many areas of basic chemicals.

Industrial gas growth in China should accelerate to 15+% for some time to come.
2013 was a year of 10%+ growth for most names despite the broader markets
seeing more muted growth. Nonetheless some start-ups were delayed into 2014
indicating to us that the growth rates should start to accelerate in 2014. Discipline
appears strong with most names focusing on only selective industrial hubs in
China. Despite the rise of some more local players, the companies continue to be
successful in focusing on Tier 1 customers and large scale investments as they
differentiate on energy efficiency, technology and service.

Figure 1: Summary of corporate comments on end-user/industry growth rates


End-user
Industrial gases
Nutrition
Basic Chemicals

Growth rate
15%+
10-15%
GDP

Automotive

10%+

Construction

8-10%

Consumer products

10-15%

Catalysts

15-20%

Agriculture (seeds and crop protection)

7-10%

Source: Deutsche Bank estimates, company data

China continues to present a good opportunity for many European (and US) chemical
companies. 2012 and 2013 were periods of re-basement for many local management
teams due to the acceptance that pure volume growth from the underlying economy
would not support such strong cost inflation and asset investment. With many
companies now into year 3 of cost cutting and efficiency drives, the modestly
improving underlying macro should result in many names being able to deliver low
double-digit profit growth with limited risks. Most companies appear confident
regarding the governments ability to manage the economy but few believe appear
confident in the public GDP numbers reported over the past two years most see 2012
and 2013 as years of 4-5% Chinese GDP growth although most now see 2014 (and
2015) as a period during which 7% growth may actually be delivered.
Doing business in China is getting easier (and the risk profile attached to individual
companies earnings in the region is improving) with many names having gone through
sometimes painful expansion programmes and the associated steep learning (and
investment) curves. This is particularly true for those who moved early and built up
relationships with the leading local companies and are now able to move to the next
stage of investment with an increasingly tailored product for the domestic Chinese
market (to supply to the growing middle class) as opposed to the re-export market.
These strategies all require a greater participation of local workforce and local R&D.
Mentioning pollution in China is not new; however, this time is did feel different more
due to the acute focus local people have now on air quality, with many stories of
growing frustration. Any environmental improvement will take time but the government
desire to be seen in a more positive light is clear. The quid pro quo of this underlying
pressure is that forecasting economic growth way above 7% is too optimistic (i.e. 8-9%)
as such levels of growth would undoubtedly increase the pollution fear. Not only does
this present big opportunities for certain chemicals (catalysts & water treatment are
obvious) but also support towards high-quality Western production methods in some
areas is clear.
Deutsche Bank AG/London

Page 7

21 March 2014
Chemicals
China Chemicals Tour

North American and European chemical companies are well represented in China,
although exposures and historical focus are often larger in the latter. This is typically a
function of a greater desire (or need) to find growth outside domestic markets in the
1990s. In Europe, of the names that we met with, the ones where we saw the strongest
investment case based on China are BASF (realistic management, early-mover position
in Nanjing, new investments inland), Linde (strong platform across the region in both
Engineering and Gas), Air Liquide (low-risk growth in the region, strong on-site order
book and new start-ups leverage) and AkzoNobel (high exposure to the region, exposed
to inland consumer and infrastructure build). Syngentas exposure is low at the
moment (2% of sales) but the long-term growth potential in agriculture seems clear. In
North America, Dow looks to have the strongest investment case based upon China.
Figure 2: Chinese sales and profit growth (as a % of total group) for chemical sector (%)
2013 (% of
group sales
from China)

% of total group Comments


EBITDA growth
coming from
China (2014-2015)

20+

Delays to 2013 start-ups short-term, strong signage supports midterm growth

Air Products

4.0

15+

Growing order book in China (particularly coal related)

AkzoNobel

10.5

25+

Good growth continues. Good cost focus. Expanding deco stores.

Arkema

11.0

20-25

BASF

9.0

20+

Focus on cost control/capital discipline. Strong self-help and


customer targeting noted. Data is shown ex Oil & Gas

Celanese

18.0

15-20

High China exposure but risks due to acetic acid challenges

Clariant

8.0

15-20

Steadily growing exposure was 4.5% in 2008

Croda

3.0

Small exposure but growing in most business areas along with


customers

Dow

7.0

10-15

Asset-light, import-based strategy in Performance businesses

DSM

14.0

25-35

Strong leverage (caprolactam, Vitamins) but competition risk is high

DuPont

9.0

10-15

Lower leverage due to PV and TiO2. New product focus

Givaudan

6.0

10

Significant Chinese exposure


Growing exposure through catalysts

Air Liquide

Majority of growth capex projects in China (PVDF, PA10,


fluorochemicals, Emulsions)

JMAT

7.0

10

Kemira

<3.0

<5.0

K+S

2.5

<5

Lanxess

11.0

20-30

Linde

9.0

20+

Monsanto

2.0

PPG

8.5

15+

One of the leading OEM coatings producers in China (22% share)

Praxair

5.0

15+

Sales in China growing strongly helped by project backlog

Solvay

7.0

10-15

Syngenta

2.0

Symrise

6.0

10-15

Significant Chinese exposure

Umicore

6.0

10-15

Growth in catalysts to continue

Yara

4.0

Small exposure in the region


Relatively low exposure, mostly from the PMP division
Exposure in the region across numerous businesses
Shown as a % of Gas. Strong on-site order book
Limited exposure

China exposure boosted by Rhodia


Small Chinese focus but long-term opportunities exist

Only NPK for fruits and vegetables

Source: Deutsche Bank estimates and company information

In our view, the names that most stand to lose from Chinas desire for self-sufficiency in
some areas (and development of its own energy reserves from coal and potentially gas
longer-term) are the high-cost basic chemical importers into China, which are mostly
from other Asian regions (particularly Japan, Korea and Taiwan). Most major Western
names have already developed leading positions in the region with a focus on
differentiated products and/or production methods.

Page 8

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Valuation & risks


We value stocks using DCF, SOTP or peer multiples. Risks include GDP slowdown, FX,
and/or rising raw material prices. Individual strategies for acquisitions and higher capex
also present some risks. For China the risks are a material slowdown in GDP, greater
competition from some local companies, cost inflation and water/power shortage.

Deutsche Bank AG/London

Page 9

21 March 2014
Chemicals
China Chemicals Tour

Key differences from last year


This is the 10th time we have hosted a tour of the region. Below we have noted the
issues that were different from last years tour alongside some of the issues that were
more surprising:

Modest improvement in the rate of demand growth versus that seen last year and
2012 albeit no-one appeared very bullish about growth prospects there was a lot
of realism

A lack of confidence in the publicly reported GDP data with most management
teams feeling that 2012 and 2013 were years of 4-5% GDP growth

Greater management conviction in their own corporate cost control with most
having put programmes in place over the past 2 years which are now bearing fruit

Signs of improving discipline from locals with delays to new investments at the
margin and a greater understanding of cash cost curves (smaller Chinese players
are often quite high) supporting delays/cancellations to new investments

Governments pollution focus starting to result in forced plant shutdowns with a lot
more expected to come in the medium term (this is both for chemicals and some
other basic materials areas)

Tangible anti-corruption efforts mentioned frequently as a leveler for Western


companies to be able to compete more fairly in some areas

Frustration from many locals on the lack of speed from the government in terms of
implementing pollution control in the region

Government being more pro-active in managing some of the weaker areas of


chemicals through direct setting of local gas prices (some noted increases of gas
prices of up to 60% for investments yet to be approved, making many nonfinancially viable)

Discussions of food inflation (and property inflation) have pretty much ceased

Companies talk less about the move inland and more about targeting customer
groups

Companies no longer feel the need to target high volume growth and are
comfortable admitting a sub-GDP targeted growth rate with a focus on the better
quality (and more profitable) customers

Page 10

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

M&A increasing in China


One clear change in communication from Western companies over the past 2 years has
been the greater desire to participate in small to mid-sized M&A within China. This
increased M&A desire appears due to three issues:

Most companies have strong balance sheets and more widely are looking to
deploy capital to boost growth (this is a global as well as a Chinese theme).
Most Western companies have strong experience of doing business in China
and so have greater confidence in being able to execute well in acquisitions.
As China matures and completion grows, the fear that annual double-digit
Chinese profit growth will no longer be easy to achieve organically is driving a
search for M&A to supplement profit growth.

Figure 3: Western companies opportunities/involvement in Chinese M&A


Chemicals sub-sector

Comments

Commodities

None of the Western names we met with are actively looking at large acquisitions in
commodity chemicals although several suggested that consolidation in the region
(where there is some oversupply) is something they would be willing to participate in.
The focus remains on good organic investments with a long-term horizon for those
investments. Examples include Bayer at Caojing, BASF at Nanjing/Chonqing and Akzo
at Ningbo. US major names prefer to look at imports and leveraging their low-cost gas
feedstock advantage in North America (and the Middle East e.g Dow)

Specialities

In the past 12m we have seen numerous small-scale transactions by Western names in
a bid to selectively build-out exposures in the region. We expect more deals in the
coming 12-18m in downstream specialty businesses to access customers and new
regions. We do not expect acquisition of technologies as those from the Western
companies are typically more advanced than local players. The focus is on buying
distribution, local manufacturing and customer access. The specialty market is very
fragmented in China so large-scale deals are unlikely. Some Western companies have
already been active in the recent past with AkzoNobel acquiring Boxing Oleochemicals
(specialty surfactants) and also Changzhou Prime Automotive (car refinish), DSM
acquiring animal pre-mix plants from Bayer, Lanxess acquiring inorganic pigments
plants (for construction and paints) and Arkema acquiring Hipro/Casda (specialty
plastics). Companies we see as likely to be active are AkzoNobel, Arkema, BASF,
Solvay, Clariant, DSM and DuPont.

Agriculture

We see acquisitions of Chinese ag-related companies by Western names as unlikely. In


Crop Protection, 68% of the market is dominated by very fragmented local generic
producers with low-end technologies, so there is no strategic rationale for Western
companies to acquire locals. They will continue to focus on organic investments
instead. However, given the governments objective to consolidate the market and
improve local technologies with a view to raising yields, we cannot rule out interest
from large domestic players in Western names, as seen in 2011 with the acquisition of
Makhteshim Agan by ChemChina. In Seeds, FDI restrictions prevent foreign companies
to invest in domestic seed companies other than through a JV with a minority
ownership, which presents significant IP risks. In Fertilizers, China is a net importer of
potash, so would likely be looking to make acquisitions. Though the country is a net
exporter of nitrogen & phosphate, it is high on the cost curve, the market is low growth
and driven by strong government intervention through export tariffs.

Industrial gases

Given its size and market position, as well as the interest in the region on the part of the
Western names, we continue to see Yingde as a company that would give a Western
firm a one-off chance to build a bigger presence in the region although we note that the
quality of the assets is lower than those of the Western names. As discussed in prior
research, we believe that Yingde could fit well with several of the larger Western names.
Beyond Yingde, no other big acquisitions seem likely medium-term but we would
expect continued small customer site takeovers (decaptivation) by all the Western
majors with Linde, Air Liquide and then Praxair the most active in this area due to the
strongest customer relationships

Source: Deutsche Bank

China an increasing role in international M&A. We have seen some limited M&A by
Chinese chemical companies as the preference has been to invest organically. However,
we note that some entities are now keen to look to acquire distribution power in
Western markets and/or technologies. We expect China to become much more active in
chemicals M&A in Western markets over the medium term, looking to acquire
technologies and distribution power, not just manufacturing capacity. ChemChina in
particular was clear about its intention to become more international.
Deutsche Bank AG/London

Page 11

21 March 2014
Chemicals
China Chemicals Tour

Petrochemicals in China
Capacity growth continues
China is a large petrochemical market. China was a relatively late entrant into the
global chemical industry. In the 1990s, the Chinese petrochemical industry was
significantly smaller than in the West and neighboring countries. However, during the
2000s the industry grew dramatically driven by government support and strong
demand growth owing to government-directed infrastructure spending, a burgeoning
middle class with rising disposable incomes, expanding construction of residential
housing and exports of finished goods. From 2000-09, the Chinese chemical industry
increased nearly 6x (underpinned by a nearly 3x increase in ethylene capacity) and built
several world-leading petrochemical companies.
In 2013, China accounted for roughly 35% of global chemical demand (PE, PP, MEG,
butadiene, PTA, styrene, phenol, PVC and methanol combined) versus 20% in 2005.
Since 2005 China has accounted for roughly 90% of global chemical demand growth.
However, chemical demand growth in China is slowing. From a demand multiplier of
1.5-2.0x GDP during last decade, Chinese chemical demand grew slightly less than
GDP in 2013. We expect Chinese chemical demand to grow at GDP (~7.5%) in 2014.
China is also a large chemical supplier in Northeast Asia. From a supply standpoint,
China is also a major chemical player within Northeast Asia where SINOPEC and China
National Petroleum Corporation (CNPC), parent company of PetroChina, have become
the leading producers of ethylene with a combined 32% of the regions production
capacity.
Figure 4: Global ethylene market by region 2013
Northeast Asia
13%

China
12%

Southeast Asia
7%

Figure 5: Top ethylene producers in Northeast Asia, 2013


SINOPEC
21%

South America
4%
Indian
Subcontinent
3%
CIS & Baltic States
3%

West Europe
15%

Others
49%

Central Europe
2%

CNPC
12%

Africa
1%

Middle East
19%

Formosa Group
7%

North America
22%
CPC-Taiwan
3%

Source: IHS Chemical

Mitsui Chemicals
3%

LG Group
5%

Source: IHS Chemical

China continues to add ethylene capacity. Chinese demand for ethylene, the largest
building block chemical, increased from 7.2MM m.t. in 2005 to 16.4MM m.t. in 2013,
or 12% of global ethylene demand. In an effort to meet this rising demand, China added
7.7MM m.t. of ethylene capacity from 2008-13, an increase of 76%, and representing
27% of global ethylene capacity additions during this period. With China still importing
~50% of its ethylene equivalent needs, China continues to add large amounts of
ethylene capacity. Over the next 4 years (2014-17) China is forecast to add an additional
10.4MM m.t. of ethylene capacity (of which 46%, or 4.9MM m.t., is coal-to-olefins and
16%, or 1.7MM m.t., is methanol-to-olefins), representing 42% of global ethylene
additions. By year-end 2017, China ethylene capacity is forecast to total 28.3MM m.t.,
or 16% of global capacity (of 178MM m.t.), versus 8% of global capacity in 2007.

Page 12

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Figure 6: Ethylene capacity additions in China, 2009-18E (000 mt)


4,500

22,000

4,000

20,000
18,000

3,500

16,000

3,000

14,000

2,500

12,000

2,000

10,000
8,000

1,500

6,000

1,000

4,000

500

2,000
0

0
2009

2010

2011

2012

2013

2014E 2015E 2016E 2017E 2018E

New Ethylene Capacity in China (LHS)

Cumulative (RHS)

Source: IHS Chemical

Figure 7: Large-scale ethylene projects scheduled to start-up in China 13-17


(000s mt)
Group/parent

Capacity (ktpa)

% of '12 China
Ethylene Capacity

Completion

SINOPEC Wuhan

800

4.9%

2013

Sichuan PC

800

4.9%

2014

Project name/location
Wuhan, Hubei
Chengdu, Sichuan
Jinshan, Shanghai

Shanghai PC

600

3.7%

2015

Erdos, Inner Mongolia

Zhongtian Hechuang

670

4.1%

2016

Hainan, Hainan

Sinopec Hainan R&C

1,000

6.1%

2017

CNOOC

1,000

6.1%

2017

Other

8,341

51.0%

Total

13,211

80.8%

Huizhou, Guangdong

Source: IHS Chemical

China sits high up on the global ethylene cost curve. Chinas energy resources are
primarily coal (95%-plus) with only limited oil and gas reserves. As a result, Chinas
ethylene production is based almost entirely on imported naphtha. With the shale gas
revolution in the US substantially lowering US ethane-based ethylene production costs,
China now sits in the upper right corner of the global ethylene cost curve. As of midMarch 2014, it costs ~55 c/lb to make ethylene from naphtha in China versus 13 c/lb to
produce ethylene from ethane in the US (and ~5 c/lb to produce ethylene from ethane
in Saudi Arabia). With US ethane production continuing to increase and the ability to
use this additional ethane limited until late decade (owing to delays in constructing new
US ethylene capacity), we expect naphtha-based ethylene producers in China to remain
at the high end of the global ethylene cost curve for the foreseeable future.

Deutsche Bank AG/London

Page 13

21 March 2014
Chemicals
China Chemicals Tour

Figure 8: China is high on the global ethylene cost curve (production cost $/mt
as of February 2013)
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
Saudi
Arabia

US
Ethane

W estern
US
US
West
US Light Northeast Southeast
Canada W eighted Coprod. Europe Naphtha
Asia
Asia
Average Int. Light Naphtha
Naphtha Naphtha

Source: IHS Chemical

2014 likely to be another tough year for Chinese ethylene producers. 2013 was a
difficult year for Chinese ethylene producers due to high feedstock costs. As a result of
its upper right hand position on the global cost curve (see above), most, if not all,
Chinese ethylene crackers lost money in 2013. In response Sinopec permanently shut
down a 150k m.t. ethylene cracker at Jinshan in November. This was the first ethylene
capacity shutdown in China in over 10 years. With the global cost curve relatively
intact, we expect Chinese ethylene crackers to remain challenged in 2014 with most
ethylene crackers operating at breakeven or at modest losses. Coupled with growing
coal-to-olefins production, we would not be surprised to see additional permanent
shutdowns of naphtha-based ethylene crackers in China during 2014.
The trend of inland investments continues. New chemical industry investments in
China continue to be made in the interior provinces. This is a shift from past years when
investments in China were focused in the eastern industrial and heavily populated
coastal regions of the country. The shift is being driven by the central governments
agenda of balancing urban/coastal and rural/interior incomes, the regions plentiful coal
reserves and the governments desire for greater chemical self-sufficiency. The vast
majority of these investments are being conceived as 100%-owned Chinese companies
with heavy state planning and financial backing. Chengdu and Chongqing are two
inland areas that are seeing increased chemical investment.
Coal-to-chemicals continue to grow. The major trend in the China chemical industry is
the development of coal-based chemical production. With the worlds third-largest coal
reserves (as well as the worlds largest coal producer) and a lower cash cost than
naphtha based production (up to 33% less) coupled with the Chinese governments
focus on reducing its dependence on imported oil (currently ~60% of Chinas oil needs
are imported) and it is desire to become more self sufficient in basic chemicals, coal-tochemical projects in China have proliferated.
Most of Chinas coal reserves are located in the Central and Northwest regions,
mainly Shanxi, Shaaxi, Inner Mongolia and Xinjiang province. These regions are 1,0003,000 miles away from the main consuming markets which are located in the Eastern
and Southern regions. With rail capacity limited and the cost for shipping coal from the
Northwest to the East and South very high, the coal price in the Northwest (~$20/m.t.)
and Inner Mongolia (<$50/m.t.) is significantly below the price in the East and South
($100/m.t.). This is important as it takes roughly 9 m.t. of coal to make 1 m.t. of olefins.

Page 14

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

China is today the clear leader in coal to chemicals. Western coal to chemical
development started in the 1950s when the modern gasification process was
developed. The Chinese coal chemical industry started later than in Western countries
with the first commercial production beginning in the 1970s. While not the pioneer,
China is today the clear leader in the coal chemical industry. Over the past 40-plus
years, China has developed a significant capacity base in coal-based PVC, benzene,
ammonia and methanol. Coal is a critical feedstock for these products with 86% of
Chinese PVC capacity coal-based, nearly 80% of Chinese methanol and ammonia
capacity coal-based and 26% of Chinese benzene capacity coal-based. These capacities
are mostly located in the East, Central, Northern regions, close to consuming markets.
Over the past 4 years a new generation of coal chemicals has emerged and created a
new wave of coal chemical investment. These new coal chemicals are primarily
focused on coal-to-olefin projects (to produce plastics), coal-to-MEG (to produce
feedstock for polyester fiber production feedstock) and coal-to-ethanol (for fuel
blending and to replace corn-based feedstock). These projects are located in the coalrich Northwest.
Water and pollution issues are not preventing coal to chemicals projects going ahead.
While up to 3x more capital intensive than naphtha-based olefin plants, coal-to-olefin
plants in Inner Mongolia and Xinjiang (Northwest China) are substantially cost
advantaged versus naphtha-based olefin producers in Eastern and Southern China (they
should enjoy significant cash margins versus breakeven to modest losses for naphthabased producers). While economically attractive, the new wave of Chinese coal
chemical projects faces a number of challenges. The key issue is water as most of
these projects are in the arid Northwest region while the coal-to-olefin process is highly
water intensive with each ton of olefins requiring 40 tons of water. In addition, coal-toolefin plants are highly capital intensive, costing up to 3x more than naphtha-based
olefin plants. And lastly, coal chemicals have higher carbon emissions than naphtha.
The first 3 coal-to-olefin projects in China came on-stream in 2010 but capacities are
being delayed. As of mid-2013, China had 10 coal-based olefin and MEG plants totaling
400k m.t. of ethylene capacity, 1.4MM m.t. of propylene capacity and 800k m.t. of
MEG capacity. Currently, ~60 coal-to-olefin projects have been announced in china. The
chemical consultancy IHS believes roughly half of these projects will be built with the
50% discount to announced projects due to the Chinese governments tight control on
project approval, water supply constraints and high capital costs. These 30 expected
projects will add roughly 15MM m.t. of olefins capacity to China by 2020 with 70%
propylene and 30% ethylene. By 2017, IHS estimates coal-to-olefins (and methanol-toolefins) will account for roughly 25% of Chinas light olefin capacity.
$60bn expected to be invested in coal to chemicals by 2020. The investment required
to build the aforementioned 30 coal-to-olefin plants is substantial. Over the past 10
years, average capital spending in China petrochemicals was $2.5B/yr (or $25B in total).
In 2013 alone, owing to the more capital intensive nature of coal chemical projects,
capital spending in China petrochemicals was $10B. In the period 2013-20, IHS
forecasts coal chemical capital spending in China will total $60B.
Shenhua/Dow methanol-to-olefins project continues to make slow progress. The
largest coal chemical project in China is a $10 billion complex in the Shaanxi province
being developed by Dow Chemical and the Shenhua Group, Chinas largest coal
company. Discussions with Dow during our trip to China indicate the project is no
longer progressing owing to its large cost and still large technology, environmental and
operational risks associated with this project. Also, the project is no longer as important
for Dow owing to Sadara, its advantaged Saudi JV with Saudi Aramco, which will
provide Dow with roughly $4B of additional sales for Asia (including China) over the
next 5 years.
Deutsche Bank AG/London

Page 15

21 March 2014
Chemicals
China Chemicals Tour

Shale gas still 7-8 years away. Shale gas continues to look like a next decade
opportunity in China. There remain serious questions and concerns around the viability
of Chinese shale gas in terms of geology, water, logistics and transportation. One of the
key differences versus the US where shale gas is located in geographically accessible
location is that in China shale gas is located in remote locations in the interior. The
availability of water is also an issue in China with the gas located in some region inland
regions where water is scarce. The result is that Chinese shale gas is likely to be higher
priced than US shale gas with its impact on chemical production costs less dramatic
than in the US. This all points to a long lead time of likely 7-8 years before commercial
quantities of shale gas are produced in China.
Oversupply continues in MDI. BASF, Bayer and Yantai all have robust plans to add MDI
capacity in China over the next few years. China MDI capacity, which totalled 1.9MM
m.t. at year-end 2013 (global capacity 6.4MM m.t), is forecast to increase 400kt m.t. in
2014 (Yantai), 550kt m.t. in 2015 (400kt m.t. from BASF, 150kt m.t. from Bayer) and
500kt post 2017 (Bayer). In total, these expansions will increase China MDI capacity to
3.4MM m.t. in 2017 (global capacity 8.8MM m.t.), or 70% above 2013 levels. While
MDI is forecast to grow 6%/yr globally over the next 5 years, and at higher rates in
China, the 70% growth in Chinese capacity over the next 4 years should lead to
continued oversupply of MDI in China and globally over the medium term, although the
oligopolistic nature of the industry should ensure that margins do not weaken from
current (low) levels. We note however that while the Yantai, BASF and first part of the
Bayer expansion are on track to start-up as noted above, the last increment of new
supply in China, Bayers 500kt m.t expansion, could be delayed beyond 2017. This
would be a material positive for MDI and would likely mitigate margin pressure.
Figure 9: Planned MDI polyurethane expansions in China
As a % of 2013 global
MDI PU capacity

Company

Plant location

Year of start-up

Size (kt)

Bayer

Caojing

2013

150

2.5%

BASF

Chongqing

2015

400

6.8%

Yantai

Ningbo

2014

300

5.1%

Yantai

Yantai

2014

600*

10.2%

Bayer

Caojing

Post 2016

500

8.5%

Total

1,950

33.1%

Source: Deutsche Bank estimates, company data. * closure of a 200kt plant and will be replaced by an 800kt plant

Page 16

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Industrial gases summary


We met with Air Liquide, Linde, Air Products, Praxair and Yingde in China. The feedback
on the individual meetings is provided in the company sections, but below we have
provided a summary of the key issues for the gases industry in China.

Disciplined growth continues


Good growth continues. All of the major gas names continue to focus heavily on
China, although many names are keen to stress that this is not the only emerging
market Russia, Middle East, India, etc. are all alternative high growth markets. Most
names have built a strong base within China although some are still playing catch-up
(Air Products). The consensus opinion from the gas companies is that China should
continue to offer strong growth rates in the future although the growth seems to have
been moderated over the past 24m to 15%+. This is in part due to the slowdown in the
regions IP rates but more due to the size of the businesses the companies have in the
region (some have sales of >Euro 1bn in China). All names commented on strong order
books with a clear recent pick-up in customer interest noted. Competition contract-bycontract basis remains high, but investment discipline seems to persist each company
feels that investment opportunities remain high and that the large number of industrial
basins in the region means there is room for everyone. No single company is present
across all of the major basins in China although some appear stronger (Linde, Air
Liquide). All companies expect RoCE progression despite ongoing high capex.
Strategies appear similar focusing on niche strengths. Linde (through the acquisition
of BOC in 2006), ahead of Air Liquide and Yingde with Praxair and then Air Products
(remaining 5th), is how the league table reads in China based upon current market
position. Linde appears to have developed profitable relationships fastest (and
capitalised on the historically strong Engineering presence) but all four names now
have similar strategies in China looking to target the best customers
(refining/petrochemical), selectively piggybacking profitable projects and building local
barriers to entry to gain economies of scale. The expansion of some companies now
into merchant and increasingly cylinders where they have dominance in an industrial
hub/region is also noted. Linde and Air Liquide seem to have the most diverse customer
relationships, Praxair a slightly larger steel bias, APD now appears to be the most
aggressive in chasing coal-based investments. Air Liquide is showing the fastest rate of
improvement and has built a strong asset base in a short period. 2013 was a year for
Linde and Praxair consolidation the focus being on bringing on-stream previous wins
with APD more aggressive and Air Liquide seeing more project wins.
Figure 10: 2013 China industrial gas market share
Linde
16%
Other
39%

Air Liquide
13%

Figure 11: Long-term growth rates by gas distribution


30%
25%
20%
15%
10%

Ying-De
13%
Messer
APD
2%
TNS
6%
2%

Praxair
9%

Source: Deutsche Bank estimates, company data, Spiritus Consulting

Deutsche Bank AG/London

5%
0%
On-site

Merchant

Cylinder

Total

Source: Deutsche Bank estimates

Page 17

21 March 2014
Chemicals
China Chemicals Tour

Following our meetings with all major western players (please see later for individual
company sections) we note 13 points in respect of Chinas industrial gas market:
Point 1: Strong growth rates continue in China. From all the gas companies, the
message appears the same demand growth slowed in 2012 and 2013 but it was still a
year of 10%+ growth for most and current gas demand is at a record level. Despite the
weaker China and global macro over the past two years, order books remain very
strong for new large on-site investments and 2014 looks likely to be a record year for
the number of on-sites coming on-stream. Chinas gas intensity (usage per capita)
remains materially below Western economies, highlighting long-term growth potential.
Figure 12: China gas consumption very low compared to Western markets

Source: United Nations Population Division, Linde data, figures excl. Japan, equipment

Point 2: Contract bidding remains competitive; the focus on customer relationships


remains high. Large on-site contracts with international majors remain fiercely
contested, due to their lower risk and strategic nature. However, we do not see clear
signs of aggressive price cutting or breakdown in RoCE discipline in the on-site
business overall. In many cases the ability to offer a lower price to the customer is a
function of using better technology or innovation for other product streams within the
gas chains rather than offering the same solution for a lower price. Soft criteria such
as customer relationships, local government access and regional knowledge are
increasingly critical in contract bidding this is further supporting gas companies
desires to move quickly into new regions to create early barriers to entry. All of the
major players appear keen to focus on China, but it is clear most names prefer to focus
on specific regions and/or industry groups. Most believe their ability to bid on more
contracts is constrained by their sales/engineering capacity (less so by capex budgets).
Point 3: Outsourcing by customers still provides some long-term potential.
Currently, approximately 80% of the Chinese gas market remains under captive
production. As technologies evolve and customer plants require updating and
enlarging, we expect outsourcing to continue and drive additional growth for gas
companies. The 12th Five Year Plan appears to encourage outsourcing through the
focus on upgrading production and a stronger focus on quality. The cultural trend
within China to own your own assets may persist, but companies seem more upbeat
on the potential for de-captivation than over the past few years. In the past three years
we have seen a steady flow of de-captivation investments (Linde/AL more active).
Page 18

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Point 4: On-site start-ups delays temporary in 2013. 2013 was a good year for all
names although at the margin on-site delays were experienced, with Air Liquide
particularly impacted. This is not due to cancellations of contract merely small delays in
the timing of the starts of new plants. This was partially due to softer demand delaying
start-ups and/or customer issues surrounding engineering or raw material access.
Nonetheless we remain of the view that these contracts will start-up in 2014 and result
in a strong growth picture within the on-site business than seen in the 2013 period.
Point 5: New on-site investments are moving inland. In line with many other industrial
companies, there is a growing awareness that the incremental material investment for
the industry will come from the inland regions where a greater proportion of the
states investment programme is being spent. Key for many names is to pick the region
where a large hub can be developed, as opposed to an isolated chemical investment.
We note recent announcements (e.g. Praxair and Linde working with BASF in
Chongqing) supporting this trend.
Point 6: Regional ROCE is improving. Gas companies have often been criticised for
spending too much money in China, materially diluting ROCE (and margins). However,
we note that the Western majors all experienced improving ROCE over the past few
years. For some 2013 was a year of flat ROCE due to some small project delays and
lower underlying growth but confidence over 2014 and 2015 ROCE is very high. This is
a key point as China should now start to be a source of improving ROCE for all
companies. The same appears true for margins as the infrastructure build-out has been
completed by most companies
Point 7: The focus on merchant and cylinder is increasing. The focus over the past few
years by the Western companies has been to invest in on-site facilities and to move
early to dominate future industrial hubs. We note an increasing tone from companies
towards expansion into both cylinders and merchant in regions where they already
have a strong on-site footprint. Given that locals tend to compete more in cylinders
and merchant, this does raise some risks for Western companies, but this is mitigated
by the fact that the expansions are only targeted to select regions where they already
have scale. Some companies are now building freestanding merchant units but
customer contract terms (duration, pricing terms) are comparable to contracts in other
regions.
Point 8: On-site pricing terms often linked to the ability to leverage off-take credits.
We suspect that one of the key areas of difference in pricing that any company can
offer a customer in a new on-site may be the assumption of the off-take (piggybacking)
credits that may come in the future from the development of industrial hubs/other
customers. Assumptions around this off-take may differ from company to company, but
over the past 10 years of visiting the region we have noted that a key bone of
contention between companies was often the assumptions for liquid credits.
Interestingly, as demand in the merchant market has often been much higher than
most conservative multinationals would have predicted, this has resulted in better
returns than expected as well as pricing trends. If a company has a particularly strong
view over the development basin, its higher assumptions on off-take credits may allow
it to become more competitive on pricing, which we do not see as ill-disciplined.
Point 9: The state is not supporting a national champion in industrial gases; the need
for environmental solutions should not be underestimated. Unlike other areas of
chemicals, there is no state-owned national industrial gas champion. From discussions
with companies and customers, it appears that the technology being offered by the
international names is seen as a key driver of energy efficiency and also to help meet
new stricter environmental standards, which as we mentioned earlier in the note is
crucial for the state to continue to focus on.

Deutsche Bank AG/London

Page 19

21 March 2014
Chemicals
China Chemicals Tour

Point 10: Local Chinese gas companies slowly closing the gap but still not
competitive in large-scale investments. There are numerous smaller local industrial gas
players that have historically, caused problems for the major players through constant
rice cutting and ill-disciplined investment. While these players remain highly
competitive in smaller plain-vanilla gas plant offerings, all of the majors noted that
many local players are showing improved discipline. Local players continue to compete
in the on-site business but for most the size of their competitive offering remains
materially below that of a Western company (world-scale on-site plants now available
up to 3000tpd compared to locals offering around 1500tpd) ensuring that for the larger
investments Western companies will continue to dominate. As China increases its
focus on environmental issues and energy consumption, the use of more expensive
Western plants often recoups the cost in higher operating efficiencies. Aside from YingDe we note increasing awareness of the engineering company Hangyang (which
currently manufactures a large proportion of gas plants used in China), which is publicly
looking to become more involved in the outsourced industrial gases industry while
this could be a longer-term threat (if it is able to scale up technology) at the moment we
are seeing the expansion as very modest.
Point 11: Ying-De seen as a credible competitor, but not yet within the large, more
technical offerings. Over the past few years some of the global gas names have been
unwilling to accept Ying-De as a credible competitor due to its small size and lack of
track record. However, it is now clear that the attitude towards Ying-De is changing.
Ying-De mgmt see themselves as a credible competitor across the suite of offerings in
the gas industry but we suspect this is more relevant in smaller on-sites or more plain
vanilla offerings. None of the Western gas companies felt that Ying-De was able to
compete on their basis of quality and full-scale. The movement of Hangyang into the
gas market directly (instead of just providing engineering support) was noted by some
as likely to increase some of the competition in the small- to-mid-sized customers that
Ying-De is very active in, although none saw this move as a strategic threat given their
larger customer focus. There was a clear message from some that Ying-De has become
a much more disciplined operator. Given its size, market position and the interest of
Western companies in the region, we remain of the opinion that consolidation of YingDe is possible over the medium term as it would offer a one-off opportunity to stepincrease presence in China and access some industrial zones.
Point 12: Coal-based investments offer potential but thats not the only opportunity in
China. The development of Chinas abundant coal reserves will happen as China strives
for energy self-sufficiency. All of the four major gas names are interested in working
with coal-based investments and over the past 24m we have begun to see some large
investments being signed, but we note that many of these coal investments will be
delayed further due to environmental concerns. Nevertheless, coal presents material
opportunities but the key issue remains the ability of any company to leverage
investments around the main coal site in order to maximise returns. Coal development
may also provide some longer-term opportunities surrounding the management of CO2
emissions, but at the moment this does not seem to be a focus area. Amongst the
Western names it is clear that Air Products has been the most aggressive in this area
over the past 2 years with the other three names preferring to be more conservative
regarding the commitment of large capital to isolated inland regions. Shale gas is an
area the gas names are increasingly discussing, but it is accepted that this is likely to be
a feature impacting order books from 2020 onwards not before.
Point 13: Reliable energy supplies no problems experienced with brown-outs.
Fears over the lack of sustainable supply of electricity have been an issue for gas
companies in the past, but the proliferation of brown-outs has been very low in the
last few years. Companies feel that they have been successful in explaining to local
governments the requirement for continuous energy supply, particularly if the gas
product services are integrated into chemical/refining facilities.
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Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

China agriculture outlook


We met with numerous companies exposed to the agriculture chain in China, including
Syngenta, BASF, ChemChina, DuPont and Dow. Feedback on the individual meetings is
contained in the company sections but below we provide a summary of the key issues:

Agriculture benefits from strong government support


China agriculture sector represents 10% of Chinese GDP. 2012 China statistical year
book estimated the Chinese agriculture sector at $831bn, accounting for 10% of
Chinese GDP. Chinas key issue is that the country remains short of food. At the
moment, China accounts for approximately 22% of the worlds population (1.3bn) yet
only possesses 7% of the worlds arable land. In addition, increasing middle-class
income growth, changing diets and consumer behaviours (increasing demand for
higher-quality food such as meat, fruits etc) and concerns on food safety mean that the
long-term squeeze on supply is likely to continue. Besides, agriculture will remain a key
element for improving rural prosperity and sustainability in China given that nearly half
of Chinese population remains in villages.
Figure 13: China is 22% of world population 2011

Figure 14: Worlds arable land 2011

China
22%

Europe
30%

ROW
31%

ROW
48%
India
16%

US
5%

China
7%
India
11%

Europe
9%

Source: Syngenta

US
21%

Source: Syngenta

Self-sufficiency is a key priority. China is already a leading producer of a number of


major crops including rice, wheat, vegetables, cotton, corn, sugarcane and soybean.
Food security remains the No. 1 priority for agricultural policy with annual grain output
targeted beyond 550m tons from 2014 to 2020 and ensures self-sufficiency for Chinese
staple food (rice/wheat). The country has already 100% self-sufficiency in rice, wheat,
vegetables and approximately 98% self sufficient in corn. The current policy allows for
corn imports and targets 40% self-sufficiency for edible oils and slight increase in
sugar/cotton imports. However, given supply/demand scenarios, targets look
challenging for soybean with 80% of the soybean demand met by imports by 2027.
Figure 15: China Ag GDP 2009-2013
Unit: Billion CNY

CAGR 12%
4749

3523

2009

Figure 16: Agriculture GDP sector (USD bn)

5237

5696

4053

2010

2011

2012

2013

Source: Syngenta, 2012 China Statistical Year Book, Public Statistics by Country, Deutsche Bank

Deutsche Bank AG/London

Source: Syngenta, 2012 China Statistical Year Book, Public Statistics by Country, Deutsche Bank

Page 21

21 March 2014
Chemicals
China Chemicals Tour

Figure 17: China is a leading producer of a number of major crops

Source:2012 China statistical Year Book, Deutsche Bank

Ag policies to accelerate the construction of a new management system. The Chinese


government has taken eight key decisions in its 3rd Plenum Communiqu; of these,
three key decisions are focused on the agriculture sector. The govt aims to i) form new
agribusiness systems and encourage industrial capitals to develop modern agriculture
in rural areas, ii) allow for equal exchanges of urban-rural elements and more property
rights to farmers, and iii) ensure that a new, integrated system of urban-rural relations
allows people living outside cities equal participation in modernization and better
property rights.
The government is focusing strongly on developing this new Agri management system
which will have continuing focus on the family-run systems fundamental position, and
meanwhile will also promote the common development of family-run, collective
proprietorship, partnership, business development and other innovative agriculture
management forms. Goverment is also targeting to give farmers the right to occupy,
use, income, transfer and contract management right mortgage, allow farmers to
contract management stake in the development of the right to industrial management
of agriculture. The third key focus of this new system will be to encourage contractual
rights to be transferred to professional investors, family farms, farmers cooperatives
and agricultural enterprises on the open market to develop various forms of scale
operation.
Land reforms to help farm consolidation. . China has 120m ha of land dedicated to
agriculture and a huge number of small household farms (~200m farming households)
with an average family farm size of 0.6ha. Government has put in some incentives in
place to attract people in cities so that people leave their farms for farmers. Clearer
property rights should also incentivise farmers to rent out their land if they wish. This is
likely to lead to bigger and more effective farms. Some of the key provisions include:

Rural land expropriation system: This provision focuses on strengthening the


farmers property rights through better litigation and documentation and
encouraging farmers to lease and mortgage land to third parties who may use
the land for non-farming purposes, and explicitly refers to the farmers right to
generate property-style income.

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Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Rural residential land transferring: This provision focuses on carefully


promoting the collateralization, guarantee, and transfer of rural properties to
increase farmers asset revenue through a few pilot regions, as well as
establishing the rural property market.

Favourable policies and green pressure should lead to a more ordered market. In the
last year Chinese authorities have issued several guidelines and notifications which
should allow for a more ordered agriculture market. Some of these guidelines are
summarized as below:

Chinese Vice Premier Wang Yang stresses to fight against counterfeits,


including crimes of producing and selling fake agricultural production materials
which is a common problem in China.

Chinese General Office of the Ministry of Agriculture has provided a number of


guidelines for the supervision and administration of pesticide for the year 2014.
Key priorities include pesticide market and manufacturer spot checks, high
toxic pesticide fixed-point operations, pesticide risk monitoring and evaluation,
low toxic pesticide residue in low demonstration subsidies and enforcement of
pesticide management campaigns.

Chinese Institute for the Control of Agrochemicals of Chinese Ministry of


Agriculture (ICAMA) introduced public notice system of pesticide registration
from 1 January 2014, in order to give the public more information on the
pesticide registration process to enhance the public credibility of pesticide
registration approval.

However resource constraints pose challenges for Chinas agriculture development.


Resource constraints remain the key issue for the Chinese agricultural sector. Despite
the pressure on food supply, cultivated land in China is undergoing a steady decline due
in part to urbanisation but also migration of the workforce over the past decade to the
cities. In addition to lower-than-world-average per capita availability of land and fresh
water, intense competition for labour (due to migration to cities) and capital investment
are the key challenges for the sector. As a result, increasing yields through better seeds,
crop protection products, and fertilization is key to meet Chinas food challenge.

Food Demand kg / capita

Figure 18: Food demand is increasing

Figure 19: Total cultivated land area has been declining


20.0

405
400

19.5

395

19.0

390

18.5

385

18.0

380
17.5

375
2005

Source: Syngenta

Deutsche Bank AG/London

2010

2020

2030

1998 1999 2000 2001 2002 2003 2004 2005


Source: Syngenta. Scale is 100mioMu

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21 March 2014
Chemicals
China Chemicals Tour

Figure 20: Arable land per capita < 50% of world average
0.7

28,277

30,000

0.59

0.6

Figure 21: Fresh water per capita < 30% of world average

Unit: ha. per capita

0.5

Unit: cu. m. per capita

25,000
20,000

0.4

0.32

0.3

15,000

World average

0.2

0.15

0.11

0.1

10,000

9,283

World average

5,000

0.03

0
U SA

Brazil

India

Japan

China

Source : Syngenta, Deutsche Bank

U SA

Brazil

India

Japan

China

Figure 23: Capital investment not attracted to agriculture

1,000

Pr i mar y
(Agr i cul tur e)
3%

100%

800

80%

600

60%

400

40%

200

20%

Ter ti ar y
54%

Secondar y
43%

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

0%

1985

2,132

Source : Syngenta, Deutsche Bank

Figure 22: Labour force flow to cities

1978

3,365
1,122

Rural Population (U nit: Million)


As % of Total Population
Source (ALL): Syngenta, Deutsche Bank

Fragmented agchem distributors landscape. The country has a complex and massive
distribution channel network where manufacturers sell to provisional/prefecture
distributors and county distributors (~50000 distributors and wholesalers) who sell the
agrochemical/seeds to a large number of retailers (>500,000) who finally sell these
products to growers. There is a growing trend for consolidation amongst distributors
although the market is still very fragmented. Distribution channels are often quite long
with 3-4 intermediaries between the agrochemical companies and farmers for crops like
wheat and corn although lower number of intermediaries (1 or 2) for vegetables.
Figure 24: The distribution model in China

Source: Syngenta

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Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Crop Protection & Seeds: strong growth potential (low base)


Chinese CP & Seeds market likely to grow at a CAGR of 6.4% through 2018. The
Chinese CP & Seeds market was estimated at CNY 39.480bn in 2013 (US$ 6.4bn) and is
expected to grow at a CAGR of 6.4% to reach CNY53.730bn (US$ 8.7bn) by 2018. The
projected rate of growth is expected to be higher than global industry average growth
rate (c.3%) due to increasing technology adoption from a low base as application rates
in China are very low vs. other markets. Within this Crop Protection (CP) market is
expected to grow at a CAGR of 8% through 2018, followed by vegetable seeds (7%
expected CAGR) and corn seeds (3% expected CAGR). Some of the key drivers of this
growth include increasing thrust on modernization (cited as a top priority for 2014),
more direct subsidies from government, increased awareness of food safety and
quality, land consolidation (likely to improve more professional farming) and growers
willingness to invest more for higher yields as they see farming as a business.
Figure 25: Chinese CP & Seeds market expected to grow at a CAGR of 6.4%
Unit: Million CNY

53,730

5 Yr. CAGR

14588

Corn SE +3%

5429

Veg SE +7%

33713

CP

39480
12428
3928

+8%

23124

2013

2018

Source: Syngenta, Deutsche Bank

CP market estimated to grow at a CAGR of 8% through 2018. The Chinese CP market


is estimated to grow at a CAGR of 8% through 2013-2018 mainly driven by improving
technology adoption. By crop, higher growth is expected in corn and rice (9% CAGR
through 2013-2018), followed by speciality crops (+8% CAGR through 2013-2018) and
vegetables (6% CAGR through 2013-2018). By treatment, stronger growth is expected
in Seed Care (SC, 15% CAGR through 2013-2018), followed by fungicides (+9% CAGR
through 2018), insecticides (+7% CAGR through 2018) and herbicides (+7% CAGR
through 2018). In 2013 CP market grew by c.6%, slightly lower than the trend growth
rate mainly due to lower infestation rate in key crops.
Figure 26: CP market growth to be driven by all crops,
corn and rice likely to grow fastest
Unit: Million CNY
CAG R +8%
23124
2646
6837

33713

5 Yr. CAGR

4063

Corn

+9%

10356

Rice

+9%

7425

Veg

+6%

Figure 27: Growth likely in all treatment applications,


Seed Care (SC) and Fungicides (F) likely to grow fastest
Unit: Million CNY

23124
7390

8177
2013

Specialty +8%

+7%

10831

+7%

9807

+9%

2649

SC

6514
1335
2013

+15%

2018

2018

Source: SmartPLAN July 1 Cut, Syngenta, Deutsche Bank, Note: Cereal, sugarcane are managed under
Specialty team in China Deutsche Bank

Deutsche Bank AG/London

10426

7885

5464
11869

5 Yr. CAGR

33713
CAGR +8%

Source: SmartPLAN July 1 Cut, Syngenta, Deutsche Bank, Note: Cereal, sugarcane are managed under
Specialty team in China Deutsche Bank. I: Insecticides, F:Fungicides, H: Herbicides and SC: Seed Care

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21 March 2014
Chemicals
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The Chinese crop protection market is highly fragmented and focused on lower value
generics. The CP market is highly fragmented in China with over 500 AI (Active
Ingredient) producers and over 1300 formulators due to low cost of production and
export demand. In 2012 the top 20 manufacturers accounted for 31.8% of the market.
With 8.0% market share, Syngenta is the leading player, followed by Bayer, Dow,
Monsanto, DuPont and BASF. R&D companies account for c68% of the market with
Chinese locals accounting for the remaining.
Figure 28: Syngenta is the largest player in crop protection with 8% market share
Syngenta
8%
Dow AS
6%
Bayer
4%
Monsanto
3%
Dupont
2%
BASF
2%
FMC
2%

Others
68%

Rest MNC's
5%

Source: Syngenta, Deutsche Bank estimates

MNCs/branded players continue to gain market share in China. Generic agrochemicals


are still the largest part of the market (c.68%); which which is symptomatic of the lower
levels of farm incomes and often low levels of farmer education given the lower prices
of generic products (costs 30% less than premium products). MNCs and branded
players with strong R&D capability have increased their market share in China to 31.8%
in 2012 from 23.6% in 2007 and 21.3% in 2000, largely growing at the expense of local
producers. With increasing regulations, costs and farms concentration as well as new
AIs introductions from the branded players, management sees the generics market
share to go down to c60% within 10 years. Increased awareness of food safety and
quality and intensive demand generation activities should help the branded players to
increase their market share.
Figure 29: MNCs/branded players continue to gain market share in China
Unit: Million CNY

Local

MNC

12169

20072

78.7%

76.4%

21.3%

23.6%

2000

2007

28499

100%

68.2%

31.8%

2012

Source: AgroCube, Syngenta, Deutsche Bank

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Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Increasing enforcement of environmental regulations boosting CP pricing. The crop


protection pricing environment is improving in China mainly due to the increasing
environmental pressure from the government on the small local producers, which is
leading to the closure of agrochemical capacities which are not complying with
environmental laws. As with many other markets, the government is increasingly
enforcing environmental and quality rules. Glyphosate has been the first pesticide to be
subject to environmental protection inspections in China. There has been an
acceleration of environmental regulation enforcement with more and more instances of
people heavily fined and jailed for not respecting environmental regulations (e.g. 62
senior managers of Zhejiang Jinfanda and Zhejiang Wynca Group were arrested in 2013
for failing to comply with environmental laws). Production was also suspended in some
companies (including Hunan Laide Biochemical and Zhejiang Runtu Chemical) on
various charges of environmental pollution. Increasing environmental pressures and
closure of some small/generics capacities has resulted in lower glyphosate output and
consequently higher domestic prices in 2013 (refer Figure 30 and Figure 31). This has
provided an opportunity to branded players to capture the market share vacated by
these small producers who were asked to suspend production on failing to comply with
environmental laws. Increasing labour costs is another factor contributing to pricing
growth. Branded players are in a favourable position in this scenario as strong brand
and efficient products are helping them to increase prices and justify the premium.
Figure 30: Glyphosate output 2013 vs. 2012

Figure 31: Glyphosate price 2013 vs. 2012


Unit: CNY per ton

Unit: 10K ton

42667

44000

62

38500

55

60

36000

33333
40

36000

33000

34416
25500

20

24125
22000

0
2012
Source: Syngenta, Desktop Research, Deutsche Bank

2013

Q1

2012

Q2

Q3

2013

Q4

Source: Syngenta, Desktop Research, Deutsche Bank

CP market consolidation to continue, R&D encouraged. The government is actively


encouraging consolidation of the domestic agrochemicals industry in a bid to improve
efficiency and increase local R&D. We estimate that there are currently over 2000
agrochemical companies and the government is targeting a sharp reduction of this over
the next 10 years. The Governments Crop Protection 2020 industry guidance targets
reducing the number of players by 30% and increasing entry barriers (more costly and
lengthy product registration, higher capital requirements and stricter license
management). Consolidated R&D efforts are expected to result in greater local market
solutions being developed. Currently most Chinese companies that have R&D centres
are not producing research compounds with the majority being spent on process
improvement/product copying. Most Chinese crop protection companies are investing
less than 1% sales in R&D compared to multinationals at 8%. These steps should
benefit the multinational players with strong technology and higher standards of health,
food and environment safety.

Deutsche Bank AG/London

Page 27

21 March 2014
Chemicals
China Chemicals Tour

Figure 32: CP- top 10 concentration rate by government


plan
60%

Figure 33: Seeds- top 10 concentration rate by


government plan
35%

50%

50%

30%

30%
25%

40%

32%

20%

30%

13%

15%
20%

10%

10%

5%

0%
2010

2015E

Source: Syngenta, Deutsche Bank

0%
2010

2015E

Source: Syngenta, Deutsche Bank

Seeds continue to enjoy strong government support. The seeds market is a relatively
new industry in China (Seeds law since 2000) and the market is currently dominated by
crops like corn, rice and vegetables. The market is growing at a rate of 8-10% (as per
Syngenta) and enjoys strong government support. The Chinese seeds market is
characterized by weak commercial breeding (reliance on public institutes),
fragmentation (thousands of small players) and fierce competition due to overcapacity.
The multinationals operating in China have leading technology offerings although they
have limited presence due to FDI (Foreign Direct Investment) restrictions forcing foreign
companies to be integrated at the JV level with minority ownership, also implying
significant IP risk. The Vegetable hybrid seeds market is expected to grow at CAGR of
7% through 2018 due to higher demand for more productive vegetable seeds. The Corn
seeds market is estimated to grow at a CAGR of 3% through 2018, although we note
higher growth rates (for corn) are possible post 2018 with the likely launch of GM corn
by 2018-2020.
Seeds is a strategic, fundamental and core element in China agriculture. The
governments intention is to build a modern seed industry with indigenous, innovation
capability to safeguard food security. The key policy drivers with their expected time
frame for full effect are the following: i) Higher barriers to drive industry consolidation
(1-3 years for full effect), ii) Stricter regulation enforcement, e.g. license management,
fighting product copying (3-5 years), iii) Promote indigenous breeding by seeds
companies (5-10 years) and iv) Pursue GM biotech in long term (long term).
Figure 34: Vegetable hybrid seeds market likely to grow
at a CAGR of 7% through 2013-2018

Figure 35: Corn seeds market likely to grow at 3% CAGR


through 2013-2018
Unit: Million CNY

Unit: Million CNY


CAG R +7%

5492

CAGR +3%

14588

12428

3928

2013

Source: SmartPLAN July 1 Cut, Syngenta, Deutsche Bank,

Page 28

2018

2013

2018

Source: SmartPLAN July 1 Cut, Syngenta

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Seeds more complicated and difficult to penetrate but big potential. The Seeds
market is highly fragmented and also highly complicated driven by the governments
desire to encourage local champions. FDI (Foreign Direct Investment) restrictions
force foreign companies to invest in Seeds only through JVs with a minority ownership
(49-51). R&D has to be integrated at the JV level implying significant IP risk. However,
the market potential is significant (Syngenta sees it doubling in 15 years with 8-10%
CAGR) and foreign companies have to adapt to this environment. Historically, seeds
R&D has been done at the public institute level. However, with the governments policy
now encouraging companies to have their own R&D, we should see public institutes
progressively withdrawing from the sector. In addition, several observers expect
Chinese authorities to approve the GM option soon.
Public opinion still against GMs. On GM crops, public opinion in China is similar to the
EU although Syngneta expects more GMs crops to be legalised in the medium term
(cotton, papaya, poplar are already approved) as certain technologies should play a very
important role in solving Chinas agricultural production challenges, such as drought
tolerance, ability for plants to grow in acid soils, etc. Syngenta expects GM corn to be
approved for cultivation in China by 2018-2020 although GM rice is unlikely to be
approved before 2025.

Deutsche Bank AG/London

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21 March 2014
Chemicals
China Chemicals Tour

China automotive outlook


The automotive sector is a material end-user for the chemicals industry and within China
remains a key driver of growth fuelled by increasing wealth and investment. In this
section we have looked in detail at the automotive market in China. The text below is
provided in conjunction with our Chinese auto analyst Vincent Ha (vincent.ha@db.com,
852 2203 6247).

2013: Passenger Vehicles sales rebound


Sales of Passenger Vehicles (PV), especially premium cars, in China stayed robust in
2013, amounting to 17.92m units, up 16% year-on-year. Despite a slow start for
premium car sales in 1Q13, probably due to pull-forward demand in 2H12 with
aggressive price discounts to push sales, sales of premium brands have picked up since
2Q13 with the return of upgrade demand and availability of more new models. To
elaborate, Germanys three major premium brands (Audi, BMW and Mercedes Benz)
recorded 18.4% YoY sales growth in China in 2013 vs. 15.7% for passenger vehicles as
a whole. However, as manufacturers have increased production amid a better market
environment, there was a limited pricing rebound for car models.
For the CV (commercial vehicle) segment, 2013 sales amounted to 4m units, up 6%
year-on-year. Commercial vehicles also saw slower start in Q1 13, but the situation
gradually improved and Q2 and Q3 saw good sales progression.

Source:CAAM

Dec

Nov

Oct

Sep

Aug

2013

Jul

2009

2012

Jun

2008

2011

Apr

2007

2010

May

2006

Mar

Jan

(Units)
500,000
450,000
400,000
350,000
300,000
250,000
200,000
150,000
100,000

Dec

Nov

2009
2013

Oct

Sep

Aug

2008
2012

Jul

Jun

Apr

2007
2011

May

Mar

Jan

Feb

2006
2010

(Units)
2,000,000
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000

Figure 37: China monthly commercial vehicle sales trend

Feb

Figure 36: China monthly passenger vehicle sales trend

Source: CAAM

We cautiously assume growth rate at c10%


Strong volume growth amid increasing wealth. China has become the worlds largest
automobile market since 2009 with a CAGR of 24% between 2001-10. During this
period, mainland Chinese disposable income per capita increased by c11% p.a., leading
to strong demand in passenger vehicles sales. Despite the cyclical fluctuations in sales
volumes, long-term commercial vehicles sales volume tracks have remained well in line
with GDP growth.
Tier 2/Tier 3 cities drive more sustainable growth. Over the past few years, new PV
registrations in Tier 1 regions have been progressing at a much slower and volatile pace
compared to Tier 2 and Tier 3 regions. Given that future auto demand growth in China
will likely be fueled by the Tier 2 and Tier 3 regions, which have a high population base,
lower current penetration and faster-than-national average economic growth, we
believe that continued demand resilience in those regions will provide a solid base for
growth.

Page 30

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Figure 38: Chinas Tier 1/2/3 regional PV markets

Figure 39: PV penetration growth trend in Tier 1/2/3 cities

Source: China Statistical Yearbook, Deutsche Bank

Source: China Statistical Yearbook, Deutsche Bank

Figure 40: China new car registration trend by regions


(Units)
Tier 1
Tier 2
Tier 3
Total

2009
1.05
3.74
5.45
10.25

2010
1.42
4.86
6.27
12.55

2011
0.94
5.22
7.53
13.69

2012 2009-12 CAGR


1.07
1%
5.41
13%
8.32
15%
14.8
13%

2012 penetration
14.50%
8.70%
5.00%
6.60%

Source: China Statistical Yearbook, Wind, Deutsche Bank

Luxury car growth outlook remains very strong. For upcoming years, we remain bullish
on Chinas luxury car sales growth. In brief, we think that demand growth for premium
cars will remain at about 15- 20% YoY in 2014-15E, above overall market growth of
about 10%. This is more or less in line with major premium auto brands target growth.
We think that such demand will be driven by:

Overall improvements in the macroeconomic environment;

An increasing share of replacement within annual Chinese auto sales, partially


stimulated by the possible implementation of purchase restrictions in more
cities;

Launches of numerous major new premium brand models (BMW X5 SUVs);

The introduction of more entry-level premium brand models, such as the Audi
A3 sedan and Mercedes Benz A Class sedan, to address a wider audience base.

We forecast overall car sales growth of c10%. We think that while underlying demand
in 2014 will remain solid for both PVs and CVs supported by macro improvement,
increasing policy interference, e.g. vehicle ownership restrictions in big cities and
tighter emission standard for CVs, will inevitably undermine growth somewhat. What is
more, considering the lingering recovery impact of the Sino-Japanese island dispute
(for PV) and CV pre-buying ahead of new emission standard, we would not be surprised
if growth in early 2014E turns out to be faster with gradual easing going forward.
Figure 41: Global passenger vehicle sales growth trends

Source: State Information Centre

Deutsche Bank AG/London

Figure 42: Impact of purchase restriction on sales growth

Source: State Information Centre

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21 March 2014
Chemicals
China Chemicals Tour

Figure 43: PV penetration in major Chinese cities

Figure 44: Per vehicle road area in major Chinese cities

Source: State Information Centre, Deutsche Bank

Source: State Information Centre, Deutsche Bank

Figure 45: Chinese vehicle sales volumes and Deutsche Bank forecasts
(m units)

2011

2012

2013E

2014E

2015E

Remark

10.12

10.74

10.74

13.02

14.14

We think demand for sedans will grow at below-average rate, given the
increasing customer desire to diversify.

YoY%

6.60%

6.10%

6.10%

8.70%

8.60%

MPVs

0.5

0.49

0.49

1.45

Passenger vehicles (PV)


Sedans

YoY%
SUVs
YoY%
Mini-cars
YoY%
Total passenger vehicles
YoY%

1.62 We expect MPV sales outperformance to continue, with increasing demand


for versatile vehicles.

11.70% -0.90% -0.90% 12.40% 12.00%


1.59

3.42

3.89

We expect the SUV segment's sales outperformance to continue, on


increasing demand to differentiate from typical sedan consumption.

20.20% 25.50% 25.50% 14.70% 13.70%


2.26

2.26

2.26

1.76

-9.40% -0.10% -0.10%

8.00%

1.9 We think demand for mini-cars troughed in 2013 and that long-term demand
should still be supported by rural economic development
7.80%

14.47

15.5

15.5

19.64

21.54

5.20%

7.10%

7.10%

9.90%

9.70%

0.88

0.64

0.76

0.83

-13.40% -27.80% 19.40%

9.80%

Commercial vehicles (CV)


Heavy-duty trucks and tractor
trailers
YoY%
Medium trucks
YoY%
Light trucks
YoY%
Mini-trucks

0.29

0.34

7.40% -0.60% -1.60% 10.10%

9.20%

1.84

-7.20% -2.00%

0.29

9.40%

0.31

1.88

0.29

0.91 We expect truck demand recovery to be maintained due to the better macro,
particularly in fixed asset investment and export activities although the
potential implementation of a stricter emission standard would cap growth

2.12

2.32

4.60% 10.00%

1.93

9.60%

0.49

0.53

0.54

0.58

0.63

YoY%

-9.90%

8.70%

0.30%

8.10%

7.90%

Buses

0.49

0.51

0.55

0.59

YoY%

10.10%

4.00%

8.10%

8.40%

4.03

3.81

4.06

4.44

4.85

-6.30% -5.50%

6.50%

9.50%

9.10%

Total commercial vehicles


YoY%
Aggregate vehicles sales
YoY%
Old vehicle sales forecast
YoY%

18.51
2.50%
18.51
2.50%

19.31

0.64 Buses' sales growth should remain relatively stable, with increasing demand
for passenger hauling on highways and for public transport
8.30%

21.93

24.09

26.39

4.30% 13.60%

9.90%

9.60%

21.54

23.65

25.87

4.30% 11.60%

9.80%

9.40%

19.31

Source: China Association of Automobile Manufacturers (CAAM), Deutsche Bank estimates

Page 32

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Capacity issue not acute but mild margin decline looks inevitable
Concerns about production over-capacity in the Chinese auto market have been
repeatedly discussed with ambitious long-term production capacity addition plans
mentioned by OEMs. To elaborate, after the exponential demand growth in 2009-10,
many new manufacturing facility expansion projects have been announced, and we
now expect industry capacity to grow at 17% in 2014-15, vs. demand growth of c.10%.
We are not overly concerned about overcapacity, although we do envision there could
be a further decline in utilization ratios in 2014-15. Our rationale is that overall industry
utilization of about 75-80% in 2013-14 is still considered healthy, especially as the more
popular and efficient OEMs should still be producing at close to full capacity going
forward. Apart from that, while the market is also concerned about a further ballooning
of capacity, given bold long-term capacity planning by some foreign and local OEMs
beyond 2014, we argue that these plans are still flexible, with room for downward
adjustments. While this would imply a further dwindling of capacity utilization towards
the 70% level in 2015E, pricing is unlikely to be under much pressure in the foreseeable
future since the major leading OEMs are still likely to maintain higher utilization. All in
all, we believe there would only be bigger risks if the whole market slows dramatically
and hence even the major OEMs start underutilizing.
Figure 46: China passenger vehicle production capacity and Deutsche Bank
estimates
(Units in thousands)

2011

2012

2013E

2014E

2015E

Shanghai Auto (SAIC)

3,420

4,135

4,985

5,485

6,285

First Auto (FAW)

2,630

3,180

3,700

4,440

5,540

Dongfeng Motor

2,358

3,140

3,770

4,225

4,550

Changan Auto

2,635

2,665

2,765

3,115

3,655

890

1,290

1,590

1,790

2,290

1,340

1,480

1,760

2,100

2,470

Chery

900

900

1,100

1,130

1,130

BYD

900

900

1,000

1,500

2,000

Geely Auto (excluding Volvo)

680

730

900

1,050

1,200

Great Wall Motor

400

650

750

1,250

1,500

93%

93%

93%

93%

93%

Yearend PV capacities of the above


companies (m units)

16.15

19.07

22.32

26.09

30.62

Implied industry yearend PV segment


capacity (m units)

17.45

20.61

24.13

28.2

33.1

YoY%

16%

18%

17%

17%

17%

Implied utilization (%)*

89%

81%

80%

75%

70%

Beijing Auto (BAIC)


Guangzhou Auto (GAC)

Market share of the above companies

Note: * Average capacity is used instead of yearend capacity Source: Company data, Deutsche Bank estimates

Downwards pricing trend to continue. However, with intense competition among


numerous OEM brands in China, we do expect the gradual vehicle pricing downtrend to
continue. We think that the OEMs will try to keep their product pricing competitive,
while striving to keep margins from eroding much. Therefore, cost-cutting measures,
such as increasing local production and local component sourcing, are likely to
continue. This would imply a mild margin downtrend in the long run, in our view.

Deutsche Bank AG/London

Page 33

21 March 2014
Chemicals
China Chemicals Tour

Figure 47: China passenger vehicle price index

Source: Cheshi.com

Figure 48: China major auto OEMs YTD profit margin

Source: CAAM

Potential clean-air policies...


Given automobile emissions are one of the major causes of air pollution (contributing
approx 20% of Chinas current PM2.5 composition by our estimates), we expect more
restrictive policies on this sector including: 1) constraining automobile ownership
growth; 2) implementation of tighter emission/fuel-efficiency standards to reduce percar emission by more than 80%; and 3) promotions to encourage the greater use of
electric vehicles (EVs) with more quantifiable ownership targets.
...Limited near-term implications on autos
We also believe that there will be a greater government focus on emissions standards
and usage, leading to higher R&D costs for the manufacturers (we have already
factored such costs into our forecasts). In addition, stricter standards could very well
lead to faster old vehicle scrapping, which could actually drive new car sales. We would
also expect the implementation of measures to reduce car usage as in other markets,
for example, higher petrol/diesel taxes, which should reduce emissions. But in terms of
unit sales and associated growth, we are less concerned that the government will seek
to reduce growth substantially especially given the ongoing wealth impact and when
car ownership penetration in China is compared to other markets. In summary, we
expect a greater national focus on emissions and vehicle usage rather than actual cars
on the road, although it is possible that localized efforts may be made to constrain car
growth in certain cities. Furthermore, we also note that Chinas auto production
includes both domestic and export demand, and we expect the China auto
manufacturers to become more viable exporters over the longer term which should
offset any slowdown in domestic growth. And for those pinning their hopes on electric
vehicles, while current demand is suppressed due to high prices and lack of rapid
charging infrastructure, this is unlikely to change over the medium term without
significant policy intervention.

Page 34

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

European companies
(Tim Jones, Head of Deutsche Bank European Chemicals Research and co-ordinator for
Deutsche Bank Global Chemicals Research, Martin Dunwoodie and Virginie BoucherFert)

Deutsche Bank AG/London

Page 35

21 March 2014
Chemicals
China Chemicals Tour

Air Liquide (BUY, Target: Euro 115): Further developing the strong
platform
We met with Marcelo Fioranelli, the new President & CEO of AL China. Mr Fioranelli
has been with AL for 13 years, with the last year spent in China. AL has been in China
for 24 years but its expansion in the region in the 1990s and early 2000s was restricted
by the companys conservatism in the type of business it would sign and its stronger
focus within Asia towards Japan and other regions with electronics exposure. This
changed sharply in the mid-2000s, and over the past few years the company has built a
strong long-term asset base. Given our estimate of ALs sales in the greater China
region, it has a No 2 market position behind that of Linde. AL employs over 4,200
people in China (3/4 in Gas and 1/4 in Engineering).
While the companys current exposure to China is lower than that of its nearest
European peer (Linde) it is above US peers (Praxair, APD) and there is a clear emphasis
on profitable growth coming from the AL head office. Regional mgmt has caught up
quickly and signed new investments at a faster rate than peers over the past few years.
Some suggest this has been done at lower ROCE levels, but our meetings over the past
few years suggest otherwise, with some good strategic wins and local dominance
developed. AL remains less keen than peers to enter into JVs, preferring a 100% owned
strategy.
AL delivered greater China sales of approximately Euro 850-900m in 2013 (6% of gas
sales) with growth of approximately 10-15% delivered in the year. We would expect the
business to see 15-20% growth in 2014 and onwards supported by ramping of existing
plants and new start-ups (some of which were delayed from 2013). The group is
planning 9 large start-ups in 2014 (3/4 delayed from 2013). AL provides no data on
country profitability but given the ramp-up nature of this business, we assume that
China is below group levels of profitability (but profitable at the EBIT level).
2013 was another strong year for signing new plants, and as of the end of 2013 the
cumulative investment decisions made in China amounted to >Euro 1.5bn. RoCE in the
region improved in 2012 and 2011 but was flat in 2013 due to some project delays but
mgmt is confident that ROCE will improve in 2014 despite high capex. As with peers,
mgmt believes it is constrained by physical engineering/sales capacity for on-sites
ensuring they remain selective in what they bid for. Near term they have seen a pick-up
in volumes since CNY as seen by peers. Some plant delays were seen last year but this
appears due to short-term issues (permitting delays, temporary softer demand).
Figure 49: Extended geographic footprint (many start-ups

Figure 50: Cumulative number of large-to mid-sized

planned in 2013)

plants in operation (excludes on-site)

Source: Air Liquide

Page 36

Source: Air Liquide

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

The China business has a diversified product portfolio. As shown below the China
business has a good split between Large Industries, Industrial Merchant and Electronic.
Within Large Industries the focus is on chemicals (45%) and metals (55%) with only
limited current sales in the oil & gas business. The outsourcing of hydrogen is at an
embryonic stage in China, but offers longer-term opportunities. The customer base is
2/3 locals and 1/3 international. Interestingly, 70% of ALs business in the region is done
under take-or-pay contracts, highlighting the defensiveness of the growth on offer.
Figure 51: Air Liquides China sales by business area

Figure 52: Air Liquides China sales by region (2013E)

(2013E)
Electronics
13%

Other
18%

Medical
2%

Beijing
3%

Jiangsu
28%

Shandong
5%
Industrial
&
Merchant
30%

Source: Deutsche Bank estimates

Large
Industries
55%

Tianjin
13%
Heibei
10%

Shanghai
23%

Source: Deutsche Bank estimates

Focus on the key basins in Eastern/Northern China with an increasing move inland
as well. AL has focused on many sites within China with an aim to generate strong
market positions in these major hubs in order to deliver the strongest ROCE profile. In
the past few years the focus has been on further developing the Northern and Eastern
sites while also extending the groups reach inland (West). Given the remoteness of
some inland opportunities the group is very selective in what it is prepared to bid on as
it aims to make sure that the investments inland can develop over time to new large
industrial hubs. Therefore stand-alone coal-based investments are of little interest to AL
as the company prefers coal-based investments that can be developed into larger hubs.
Figure 53: A summary of the historical investments that Air Liquide has made in China

Source: Air Liquide

Deutsche Bank AG/London

Page 37

21 March 2014
Chemicals
China Chemicals Tour

Looking to expand in all areas of gases. ALs recent wins have been focused on
chemicals but also increasingly in the coal industry. The company is also active in the
electronics area. Coal-to-chemicals is of big interest to AL and we would expect further
investments in this area near term. However, as noted earlier, the group is fully aware
that some of the bigger inland investments in remote regions may see further delays
and that of the many announced coal-based investments, a good number may well
be cancelled or delayed significantly. We would expect AL to further leverage its
expertise in hydrogen (syngas) where profitability can often be more supportive,
although we note that outsourcing of hydrogen does seem to be slower in the region
than in other areas of gases.
Outsourcing by customers still provides longer-term potential. Currently,
approximately 80% of the Chinese gas market remains under captive production. As
technologies evolve and customer plants require updating and enlarging, we expect
outsourcing (also called de-captivation) to continue and drive additional growth
opportunities for gas companies. Outsourcing seems to be encouraged by the 12th Five
Year Plan as part of the upgrading of production and improvement on efficiency. The
cultural trend within China to own your own assets persists; nonetheless, the
selective sale of customer plants and/or new over-the-fence agreements is still
occurring. Those with the best customer relationships continue to benefit most from
this trend. Air Liquide (and Linde) appear to have been more successful in
outsourcing/de-captivation than peers over the past 12-18m. By product we note that
outsourcing in the more basic oxygen and nitrogen areas seems to be exceeding that of
the hydrogen market. As noted in Figure 55, the growth in the oxygen market in the
region has been strong over the past four years, but the proportion of the market that is
now outsourced has increased to 19% by 2011 from 10% in 2004 and 12% in 2007.
Figure 54: Increasing the focus on local engineering

Source: Air Liquide

Figure 55: Oxygen outsourcing to continue

Source: Air Liquide

Engineering facility remains key to the companys growing success in the region. AL
like some other majors has invested in its own engineering facility within China (at
Hangzhou). This gives the company significant cost and local knowledge advantage.
While cost reductions of up to 25% are attractive, the greater success has been the
reduced manufacturing lead-times to build, which have been strong positives for the
local customer base. Air Liquide is now exporting product from China to the rest of the
world, which is direct evidence of the strength of this engineering business. Assessing
our meetings over the past few years, it is clear that the focus on being able to also
offer Engineering competence (locally) is becoming much more important in winning
on-site business. Management noted that it is able to offer extensive technology to
customers, helped by the Lurgi Engineering business.

Page 38

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Contract bidding remains competitive; the focus on customer relationships remains


high. Management noted that large on-site contracts with international majors remain
competitive but that they continue to see strong investment discipline from the global
players with very little evidence of trophy contracts being bid for. Soft criteria such
as customer relationships, local government access and regional knowledge are
increasingly critical in contract bidding this is further supporting gas companies
desires to move quickly into new regions to create early barriers to entry. Interestingly
management noted that merchant gas pricing have been broadly stable in many of the
major hubs within China, which is further tangible evidence of generally disciplined
behaviour even in the more commoditised merchant gas market.
Local gas companies slowly closing the gap but Western names still have a heavily
differentiated offering. Management noted that there are a growing number of local
industrial gas players but that its focus tends to be in the cylinder and merchant
markets. In recent years one or two larger local players (Yingde is the main one) have
started to become more competitive in on-site but that their offering tends to be based
around weaker engineering so is only really competitive for the smaller plants they
cannot offer the scale of energy efficiency that the main players can offer with smaller
plants generally not offering the same potential for hub development this has not
resulted in material competition for Air Liquide. Air Liquide can build world-scale plants
over 3000tpd compared to locals at 1000-1500tpd. For the larger investments, it
appears that the Western companies continue to differentiate their offerings.
Investment discipline improved, despite the high desire to grow. AL is sometimes
criticised for its longer-term view in investments and expansions, but in China we are
confident that the company is acting in a disciplined manner with regard to contract
terms and commitments. We suspect that one of the key areas of difference in pricing
that any company can offer a customer in a new on-site may be the assumption of the
off-take (piggy backing) credits that may come in the future from the development of
either industrial hubs and other customers. Assumptions around this off-take may differ
from company to company, but we see no evidence that Air Liquides assumptions in
this area are necessarily more aggressive than for other companies. Clearly, if a
company has a particularly strong view over the development basin, its higher
assumptions on off-take credits may allow it to become more competitive on pricing.
We do not see this as ill-discipline in the industry.
The Teng Fei programme, launched in 2007, is seen as the growth part of the groupwide ALMA programme. It is also worth noting that the group-wide cost cutting
programme (ALMA) has been implemented in China since 2008 (echoing the groupwide focus on the cost base).
Figure 56: A history of Air Liquide in China

Source: Air Liquide

Deutsche Bank AG/London

Page 39

21 March 2014
Chemicals
China Chemicals Tour

AkzoNobel (Buy, Target: Euro 67): well positioned for growth


We met with Lin Liangqi, President AkzoNobel China and BU Director AkzoNobel Deco
Paints China and North Asia, Felix Jiang Business Development Director, Ethan Hou
Regional Director, Specialty Plastics Asia and Paul Radlinski, Manager Chelates and
Micronutrients.
AkzoNobel started in China in the early 1980s and now has 25 sites in operation and
7,400 employees. Sales in 2013 grew just over 1% to Euro 1.64bn (11% of group sales).
In China, Decorative Coatings, Performance Coatings and Chemicals are all
represented. The group aims to remain a leader in sustainability, which is aligned well
with Chinas Five Year Plan focusing on the quality of growth as well as quantity. There
is a clear focus with the new Group CEO on increasing functional and operational
excellence and not pursuing growth at the expense of profitability. As part of this the
company has consolidated its offices in Shanghai, harmonising support functions, and
has a BU initiative to present one face to customers in China.
Figure 57: AkzoNobel products and market positions in China
Business Area

Business Unit

Sub Business Unit

Manufacturing sites Market leadership


(main land China)
position

Decorative Paints

Deco China

N/A

Performance Coatings

Automotive &
CR, Aerospace
Aerospace Coatings Coating, Specialty
Finishes

Industrial Coatings

Coil, Packaging
Coating, Wood
Finishes and
Adhesives

Marine and
Protective Coatings

Marine Coatings,
Protective Coatings

Powder Coatings

Interpon & Resicoat 6

Functional
Chemicals

PA, EA,OS, Chelates 6


& micronutrients, OP
and SD

1- Sulfur,
polysulphides,
organic peroxides

Specialty Chemicals

2- Chelates, EA,
Metal alkyls, PA
Industrial Chemicals MCA

Pulp & Paper


Chemicals

N/A

Surface Chemistry

Personal Care &


Surfactants

Source: AkzoNobel

Deco coatings: Building a leading position. Decorative Paints (a JV with Swire Pacific
where AN has a 70% share) generated revenues of E566m in 2013 (up 13%) with four
factories in Greater China (three in China and one in Taiwan) and 1885 people. The
company continues to strengthen its market position in Decorative Coatings in China
especially in the Project Market driven by infrastructure and affordable housing, and is
the No. 2 with a market share of 12-13%, behind Nippon Paint which has 17-18%. The
majority of sales are through the Traditional channel, which comprises small scale
outlets selling to both consumers and professionals (Figure 58). By segment there is a
fairly even split among premium, mass, economy and woodcare (Figure 59). AkzoNobel
estimates the market size of decorative coatings in China at some E4.1bn. The project
market has been strong, driven by infrastructure investment, whilst retail has slightly
stagnated because of continuing real estate macro controls designed to cool the
property market.

Page 40

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Figure 58: Revenue by channel

Prof essional
6%

Figure 59: Revenue by segment

Modern**
4%

Economy
18%
Mass
29%

Project
21%

Premium
25%
Traditional*
69%

Woodcare &
Others
28%

Source: AkzoNobel, *Small-scale outlets selling to both consumers and professionals, ** Larger -scale,
big box retailers, more consumer-oriented

Source: AkzoNobel

Strategy in China is to focus on fewer, bigger, more powerful brands. In line with the
strategy to reduce complexity across the whole company, AkzoNobel is continuing to
rationalise its brand portfolio in China. It aims to have one major brand for each enduser segment that cuts across the main product categories (see Figure 60). Business
strategies have been aligned with the company strategy. There are more specific areas
of focus with a drive to promote growth in the redecoration market, aggressive growth
in the project market which grew 11% in 2013, gain market share in the mass market
using the Dulux brand and optimise the distribution chain.
Figure 60: Focusing investment on fewer, bigger, more powerful brands
Paint
generalist
ConsumerSuper premium
to Mass

Woodcare

Pre-Deco

Other
specialist

Dulux

(Traditional & Modern


channels)

Contractor/
Painter
(Professional channel)

B2B- Super
premium to Mass
(Project channel)

levis

Dulux Pro

Source: Deutsche Bank, AkzoNobel

Geographic coverage is extensive across regions and city tiers. AkzoNobel has
regional headquarters in each of Chinas four main regions (Figure 61). The highest
growth is expected in the west and this is where the company is increasing capacity
and investing in distribution and people. Figure 62 shows that the business is still
biased towards Class A cities, with only 9% of revenue coming from Class D cities.

Deutsche Bank AG/London

Page 41

21 March 2014
Chemicals
China Chemicals Tour

Figure 61: Geographic coverage

Figure 62: Revenue by city class


Class D (379
cities)
8%
Class A (13
cities)
32%

Class C (232
cities)
27%

Class B (61
cities)
33%

Source: AkzoNobel

Source: AkzoNobel

Redecoration is still not well developed. There is still not much redecoration in China,
with the vast majority of painting being done on new builds. AkzoNobel is trying to
stimulate the redecoration segment of the market with communications aimed at
educating the market and also services designed to make repainting as easy as possible
such as the Easy Paint service (the company aims to shorten the average time for redecoration to 3 years from 7 years). This service operates via a hotline where the
customer calls and arranges a site visit and consultation resulting in a quote and advice
on colours, etc. The painter comes out and moves and covers all furniture, does the
painting and then cleans and returns the furniture providing a complete, hassle- free
redecorating service.
Performance Coatings has strong market positions across all its segments in China,
these being Powder Coatings, Automotive and Aerospace Coatings, Industrial Coatings,
Wood Finishes and Adhesives and Powder Coatings.

Powder Coatings is a good growth story in the region. No sales numbers are
provided, but we estimate Powder Coatings is >10% of AkzoNobels China
business it currently employs over 15% of the China workforce and is the
market leader with 6% market share. It is benefiting from the move west and
the development of infrastructure (railways, airports and construction
equipment), urbanisation (building activity, household fittings and appliances)
and environmental regulations (drive for eco-efficient paints).

A&AC hold strong market positions. The market size of auto refinishes is
estimated at $400m and expected to grow to $1bn by 2016 (AkzoNobel has a
30% market share). The market is still fragmented with over 200 auto refinishes
producers. The market size for the Specialty Finishes unit is E618m split mainly
between Consumer Electronics (CAGR 4% to 2018) and Automotive (CAGR
15% to 2018). Akzo has a leading position in CE and Auto Interior but lags in
Auto exterior. All segments are highly fragmented.

Marine & Protective. AkzoNobel has c.25% market share in the China new
build marine market and c.20% in the maintenance and repair market. The new
build market has been weak due to global oversupply. In protective coatings
AkzoNobel has about 10% market share, with the majority of players in the
market being medium-sized local players and hundreds of smaller competitors
(80% of the market). The company operates one mega manufacturing site in
China and has the advantage of a global product range and network.

Page 42

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Industrial Coatings. AkzoNobel is No. 2 by volume and value in the packaging


coatings market with four manufacturing sites. In the extrusion coatings
market AkzoNobel has c.10% market share (No. 4) but concentrates only on
the 17% of the market that is top tier. In coil coatings Akzo has c.7% market
share and focuses on the top and mid tiers that comprise 70% of the market.

Wood Finishes and Adhesives. AkzoNobel is the leader in China with 30%
market share. Historically activities have been focused on the premium export
market but this has been shifting more recently to the domestic market in
China.

Specialty Chemicals benefiting from the expansion at Ningbo. The Ningbo expansion
is progressing well with a total investment of just under E400m. Figure 63 shows the
status of the various parts of the expansion:
Figure 63: Progress on the Ningbo Specialty Chemicals multi-site
Plant

Status

Capex

Infra+ waste water

Complete

E47m

Utilization 2013

Chelates

Complete

E65m

70-75%

Ethylene Amines

Complete

E145m

80-85%

Organic Peroxides

Complete

E17m

80-85%

Bermocoll

2013

E54m

Start-up

DCP

2015

E45m

Source: AkzoNobel, Planned: waste water extension, SC ethoxylation

By business unit in China:

Functional Chemicals has a cost leadership position and technology


advantages over local competitors. It is benefiting from the start-up of the
Ningbo site with a number of products expanding capacity and overall has four
manufacturing locations.

Industrial Chemicals has a leading position in the Chinese market in


monochloroacetic acid (MCA) used in pharma, dyes and herbicides (it is the
precursor for glyphosate). AkzoNobel is the lowest-cost producer with scale
and technology advantages. The expansion in Taixing from 60kt to 100kt has
been finished and running at full capacity from start-up. AkzoNobel expects the
MCA market in China to grow 6% p.a. to 2017.

Pulp & Performance Chemicals. AkzoNobel has the No. 3 position in China
with 12% market share, behind BASF and Kemira. The largest and fastest
paper machines are in China, and the market should overtake the North
American market in terms of size around 2015.

Surface Chemistry has the No. 1 position in China, strengthened by the


acquisition of Boxing Oleochemicals in January 2012 with the integration now
finalised boosting new product introductions to the Asian market. This gives
local production for customers with minimal reliance on imports.

Deutsche Bank AG/London

Page 43

21 March 2014
Chemicals
China Chemicals Tour

BASF (Buy, Target: Euro 94). Realistic about the region


We met with Dr Brudermuller (Vice Chairman of BASF). BASF has its main integrated
Verbund site at Nanjing and also just opened an integrated R&D centre in Shanghai.
Asia is already the largest market for the chemicals industry (accounting for 41% of
total global demand in 2010) but BASF expects this to continue to rise with demand in
the region accounting for 50% of global demand by 2020. BASFs Asian sales have
grown by an average rate of 13% per annum (2004-2012) with EBITDA growing at 11%.
Asia accounted for 21% of BASF group sales (ex Oil & Gas) and 14% of EBITDA in
2013. China is estimated to account for 41% of these sales in 2013 (equivalent to 9% of
group sales ex Oil & Gas). BASF is targeting Asian sales of Euro 25bn by 2020. Sales in
2013 were Euro 12.45bn, so this target implies 10.5% growth per annum
(approximately 4.5% points above the average 6% growth a year that BASF expects for
Asia). This does assume a slowdown from the rate of growth seen in the past few
years, but given the size of BASFs business it is inevitable that delivering such strong
rates of growth becomes incrementally tougher to do on a larger business. For the past
two years the growth of BASFs Asian business has been below managements
expectations, albeit in part this was driven by de-stocking in some product chains and
softer underlying demand. However, it is clear that the focus on cost efficiency, best
practice, pricing management (what we often refer to as self-help) has ratcheted up
materially in the region.
BASF is targeting 70% of sales to be made locally (currently at 60%). The company
already earns a strong premium on its cost of capital in the region. The company
estimates that in the highly fragmented Asian market it has approximately 9-10% share
and is the largest chemical company.
Figure 64: BASFs Asian sales have grown by an average

Figure 65: BASFs Asian EBITDA has grown by an

rate of 13% per annum since 2004

average rate of 11% per annum since 2004

16
14
12
10
8
6
4
2
0
2004 2005 2006 2007 2008 2009 2010 2011 2012

1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2004 2005 2006 2007 2008 2009 2010 2011 2012

Sales, Euro bn
Source: BASF

EBITDA, Euro bn
Source: BASF

Strong track record in China, despite short-term pressures. BASF has been in China
since 1885, and sales in 2013 were at Euro 5.1bn. In 2013, China accounted for 9% of
BASF group sales (ex Oil & Gas). While no EBIT numbers are released on a country
level, we estimate profitability in China in 2013 was below group average. There is no
formal guidance on returns in the region but we note that China achieved its cost of
capital in 2011 but we estimate that it did not in 2012 and 2013 due to pressure on
some of the more upstream chains (such as caprolactam). Sales in China have grown
by an average of just under 20% per annum since 2003.
Mgmt stated that demand so far in 2014 has improved at a faster rate post CNY than in
2013. The cracker in Nanjing is currently running strongly (>90%) but profitability in
past 18m was relatively weak due to feedstock prices.

Page 44

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Early move advantages. BASF prioritised Asia and China earlier than Western peers
and has been able to develop a strong asset base alongside some strong local
partnerships, the value of which should not be underestimated. BASF is the only nonAsian name in the Top 10 in the region. In China, BASF is the 4th largest chemical
company (by sales) behind Sinopec, Petrochina and ChemChina. The asset base is
focused on regional hubs with a "close to the customer" mentality. Early moves to
Nanjing (Verbund complex started-up in 2004) and Caojing and now more in-land
investments (Chongqing in 2015 for PUs, Xinjiang for BDO/polyTHF) have enabled
BASF to gain access to raw materials and build local relationships. The track-record of
strong success in investment execution and environmental commitment is noted.
Figure 66: BASF Asia Pacific sales by segment

Figure 67: BASF Asia Pacific sales by sub-region

Agricultural Other
Solutions
8%
4%
Chemicals
31%
Perf.
Products
27%
Functional
Materials &
Solutions
30%
Source: Deutsche Bank, BASF

Source: Deutsche Bank, BASF, ASEAN include Singapore, Philippines, Vietnam, Thailand, Indonesia,
Malaysia. South Asia include Indian, Pakistan, Bangladesh, Sri Lanka

Figure 68: BASF major investment projects in Asia Pacific

Source: BASF

Figure 69: BASF in Asia

Source: BASF

Figure 70: Chemical market in Asia Pacific is dominated by local players


Top 8 chemical producers in Asia Pacific

Chemical sales in Asia Pacific in 2012 (E, bn)

Comments

Sinopec

44.9

Chemicals segment only

Mitsubishi Chemicals

29.7

estimated (business year April - March)

Formosa Chemicals

23.7

Formosa Petrochemical Corp. only

ChemChina

19.9

2011

Sumitomo Chemicals

18.3

estimated (business year April - March)

LG Chem

16.1

Toray

15.5

BASF

14.9

adjusted to changes in IFRS: 12.5 bn

Source: Deutsche Bank, BASF, company reports

Deutsche Bank AG/London

Page 45

21 March 2014
Chemicals
China Chemicals Tour

Strong investment focus in Asia/China. BASF remains committed to the region and
has already created a strong R&D network across the Asia region to capitalise on
developing products for the local markets. BASF already has 9 R&D centres in the
region. Capex remains high with the company having spent Euro 4bn in the region from
1992 to 2001 and then a further E6bn from 2002 to 2012 around 50% of this has been
invested in China. Management is now planning Euro 3bn of capital spend 2013-2017
(around 30% of capex for the chemical businesses). Major investments in the region
over the past 20 years have been Kauntan (Malaysia), Nanjing (China) and Caojing
(China) with the three large planned investments being Nanjing (expansion), Dahej/India
(world-scale specialties plant) and Chongqing (an MDI plant in 2015). The development
of a world-scale specialties plant in Malaysia (Kuantan) has been stopped (due to a lack
of economic rationale for BASF) but the company remains committed to further
expansion of the Nanjing site. Despite ongoing strong investment regional management
still targets earning a premium on its cost of capital for the region.
Figure 71: BASF has a strong production network in Asia and China

Source: BASF

Bold CAGR sales targets for China (11%) and Asia (9%) by 2020 whether they are
achievable should not detract from strong growth on offer. In China mgmt expects
their relevant market to grow at 7% pa to 2020 but plans to outgrow this with targeted
sales in China of E12bn by 2020 (from E5.1bn in 2012) implying a CAGR of 11%. This
target is bold but mgmt feels the business has the potential through the strong
investments, strengthening local R&D and pro-active customer targeting. Small-scale
M&A is also likely to play a part. These targets could be achievable if everything goes
right but we prefer not to assume this in our DCF and long-term forecasts (mgmt
accepts these are challenging targets but the aim is to refocus regional workforce).
Figure 72: Euro 12bn of sales in China by 2020 (from Euro
5.1bn in 2012) implies a CAGR of 11%

Figure 73: Euro 25bn of sales in Asia by 2020 driven


predominantly by organic growth

14
12
10

>E10bn

>E2bn

New Sales
Target:
E25bn

E12.5bn

4
2
0
2012

2020
Sales (Euro bn)

Source: BASF

Page 46

2012 restated

Organic
Grow th

New Business
& Acquistions

2020

Source: Deutsche Bank, BASF

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Capex expansion programme should not detract from value-creation in the region. To
fund the growth expected BASF is planning several large investments in the region
(particularly in China) with a total spend of Euro 10bn in Asia (including JV partners
share of approximately Euro 2bn) of which approximately 50% is earmarked for China
specifically. This programme is targeted to raise the level of locally produced product as
a % of the region's sales from 54% in 2012 to 75% by 2020. Key with all expansion
plans is whether the group can deliver a return and this was the exact debate over
Nanjing back in 2004. While data is limited on regional returns we estimate that China
has been able to exceed its cost of capital in 2010/2011 with 2012 and 2013 appearing
to be broadly in-line. With profitability in the region seemingly depressed by some
cyclical pressures in certain chains (e.g. caprolactam, acrylic acid), the planned cost
cutting and expected good top-line growth means that despite the strong investment
plan we would expect China (and Asia) to be able to contribute to our forecast
improvement in BASF group ROCE over the next five years, even if China's economic
growth rate remains at more subdued rates than in the previous 10 years.
Figure 74: The expansion of the Nanjing site will result in

Figure 75: BASF investments in Asia (Euro, bn)

some new product lines being added to Verbund network


plan**

actual*

~10

10
7
5

5
BA SF share:
~75%

BA SF share:
~80%

0
1993-2002
Capex p.a
0.5
Kuantan
Milestones
(Malaysia)
Source: BASF

2003-2012
2013-2020
0.7
1.25
Chongqing/Maoming
Nanjing
(China), Kuantan
(China)
(Malaysia)

Source: Source: Deutsche Bank, BASF, * Investments 1993-2012 incl. partners and incl. intangibles **
Investments 2013-2020 incl. partners, post IFRS 10 & 11, excl. intangibles

Profit generation has not been strong enough an increasing focus on the cost base.
There has been a clear shift over the past two years in how BASF has been focusing its
efforts within Asia and particularly China. This is all in response to the known threats
from local competition alongside the slowing of the rate of GDP in the region
(compared to rates seen in 2000 decade), maturing of the company's business, as well
as the on-going high cost inflation (particularly labour). While the commitment to invest
in large plants (where they have some technology edge) is still there the group is
increasingly turning to "self-help" in the region to drive profit growth at a faster rate
than sales growth. Management is targeting E1bn of cost savings in Asia by 2020.
Asian competition increasing so BASF is moving further downstream and increasing
regional R&D to differentiate product offerings. Asian players have been gaining
market share with their global chemical share increased from 21% in 2006 to over 30%
currently. Their higher exposures to high-growth Asian markets in addition to some
feedstock advantages have been the key drivers, but we also note that many of the
larger names have focused heavily on improving their production methods and
resulting end-product. This will continue to be a threat to Western companies abilities
to generate profitable growth in the region. Mgmt was open in discussing the
increasing pressures from local players, who often have different economic targets (less
capital discipline) in addition to some preferential access to raw materials. However,
mgmt believes their increasing focus on differentiated product offerings (more
downstream, industrial specialties) as well as better customer targeting through R&D
will ensure that they are able to return to a trend of market share gains in their focus
markets.
Deutsche Bank AG/London

Page 47

21 March 2014
Chemicals
China Chemicals Tour

Figure 76: Dynamic industrialization drives sales- BASF


will generate annual sales growth above SRM growth

Figure 77: BASF industry teams focus on ten important


industries

Figure 78: BASF expanding research capabilities in Asia


Pacific with new R&D centers

Figure 79: Global Top 100 Chemical Companies (US$ bn)

Source (ALL): BASF

Improving recognition of intellectual property in China. Low recognition of intellectual


property has historically been a problem in China and a key factor preventing many
companies (particularly more downstream names) making material technology-based
investments in China. However, BASF has experienced limited problems in this area
and sees three issues supporting this trend: 1) credible JV partners (like Sinopec) do not
pose any threat to intellectual property due to their own reputational risk, 2) Chinese
officials are acutely aware that this remains a key stumbling block for many Western
companies to invest in the region, which has already resulted in a step-change in the
legal awareness of intellectual property, and 3) Chinese state entities are increasingly
looking to develop their own R&D so are also pushing for more protection the majority
of legal patent disputes in the region are now between Chinese companies.
Shifting the focus closer to the consumer and starting to move inland. BASF
management believes (we agree) that the straight bulk chemical markets are becoming
more competitive and will continue to do so in the coming years and that large-scale
upstream investments (that are not integrated into downstream specialty products)
make limited economic sense. This view is underpinned by the large planned
expansions of Chinese ethylene crackers over the next few years, alongside the planned
expansions in Middle Eastern crackers and now planned expansions in North America
on the back of shale gas. Instead, BASF will focus on developing more value-added
products that are back-integrated into current manufacturing (such as specialty plastics,
specialty chemicals, catalysts, etc.) and have high barriers to entry (through capital,
technology or customer relationships). As a result, management sees little reason to
invest in another large integrated petrochemicals site (as seen in Nanjing) and has no
intention of expanding into coal-to-chemicals.
Page 48

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Oversupply in MDI PU, but discipline should support industry margins. BASF is
planning an MDI facility at Chongqing, a big move into the inland regions where we
expect government stimulus to continue to be invested. We note that the level of
scrutiny by local and national government on energy efficiency, water treatment and
pollution controls should not be underestimated; this has caused a modest delay to the
plant but BASF is confident this will come on-stream in 2015 (previously 2014). Clearly
this is a bold investment as was Nanjing and while the visibility on the ROCE for the
investment may be quite low, we see this as BASFs benchmark investment to provide
the group with access to the strong growth potential in the western China region.
BASF, Bayer and Yantai all have strong plans for further expansion in MDI and none has
suffered any major technical problems, with all having been in the industry for many
years. While we see MDI as a high growth product BASF, Bayer and Yantai all have big
expansion programmes. However, we note that after meeting all of the main producers
of MDI, there is some clear flexibility in the exact timing of start-ups (Bayer has delayed
to beyond 2016, BASF to 2015) and companies are likely to be disciplined in how
quickly they ramp up production. This should mitigate margin pressure and most likely
result in flattish margins for the next few years through this build-out phase. We also
note that Bayers low-cost production site will help offset some of this as will BASFs
inland strategy (its 400kt investment is in the Chongqing region and getting product
from the sea regions inland is not going to be easy). Yantai is benefitting from low-cost
finance (please see the feedback section following our meeting with Yantai).
Figure 80: Planned MDI polyurethane expansions in China
As a % of 2013 global
MDI PU capacity

Company

Plant location

Year of start-up

Size (kt)

Bayer

Caojing

2013

150

2.5%

BASF

Chongqing

2015

400

6.8%

Yantai

Ningbo

2014

300

5.1%

Yantai

Yantai

2014

600*

10.2%

Bayer

Caojing

Post 2016

500

Total

1,950

8.5%
33.1%

Source: Deutsche Bank estimates, company data. * closure of a 200kt plant and will be replaced by an 800kt plant

Malaysian and India also regional hubs. BASF has a Verbund site in Malaysia (at
Kuantan) as a JV with Petronas (60/40 in BASFs favour) that started up in 2001. BASF
signed a MOU with Petronas (in Dec 2010) to look into a new world-scale specialties
chemicals plant but has decided not to proceed due to a lack of economic rationale for
BASF. The group is looking at an expansion in Dahej (India) for specialties likely to
come on stream in 2015.
Management has experienced limited issues in relation to employee turnover,
engineering access and power outages. The current employee turnover rate for BASF
in China is running at approximately 2% per annum, well below the 10%+ industry
average. Wage inflation is running at around 10% per annum. A strong local brand
name and an active policy to increase the level of locals in senior management
positions are helping in this regard. 95% of BASFs Asian employees are locals while
60% of Asian management are locals. Management has reiterated its previous
comments that it continues to see very limited problems with access to construction in
China and feels that its strong track record in the region and healthy JV relationships
continue to support a greater ability to get things done in the region. Finally, BASF has
experienced no issues with energy shortages (brown-outs) at its plants, and with a
policy of maintaining back-up generators at all main sites the risk of disruption remains
low.

Deutsche Bank AG/London

Page 49

21 March 2014
Chemicals
China Chemicals Tour

Clariant (Hold, Target: CHF 12): Looking to increase scale in the


region and helping customers move up the value chain
We met with Jan Kreibaum, President of Region Greater China & Korea. Jan was
appointed to the position on 1 September 2013 and has previously held senior sales
and management positions at companies such as BASF and Ciba over the past 20 years
with 18 years experience in Asia.
Clariants first office in China was established in Shanghai in 1895 as part of the
Hoechst organisation. Through the Sandoz part of the business the first office was set
up in Beijing in 1979. China (alongside India and Brazil) remains one of the three growth
regions within the third pillar of the groups growth strategy (Growth dynamics in
emerging markets).
In 2011 Greater Chinas chemical market amounted to $936bn, the largest globally. By
2020 Clariant estimates that the Chinese market will double to $1737bn growing at 7%
CAGR and accounting for 60% of global demand growth in chemicals in the next
decade. With growing urbanisation and rising middle class in China, we see this longterm growth potential as realistic.
Figure 81: China (largest global chemicals market) will account for 60% of global
demand growth in next decade

Source: Clariant

In 2013, Clariant sales grew by 10% to CHF 484m in China with the target being GDP
growth or above. China sales in 2013 were equivalent to 8% of group sales but
management wants this to be well above 10% of group sales and believes it can be
achieved through organic growth, without the need for M&A. Margins in China are
similar to the rest of the group, so this growth will not be dilutive. There has already
been good progress on this front and the proportion of sales derived from China has
increased from 3.5% in 2005 to 4.5% in 2008 and 8.0% currently. The company has
over 14 sites in the region (a reduction from over 20 previously as they focus on
consolidating hubs) and approximately 1350 employees including discontinued
businesses. Of sales made in China approximately 50-60% are manufactured locally and
this ratio is expected to steadily increase. Management estimates that approximately
30% of the companys sales in China end up being re-exported, particularly to North
America.

Page 50

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Broad footprint, regional hubs starting to be developed. Figure 82 details the regional
footprint of Clariant in China, though some of these sites are just office sites rather than
pure production sites. Clariant has in the past had a number of production sites and no
clear hub in the region but in the past year and with further investments the scale has
been enlarged in the Eastern regions to start replacing imports from Europe (and to a
lesser extent the US). Management is focusing on developing multi-purpose plants to
further consolidate production in the future. There is no divisional breakdown of the
business in China but management noted that the split between business areas is not
dissimilar to the group overall. The highest exposure to China is in Plastics & Coatings
then Care Chemicals and Natural Resources with the smallest exposure being Catalysis
& Energy.
Figure 82: Clariants regional footprint in Greater China

Source: Clariant

Underrepresented in the region but plans to expand. China accounts for 16% of
global specialty chemical demand but Clariant only generates 8% of its sales in the
region with a target of 10% of group sales in the future. There are three key areas of
focus for expansion:
1.

2.

Localization:

Local sourcing and local production to reduce cost, shorten lead time and
raise brand awareness.

Establishment of local technical service intensifies relationship with


domestic customers.

Market Orientation:

Improve collaboration across BUs to pursue cross BU sectors e.g. autos.

Prioritize products that match Chinas needs e.g. specialty chemicals.

Enhance local marketing and sales skills.

Work closely with government bodies and industry associations to help


shape product specifications and environmental standards.

Deutsche Bank AG/London

Page 51

21 March 2014
Chemicals
China Chemicals Tour

3.

Innovation:

Increasingly invest in R&D to serve the Chinese market

Being trusted partners for Chinas indigenous innovation in sectors that


have backing from government ministries e.g. electric vehicles, new
energy technologies, agriculture.

Enhance contacts with local research institutes and universities.

Figure 83: Global specialty chemical sales by region


(2013). China accounts for 16%

Figure 84: Clariant sales by region (2013). China accounts


for approximately 8%
RoW
22%

RoW
22%

Europe
38%

Europe
27%
China
8%

Latam
8%

China
16%

Latin
America
15%

North
America
27%

Source: Deutsche Bank estimates. China includes Taiwan, Macao, Hong Kong

North
America
17%

Source: Clariant

Selective growth plans for the region. Management is confident in its growth plans for
the region to take the percentage of sales for China to over 10% of the group total. They
are focused on organic growth but have not ruled out some smaller M&A and they are
continually evaluating opportunities in China in conjunction with the various BUs. For
both M&A and organic growth they are being selective in where they want to grow to
enhance the margin. When the various business plans are produced and examined,
market share is not the focus, rather quality growth.
Overcapacity in China is an issue but Clariant is trying to be as differentiated as
possible. Management accepts that overcapacity and commoditisation within
specialities is an ongoing threat and with some local competition also improving
product quality as local government regulations focus producers into better-quality
production this is becoming an additional pressure factor. In the past management
has exited some businesses that were no longer viable (such as optical brighteners,
anti-oxidant additives). However, Clariant feels this negative impact of commoditisation
can continue to be offset by growth from stronger penetration of the Chinese market
and a further focus on premium product to customers looking to improve their own
production quality this appears in line with the 12th Five Year Plan to increase the
quality of Chinas production output.
Activity at the start of 2014 better than the start of 2013. Consumer demand has
slowed down but was still strong through 2013. It was still early post Chinese New Year
but management noted that activity levels in January 2014 were above those in 2013.

Page 52

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Croda (Buy, Target: 2850p): Increasing focus on China


We met with Sean Christie, Group Finance Director, David Barraclough Vice President
Asia Pacific and Dr. Sherman Chau, Managing Director, Croda China. Crodas presence
in China increased substantially in 2013 with the SIPO JV and the company now has
one manufacturing site and six sales offices in the country. This is in-line with the
increasing focus on both Asia and Latam with the establishment of Management
Boards in the two regions. Figure 85 provides a summary of the trends that should
drive growth in the region.
Figure 85: Trends driving growth for Croda in China

Source: Croda

Majority of sales in China are in Consumer Care with 60-65% coming from this division
and 35-40% coming from Performance Technologies and Industrial Chemicals. Croda
does not release China sales but we estimate that sales from China represent 3-4% of
group sales. Most business areas are represented in China including Personal Care,
Crop Care, Health Care, Home Care, Polymer Additives, Lubricants, Coatings &
Polymers, Geo Tech and Industrial Chemicals.
Figure 86: Croda geographic breakdown of sales

LATAM
11%

Other
emerging
markets
7%

W. Europe
38%

Asia
18%

Figure 87: Croda Asia Pacific geographic sales


Singapore Others
5%
4%
Malaysia
5%
Indonesia
5%
Australasia
5%

India
21%

Thailand
7%

N. America
26%
Source: Croda

Deutsche Bank AG/London

South
Korea
8%

China
21%

Japan
19%

Source: Deutsche Bank estimates, Croda

Page 53

21 March 2014
Chemicals
China Chemicals Tour

Crodas China sales grew high double digit in 2013 despite the slowdown in growth
overall for the country. This was driven by much of Consumer Care with good growth
from all three business units, Personal Care, Crop Care and Health Care. Most of this
growth was volume growth with only some modest pricing. Croda is underweight
Performance Technologies in China relative to other regions and that was part of the
rationale behind the SIPO acquisition in 2013.
The key driver of the personal care market is the growing middle class with rising
disposable income. This is now penetrating beyond the tier one cities and further
inland. Croda has moved with its customers, focusing on serving the multinationals as
they grow in the region but also supplying the larger local producers, which are very
fast moving as they need to react quickly to compete with the MNCs. Local players are
in general becoming larger with the some of the smaller ones falling away and
becoming more important for Croda in China.
The China crop care market is an opportunity given the supportive trends, with
increasing polymeric surfactant demand to increase emulsion stability and
environmental protection (growing focus on the environment in China). This green
theme is increasing with a desire for water-based formulations in all sectors. The key
drivers for the sector in China remain an increasing requirement for food and in
particular oil seed crops (increasing yield). Government legislation is driving the
development of more environmentally friendly formulations (water based rather than
solvent based).
SIPO acquisition increases presence in China. SIPO was established in 1993 and is
located in Sichuan province with new production facilities built in 2011. Croda bought a
65% stake in a JV with Sichuan Forever in 2013 for a consideration of 41.3m
(including 11m of debt). It specialises in fatty acids and their derivatives and had sales
in 2012 of 28.0m and EBITDA of 3.1m. Management expects SIPO to remain below
the group margin for some time, being a 2-3 year margin improvement story, but it
expands the footprint in Asia and brings good manufacturing assets into the group.
Sales come mainly from the more developed eastern and southern parts of the
country. The trend in the eastern coastal region, which has developed first, is for fixed
asset investment to moderate and retail sales to rise with the middle class population
increasing. The majority of Crodas sales in China are made in the more developed
southern and eastern regions. Croda has six sales offices in and one manufacturing site
in China with 301 employees and over 1500 customers.
Figure 88: Sales by region in Greater China

North
10%

Taiw an
12%

Figure 89: Sales by market segment in Greater China

West
3%

South
40%

Perf .
Technologies
& Industrial
Chemicals
40%
Consumer
Care
60%

East
35%

Source: Deutsche Bank estimates, Croda

Page 54

Source: Deutsche Bank estimates, Croda

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Growth strategy in China is to move inland and increase indigenous innovation. The
growth strategy involves moving with customers and the company will put sufficient
sales resource on the ground to deal with that. In particular the SIPO acquisition helps
with this move being located reasonably close to Chengdu. There is R&D in China by
way of technical service centres in Shanghai and Guangzhou. The cost for these is
relatively low and Croda is now making additional investments to expand capabilities.
This is all designed to enable greater proximity to customers with local products for
local markets, meaning fewer missed opportunities. The company is also looking to
develop local talent and at the same time maintain the culture of the company as it
expands further.
China is still primarily a sales operation for Croda with little local manufacturing,
which means the margin for China alone is lower than the group margin, although
when manufacturing and selling is taken into account it does not dilute the overall
group margin. Manufacturing will increase with the acquisition of SIPO with initial
focus on Performance Technology products such as high end slip additives for the fast
growing consumer packaging market.
There is an increasing move towards greater sustainability in China which plays to
Crodas strengths, although it is still early days in comparison with more developed
markets. The company is able to offer 100% green solutions but also add more
petrochemical content to it if customers specify that. Pricing is similar to other regions
in that Croda does not increase prices just because it is able to; rather, these are
increased when raw material inflation makes it necessary, although these are currently
reasonably benign in the region.

Deutsche Bank AG/London

Page 55

21 March 2014
Chemicals
China Chemicals Tour

DSM (Hold, Target: Euro 47): Focusing on consumer growth


We met with Weiming Jiang, President of DSM China, at DSMs headquarters in
Shanghai. DSM first began trading in China in 1963 with a trading license for urea. The
companys first representative office was opened in 1993 with the first production
facility opened in 1995. Weiming highlighted that DSM is well positioned to benefit
from developments in China including a greater focus on sustainable growth, healthier
living standards and the anti-corruption campaign. DSM is well represented in the
region with a full spectrum of products from Nutrition, Pharma, Performance Materials
and Polymer Intermediates.
Overall developments and trends in China remain supportive to DSM. Management
noted that for 2013 Chinas GDP was 7.7%; slightly above the governments target of
7.0-7.5%. Investment remained a key component of Chinas GDP while consumption
weakened despite an increase in domestic consumption being a key goal for Chinas
leaders. Management noted that 2014 presents a mixed picture with some observers
expecting GDP above 8% and others seeing the 7.5% target as already stretched. DSM
expects at least 7% but various risks were highlighted including Chinas financial
situation with respect to non-performing debts and the situation around shadow
banking.
In 2013, DSM China sales were $1.7bn (c.13% of group sales), flat on 2012 as growth
in Nutrition was offset by weakness in the PA6/caprolactam chain. Nutrition sales
growth was strong at 20% driven mainly by Human Nutrition and Health although
Animal Nutrition and Health also grew double digit. Polymer Intermediates sales
declined due to lower caprolactam prices. The company is targeting $3.0bn sales by
2015. Management provided no EBIT numbers for the region (EBIT is done by business
unit not by country within the group). DSM has approximately 3400 employees in
China and 25 manufacturing sites, shown in Figure 90.
Figure 90: DSM locations in China

Source: DSM

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Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

China is a key market for Animal Nutrition given it is the largest meat producer
globally producing 50% of global pig meat and 18% of global poultry and production
continues to grow despite the impact of disease in poultry. DSM benefits from a
strong reputation in quality, traceability and sustainability which is very important
given the increasing focus in the country on food safety. They have continued to invest
in premix facilities with the acquisition of Bayers facility in Western China and have a
new ANH R&D centre in China.
Human Nutrition is fast growing driven by the growing middle class and their desire
to enhance health through supplements; demand for high quality infant nutrition and
growth in the general food industry. The focus is on both MNCs and also local
Chinese producers with the split between the two being 50/50. Vitamin performance
was relatively weak in 2013, especially vitamin E which has suffered from low animal
feed volumes and a speculation regarding a potential new entrant (Haixin) leading to
lower prices. Whilst there are some signs of improvement in meat production
management does not expect a positive impact to be seen in the Q1 14 results.
The focus on environmental and food quality has permanently increased. An
increasing focus on R&D in the region (the head office also encompasses a state-ofthe-art R&D facility for the local market), the hangover from the food tainting issues
seen in 2008, alongside greater environmental compliance has also increased the
focus on quality control by many of the larger buyers. DSM views these as strong
positives for its business as it continues to position itself as one of the premium
players in vitamins and nutrition in the region. In addition, the increasing tightening of
environmental regulations as part of the Five Year Plan (not just in the eastern regions
but also increasingly in the inland regions) has also resulted in DSM being able to
leverage its green credentials to further strengthen their brand. DSMs 3P strategy
(People, Planet, Profit) and the focus on sustainability are tangible examples of this
branding.
Polymer Intermediates pricing remains under pressure with increased supply.
Caprolactam has been weaker for DSM again in China in 2013. Utilisation rates
remained high (and are expected to in 2013 too) but pricing declined because of
increased supply to the market. This supply is partly in response to the high cycle
conditions in recent years and the availability of money to invest, which led to some
irrational investment decisions being taken at the time by some suppliers. DSM does
not see conditions worsening as there are a number of producers not making variable
costs and some shutdowns have been seen. DSM is aiming to reduce its merchant
position in the product so that it is less dependent on the commodity market. The
second line in Nanjing with 200kt capacity is still scheduled to come on stream in
2014; this is a JV with Sinopec (raw materials are secure and sourced locally) and
Sinopec is backing the new line with upstream investment of US$1bn. Management
believes that DSM is the only foreign company with advanced technology in China and
that they are the lowest cost producer.
Performance Materials underrepresented in China and should benefit from trends.
Longer term, management notes that penetration of its Performance Materials
products within the Chinese market remains relatively low. Autos remains a good
example with growth above that of auto growth due to the increasing content of
lightweight materials driven in part by Chinas desire for sustainability to combat
pollution. E&E is also an area where DSM could see high growth due to the continued
growth in tablets and communication devices including smartphones. Significant
growth from some of its higher value products could be achieved with very little sales
force investment.

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21 March 2014
Chemicals
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Increasing the focus on local management. DSM has demonstrated a clear


commitment towards increasing the levels of local management in the region. As a
fluent local speaker Weiming Jiang is keen to stress that the DSM culture in China is
to attract local talent by showing that locals can be promoted from within to senior
management positions. The increasing proportion of locals in management leads to
better connections with government and industry leaders. This has become more
evident with the organizational changes in the group with business group HQs moved
to Asia (with caprolactam to Shanghai) and innovation centres in China and India.
Strategic progress has been made in China to capture opportunities. In addition to a
greater focus on local talent there have been a number of investments including the
second caprolactam line at Nanjing, new plants for 6-APA, SSC and also composite
resins. The DAI JV with Sinochem and new 6-APA plant should drive growth in China
as both supply and demand in anti-infectives continue to move to Asia and other high
growth economies. DSM has continued to focus on increasing its presence in the
region which has taken the form of the DAI JV with Sinochem which utilises DSMs
strong technology in production allied to Sinochems distribution in the Chinese
market.
Move west following key end markets. In common with almost all companies DSM is
looking to move inland to the west to be close to where the growth and new markets
are. They are doing this by analysing the industries which are expanding there with
agriculture highlighted. This has led to building a pre-mix plant in Sichuan and DSM
sees the key strategically as positioning themselves in different regions. In addition
they have an animal testing centre in China which tests how pigs and chicken grow
with different types of food/premixes.
Anti-corruption measures are benefiting western companies such as DSM. These
measures are providing a more level playing field for the MNCs, especially with regard
to land rights, tax benefits and access to utilities and energy. Being seen as untainted
by corruption has made DSM more attractive to potential employees and customers
due to the appeal of a sustainable growth company and doing business in the right
way.

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Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Kemira (Hold, Target Euro 12) China focus increasing


Kemira has a relatively small presence in China. APAC sales amount to E140m which
represent 6% of group sales with China and Indonesia being the biggest countries. We
therefore estimate China sales as c3% of group sales. Paper makes up the bulk (70%)
of Kemiras activities in APAC with E100m sales in the region (4.5%) of group sales.
Management noted that 2013 was a weak year for the Kemira business in China which
declined largely due to price pressure. However the business started to improve
towards the end of the year and has continued to do so since the start of the year even
through the Chinese New Year. 2014 should therefore be a growth year, also helped
by the opening of the new Nanjing plant.
Paper in China

China is the biggest paper producing country in the world in terms of capacity
(10% bigger than the US which explains why the head of the Paper division
recently relocated to Asia. The company has a #2 position in Paper (wet-end
chemistry) in China (and Indonesia) however unlike in Europe the market share
is relatively small as this is a very fragmented market. However, management
explained that the market share is not as relevant in China as it is in Europe as
there are a lot of very old, out of date, small paper mills which do not compete
in Kemiras market. These old paper mills are polluting and as in many other
industries, the Chinese government has already been cutting down the
number of these old mills in several rounds.

Whilst growth in mature markets is driven by innovation with the company


having R&D hubs in EMEA and NA, growth in China (and Indonesia) is driven
by superior technical know-how and product offering (better performing
products) compared to the competition as well as local investments. In
addition, Kemira can cover a broad range of customers needs whilst smaller
competitors are only focused on one part of customers' needs.

The Paper industry was weak in China for most of 2013 (revenues declined for
Kemira) but management noted an improvement towards the year-end which
has continued since the start of 2014 even through the CNY.
General business

Kemira has two manufacturing sites in China, one in Yanzhou (JV with
Wilmar) and one in Nanjing in the Nanjing Chemical Industry Park (NCIP)
which provides easy access to raw materials and utilities such as electricity,
steam, natural gas, nitrogen, process water and wastewater treatment. The
chemical park also provides a good geographical position close to Kemiras
targeted customer base with several modes of transportation for logistics. The
production in Kemiras Nanjing site is ramping-up with 5 product lines: ASA
sizing, defoamers, deinking agents, polyacrylates and biocides.

The global R&D hub for tissue R&D is located in Shanghai. The company is
targeting high single digit growth in tissue.

Kemira has formed partnerships in China, the latest being with Stora Enso (JV
to promote water management in Guanxi Province in Sothern China) and
Wilmar (JV for the manufacturing of alkyl ketene dimer wax in China).

The company has a clear focus on 3 key areas to support accelerated growth
in the medium-term:

Deutsche Bank AG/London

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21 March 2014
Chemicals
China Chemicals Tour

Page 60

Sludge Treatment (M&I): In China Kemira has a relatively strong position


in sludge treatment which it sees as a growth driver. The 5-year plan is
indeed requesting sludge dewatering with a water content having to drop
from 80% to 60%.

Industrial Water and Wastewater: Kemira offers products which work well
with the membrane technology, the most widespread water filtration
technology used in China, e.g. antiscalant products which make
membrane filtration much more effective. A combination of membrane
and chemical products appears to be the best technology.

Shale Gas: Management sees Kemira as having a good technology for


share gas although shale gas in China is still at a very early stage.

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Lanxess (Hold, Target Euro 49): Growth strategy for China


We met with Ming Chien, CEO Greater China and Ulrike Weihs, Investor Relations.
Greater China represents 47% of Lanxesss sales in Asia and 12% of 9M 13 group
sales. Through the first nine months of 2013 Greater China sales experienced a slight
decline of 3% in the face of difficult market conditions. With quality of growth now
becoming more important than simply quantity of growth, sustainable development is
a key competitive advantage.
Figure 91: Greater China 47% of Lanxesss Asian sales, and were reasonably stable in the first nine months of 2013

Sales in Asia: China most important market

Rest of
APAC
53%

China
47%

Sales [Euro , m]
900
800
700
600
500
400
300
200
100
0

777

751
-26

9M 2012

9M 2013

Source: Lanxess, * including Mainland, Hong kong, Taiwan, Macao

Lanxess has a strong and growing presence in China driven by increasing


urbanisation and the need for rubber amongst other chemicals (mobility is a key mega
trend that will drive growth for Lanxess in China alongside further urbanisation). Figure
92 shows the location of Lanxesss offices, production sites and R&D centres.
Increasingly the focus is on both research and development whereas previously it had
been more development. Environmental regulations are also becoming tougher. There
is a strong focus on local expertise with an in house training program customised for
the China organisation. International assignments are used to increase the exposure
and experience in managing people internationally. Local talent development is
important and more than 80% of the management team are local hires. This focus on
staff development is evident in the low staff turnover in China which at 5.8% is
significantly less than the chemical industry average of 9.6%.
Figure 92: Location of Lanxess sites in China

Source: Lanxess

Deutsche Bank AG/London

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21 March 2014
Chemicals
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Chinas GDP growth is robust but challenges remain. GDP growth was 7.7% in 2013
which exceeded the target of 7.5%, although growth in 2014 is expected to slow
slightly. Existing problems have become more severe with overcapacities in steel and
cement, local government debt and a property bubble. However Chinas urbanization
process will continue with the rate of 50% behind that of 82% in the US and 91% in
Japan. By 2030 the urbanization rate will increase to over 70% which is expected to
push up domestic consumption.
Increasing focus on environmental issues. Chinas ambition has changed from
making sure the population has sufficient food and clothing to focus more on
environmental issues. The 11th Five Year Plan set a target to reduce energy use per
unit of GDP by 20% (the outcome was 19%). The 12th Five Year Plan requires a
reduction in carbon intensity per unit GDP by 17% and by 2020 China has expressed
its intention to have reduced carbon intensity by 40-45% (compared with 2005). There
was also been a pilot program launched for low carbon development in five provinces
and eight cities in 2010 and by 2015 China expects to have 1000 model eco-districts
and eco-towns.
Increased mobility driving growth in tyres and plastics for autos. One of the trends
that Lanxess should benefit from is increasing mobility with China forecast to
contribute 35% of world car market growth between 2011 and 2020 with a CAGR of
6%. This sales growth is likely to stimulate the demand for high performance rubber
which should benefit Lanxess. We see material scope for growth in the car ownership
structure in China as compared to US and Europe (Figure 93).
Figure 93: Car ownership is low in Asia compared to Europe or the US
Pessenger cars per 1,000 inhabitants

Dynamics

Population in millions

There are ~300m Americans


In the US, of every 1000
people ~800 own a car

There are ~3bn Asians


In Asia of every 1000 people
~40 own a car

Western Europe

United States

Asia

Solid long- term growth


potential from Asia

Source: Lanxess, Michelin

Opportunities in tyres for Lanxess because of growth in auto production. This has
positive implications for tyre demand, and with increasing volumes plus tyre labelling
Lanxess should stand to benefit. Chinas policy on tyres targets 90% of tyres being
radial by 2015, which will require the halo-butyl Lanxess produces. Re-treading is nonexistent in China but Lanxess expects this to come in time and it requires high quality
performance rubber. Management expects greater use of green tyres and tyre
labelling as part of the governments attempts to reduce air pollution and it noted the
Self-Discipline standard was launched 1 March 2014.
Butyl Rubber re-calibrating from extreme tightness. The halo-butyl plant in Singapore
started up in 2013. The decision to base the plant in Singapore rather than China was
made for a number of reasons. One of these was that key raw materials would only be
available from local producers and conditional on Lanxess entering into a JV to
produce butyl, and Lanxess did not want to bring the technology into China. Limited
capacity additions tightened the halo-butyl market over a number of years although
this is loosening with the addition of new capacity.

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21 March 2014
Chemicals
China Chemicals Tour

New butyl plants are being developed in China. Management mentioned that a
couple of Chinese competitors (Cenway and Panjin) have constructed their own butyl
plants and are developing the production process, although we believe that the quality
of product is not yet up to the same standard as Lanxess. The production process is
very complex and for Lanxess it takes three years to construct a plant and then a
further 3-6 months to ramp up production and they are very familiar with the process.
Lanxess believes that Chinese competitors will eventually be able to produce halo
butyl to the same standard but that this is some way off yet.
New EPDM investment in Changzhou would give Lanxess a clear number 1 position.
Management expects the EPDM market in China to grow by as much as 8% in the
coming years and whilst the globally the product is oversupplied, China has significant
demand for imported material. EPDM is mainly used in auto non-tyre applications and
Lanxesss products are especially strong in this market. It will improve its market share
with a new 160kt facility (c.10% of total global capacity). Ground breaking was
September 2012 and the plant is due to come on stream in 2015. Whilst the main
plant is in China, Lanxess will bring the catalysts in from Europe to protect its IP.
Strengthening its position in the growing western region. Lanxess opened an office
in Chengdu in December 2012 as a stepping stone in moving into the growing western
region. This is to take advantage of urbanization and the mobility trend in western
China. They are also following their customers west and the new office will enable
them to respond to their needs in a timely manner.

Deutsche Bank AG/London

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21 March 2014
Chemicals
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Linde (Buy, Target: Euro 170): Leading position in China


We met with Steven Fang (Head of China) and Sanjiv Lamba (Member of the Executive
Board). Linde is the largest industrial gas player in China (16% market share, 2013)
with its presence materially enhanced by the acquisition of BOC in 2006. In 2013
reported sales in China increased by 6.1% (ex FX) to Euro 1.234bn which equates to
9% of 2013 total Gas sales. Growth is expected to be at 15-20% per annum in the
coming years. While no profitability numbers are available, we estimate that
profitability in China is similar to the group level although RoCE is lower (but rising)
due to the scale of investment in the past few years. Management is confident returns
on new investments in China are in line with new contracts in other regions of the
world (and above current group average).
Figure 94: 2013 China industrial gas market share
(mainland only, excludes HK and Taiwan)
Linde
16%
Other
39%

Figure 95: Linde sales in Greater China have shown


strong progress over the past six years
1200
1000
800

Air Liquide
13%

600
400
200

Ying-De
13%
Messer
APD
2%
TNS
6%
2%

0
2007

Praxair
9%

Source: Deutsche Bank estimates, company data, Spiritus Consulting

2008

2009

Consolidated sales (Euro, m)

2010

2011

2012

Share of JV sales (Euro, m)

Source: Linde

A long history in the region. Linde (through BOC) was the first international gases
company to set-up in the region in 1986 although the Engineering business had been
operating earlier. Linde Engineering first built a plant in 1911 and by 1965 had built
over 100 plants the strength of Lindes Engineering brand in China should not be
underestimated. Linde Gas already employs over 4,400 people in Greater China with a
further 1,000 in Engineering. The Linde Gas business has around 70 wholly owned and
JV companies in the region and has over 200 operational plants. Like most companies
Linde has been focused on the three hubs of Shanghai/Nanjing, HK/Guandong and
Tianjin/Beijing but is now increasingly moving the footprint inland to ensure it is able
to access growth potential of these regions.
Figure 96: Lindes footprint matches the GDP potential of China

Source: Linde

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Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

2012-2013 win rates lower, as focus is on good ramp-ups and developing industrial
hubs. The number of new announcements in the past two years has been limited
compared to other Western peers although given the very strong win rate in 2010 and
2011 this appears a deliberate strategy from management to focus on the proper
implementation of new plants in 2013 rather than to over-stretch themselves. Strong
wins in 2010 and 2011 have been focused on chemicals with some steel across both
local and Western end-users.
Figure 97: Strong project pipeline in the region

Source: Linde

Figure 98: Recent start-ups in the region

Source: Linde

Chinese gas market offers strong long-term growth. Linde sees growth in the Gas
market driven by GDP but also the massive opportunities in energy management in the
region. Gas consumption per capital is expected to grow in the next few years but still
only forecast to be at a tenth of the level of North America by 2016 highlighting the
strong long-term growth potential of China.
Outsourcing the growing opportunity. The outsourcing potential is significant in
China although as with many gas companies the trend has been relatively slow in the
past few years given the cultural desire to own your own assets in the region.
Nevertheless as customers focus more on capital efficiency and as plant sizes are
increased the desire to outsource becomes higher. Where Linde Engineering has built
a plant this often gives them a strong advantage in being able to buy back the plant. In
the past 3 years Linde has been completed 4 site takeovers in China and given their
strong history in China and deep customer relationships we expect more opportunities
to arise (than for some other gas names). Linde (and AL) appear more successful in
this area than US peers.
Figure 99: Strong gas growth in China medium-term

Source: Linde

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21 March 2014
Chemicals
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Strategy to focus on largest customers. Lindes strategy for the region is to focus on
the key Tier 1 customers and work with them through their expansion programmes. As
shown below the customer list in the region is impressive and spans many end-users
and appears more diverse that some of its international peers, particularly US names.
Figure 100: A very broad customer list in the region
Industry

Key local players

Other international players

Oil & Petrochemical

SINOPEC

BP

BASF/YPC

SAUDI ARAMCO
EXXONMOBIL

Chemicals

Metallurgy

WANHUA

BASF

HUAYI

DOW

HANWHA

BAYER

TISCO

THYSSENKRUPP

GISE

VOESTALPINE

MANNSHAN IRON & STEEL COMPANY


BAO STEEL
Electronics

BOE

SHARP

RENESOLA

PHILIPS

YAGEO

NDK

HAIER

ASUS

Source: Linde

On-site remains the key driver of growth. Lindes business in China is heavily focused
on the tonnage business with around 70% sales coming from this. Merchant accounts
for approximately 20% with Cylinder the remaining 10%. Linde is focused on winning
early contracts with the tier one customers, then leveraging the on-site investment to
either gain a strong position in the merchant business (through piggy-backing of onsites) as has been done in the Ningbo area or to possibly also expand into cylinders.
We estimate that 40% of the start-ups in 2010-2012 for the whole of Linde Gas have
been in China alone, highlighting the scale of the investment in the region.
Management estimates that the majority of group capex will continue to be spent in
emerging markets (particularly China, India, Middle East) over next few years.
Merchant and cylinder expansion is now increasing. As with most gas companies we
note a growing willingness to expand further into the merchant and cylinder
businesses in some regions. As the businesses mature in the regions we see Linde
increasingly leveraging the on-site business and providing product into the merchant
and cylinder markets. This has traditionally not been an area of focus for the major
Western names but as infrastructure and knowledge of local markets grows this
appears to be a logical step to further leverage strength in local regions/industrial
hubs. We note that from discussions with Linde and global peers the contract terms
for the merchant deliver (and cylinder) tend to be similar to those use in Western
markets with price escalation clauses and take-or-pay agreements in place. We do not
see this move as likely to increase the risk profile of the businesses in the region. By
2020 Linde expects China to be the worlds largest packaged gas (cylinder) market.
Healthcare strong long-term growth potential. The Healthcare business maybe
small for Linde at the moment but the growth prospects in the group remains strong.
Linde is already present in 5 provinces in the mainland and has a dedicated Healthcare
team in place. Linde plans to use its already strong Healthcare platform in Hong Kong
where it has developed its Asian centre of excellence as a base to expand into the
mainland.

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Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Figure 101: Linde Healthcare a big opportunity in China

Source: Deutsche Bank, Company data

Critical to the on-going success of the gas business in the region has been the
leverage of Engineering. As Gas investments continue to become more complex (and
larger scale) the strong competence of Engineering should not be underestimated. As
can be seen in Figure 102 and Figure 103 the foot print of the Engineering business is
very impressive and gives Linde a lead-time advantage on new chemicals, refining etc
investments compared to its other gas peers who often have weaker Engineering
presence. Coal-to-olefins is a good example where of the current 50+ projects being
built or under discussion Linde Engineering is already providing key technology for 32
of these projects this will ensure that they are in a strong position to fully understand
the opportunities for the industrial gas market in these hubs.
Figure 102: Linde Engineering has a leading position in

Figure 103: The Linde Gas business also has a strong

China and a strong footprint

footprint in the region

Source: Linde

Source: Linde

Linde Engineering operates out of three bases in the region (Dalian, Beijing and
Hangzhou). Engineering for China is now almost all done locally which is providing
strong local support to customers, an enhanced ability to tailor the product to the local
market whilst lowering the cost base for Linde. In addition the recently opened gas
technology centre in Shanghai (Linde only has 2 others in Munich and North America)
is increasingly supporting local market gas application selling rather than just selling
the gas itself. Linde Engineering has already delivered over 70 ASUs to customers in
China in the past 10 years.

Deutsche Bank AG/London

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21 March 2014
Chemicals
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Local players becoming more competitive but only in the smaller sized on-site
contracts. Management noted the increasing activity by some local gas companies but
believes that the offering from these companies remains suited to smaller on-site
investments as the weaker technology and lower energy efficiency means they are not
competitive for the largest on-site and cluster investments. Over the past few years we
note that while the locals have been progressing steadily we continue to see a
noticeable difference between offerings from Western names like Linde and the locals.
Coal to chemicals is a big opportunity for the gas industry Linde more embedded
in the technology than peers. The investment opportunities in this area in the next 10
years will be immense and while most of the majors are trying to position themselves
for some of the growth, Linde seems to have a head start through Engineering
although win-rates in 2012 seem to favour Air Products as they appear to have been
targeting some selective investments. Linde prefer to be more selective, waiting for
the investments that ioffer access to future large industrial basins rather than standalone remote investments where the opportunities to make super high returns is
minimal.
Strong pricing focus in China, helped through the HPO programme. The HPO
programme continues to be implemented in China with management very heavily
focused on the pricing modelling (called LindePro) to ensure that ALL cost inflation in
the business is recouped through pricing improvements to customers. This is a bold
target, although management is very confident of achieving this.

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Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Solvay (Hold, Target Euro 108): Investing for growth


We met with Vincent de Cuyper, member of the Executive Committee of Solvay,
Michel Ybert (President Asia Pacific), Marco Martinelli (Director of Asia Growth and
Development Solvay Specialty Polymers), Pierre-Frank Valentin (Vice-President and
General Manager of Solvay Novecare in Asia- Pacific) and Pascal Metivier (Head of
R&D in Asia). The main focus of the meeting was Specialty Polymers and Novecare,
two fast growing BUs with a strong footprint in China, as well as R&D.
China represents 10% of Solvay sales. China represents one third of Solvays APAC
sales which represents c10% of group sales. This presence was reinforced in 2010
when Rhodia acquired Feixiang. The company currently employs 3000 people in
China, mainly locals with the same proportion of qualified people as in Europe and a
low turnover rate (half the industry average). Solvays China exposure should grow
further in the coming years due to investments currently under way as 50% of groups
total capex in the next few years is directed to APAC, with a larger portion in China.
The companys most important segments in China are Novecare (reinforced by the
Feixiang acquisition) and Specialty Polymers.
On current activity levels, management is confident and noted that the situation is
healthy although not booming. The year has started with good indicators. Customers
are showing very positive optimism in orders and forecasts and the company is seeing
some applications which have been weak in the past few years coming back.
Solvay to outpace the rate of chemical growth in China. The chemical industry in
China is expected to grow at 5% p.a. in the long-term, outpacing global and Asian
CAGR although this is below the historic growth rate. Management stressed this
targeted growth rate applies to the entire chemical industry whereas Solvay focuses
on faster growing specialty products. The priority for the chemical industry in China is
to move away from basic/commodity chemicals to specialties/value added products,
which is what Solvay is predominantly focused on in the country with Advanced
Formulations (Aroma Performance, Novecare), Advanced Materials (Specialty
Polymers, Rare Earth Systems), Functional Polymers (Engineering Plastics) and
Performance Chemicals (soda Ash & Derivatives, Peroxides, Emerging Biochemicals).
Figure 104: Long term global chemical demand

Source: BCG

Deutsche Bank AG/London

Figure 105: Chinese growth dynamics

Source: Deutsche Bank

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21 March 2014
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Solvay is investing in China. So far Solvay has been supporting most of the growth of
its Asian business from Europe and the US which is not sustainable. Solvays decision
to invest in Asia/China is therefore not driven by cost reasons (although they are lower,
they are increasing) but by the need to support the growth of its Asian business.
However, the company has been careful about the risk of overcapacity and decided to
phase its investments in order to protect its RoCE. For example, Changshou has been
a phased investment in two waves with the company concluding alliances (e.g. 3F) in
order to maximize capacity utilization. In addition, Solvay plays differentiation in order
to compete at the top. For instance in PVDF, the company has been alone in the highend (O&G) market for the past 15 years. In the middle (membranes), the market is
dominated by Japanese or global competitors only whilst in the low-end
(photovoltaic), there are 8-12 competitors. Management also highlighted that most
projects in which Solvay is involved in should benefit from growth of over 10% in the
next few years and which does reduce the risk of overcapacity.
Solvay APAC/China presence. 25% of Solvay group manufacturing sites are located in
APAC, predominantly in two segments the company is planning to grow: Advanced
formulations and Advanced Materials. Of the 15 R&D centers in the group, 4 are based
in Asia.
Figure 106: 29 state-of-the-art manufacturing sites in

Figure 107: 29 state-of-the-art manufacturing sites in

Asia Pacific

Asia Pacific and growing

Source: Solvay

Source: Solvay

Figure 108: Solid R&D setup in Asia-Pacific

Source: Solvay

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Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

1) Specialty Polymers in China: a broad range of high/ultra high performance polymers


In China, all products in the Specialty Polymers BU are high- (PESU, PPA, PTFE) or
ultra (PAEK, PEEK) performance polymers (see Figure 110) and the company has
ongoing investments in PVDF and FKM (which should be ready early 2015). The global
specialty polymer market is expected to grow at c8.5% CAGR (2013-2016). In China
Specialty Polymers serve well diversified and highly dynamic end markets resulting in
a superior growth profile, e.g. Healthcare, Energy, Smart Devices, Water &
Transportation growing at >10% CAGR. Figure 111 shows Solvays Specialty
Polymers response to specific issues of the Asian market.
Figure 109: Specialty Polymers net sales by end markets

Source: Solvay

Figure 110: Solvays unique solution portfolio

Source: Solvay

Figure 111: Solution capabilities addressing Asian market specifics


Asian market specifics
1. Main global production region for
Electricals, Electronics (E/E) and smart
devices

Specialty Polymers response


Widest offer in high-performance polymers for
E/E
Leader in several applications
Open innovation in close collaboration with
customers

2. Environmental concerns:
Purified/drinkable water
Emissions reduction

Offering high-tech innovative & sustainable


products
Water purification membranes
Light-weight materials for transportation

3. Growing population, urbanization and


purchasing power boosts local demand for
domestic products

Investing in local production capacity


expansion, complemented by import from EU
and US
Actively seeking for M&A in Asia: production JV
for TFE/PTFE in China

4. Local presence essential to support


customers expansion regionally

35% of our sales force in Asia today


Supported by R&I centers and technical
marketing capability

Source: Solvay

Specialty Polymers regional footprint. In China, the company currently has one
Specialty Polymer production site in Changshu (out of 15 globally) and one R&D (R&I)
center in Shanghai. The manufacturing capacity in the Asian region is expected to
triple over 2013-2016, with the majority of investment taking place in China.

Deutsche Bank AG/London

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21 March 2014
Chemicals
China Chemicals Tour

Figure 112: Significant local presence spurred by investments

Source: Solvay

2) Novecare double digit growth targeted


Novecare is part of the Advanced Formulations division (previously called Consumer
Chemicals). This BU is organised by market: Agro (surfactant to reduce the amount of
water used, increase efficacy of product, increase yield of seed), O&G, Industrial (metal
working, lubricant, mining activities), Coatings (e.g. paint additives) and HPC.
Novecare sales in China represent just over 50% of the BU sales in Asia (cE565m), of
which 75% are derived from Industrial (including Amines) and HPC.
Double digit EBITDA growth targeted. The company is targeting double digit EBITDA
growth for the Novecare BU globally, primarily driven by O&G and agro formulations
whereas the picture in Asia is different. Double digit growth is also targeted but some
markets (Agro, Personal Care and Coatings) are expected to grow faster than in the
RoW underpinned by the increasing middle class and the need to bring differentiated
solutions (eg automotive bitumen, mining, paint additives, hair care etc). The company
also thrives to continue gaining competitiveness through manufacturing excellence
and raw material sourcing.
Figure 113: Geographically well-balanced portfolio in
Asia and by end-markets

Source: Solvay

Page 72

Figure 114: Novecare well placed to benefit from Asian


market dynamics

Source: Solvay, * Contribution margin = Net sales variable costs ** Including 2 months of Chemlogics

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Novecare regional footprint. The BU has 5 plants covering the whole of China.
Amongst others, it provides amines back-integration for surfactants, cationic guar
derivatives for HPC expansion in Zhangjiagang and started-up a new specialty
monomer unit for Coatings in Zhenjiang in 2013. China also has a strong R&D hub
focusing on Industrial market, amine technology and process support.
Figure 115: Novecare strong regional industrial and R&I footprint

Source: Solvay

Leverage Chemlogics in China shale gas opportunities. O&G is currently small in Asia
but the company is planning to leverage Chemlogics (acquired end 2013) due to the
significant shale gas reserves existing in China. In addition, due to the different type of
geology vs. the US, a lot of equipment (not just chemicals) is needed to extract the
shale gas, the water needs to be recycled etc A significant number of very centralised
state owned O&G companies have already started to work on shale gas and are
opening to foreign companies. Solvay offers a broad portfolio of technologies and has
already started to work on special formulations than can be produced in various sites
in Asia. Management highlighted that Solvay recently received its first two orders in
China of the Chemlogics technology although it stressed it has been careful not to
include any upside from O&G in Asia in the roadmap to 2016 due to conservatism as
this is still embryonic.
Figure 116: Global Oil & Gas chemicals market poised to fast growth in Asia
longer term

Source: EIA, BP, SRI, Roland Berger, Solvay

Deutsche Bank AG/London

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21 March 2014
Chemicals
China Chemicals Tour

3) R&D in China
Strong and continuing R&D investments in Asia/China. Solvay has always had a strong
focus on Research & Development activities in Asia Pacific region. The company has 4
large Research & Investment (R&I) centres and 9 GBU laboratories in Asia with 270
employees at the end of 2013. The company targets to double this employee count by
2016 and targets to have a capex of >E20m in the next 3 years. Solvay has invested
heavily in R&I and is among the leading players for R&I intensity in Asia Pacific (see
Figure 118). Solvay has transformed from being a technical supporter when it first
started its first laboratories in Shanghai in 1997 to global innovation centre in 2012.
Figure 117: Increasing personnel base

Figure 118: R&I intensity by company in Asia

500
~2x

400
300
200

~4x

100
0
2008

Source: Solvay

Figure 119: Solid R&D setup

Source: Solvay

2013

2016

Source: Solvay

Figure 120: Research & Investment centre Shanghai

Source: Solvay

Collaboration with top scientific partners. Solvay has set up a unique international
collaborative lab in China (a consortium of 6 top level scientific partners) with 3 key
priorities (delivering breakthrough Eco-Innovation projects, supporting sales growth in
Asia and carrying out high-level research to develop a strong academic network).
Solvay has ambitious research targets in the areas of bio-based surfactants,
monomers, solvents, new catalytic concepts, CO2 activation, water retention & seed
treatment. This fast pace of Research & Investment has provided an advantage to
grow business faster and bring innovative solution to the regional customer therefore
bringing diversity, open innovations, competencies and an edge over its competitors.

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Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Figure 121: Key laboratories in Asia

Source: Solvay

Differentiation a must to fight against local competition. Chinese local


manufacturers are able to deliver good technologies. Where Solvay differentiates is on
formulations, technical service, customers proximity and application. Differentiation
requires constant innovation. When a high margin segment is attacked by too many
competitors, the company needs to innovate and move on to a superior
technology/application.
Solvay continues to differentiate. eg mobile device: Chinese competitors gain mkt
share to giants. Solvay used to play with the giants but also play with the locals who
become bigger.

Deutsche Bank AG/London

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21 March 2014
Chemicals
China Chemicals Tour

Syngenta (Buy, Target: CHF 400): A leading position in a


fragmented market with strong growth potential
We met with Pierre Cohadon, China territory head at Syngenta. We also had the
opportunity to do a field trip and visit some distributors, fields and an Experiencing
Center in the shanghai region. We have discussed some of the background
information that Syngenta provided on the Chinese agriculture market in pages 21 to
29 but below have also highlighted the comments of specific relevance to Syngenta.
Leading position in a highly fragmented market. Syngenta currently derives
approximately $335m revenues in the region which represents 2.3% of group sales
although the long-term potential within the region is material. With a market share in
excess of 7% in the crop protection market in China, Syngenta is the leading player,
followed by Dow, Bayer, Monsanto, DuPont and BASF. R&D companies account for
c32% of the market with Chinese locals accounting for the remaining. In Seeds, it is
the #2 player after DuPont but before Monsanto, and is mostly present in Corn and
Vegetables seeds. The company has only a limited presence in rice and specialty
crops.
Figure 122: Syngenta is the largest player in crop protection with 8% market share
Syngenta
8%
Dow AS
6%
Bayer
4%
Monsanto
3%
Dupont
2%
BASF
2%
Others
68%

FMC
2%
Rest MNC's
5%

Source: Deutsche Bank

Syngenta has been growing strongly in China. Syngenta China sales have been
growing at a CAGR of 20% in the last six years. The rate of growth has been highest
for Lawn & Garden (67%, from a low base), followed by Seeds (31% CAGR 2007-2013)
and Crop Protection (19% CAGR 2007-2013). In 2013, the company estimates that in
Crop Protection, it grew at approximately twice the c6% market growth rate (we
estimate c12%). Syngenta has a leading position in almost all the markets in China.
Syngenta has higher presence on the east coast of China with good growth potential
also in inland China.

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Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Figure 123: Syngenta China Sales (million USD)

Unit: Million USD

2007

2008
CP

2009

2010

Seeds

2011

2012

2013

Law n & Garden

Source: Syngenta, Deutsche Bank

Figure 124: Syngenta seeing strong growth in all key markets

Source: Syngenta

Syngenta targets 20% sales CAGR through 2018. Syngenta targets to deliver 20%
sales CAGR in the next five years (almost 3x of agrochemical market CAGR anticipated
through this period) driven by following factors:

7% sales CAGR contribution from existing portfolio based on continuous


demand generation activities.

7% sales CAGR contribution from new launches as the company targets to


launch ~20 new CP products and 70+ new vegetable seeds varieties in the
next five years

6% sales CAGR contribution from new CIS offers.

Deutsche Bank AG/London

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21 March 2014
Chemicals
China Chemicals Tour

Syngenta active with the government on the Viptera grain issue. Viptera and
Duracade, two of Syngentas GM corn traits have not been approved in China yet,
fostering some of the leading US grain traders to stop buying US grain containing
these traits. In China, the request for approval cannot be submitted until the trait is
approved in the US. Viptera was approved in 2010 explaining why the approval
process (which takes on average 3 years) only started in 2010. The approval is given
by the Ministry of Agriculture following the scientific assessment from the Bio Safety
Committee. The Chinese government is very careful to take into account public
opinion which is currently particularly sensitive to food safety issues, and is following
advice from scientists sitting on this committee. Syngenta has organised workshops
with scientists on the committee and the situation is progressing well. We therefore
believe an approval this year (towards H2) is not completely out of reach.
Syngenta investing $70m to uplift local supply capability and improve profitability.
Syngenta is investing $70m to uplift local supply capability and improve profitability in
China. The proportion of products locally produced should increase from 25% today to
80% upon completion of this expansion programme. The company is investing in a
local CP formulation capacity in the Nantong site which is likely to drive $24m savings
per annum by 2016-2017, from the avoidance of formulation bulk import duty,
avoidance of formulation drumming, fixed cost savings, avoidance of AI export nonrefundable and logistics cost savings. The company has also built a new 500 ton/year
vegetable seeds processing plant in Shandong which has built-in flexibility of future
capacity expansions to support the business growth.
Priority to increase efficiency and profitability in 2014. Local management has been
given clear targets to increase profitability. The sales force is now heavily incentivised
on profitability, pricing and working capital, not just on sales anymore. These targets
are stricter than usual given the weakness the group has experienced in 2013.
Syngenta to benefit from integrated offers in 2014: Syngenta expects to generate
higher benefits from the integrated offerings in 2014. Some of the integrated solutions
where the company is particularly optimistic on include GroMore on rice, OK tuber:
more potato, less work, MaxVeg (simplified CP solutions for key crop stages to
achieve more from less) and corn: start right, high yield offerings (refer Figure 125 for
more details). Syngenta is aggressively using crop expos for promoting integrated
solutions on all major crops in China and their own Experience Centers for Crop
Solutions display and farmers trainings.
Figure 125: Syngenta to start benefitting from integrated offers in 2014

Source: Syngenta

Page 78

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Field trip in Shanghai. We visited the Chingming island, which serves as the
agriculture base for Shanghai. The Shanghai crop area represents 0.06% of Chinas
planted area. Vegetables and rice are the main crops followed by wheat and barley. It
is a relatively small agricultural market in China however it is heavily subsidised by the
government (government purchases account for 50% of the total market) due to high
safety and quality requirements given the region is a heavily populated area. Syngenta
shanghai business has been steadily growing, at a 20% CAGR since 2009. We visited a
local flagship distributor which sells 35% of branded products, of which 18% are
Syngentas. The store sells 140 brands in total. In a nearby smaller shop we visited,
branded products represented only 5% of all products sold.
Seeds more complicated and difficult to penetrate but big potential. The Seeds
market is highly fragmented and also highly complicated driven by the governments
desire to encourage local champions. FDI restrictions force foreign companies to
invest in Seeds only through JVs with a minority ownership (49-51). R&D has to be
integrated at the JV level implying significant IP risk. However, the market potential is
very significant (Syngenta sees it doubling in 15 years with 8-10% CAGR) and foreign
companies have to adapt to this environment. In order to penetrate the market
Syngenta set up in 2007 a 49-51 JV with Sanbei, a leading Chinese corn seed
company. Corn is the largest and a key strategic crop in China due to growing protein
consumption however yields are low (40% below the US). Sanbei has strong
commercial operations and an attractive product portfolio, which added to Syngenta's
expertise in corn breeding, is allowing the company to offer improved and broader
product availability for Chinese growers. Sanbei, as other local seed companies, has
been lacking innovation as R&D is done at the public institute level in China. However,
with the governments policy now encouraging companies to have their own R&D.

Deutsche Bank AG/London

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21 March 2014
Chemicals
China Chemicals Tour

Symrise (Buy, Target: Euro 39): Well positioned for growth


We met with Mathys Boeren, Senior Vice President Asia Pacific, Yee Heng Gan, Vice
President Flavour & Nutrition, Greater China and Jeff Yao, Vice President Scent &
Care, Greater China.
Symrise is the #4 F&F player in China. Headquartered in Shanghai, Symrise has been
present in China since 1982. It is the #4 international F&F house in the country. The
company has been outgrowing the market over the past 4 years and now derives Euro
110m of sales in China which represents 6% of groups sales. The company has 281
employees in China with an education level (university or above) of 70%. The company
has a production site in Shanghai (Jingqiao) with sales office in Guangzhou and
Beijing. It is currently investing E15m to increase the capacity if its Jingqiao production
site (project due for completion this summer). On current demand trends,
management highlighted business remains very solid. It noted anti corruption
measures have an impact on high-end alcohol, restaurants and tobacco but the
company has an immaterial exposure to these markets.
Market still relatively fragmented but MNCs catching up. The F&F market in China is
not as consolidated as the global market. It is dominated by local companies like Hua
Bao although global players are catching up with an overall market share > 45%.

The Chinese Flavours market is more fragmented than Fragrances. MNCs


represent 55% of the market and Symrise has a 6% share of the total market.
There are about 300 manufacturers of which 30 are sizeable. Over the past 5
years, MNC flavour houses have gained market share over the locals due to
recent food scandals and the desire from Food and Beverage manufacturers
to deal with non Chinese suppliers. Local flavour houses have experienced
volatile growth, highly dependent on their customer base. Symrise has grown
at a 13.3% CAGR in Food, 9.3% in Food & Tobacco.

The Chinese Fragrances market is dominated by international F&F houses.


MNCs lead in Personal Care whilst Locals lead in Household. Personal Care is
expected to grow particularly fast as increasing urbanization and aging
population in developing markets demand for better innovative products in
these segments. Symrise ranks 4th amongst MNCs with a 9% overall market
share. It is particularly strong in Oral Care where its market share amounts to
35% (In Oral Care, MNCs market share amounts to 65%). The company has
been growing at 16.8% CAGR over the past 3 years.

Figure 126: Symrise #4 in China Flavours market


(2013E)
Other
locals
23%

Givaudan
10%
IFF
9%
Firmenich
7%
Symrise
6%

Hua Bao
22%
Other
MNCs
17%
Source: Symrise, Deutsche Bank

Page 80

Hasegaw a
4%
Takasego
2%

Figure 127: Symrise #4 in China Fragrances market


(2013E)
Locals
17%

Givaudan
22%

Other
MNCs
9%
Hasegaw a
2%
Mane
4%
Takasago
6% Symrise
9%

IFF
16%

Firmenich
15%

Source: Symrise, Deutsche Bank

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

China growth potential outweighs the risks. Risks are significant in China, notably
due to numerous food scandals. However, these food scandals push locals to deal
with MNCs which is benefiting companies like Symrise. In addition, social
demographic changes should continue to drive F&F industry in China as rural to urban
migration gives rise to >300 Mio new consumers who cluster around cities. The
migration to cities translates to new consumption habits which increase processed
food consumption which lead to increased consumption of flavours. As a result, the
F&F market is expect5ed to grow at a c10% CAGR over the next few years.
Few new entrants in recent years. Given the strong growth potential, many new
players are attracted to leverage this very attractive market in the F&F space.
However, we note there have been very few new entrants in recent years due to high
entry barriers to flavour manufacture in terms of licensing restrictions, intellectual
technology and complex regulatory systems. Management foresees consolidation in
the market as small locals will merge to become bigger and increase their ability to
cope with barriers to entry. On M&A in China, the company stated that it would be
concerned with the likely regulatory issues. Some key food manufacturers are actually
taking smaller local players off their core list because of quality and reliability issues.
Symrise is exposed to a mix of global and local customers. The F&F market consists
of local and global customers. In S&C, global customers account for the largest
portion of the market whilst they are small in F&N as most local players focus on
Flavours. The company is very careful with the customers it is doing business with in
order to avoid being linked with food scandals (in 2011 the DEHP beverage packaging
scandal cost Symrise E6-8m high margin sales). Many are coming up with in-house
creation team or R&D people who can mimic flavours and challenge flavour suppliers.
Pressure increasing on suppliers. Symrise raw material sourcing is done globally due
to economies of scale and quality requirements hence the company does not benefit
from low cost local sourcing. In addition, increasing costs of tests and controls
(chemicals and natural precursors including air and water pollution) have been
minimising former cost advantages of local dubious suppliers. Food scandals and
adulteration cases force upstream suppliers to ensure proper tracing.
High margin market with more upside. Local management stressed that low income
does not mean low pricing. Even for small or mid-sized customers in China,
relationship, efficacy and reliability are key capabilities which come before the price in
the customers decision process. And although small Chinese locals may pay $50kg
against up to $300/kg for big multinationals, it is not due to a lower price but the fact
small locals use less product. Symrise also offers an online F&F library where small
customers can pick and chose off the shelf products which increases efficiency.
On costs, the company manages to keep them relatively low as employees are mainly
locals (95%). Labour cost is increasing but management stressed the company needs
high quality talents and returns on these higher salaries are significant. The regulatory
cost has also increased but management notes this is a global problem, not just in
China. The company has increased its regulatory team in China by . Importantly, it is
passing most of the increase in regulatory cost on to customers especially as
regulation not only come from the government but also from customers who tend to
have their own, even more stringent, requirements (e.g. need to replace some raw
materials).
The relatively small size of the business enables local management to exercise a strong
control on all P&L aspects and be very reactive when necessary such as in 2011 when
raw material costs increased sharply. Local management is satisfied that it has been
able to pass on the raw material cost pressure due to its strong relationships and very
frequent discussions with customers. The 4 levers the company is using to offset the
raw material cost pressure include reformulation, price increase, procurement
improvement and efficiency/scale.
Deutsche Bank AG/London

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21 March 2014
Chemicals
China Chemicals Tour

Management highlighted furthermore that the company has already invested in people
so leverage/margin upside has yet to come.
China Food & Flavours market. The Flavours market in China is estimated at E918m.
The Food industry in China has been growing at an average rate of 20-25% with strong
market presence from local and global manufacturers and brands. Major brands of
beverages and food products go through almost annual cycles of flavour improvement
to capture more market share or sustain existing customers.
The competition between food & beverage manufacturers and brands particularly in
the second and third tier cities has increased. Past scandals have also led to stronger
regulations particularly on the agricultural producers, food manufacturers, additives,
ingredient suppliers and food. For this reason Symrise only deals with the global
customers or the locals which are large enough and have strong expansion plans.
Overall, the big 4 flavour houses tend to deal with similarly big customers whilst local
players focus on smaller local Chinese food and beverage manufacturers.
Symrise combines local Chinese knowledge of customers and markets, local
operational excellence with its global research background and strengths in upstream
raw-material processing, while leveraging consumer insights and research. Symrise is
positioned well to develop faster than competitors due to this unique ability and higher
than industry-win-rate of major brands of food & beverage products which are
perennial favourites in the market. The company edges out competitors in rigorous
cycles of flavour improvement to gain greater flavour share in major food and
beverage products.

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Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Chinese companies
(Tim Jones, Head of Deutsche Bank European Chemicals Research, David
Begleiter, Head of Deutsche Bank North American Chemicals Research,
Virginie Boucher-Ferte and Martin Dunwoodie)

Deutsche Bank AG/London

Page 83

21 March 2014
Chemicals
China Chemicals Tour

ChemChina (China National Chemical Corporation)


We spoke with Mr Chen, CEO of Finance at ChemChina.
China National Chemical Corporation (ChemChina) is a large State-owned
enterprise under the administration of SASAC and established in May 2004
with the approval of the State Council. ChemChina is in the list of Fortune 500
and is Chinas largest chemical company and ranks 14th in the worlds
chemical companies (by sales). Since its establishment in 2004, ChemChina
has adhered to its development orientation traditional chemicals, advanced
materials. Instead of competing with upstream players for resources and
downstream players for markets, ChemChina will further optimize its industrial
structure through expanding its leading businesses both upstream and
downstream in light of a Harmony brings wealth principle. It will form a
competitive edge by R&D and innovation and use a market-oriented
competitive method to develop itself. It sees itself as a national innovative
enterprise.
In 2013, total assets reached approximately RMB 300billion and sales reached
approximately RMB 260billion (30% growth year-on-year). ChemChina has
opened production and R&D bases in 140 countries and regions around the
world. It controls nine A-share listed companies and has a total of 118
enterprises, six overseas divisions and 24 R&D institutes.
Key points from our discussions are as follows:

ChemChinas business is made up of 6 sectors: new chemical materials;


basic chemical materials; oil processing; agrochemicals; rubber products;
chemical equipment.

ChemChina is implementing the 12th Five Year Plan and accelerating


industrial restructuring. Its strategic focus is based on business layout of
3+1, namely: materials science, environmental science and life science
plus the focus on basic chemical.

Since 2006 it has bought six businesses in Europe, Australia and Israel
becoming more international. These included Elkem for silicon metal
($2.2bn) which satisfied the new materials criteria and a majority stake in
MA Industries (consistent with the life science criteria). They also flagged
their ownership of Bluestar with Blackstone owning 20%.

ChemChina highlighted its desire to become more international with good


corporate governance and flagged Blackstone owning 20% of Bluestar as
an example of this.

ChemChina is the 14th largest chemical company in the world by revenues


and they are targeting to become Top 3 globally by 2040. This is expected
to be achieved predominantly through further acquisitions. Management
notes that while Europe has started to tighten regulations surrounding
foreign investment in companies, it still sees good possibilities to acquire
businesses from the region.

Management noted that there is an oversupply situation in many areas of


very basic chemicals in China and so as a company it sees interesting
growth opportunities in more downstream specialty chemicals with a
differentiated product offering in the region

Page 84

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Management is looking for further acquisitions with the criteria being


technology, branding, management quality and distribution channels to
become more international. They are less focused on buying
processing/manufacturing capacity. The company is actively looking at
assets globally and continues to look for overseas opportunities in both
Europe and North America. They have no formal focus on deal size
management is driven by the strategic logic to acquire assets. The groups
strategy is to make money for its shareholders (Chinese government) and
they focus on RoE and EVA.

Management expects to make more moves in these three areas and


flagged catalysts, battery materials and agrochemicals as interesting areas.
The MA acquisition was highlighted as being complementary to
ChemChinas existing activities and fitting well with urbanization in China,
fewer producers, more consumers and more protein consumption. They
noted China is 20 years behind more developed economies in agriculture
but improving so they see a strong commercial rationale for the acquisition.

While the focus is on growing the business they are also looking to divest
assets (via trade sale or possible IPO) where they see value-creating
opportunities. The aim of the portfolio restructuring is to move away from
commodities and towards the three specialty areas.

Deutsche Bank AG/London

Page 85

21 March 2014
Chemicals
China Chemicals Tour

Yantai Wanhua (N/R, 600309:CH). Bold plans for MDI


polyurethane expansion and PDH
We spoke with Ms Xiao Minghua, Head of Investor Relations for Yantai
Wanhua.
Yantai Wanhua Polyurethanes was established in 1998 and listed on the
Shanghai Stock Exchange in 2001. Yantai Wanua specializes in the research,
production and sales of MDI and related products such as modified MDI,
polyether polyurethane rigid foam, aromatic polyamine, and thermoplastic
polyurethane products (TPUs).
In 2012 Yantai Wanhua achieved sales of RMB 15.9bn (up 16.7% year-on-year)
with net profit of RMB 2.35bn (up 26.7% year-on-year). Yantai Wanhua has
total MDI capacity of 1.4mt/year.
Yantai Wanhua has subsidiaries in Japan, the United States, Europe, Hong
Kong, Russia, Dubai and India, serving customers globally. It is also building a
PDH (propane de-hydrogenation unit) to start-up in 2015.
Key points from our meeting are as follows:

Yantai produces 1.4mtpa of MDI which equates to 23% of world capacity. It


is the No. 1 producer followed by Bayer and BASF both with respective
market shares of 20% and 19%.

The company has ambitious plans to increase its capacity and market
share. Yantai currently has two lines at Ningbo of 600kt and then a further
200kt production at Yantai, Shandong. Yantai is planning to replace the
existing 200kt plant with an 800kt capacity. It expects to have this
expansion complete by the end of 2014. By then, total capacity will be
2.0mt which is a net increase of 600kt which is equivalent to 10% of world
capacity. As this is mostly an expansion of existing capacity sites the
investment cost is expected to be lower than Greenfield with the 800kt in
Yantai costing 13bn RMB.

Some industry observers have suggested that Yantai has been suffering
from technical issues with its MDI production, but Yantai themselves
confirmed they have not suffered any problems. Operating rates for their
facilities in 2013 averaged between 80% and 90%.

MDI polyurethane is a product that the Chinese government classifies as


encourage and Yantai see some support for the financing of their
expansion plans. Yantai has a 20 year funding in place from the state for
RMB 13bn at below benchmark rates (fixed) and sees this competitive
financing as allowing the company to make strong profits even if there is
some competitive oversupply risks in MDI medium term.

Yantai does not believe that any other producer of MDI in China (BASF,
Bayer, Huntsman) has a material advantage on the cost of production.
Management doesnt think it can compare technologies but believes they
have a cost advantage (largest facility). Not much difference in raw material
sourcing (benzene) but management believes the advantage is in
construction (using local equipment) and power (they have preferential
supplies).

Yantai has no plans to build facilities inland as this would require extensive
infrastructure such as a desalination plant and would be a long distance
from ports.

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Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

MDi margins were flat year-on-year in 2013 and it is expected that they will
remain flattish in 2014 despite some modestly increased capacities as
demand growth will ensure that operating rates remain stable. In 2013 MDI
Chinese demand growth was 14% and a similar double-digit growth rate is
expected for 2014.

Not all MDI produced is used in China as approximately 25% exported to


Europe, N America, SE Asia, India and Russia. However domestic use is the
first priority and the level of exports depends on demand, domestic and
export.

Yantai expects some industry capacity closures in 2014 with the highest
cost producers in Japan and South Korea likely to see some rationalization.

Yantai is planning to build a 750kt PDH unit with a planned start-up time of
2015. It intends to use imported LPG to source the propane (no details were
provided on the pricing of this LPG) but has yet to source the product. This
will be used for the production of acrylic acid.

Capex for the PDH and the MDI investment will be approximately RMB
20bn split evenly between the two investments.

Deutsche Bank AG/London

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21 March 2014
Chemicals
China Chemicals Tour

Yingde Gases (BUY, HKD 8.8, 2168.HK David Hurd / DB


Analyst - 852 2203 6242)
We met with Samantha Wong (CFO) and Urania Zhnag (Head of Investor
Relations). Yingde Gases is a leading industrial gas producer in China with an
estimated 9% market share in the Chinese industrial gas market (DB estimates,
based on the whole Chinese market across all distribution methods).
Yingde Gases is a large-scale and professional company, dedicating to the
national development of industrial gases. The major businesses are on-site gas
supply, retailed gas distribution, specialized production of industrial gases like
Oxygen, Nitrogen, Argon and some specialty gases. Customers are mainly
from iron and steel, chemical, non-ferrous metals, electronics, energy
industries.
Yingde Gases was established in October 2001. After 10 years of development,
it has become the largest gas service company in China. Yingde Gases was
listed on the main board of Hong Kong Stock Exchange on 8th October, 2009.
The company stock is in the Hang Seng Composite Index (HSCI), the Hang
Seng Mainland 100 and Morgan Stanley Capital International (MSCI) China
Index.
We note the following key points from our meeting:

FY 13 sales for the group increased 38.5% to RMB 6.9bn with 88% of sales
derived from the on-site business and 11% derived from the merchant
business. FY 13 operating profit increased 38.6% to RMB 1.53bn. Total
assets at the end of FY 13 stood at RMB 16.6bn.

The group had 54 on-site operating units as at FY 2013 (with 14 start-ups in


2013). Combined oxygen capacity as at FY 13 was 1.57m Nm3/hr of
oxygen, 2.1m Nm3/hr of nitrogen and 42k Nm3/hr of Argon.

Yingde has a large steel customer exposure but mgmt feels that they have
targeted the higher quality customers this is mitigating the impact the
company is experiencing from the steel industrys pressures. Yingde only
has 3 steel customers who are below take-or-pay threshold levels. None of
their steel customers have negative cashflow at the moment. Yingde has
more recently been successful in diversifying its client base into refining,
petrochemicals and coal-to producers.

They see industry IRR rates as declining on new contracts. They were
winning projects early-on at 30%+ but now the target IRRs are around 14%.

Mgmt believes that the rate (IRRs) that the big four Western gas companies
have applied to contracts in China have been lowered in the past few years.
While this is partially due to their lower capital costs, Yingde believes that it
is more due to competition. We note that the big 4 names do not disagree
with this statement but refer to plain vanilla investments as being less
attractive and the way they still get high IRRs is to focus on more complex
(often larger) investments and/or offer added-value through services.

Mgmt is targeting 2x GDP growth in China for their sales and while they are
being quite selective in what they bid for they feel that they can hit this
targeted growth rate.

Yingde is focusing on coal gasification projects as they feel they have one
of the best coal gasification technologies in China. Mgmt noted that their
product is good for mid-sized plants more than the giant ones.

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Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Mgmt feels that the Western big 4 names are very good at merchant and
pipeline but that they do not offer (in general) any better technology than
Ying-de within the on-site business in China. This is an interesting comment
as all four of the Big 4 names in their presentations said that this was not
the case.

Ying-de is not aiming to always offer customers the "best" (and often most
expensive) product but are instead are trying to match the plant to the
customer's needs as cleanly and efficiently as possible. Mgmt believes that
their target IRRs on investments are typically 2-3 percentage points higher
than most of their competitors due mostly to their lower operating costs as
they see themselves as more efficient

Yingde is not planning to build any free standing merchant capacities and
has no desire to expand into the cylinder market as it sees this as a very
competitive business that is not a gas business but more a local service
business where they have no expertise.

Mgmt has seen no customer shutdowns due to air pollution problems either
through poor air quality supply into the ASU or, more importantly, reduced
production due to emission problems.

Mgmt believes that they have a 40% market share in China in their on-site
business this analysis is based on consultants called SAI.

2013 bidding activity was lower last year and has now improved. 2013
below 2012 but their win-rate has increased compared to peers - their winrate is more than 90% on contracts that they want to win. They expect to
win more in 2014.

Mgmt noted that merchant pricing - on average in China - for the core
products (LAR, LIN, LOX) have been flat through 2013. The price has seen
some decline in the past but through 2013 this caused some smaller
players to shutdown capacity which reduced supply and stabilized prices.

They have seen several new joiners in the market in the past 5 years (mgmt
noted around 10 new entrants) but that as of the end of 2013 only a few of
these still exist as many have had operational problems with plants and/or
financing issues.

Hangyang is the main ASU engineering company within China producing


an estimated 40% of ASUs used in the region. They are the main supplier to
Ying-de. In 2007 Hangyang entered the industrial gas market directly as a
seller of equipment and an operator which is a competitive risk to Yingde
and some other smaller local companies. Yingde mgmt sees this threat as
limited for 3 reasons; 1) as there are 10 other reasonable scale suppliers
they can (and do) use - Yingde owns a 30% equity stake in one of these
suppliers: "China National Air Separation Plant Corporation"; 2) Hangyang is
making losses at the moment in their gas business which may suggest a
weaker than expect success rate, and 3) Yingde is the biggest customer for
Hangyang.

Mgmt was keen to stress that even though many Western observers see
them as a pure Chinese company they are not state owned or controlled
and given where they are listed they are seen by the Chinese state as a FIE
(foreign investment entity) and as such do not see any benefits from any
special relationships with the Chinese state.

Ying-de gas's operations are all within China and in the shorter-term they
are happy to remain focused on the Chinese market. Mgmt stated that
long-term they may expand overseas as it believes their lower-cost model
would be attractive to many customers outside of China.

Deutsche Bank AG/London

Page 89

21 March 2014
Chemicals
China Chemicals Tour

Figure 128: Yingde Gas has diverse operations within China

Source: Yingde

Page 90

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

US companies
(David Begleiter, Head of Deutsche Bank North American Chemicals Research)

Deutsche Bank AG/London

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21 March 2014
Chemicals
China Chemicals Tour

Dow Chemical (Hold, Target: $48): Coal-to-olefins a next


decade project
We met with Peter Sykes, President, Dow Asia Pacific, Peter Wong, President Dow
Greater China and Vincent Lai, Asia Finance Director at the Shanghai Dow Center, an
impressive state-of-the-art research and development center and Dows Asia Pacific
headquarters. Prior to assuming his role as head of Dows China business in 2010, Mr.
Sykes served as President, Dow Great China, President, Dow Automotive Systems and
President, Dow Japan and Korea. In total, Mr. Sykes has spent over 20 years working
for Dow in Asia.
Prior to its acquisition of Rohm & Haas in 2009, Dow had developed a unique, importbased strategy for China focused on its Performance businesses. This strategy has been
further enhanced by the acquisition of Rohm & Haas, which added a sizeable presence
in locally produced electronic materials. While Dow continues to progress toward
building a large, basic chemical manufacturing site in central China, currently 75-80%
of what Dow sells in China is imported with 98%-plus of its China sales from its
performance (63%) and market driven (35%) businesses (and < 2% from commodities).
Dow's business in Greater China dates back to the 1930s, when it supplied China with
products through trading agents. Dow opened its first sales office in Asia-Pacific in
Hong Kong in 1957 and an office in Taiwan in 1968. In 1979, Dow established its first
China office in Guangzhou. Today, Dow has 7 business centers across Greater China in
Beijing, Shanghai, Guangzhou, Taipei, Hong Kong, Tianjin and Chengdu plus 18 key
manufacturing sites and 3,600 employees. In 2004, Shanghai became Dow Greater
China's headquarters. And in 2009, the Shanghai Dow Center opened.
In 2013, Dows Greater China (China, Hong Kong, Taiwan) sales totaled $4.5B, up 2%
YoY, and 8% of total company sales. Underlying sales growth of 4-5% was offset by
some portfolio pruning. By country, China sales were up while Taiwan (~1/5 of Greater
China) was down reflecting weakness in electronics. Highlighting the capital light
nature of its import-based strategy for China, Greater China assets total $1.2B, or 2% of
total company assets. Greater China is Dows second largest market behind the U.S.
(and ahead of Germany) and a key component of the companys global business and
growth strategy. Greater China accounted for 43% of Dows $10.2B in 2013 AsiaPacific sales, or 18% of total company sales. Since 2003, Dow's Asia Pacific sales have
grown at a compound rate of 13%.
Figure 129: Dow Chemical sales by geography, 2013
Asia Pacific
18%

Europe,
Middle East
& Africa
32%

Source: Dow Chemical

Page 92

Figure 130: Dow Chemical sales by market, 2013

Latin
America
14%

North
America
36%

Emerging
35%

Developed
65%

Source: Dow Chemical

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Dows China strategy is focused on its Performance businesses


Dows strategy in China differs from its multinational peers. Starting in the early 1990s,
Dow actively explored the viability of building a world-scale naphtha-based ethylene
cracker with derivative units in China. However, despite years of negotiations, Dow was
not able to find a project that would generate adequate returns. As a result, Dow has
not made the large, basic and intermediate chemical investments that companies such
as BASF, Bayer, BP, Celanese, Shell and ExxonMobil have made in China.
Instead, Dows China strategy has focused on its value added business portfolio, selling
higher value, environmental and consumer driven products. As a result, Dows plants in
China tend to be smaller, more flexible and closer to its customers than its peers plants,
enabling Dow to better meet the needs of the market. Another element of Dows China
strategy is to focus on Chinese companies. Of Dows top 10 customers in China all are
local Chinese companies with its largest customer being Haier, the largest white good
(home appliances) supplier in the world.
In executing its China strategy Dow has focused on building market share in China with
imported product from its low cost, advantaged feedstock joint ventures in Kuwait,
Thailand and, until 2009 when it was divested, Malaysia. Today, 75% of what Dow sells
in China is imported with 63% of sales in its Performance Businesses, 35% of sales in
its Market Driven businesses and less than 2% in commodity products. Going forward,
Dow's Saudi Arabian-based Sadara project (joint venture with Saudi Aramaco,
potentially the world's largest petrochemical complex), will become another important
source of low cost, advantaged feedstocks for its China business. Dow forecasts that
50% of Sadara's production will be exported to Asia with 50% of that going to China.
What makes this import-based strategy work for Dow are: 1) a high-quality marketing
and sales force that management believes is the equal to any Western company in
China, 2) low import duties on chemical and plastic products, making China essentially
an open market and 3) a reliable and consistent supply chain. Management noted that
local Chinese customers are very comfortable with imported products as long as
logistics/supply chains function reliably.
Despite the focus on imports, Dow has built a sizeable manufacturing, research and
development base in region. Dow has 17 key manufacturing sites in Greater China with
12 in China, 4 in Taiwan and 1 in Hong Kong. In 2009 Dow opened the Shanghai Dow
Center at the Zhangjiang Hi-Tech Park in Shanghai. At the heart of the center is a stateof-the-art research and development facility which houses 500 scientists and engineers
working in roughly 80 integrated labs. This facility, which is home to more than a dozen
Global Application Development Centers and Research Centers of Excellence, has
substantially enhanced Dows ability to work with customers at the local level in China
and Asia (the key to building sustainable relationships), accelerate product development
and differentiation for China and Asia and strengthened Dows competitive position for
long-term growth in China and Asia. The center is also Dows Asia Pacific headquarters
and includes a global information technology hub as well as other support and service
facilities.
Dows Greater China growth drivers
In China, Dows growth strategies are aligned with and being fueled by Chinas 12th
Five Year Plan (2011-15) and 3rd Plenum Reforms. The key elements of the 12th Five
Year Plan are increasing food production and safety, decreasing dependence on fossil
fuels, protecting lives and the environment, growing in developing markets,
urbanization and infrastructure development, increasing peoples disposable income
and industry restructuring and local innovation.

Deutsche Bank AG/London

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21 March 2014
Chemicals
China Chemicals Tour

Overlaying Dows strengths and capabilities to Chinas growth and reform focus, Dow
Greater China is focused on the following growth drivers / themes: Food security and
safety, infrastructure upgrade, energy efficiency and environmental protection.
Dows coal-to-olefins megaproject looking unlikely this decade
Despite its unsuccessful 20-year effort to build an integrated-ethylene complex in
China, Dow has not stopped trying. And over time, its thinking has evolved. For the last
few years, Dow has been focused on a coal-to-chemicals project with Shenhua Group,
Chinas largest coal company. This $10B-plus integrated chemical project would utilize
and add value to the Chinas vast coal reserves while reducing the countrys reliance on
imported products. It would also align with the governments Go West strategy by
making a significant contribution to an underdeveloped province.
However, with its multi-billion dollar opportunities on the US Gulf Coast taking
advantage of low cost ethane and propane and Sadara taking advantage of inexpensive
Saudi feedstock, this project is no longer progressing in its current form. Additionally,
the project is looking less feasible given increasing environmental concerns in China
around burning coal coupled with growing costs and still large technology,
environmental and operational risks associated with this project. At best, we believe
this would be a next decade project for Dow with the potential for it to evolve toward a
natural gas-based feedstock should shale gas development occur in China.
Sadara: A key growth enabler
A key growth driver for Dow in China and all of Asia starting in 2H15 will be Sadara, its
Saudi Arabia based petrochemical joint venture project (with Saudi Aramco). While
ultimately owning only 35% of the project, Dow will be responsible for selling 100% of
the product. Dow intends to place the majority Sadaras output into the worlds largest
market, Asia. Ultimately, Dow expects to place $4B of Sadara sales into Asia Pacific
with a sizeable portion into China.
Despite the potential for price and margin pressure from this additional volume, Dow
believes it will be able to place Sadara product into Asia and China without significant
price or margin pressure owing to its low market share in the region. In China, Dow
estimates it had a 2% share of the market in 2012. In 2018, even with Sadara volumes
Dow forecasts it will have only a 4% share of the market. In the rest of Asia, Dow
estimates it had a 3% share of the market in 2012. In 2018, even with Sadara volumes
Dow forecasts it will have only a 5% share of the market
Current trends: 2014 is off to a slow start
With respect to recent trends and the current business environment in China, Dow
noted the following:

2014 is off to a decent, though not spectacular start with January and February
volumes soft as usual due to the Lunar New Year holiday.

For 2014, Dow expects China to grow at its targeted rate of 7.5%.

Dow expects the next big step up in its China sales (and sales) growth will occur
when Sadara comes online in 2015-16. 50% of Sadaras output will be exported to
Asia with 50% of that targeted for China. At its full operating rate, Dow expects
Sadara will add $1.5-$2.0B of sales to its China operations.

The most common request Dow receives from its Chinese customers is Help me
make my products better.

Dow believes its GDP multiplier in China is gradually declining, reflecting the maturing
of key end markets.

Page 94

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

DuPont (Buy, Target: $70). Strength through diversity


We met with Tony Su, President, DuPont Greater China (China, Hong Kong and Taiwan)
in Shanghai. Mr. Su has spent more than 30 years with DuPont. Prior to assuming his
current role in 2010, Mr. Su was Vice President for Marketing and Sales for DuPont
China.
DuPont has made a broad and significant commitment to grow its presence in China by
employing its science. DuPont believes it can achieve 10%-plus compound sales
growth in China over the next 3-5 years owing to the tight alignment between its
capabilities and competencies and Chinas 12th Five Year Plan (increasing food
production and safety, decreasing dependence on fossil fuels, protecting lives and the
environment, growing in developing markets, urbanization and infrastructure
development, increasing peoples disposable income and industry restructuring and
local innovation).
DuPont made its first sales into China in the 1860s during the Qing Dynasty. DuPont
China Holding Company Limited was established in Shenzhen in 1988 as the first
wholly-owned entity of the company. Today, DuPont China (China/Hong Kong ex
Taiwan) has more than 40 wholly owned or joint venture entities, 11 wholly-owned
plants, 13 joint venture plants, 4 R&D Centers, 5 corporate offices, 14 joint ventures and
more than 6,300 employees. DuPonts investment in China totals more than $1 billion.
DuPont China (China/Hong Kong, ex-Taiwan) is DuPonts 2nd largest market (behind
the US and ahead of Brazil, Germany, and Japan) with 2013 sales of $3.0B, up 1.5%
YoY, and 8.4% of total sales. Ex-metal pass through (primarily silver in PV), sales rose
nearly 8%. By segment, Performance Materials is DuPonts largest business in China
with ~25% of sales followed by Performance Chemicals (~20%), Electronics and
Communication (~20%), Safety & Protection (~15%), and Agriculture (~10%). DuPonts
four leading end markets in China are agriculture, auto, photovoltaics (PV) and
electronics. Over the last 5 years (09-13) DuPont China sales (ex Pioneer {operates
through a minority owned JV} and Performance Coatings {divested in 2013) have grown
at a 17% compound rate.
DuPont Greater China (including Taiwan) 2013 sales rose a modest 0.8% to $3.6B as
weak demand in electronics, PV and TiO2 offset modest, but broad based gains in the
rest of the portfolio. Taiwan sales fell 2.5% YoY to $579MM in 2013, or 1.6% of total
sales, reflecting the aforementioned weakness in electronics.
DuPonts long-term plan includes compound annual growth targets of 7% for sales and
12% for EPS. In 2013, sales were up 3% and operating profit rose 3%. Sales growth
reflected strong growth from Agriculture (+13%) which offset weakness in TiO2
(Performance Chemicals sales fell 6%) and Electronics & Communications (-6%). Sales
in developing markets, which include China, India, and the countries located in Latin
America, Eastern and Central Europe, Middle East, Africa, and Southeast Asia, rose 6%
in 2013 (after rising 7% in 2013) and are targeted to make up 40% of DuPonts sales by
2015 versus 37% in 2012. In 2013, sales of new products introduced in the last four
years were in line with the company's long-term target of 30% of total sales.
Additionally, the company met its 2013 goals for corporate expense reduction (of
$300MM reflecting stranded costs from the sale of Performance Coatings) as well as its
fixed cost productivity targets of $300MM. In 2014, DuPont is targeting another
$300MM of productivity gains.

Deutsche Bank AG/London

Page 95

21 March 2014
Chemicals
China Chemicals Tour

Figure 131: DuPont Greater China sales rose 1% in 2013 as growth in China
/Hong Kong (+1.5%) was partially offset by lower sales in Taiwan (-2.5%) (YoY
% change in sales)

60%

51%50%
48%

50%
40%
30%
18%17%
14% 13%

20%
10%

22%
9%

10%
4% 3%

9% 11%

5%

1% 1%

0%
(10%)

(4%)

(2%)

(20%)
2006

2007

2008

China/Hong Kong

(14%)
2009

2010

Taiwan

2011

(2%)(3%)
(9%)

(3%)

2012

2013

Greater China

Source: DuPont

Figure 132: DuPont sales by geography, 2013


China/Hong Japan
4%
Kong
8%

Canada
3%

US
39%

Asia Pacific
10%

Figure 133: DuPont sales by segment, 2013


Electronics &
Communication
7%
Nutrition &
Health
10%

BioSciences
3%
Agriculture
33%

Safety &
Protection
11%

Latin America
13%
Performance
Materials
18%

EMEA
23%
Source: DuPont

Performance
Chemicals
18%

Source: DuPont

DuPonts strategic priorities are visible in China


DuPonts is focused on three strategic priorities to the increase the value of the
company: i) Ag & Nutrition: Extend its leadership position across the high value, science
driven segments of the Ag and Food value chains; ii) Bio-Based Industrials: Develop
world-leading industrial biotechnology capabilities to create transformational new biobased businesses and; iii) Advanced Materials: Strengthen and grow it leading positions
in differentiated high-value materials and leverage new science. By building and
leveraging its three world leading positions in Ag & Nutrition, Bio-Based Industrials and
Advance Materials, all of which are underpinned by its world leading science and
technology, management believes it will create a high growth, higher margin and
higher value company.
In China, these strategic priorities are driving DuPonts investment and growth
strategies with increasing success. Elements of these strategic priorities are visible
across DuPonts broad portfolio and has underpinned the aforementioned 17% CAGR
growth in China from 2009-13.
Page 96

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

In China, DuPonts growth strategies are aligned with and being fueled by Chinas 12th
Five Year Plan (2011-15). The key elements of the 12th Five Year Plan are increasing
food production and safety, decreasing dependence on fossil fuels, protecting lives and
the environment, growing in developing markets, urbanization and infrastructure
development, increasing peoples disposable income and industry restructuring and
local innovation.
In addition, with more of Chinas growth taking place in 2nd and 3rd tier cities, DuPont
has enhanced its sales force in these 2nd and 3rd tier cities at a low marginal cost. As a
result, DuPont sales cover total more than 950 cities by 2013 vs less than 10 in 2008.
In support of its growth strategy of delivering science-powered innovations for local
(China) market needs, DuPont in 2010 announced an expansion of its China R&D Center
at the Zhangjiang Hi-Tech Park in Shanghai. Opened in 2005 with an investment of
$20MM, the DuPont China R&D Center was the companys third comprehensive R&D
facility outside the U.S. The Center provides technical support to all key businesses in
the region and supports research, application development, training, technology
transfer, and licensing of DuPont technologies. The expansion, which opened in
October 2013, more than doubled the size of the facility. Today the Center houses more
than 300 researchers working in more than 30 laboratories. Primary areas of focus
include new material applications for photovoltaics, bio-based materials and automotive
materials and testing capabilities.
DuPonts increasing ability to bring new products to the China market is a key driver of
DuPonts growth strategy. Success is being achieved with notices of invention
increasing from 10 in 2007 to more than 40 in 2010, more than 50 in 2011 and nearly
60 in 2012. In 2013, DuPont brought more than 65 new product offerings to the market
in China.
Figure 134: Chinas 12th Five Year Plan: Opportunities and Implications for DuPont
China Opportunities

Implication

Increasing Food Production &


Safety

Higher yields
Advanced technology in ag &
nutrition
Food quality
Food safety

DuPont

Decreasing Dependence on
Fossil Fuels

New energy
Energy efficiency
New materials
Bio materials

Protecting Lives &


Environment

Water treatment &


conservation
Emission reduction
New materials
Mass transportation

DSS
DCAF
DPT
Bl

Growing in Developing Markets,


Urbanization & Infrastructure
Development

Construction
Infrastructure
Electricity grid
Mass transportation

Bl
DPP
DTT
DPT

Increasing Peoples
Disposable Income

Automotive
Construction
Consumer goods & food
Electronics & communications

OPC
Bl
DTT
E&C

Industry Restructuring &


Indigenous Innovation

Agricultural modernization
Upgrading traditional industries
Develop new strategic
industries
Services sector development

DC&F
DCP
Pioneer
DPP

Pioneer
Danisco
Animal Health
Packaging& Industrial Polymers
Photovoltaics
Bio-fuel
Bio-materials
Mass transportation

Source: DuPont

Deutsche Bank AG/London

Page 97

21 March 2014
Chemicals
China Chemicals Tour

Chinas long-term trends should support DuPonts growth


Enhancing DuPonts growth efforts in China is the fact that a large number of Chinas
long-term growth trends (greater demand for agriculture commodities, sustainable
development, clean air and water) are closely aligned with DuPonts capabilities and
competencies. By growth trend, we note the following:
Agriculture: Higher yields, advanced technologies in corn and rice and improved food
quality are priorities for the Chinese government. As a global leader in seed technology,
crop protection chemicals and food safety, management believes it is well positioned to
benefit from growth within the Chinese seed and crop chemical market.
In seeds, where Pioneer operates through two 49%-owned JVs and one biotech
research JV (all with local partners), China sales increased at 21% CAGR from 2009-13
to over $300MM on a 100% basis. Leading its growth in China has been corn. Among
multinationals, Pioneer has a greater than 75% share of the China corn seed market, the
worlds second largest corn seed market. Within the entire corn seed market (including
local Chinese suppliers), Pioneer believes its share is close to 10%. The Chinese seed
market is currently entirely conventional (hybrid) seed. Prospects for the introduction of
genetically modified corn seed in the next few years remain limited.
In order to help drive long-term growth in its seed business in China, since 2010 DuPont
has 1) nearly doubled its seed production capacity, 2) enhanced its product portfolio
through new products, 3) extending its market coverage to the Southwest and early
maturity corn markets, 4) increasing its research investment with the opening of a new
molecular breeding technology center in eastern China and 5) enhanced its customer
service.
In crop chemicals, DuPont has less than a 5% market share of Chinas ~$3 billion crop
protection market (the worlds third largest). This is despite DuPonts crop protection
sales in China having increased at a 17% CAGR from 2009-13. This growth has been
driven largely by Rynaxypyr (insecticide) (China sales >10% of 2013 sales of $1B).
Going forward, DuPont forecast its crop protection sales will increase at a 30% CAGR
from 2013-17 driven by the continuing growth of its existing portfolio (led by
Rynaxypyr), accelerating new product pipeline (including Cynazyypr insecticide which
was registered in 2013), enhanced market coverage in rice and corn, and growth in
specialty crops.
Environment: The Chinese government is increasing its focus on and commitment to
environmental protection, reducing air and water pollution, clean fuels and sustainable
development. The initial manifestation of this change was the elevation of Chinas
environmental protection agency to a ministerial level 6 years ago. As a result,
economic growth is no longer the only barometer by which development decisions are
made. With new/enhanced government regulations for clean fuel, clean air and energy
conservation there is strong and growing demand in China for clean technology
offerings.
With a multitude of technologies and competencies in clean technology (alternative
energy, biofuels, sulfur products and services ). DuPont believes it is well positioned to
benefit from this powerful secular growth trend. Going forward, DuPont forecasts its
clean technology sales will increase at a 18% CAGR from 2013-17 driven by growth in
clean fuel demand (expected to double over next 5 years) and increasing focus on sulfur
reduction.

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Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Nutrition & Health: In China, urbanization, rising disposable income, chronic disease
and an aging population are driving a shift in consumer behavior from price-sensitive to
safe and high quality consumption which is accelerating the high end food market. As a
result, packaged food and healthy nutrition food consumption is expected to increase
significantly over the next 5-10 years. With a fully integrated nutrition and health
offering, a track record of innovation, production efficiency and sustainability and
leading supplier of food safety products and solutions, DuPont believes it is well
positioned to capitalize on these mega-trends. Underpinned by these strengths, DuPont
forecasts Nutrition & Health sales will increase at 17% CAGR from 2013-17.
Renewable Energy: There is a strong new energy focus by the Chinese government as
it seeks to reduce the countrys dependence on fossil fuels. To further this goal the
government has put in place targets for non-fossil energy consumption of 10.7% in
2014, 11.4% in 2015 and 15% by 2020. In support of these targets, the Chinese
government is accelerating solar power development with a target of reach grid parity
by 2020.
As a leading supplier of photovoltaic (PV) materials (conductive pastes, solar cell
backsheets), DuPont is well positioned to capitalize on the governments strong new
energy focus. In 2013, China became the worlds largest PV installation market with 10
GW installed. And from a cumulative installed base of 21 GW, China is targeting 35
GW of installed PV capacity by 2015. With a DuPont opportunity of $60MM/GW,
DuPont is forecasting its China PV sales will grow at a 13-15% CAGR from 2013-17. PV
materials is DuPonts largest business in China
DuPont also sees an opportunity for biofuels in China driven by the governments
strong new energy focus. DuPont is currently working with Chinese partners in the
development of 2nd generation cellulosic ethanol. This includes the signing in 2013 of
an agreement with a Chinese state owned company for the commercialization of
DuPonts cellulosic ethanol technology in China
Auto Industry: The Chinese government is committed to equitably distributing the
benefits of economic growth in order to maintain social stability. The implications of
this strategy are an enhancement of rural infrastructure and increased domestic
consumption. With a large number of technologies and products for the automotive and
electronics industries, DuPont is well positioned to benefit from a primary manifestation
of this strategy: increased Chinese automotive and electronics production. To enhance
its ability to benefit from the automotive opportunity DuPont in 2011 opened a China
auto center to accelerate the customization of its offerings for the fast growing Chinese
auto industry, the worlds largest car market. Coupled with its increasing penetration of
Chinese auto OEM , DuPont targets to double its auto-related business in China by 2016
(vs 2012).
3C (Consumer Electronics, Computers, Communication): DuPont also appears well
positioned to benefit from the accelerated hi-tech development in Chinas 3C industry
owing to a wide range of material solutions and products. DuPont forecasts 3C sales in
China will increase at a 10% CAGR from 2013-17.
Mass Transportation: China is investing heavily in its mass transportation industry. In
2013, the Chinese government invested $110B in trains and highways with $400B
forecasted to be invested over the next 5 years (70% for train, 30% for infrastructure). In
aerospace, the first C919 is scheduled to be delivered in 2016 with an order book of 400
units. DuPont strategic focus in this market is on railway/aircraft safety and reliability
improvement, working with top railway leaders and on locally made airplanes driven by
strong market growth, DuPont forecasts its mass transportation China sales will
increase at a 20% CAGR from 2013-17.

Deutsche Bank AG/London

Page 99

21 March 2014
Chemicals
China Chemicals Tour

TiO2
With over $1B already invested in China, DuPont has made a significant commitment to
the country. While DuPont remains committed to investing aggressively in China going
forward, one area where it is not investing is TiO2.
In 2005, DuPont announced plans to build a $1 billion TiO2 facility in Dongying. This
world-scale TiO2 plant was targeted to have an annual capacity of 200,000 mt (3% of
global capacity). DuPont has completed geologic and environmental impact studies and
has received environmental approvals for the project. However, it has been unable to
obtain a business license for the facility due to opposition from Chinese TiO2 producers
who are opposed to DuPont entering the Chinese market. Coupled with the TiO2 cycle
rolling over in 2012-13 and increasing amounts of inexpensive Chinese sulfate-based
TiO2 being used by Western paint companies, DuPonts TiO2 expansion in China is has
been suspended.
In China, DuPont estimates TiO2 capacity at 1.5-1.8MM m.t. (NDRC says nameplate
capacity is 1.8MM m.t.). This capacity is spread amongst 60-plus producers. Almost all
the capacity in China is sulfate-based (there is one chloride plant). While China has been
adding ~100K m.t. per year, DuPont believes it is getting more difficult to add TiO2
capacity due to environmental concerns around sulfate-based TiO2 (generates 7x more
waste material than chloride-based TiO2).
On an operating basis, DuPont believes TiO2 operating rates improved in China in 2013.
In 2014, DuPont expects further growth in the China TiO2 market underpinned by 7.07.5% GDP growth.
Current trends: 2013 is off to a normal but slow start
With respect to recent trends and the current business environment in China, DuPont
noted the following:

Q1 is off to a normal start with low growth in the first 2 months of the year.
Typically, DuPont does not see strong growth in China until March-April.

PV volume is growing nicely in Q1.

TiO2 prices in China have stabilized.

DuPont is optimistic demand that will pick up heading into the spring.

DuPont believes environmental protection and infrastructure development will be its


primary China growth drivers over the next 2-3 years.

DuPont is targeting 10%-plus growth in China over the next 3 years.

Page 100

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Praxair (Buy, Target: $145). Targeting a doubling of sales by 2017


We met with John Panikar, President, Praxair Asia and Minda Ho, President, Praxair
China and Global Vice President Gasification at Praxairs Asia headquarters in Shanghai.
Mr. Panikar became President of Praxair Asia on January 1, 2014. Mr. Panikar has been
with Praxair for 23 years. Mr. Ho became President of Praxair China in 2011. Mr. Ho
has been with Praxair for 29 years. Praxair has built a successful business in Asia
centered on the fast growing economies of China and India (where Praxair is #1 with a
~35% market share). As with the rest of its businesses / geographies, Praxairs primary
focus in Asia is on returns and profitability. Within China, Praxair believes it has the
most profitable and highest return on capital business of any of its US, European and
Chinese industrial gas peers. In addition to focusing on returns and profitability, Asia is
also Praxairs primary growth driver and one of the keys to Praxair return to 10%-plus
EPS growth in 2014E following 2 years of sub 10% EPS growth.
During the 5-year period 2004-08 Asia was Praxairs fastest growing region with sales
and earnings increasing at a compound rate of 18%. However, in 2009 sales and
earnings declined due to the global economic downturn and FX headwinds. In 2009,
Praxairs Asia sales fell 1% to $885 million (10% of total sales), operating profit declined
7% to $138 million (7% of total operating profit) and operating margins compressed
110 basis points to 15.6% (vs. total company operating margins of 21.0%).
Over the past 4 years (2010-13) Asia has rebounded strongly due to new plant start-ups
and strong underlying growth. As a result, sales have grown at a compound rate of
17% CAGR (to $1.5B, 13% of total sales), operating profit has expanded at an 18%
compound rate (to $271MM, 10% of total operating profit) and operating margins have
expanded 220 bps to 17.8% (due in part to mix owing to a lower proportion of lower
margin electronic sales). Praxair expects solid 10%-plus growth in Asia over the next 35 years driven by its strong project backlog and solid underlying growth in China and
India.
In Asia, Praxair focuses on four countries: China, India, Thailand and Korea. These are
four of the 11 core geographies Praxair focuses on as it is these locations where it has
its strongest market positions and thus its lowest distribution and production costs.
Praxair also has smaller operations in Japan, Malaysia, Taiwan and the Middle East. By
end market, Praxair Asia is heavily weighted towards metals, chemicals, and
manufacturing along with a large CO2 business in Thailand (for freezing shrimp).
Praxair is investing aggressively in Asia. In 2013, Asia capital spending totaled
$450MM, up 4%, and 22% of the companys $2.0B in total capital spending. Of the ~40
projects in Praxairs large project backlog, 40% are in Asia, the majority of which are in
China. By dollar amount, Asia represents more than half of the $2.2B of capital
investment represented by its ~40 project backlog. Growth spending accounts for
approximately 75% of Praxairs estimated 2014 capital spending of $1.9B.

Deutsche Bank AG/London

Page 101

21 March 2014
Chemicals
China Chemicals Tour

Figure 135: Praxair sales by geography, 2013


Asia
13%

Figure 136: Praxair capital expenditures by region, 2013

Surface
Tech
5%

Asia
23%

Surface
Tech
2%

Europe
13%

South
America
17%

Source: Praxair

North
America
39%

North
America
52%

Europe
22%
South
America
14%
Source: Praxair

Praxairs China operations have a return on capital of around 10%


Praxair began operations in China in 1988, established its first joint venture in 1992 and
brought on-line its first plant in 1993. Today, Praxair China, headquartered in Shanghai,
is the leading industrial gases supplier in China with 22 wholly owned companies, 10
joint ventures (with leading steel, chemical and electronics companies), over 1,200
employees, several strategic alliances, a technology center, ~35 plants and a total
investment of more than $1B.
Praxairs areas of strength in China are in the Shanghai River delta, the Pearl River delta
and Beijing. Praxair has 3 major enclaves in China: Caojing (Shaghai Chemical Industrial
Park) (50/50 JV with 2 ASUs and 2 HyCo units, $20B chemical and refining investment
in the park), Daya Bay ($4B petrochemical investment by Shell and CNOOC) and
Chongqing (upcoming, 2 ASUs totaling >5,000 tpd, $5B petrochemical complex led by
BASF MDI project). Key customers include BP, BASF, Bayer, Shell, Bao Steel, Sinopec,
SMIC and SOPO. In addition to being Praxairs Asia headquarters, Shanghai is also the
hub of engineering resources and an R&D center that supports Praxairs Asia business.
Praxairs combined China sales (including its 50% share in the SCIP [Shanghai Chemical
Industry Park] JV with Air Liquide, or roughly $100 million) were $870 million in 2013,
up 16% YoY, 7% of total company sales and 57% of Asian sales (vs 53% in 2012 and
47% in 2011). By mode of distribution, roughly 55% is on-site, 40% is Merchant and
less than 10% is Packaged Gases. Praxair estimates more than 80% of its customer
production is consumed locally. Praxair expects its China sales to grow at a compound
rate of 15% and reach ~$1.5B in 2017 with operating margins of around 20%. This
growth is expected to be driven primarily by its large project backlog and to a lesser
degree by base business underpinned by Chinese economic growth of 7.0-7.5%.
Praxairs return on capital in China was ~10% in 2013 versus a total company return on
capital of 12.8% (down from 13.9% in 2012). Praxair expects to increase its China
returns on capital by 100-200 bps (to 11-12%) by 2017 as the benefit of operating
leverage from greater scale, higher plant loadings and cost productivity gains more
than offset a growing capital base from new plant start-ups. Praxairs hurdle rates for
projects in China are comparable to its hurdle rates for projects in the US.

Page 102

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Figure 137: Praxair China sales, which increased 16% in 2013, are forecasted
to increase at a 15% CAGR thru 2017 driven by ($ in millions)

$1,600

$1,500

$1,400
$1,200
$1,000

$870
$750

$800

$615
$510

$600
$400
$400
$200

$185

$228

2005

2006

$0
2009

2010

2011

2012

2013

2017E

Source: Praxair

Figure 138: a large project backlog which will further enhance


Major Backlog Projects
Jin Jing Glass
BASF integrated MD (Chongqing)I
Oxiran and YCIPs exclusive industrial gas pipeline
Yankuang Guohong (coal gasification)
Jinlong Copper
10+ small onsites
Source: Praxair

Figure 139: Praxair Chinas increasing distribution density and an expanding


footprint

Source: Praxair

Deutsche Bank AG/London

Page 103

21 March 2014
Chemicals
China Chemicals Tour

Praxair is taking a selective approach to the China market


Praxair is taking a selective approach in China, focusing on high-quality customers and
projects with attractive locations and end markets while maintaining strict return on
capital criteria. Overlaying this selective approach is a strategy focused on 1) building
density in core markets (large enclaves) and expanding geographic coverage (to regions
with increasing industrial gas intensity), 2) capitalizing on mega trends (gasification,
refinery hydrogen, energy efficiency and environmental applications (combustion,
water), drive for locally produced heavy equipment, infrastructure build-out in interior
regions, 3) having the most competitive air separation design (through low cost
sourcing underpinned by maintaining global capabilities based in China, and high
efficiency and reliability), and 4) operational excellence/reliability. As a result of its
selective approach and its strategic priorities, of the current China industrial gas market
opportunity of ~200k tpd, Praxair is targeting only 45k tpd with a focus on gasification,
chemicals and refining, steel, non-ferrous, electronics and general manufacturing.
Praxair believes one of its key competitive advantages in China is its ability to build
larger plants than local Chinese competitors. Praxair is able to build 3,000 tpd oxygen
plants as a standard design with the ability to go up to 5,000 tpd. In contrast, the
largest plants local Chinese competitors are able to build are just now reaching the
3,000 tpd plant size.
China is a large industrial gas market with numerous growth opportunities in
infrastructure development and industrialization of inland provinces. The China
industrial gas market is estimated at more than $2B in sales with roughly half captive,
30%-plus controlled by the 4 major global industrial gas companies and around 20% is
in the hands of local (Chinese) producers. Among the global companies, Praxair,
Linde/(BOC) and Air Liquide all have market shares of 7-10%. Air Products is fourth in
China with a 6-7% market share. While of similar size to its peers, as a result of its more
selective approach to customers and projects, and with a focus on creating enclaves,
Praxair believes it has the highest operating margin of any industrial gas company in
China.
Current trends: Business is stable
With respect to recent trends and the current business environment in China, Praxair
noted the following:

Loadings (volumes) are higher than a year ago. Both of Praxairs gasification projects
are running full and all of its projects are above their take-or-pay minimum volumes
are back to pre-Lunar New Year levels with the Guandong area having come back
faster than the east / coastal region.

Business development activity in China for large on-site projects (primarily coal
gasification) is slightly lower than last year. The competitive intensity of the bidding
process on these projects is about the same as it was last year. While business
development activity is slightly lower, the size of the projects Praxair is working on
are larger as a number of them are gasification projects that will require more than
10,000 tpd of oxygen

Merchant gas LOX/LIN pricing has stabilized. Liquid argon (LAR) pricing has in
general stabilized vs Q4 though there remains pressure in the south

Praxair is targeting 10%-plus sales growth in China in 2014 with volumes growing
1.5-2.0x industrial production due to plant start-ups. Relative to the US, intensity of
gas use is still very low in China (4% of US per capita gas consumption).

Page 104

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

As a result of its selective approach to customers and projects overlaid with its
strategic priorities, of the current China industrial gas market opportunity of ~200k
tpd, Praxair is ony targeting 45k tpd with a focus on gasification, chemicals and
refining, steel, non-ferrous, electronics and general manufacturing Praxairs win rate
on targeted opportunities is 30-40%.

While China remains a competitive industrial gas market, returns on new projects
are attractive with returns at least as good as the rest of the world.

In coal gasification, Praxair believes there is a $1B-plus revenue opportunity over the
next 5-7 years driven by Chinas abundant and low cost coal reserves, the expansion
of the domestic chemical industry and Chinas desire to increase its energy security
(and reduce its reliance on imported oil). Praxair expects to win its fair share (2530%) of this business as it has a proven and reliable 3,000 tpd plant design. Coal
gasification is already a key driver of Praxairs China business with one 3,000 tpd air
separation plant started up in 2009 supplying oxygen for coal gasification units for
chemical production (Jiangsu SOPO [acetic acid]), another 3,000 tpd air separation
plant started up in 2012 supplying oxygen for coal gasification units for chemical
production (Anhui Huayi Chemical) and a third 3,000 tpd air separation plant for coal
gasification units for chemical production (Yankuang Guohong Chemical) under
construction with start-up in 2014.

Praxair continues to increase its focus on applications development as it has become


a key enabler in growing merchant gas volumes at a multiple of industrial
production. Applications development is critical in the merchant business as > 50%
of merchant sales have applications involved. Praxair believes a growing number of
environmental applications will help its China merchant gas business grow faster
than industrial production.

Chinese industrial gas companies are continuing to improve their technical


competency. They can now build plants of up to 3,000 tpd versus 400 tpd a few
years ago. However, their operating skills remain below those of the four Western
industrial gas companies.

Deutsche Bank AG/London

Page 105

21 March 2014
Chemicals
China Chemicals Tour

Air Products (Buy, Target: $121). Large on-site projects drive


China growth
We met with Phil Sproger, Vice President Tonnage Development, Asia at Air Products
China headquarters in Shanghai. Air Products has built a large ($2.3B in sales),
profitable and growing Asian business focused on electronic specialty materials and
tonnage and merchant gases. Due to its larger and more established business in Asia
(1.5x larger than Praxair), Air Products was initially slightly more cautious than its US
and European industrial gas peers in bidding for projects in China. This has changed in
recent years as Air Products has won a number of large, on-site tonnage awards in
China including 3 large coal gasification projects. These 3 projects are the largest onsite air separation unit (ASU) orders ever awarded to an industrial gas company. The
first of these projects (8,200 tpd) comes on-line in 2H 2014 while the other two projects
come on-line in 2015 (12,000 tpd) and 20016 (10,000 tpd), respectively. As these
projects come on line, Air Products China market share should rise to the 7-10% of
range of its US and Europe peers from its prior 5-6% range.
In fiscal 2013 (ending September 30), Air Products Asia sales increased 1% to $2.3B
(23% of total sales). In fiscal Q1 2014, Air Products Asia Merchant Gases sales rose 6%
on 8% higher volumes driven by strength in China. For fiscal 2014, we expect Air
Products Asia sales to increase 7-10% driven by new plant start-ups and merchant
strength in China. In 2013, roughly 40% of Air Products $1.7B in capital spending
(including noncurrent capital lease receivables) was in Asia.
In Asia, Air Products focuses on four countries: China, Korea, Taiwan and Japan.
Together, these 4 countries account for more than 80% of Air Products Asian sales. Air
Products believes it has the #1 gases position in Korea (2/3 from electronics and
tonnage gases) and Taiwan (2/3 from electronics and tonnage gases) and the #2
position in Singapore, Malaysia and Thailand. Air Products has a small position in India
(<$100MM in sales through a joint venture). Within China, Air Products believes it has
the #1 position in the Tianjin/Beijing area.
By segment, and on a 100% owned basis, Air Products Asia is heavily weighted
towards Electronics (~40% of sales), followed by Merchant Gases (30-35%), Tonnage
Gases (20%) and Performance Materials (5-10%). Within Asia, Air Products operates
~20 tonnage plants (versus 50 in the US and Canada and 30 in Europe) and over 45
electronics facilities (versus 45 in the US).
Over the last five years, Asia has been Air Products highest growth region. This growth
has been led by Electronics which derives ~50% of its $1.3B in sales from Asia. A key
growth driver has been the LCD industry: Air Products supplies more than 60% of the
LCD fabs in Korea and Taiwan. As many of these companies with LCD fabs in Korea
and Taiwan are investing in China, we believe Air Products is well positioned to capture
this business. Air Products long-standing position serving the semiconductor and LCD
industries has enabled it to be a leading supplier to the thin-film PV industry where it
has won a large number of contracts to supply the photovoltaic market.
In Tonnage, Air Products is focused on growing its existing franchises with most
growth focused in China. In Merchant, despite a slightly more cautious/disciplined
approach than its peers, Air Products has grown its business 20%-plus/year driven by
strong demand throughout the region while developing production infrastructure in
high growth markets. Air Products believes it has a leading liquid/bulk share in China as
well as leading positions in Taiwan, Korea and Thailand. And in Performance Materials,
Air Products has strong and profitable operations with an expanding manufacturing
footprint.

Page 106

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Figure 140: Air Products has leadership positions in industrial gases


throughout Asia

#1

#1

Korea

Tianjin/Beijing

China

#3

Shanghai

#2

India

#3
Thailand

Malaysia

#2

Taiwan
Hong Kong/
Guangzhou

#1

#2
#2
Singapore

Indonesia

#3
Source: Air Products

Sales in China are focused on electronics with a growing position in coal gasification
Air Products began operations in China in 1987 with the establishment of a joint
venture in Shenzhen. Today, Air Products China, headquartered in Shanghai, has sales
of $1B, or 10% of total company sales (up 6% vs 2012), nearly $1.3B of investments,
more than 50 production facilities and 2,800 employees. Sales are focused in
electronics and fiberglass/glass with a growing position in steel and chemicals. While
the majority of sales today are in the merchant business, with the start-up of a number
of large tonnage projects over the next 2 years, tonnage will surpass merchant as Air
Products largest business in China by 2015.
China is one of Air Products largest growth opportunities. To capture this growth, Air
Products is pursuing an integrated gases and materials strategy. In addition to
increasing its business development resources in China (see below), Air Products
relocated a member of its Corporate Executive Committee, Steve Jones, to China in
2011 to drive its business in the country. In addition to leading the global tonnage
business, Mr. Jones is also Air Products China President.
Air Products strategy in China (and Asia) is to serve customers with local
manufacturing capabilities (to ensure the best quality for lowest cost) supported by
best-in-class technology. To this end, Air Products operates a global engineering center
near Shanghai with over 220 engineers and >$1B of projects in execution (and equal to
one-third of its $3.5B project backlog), a global cryogenic equipment manufacturing
facility in Caojing (which has built many of the coldboxes it has sold in Asia as
localization helps drive low costs) and a technology center at the Zhangjiang Hi-Tech
Park with a primary focus on Performance Materials.
Deutsche Bank AG/London

Page 107

21 March 2014
Chemicals
China Chemicals Tour

For most of last decade, Air Products Tonnage business in China did not keep pace
with its Merchant business. This was due to a lack of experienced commercial
development professionals in China. To remedy this situation Air Products has more
than doubled commercial development professionals in China over the past 5-plus
years, installed new management and crafted a strategy to pursue large ASU projects in
the high growth coal gasification market. Results from this investments and new
strategy have been impressive. In 2010 Air Products was awarded (at the time) the
largest single ASU on-site order for an industrial gas company - 8,200 tpd of oxygen
{O2} for a coal gasification facility (for chemical production) for Pucheng Clean Energy
in Shaanxi province. This project is scheduled to start-up H2FY14. In 2011 Air Products
topped this with a contract from Shaanxi Future Energy Chemical for a 12,000 tpd O2
facility for a coal chemical plant. This is the largest single on-site ASU order ever
awarded to an industrial gas company. The facility, also located in Shaanxi Province,
will start-up in FY2015. And in 2013, Air Products received the second largest ASU
onsite order ever awarded for a single project, 10,000 tpd of O2 for a coal gasification
facility that will produce liquids, primarily diesel fuel and derivatives for Shanxi Luan
Mining Group with startup in FY2016. In total, Air Products has 8 major investments
supporting the gasification segment in China including 2 in the coal to liquid subsegment.
These projects have also enabled Air Products to accelerate its growth in Western
China, a region of increasing importance. The company first entered Shaanxi Province
(in Western China) in 2006 to serve the electronics industry and has continued to invest
in the province since then. Air Products has signed several significant contracts and has
three major projects producing more than 20,000 tons per day of oxygen in operation or
under construction. In Xi'an, capital of Shaanxi, Air Products has been awarded a major
contract to supply ultra-high purity nitrogen and other bulk gases to Samsung
Electronics' memory chip fab, which is the most advanced of its kind in China and the
largest overseas investment ever made by the company.
We note Air Products strategy of pursuing large ASU projects in the high growth China
coal gasification market differs from its US and European peers, who have chosen to
focus their efforts on a larger number of smaller projects for more traditional steel,
chemical and electronic customers. While the concentration of Air Products backlog in
fewer, larger projects, increases the risk versus its peers, we believe the risk is
manageable given the importance China has placed on utilizing its abundant coal
reserves in more environmentally friendly applications, such as coal gasification.
Notwithstanding the significant growth Air Products and its peers have seen to date in
China, the longer-term industrial gas opportunity in China remains significant. Air
Products estimates China will represent 70% of the global large plant oxygen market
over the next 10 years, a market that Air Products estimate will total 1MM tpd of O2
and $25B of capital investment. Within China, this growth will manifest itself primarily
within coal gasification for chemical production.
Oxygen for coal gasification in China is a high growth market over the next ten years as
China pursues its goals of energy independence, increased use of domestic resources
and environmental improvement. The primary use of coal gasification is expected to be
for the production of synthetic natural gas (SNG) with nearly 60% of the oxygen for coal
gasification over the next 10 years forecasted to go this end market. Air Products is a
developing a leading position in the China oxygen market. When complete, Air Products
will be the largest supplier of oxygen for use in coal gasification.

Page 108

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Figure 141: Oxygen for coal gasification in China: 57% of the oxygen for coal
gasification over the next 10 years will be for synthetic natural gas (SNG)
projects

Other
Gasification
4%

Fertilizers
9%

Coal-toChemicals
15%
SNG
57%
CFT/Reining
15%

Source: Air Products

Current trends: Business development activity is active and strong


With respect to recent trends and the current business environment in China (and other
countries), Air Products noted the following:

Business trends were stable in the first two and half months of the year with
volumes back to normal following volatility a year ago.

Business development activity for large on-site projects (primarily coal gasification
for synthetic natural gas) remains strong with no signs of slowing. Air Products has
won more than any other industrial gas company included the 3 largest awards.
Overall bidding activity on industrial projects is unchanged versus a year ago with
Air Products currently bidding on a large number of projects.

Air Products large project backlog totaled $3.5B at 12/31/13 (vs $3.0B at 12/31/12).

Air Products has $1B (of sales) of unutilized merchant capacity with 30-40%
incremental margins. The largest amount of this unutilized capacity is in the US,
followed by Asia (including China) and then Europe.

Asia / China LOX/LIN loadings are in the mid-70s.

Returns in China are higher because of the additional risk of the projects.

The sweet spot for gasification is in 3,000 tpd plant range. This is a size that local
Chinese industrial gas companies including Yingde Gases are just now starting to be
able to compete in (though their strength is in the 1,000-2,000 tpd plant range).

Deutsche Bank AG/London

Page 109

21 March 2014
Chemicals
China Chemicals Tour

Air Products success in bidding for large on-site, primarily coal gasification projects,
reflects success it has had in lowering the cost of its 3,000 tpd ASU and the
confidence it has in the long-term prospects for coal-gasification in China. Air
Products has lowered the cost of its 3,000 tpd ASU by more than 30% from the
PCEC award in 2010 to the LuAn award in February 2013.

Air Products only has 3 onsite (tonnage) steel customers. Thus any slowdown in
steel production or shutdown of steel plants will not make have a material impact on
Air Products.

Figure 142: Air Products has more than 22 major production facilities in China
Regional Centers
Major Gases Production
Performance Materials Fa

Beijing
Tangshan

China

Yantai

Tianjin
Zibo

Wuxi
Kunshan

Nanjing
Changzhou

ZJG
Tongxiang
Guangzhou

Shanghai
Ningbo
Fuzhou

Guangzhou

Shenzhen

Zhuhai

Hong Kong

Source: Air Products

Figure 143: Air Products - Major Projects in China


PLANT

LOCATION

Customer

CAPACITY

TIMING

ASU/Liquid

Guiyang, China

Yankuang

2,000 TPD O2

Onstream

H2

Chengdu, China

Petrochina

90 MMSCFD H2

Onstream

ASU/Liquid

Nanjing, China

Wison

1,500 TPD O2

Onstream

ASU/Liquid

Xian, China

Samsung

World Scale

Onstream

ASU/Liquid

Xinxiang, China

XLX

2,000 TPD O2

Onstream

ASU/Liquid

Weinan, China

PCEC

8,200 TPD O2

H2FY14

ASU/Liquid

Hebei, China

Zhengyuan

2,000 TPD O2

H2FY14

ASU

Yulin, China

Yankuang

12,000 TPD O2

FY15

ASU

Changzhi City, China

LuAm

10,000 TPD O2

FY16

Source: Air Products

Page 110

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Figure 144: Air Products large project backlog at historic highs ($ in billions)

$3.8

$3.5 $3.5

$3.4
$3.0
$3.0

$2.8 $2.8

$3.0 $3.0
$2.8

$2.5 $2.5

$2.6
$2.3
$2.2

$2.0
$1.8

$1.8
$1.4

Q1 '14

Q4 '13

Q3 '13

Q2 '13

Q1 '13

Q4 '12

Q3 '12

Q2 '12

Q1 '12

Q4 '11

Q3 '11

Q2 '11

Q1 '11

$1.0

Source: Air Products

Figure 145: FY14E Capital Spending by Segment

Figure 146: FY14E Capital Spending by Region


Other
Europe
2%

E&E (Tees
Valley)
21%

Electronics
& PM
12%

Tees Valley
19%
Asia
47%

Tonnage
54%

Americas
32%

Merchant
13%

Source: Air Product

Source: Air Product

Figure 147: Capital Spending non GAAP basis ($ in millions)


Fiscal Year
2014 Forecast

Capital Spending
$1,900-$2,100

2013

$1,997

2012

$2,088

2011

$1,539

2010

$1,298

2009

$1,475

2008

$1,355

2007

$1,635

Source: Air Product

Deutsche Bank AG/London

Page 111

21 March 2014
Chemicals
China Chemicals Tour

Celanese (Buy, TP: $60). Acetic acid profitability challenged in


China
We met with Mark Oberle, Senior Vice President, Asia. Mr. Oberle has been in his
current role since February 2013. Mr. Oberle joined Celanese in 2005.
Celanese has a long-term commitment the Asia region dating back decades. Growth in
the Asia region, and China in particular, has been a key part of Celanese strategy for
more than a decade. Celanese focus on and commitment to China is underscored by its
$500MM Nanjing chemical complex, Celanese largest integrated production site world.
Further evidence of Celanese commitment to China occurred in 2009 when Celanese
moved the headquarters of its Acetyl Intermediates business to Shanghai. This was
followed in 2011 by the opening of the Celanese Shanghai Commercial and Technology
Center (CSCT). The CSCT, located at the Zhangjiang Hi-Tech Park in Shanghai,
combined previously separate R&D, marketing and business functions. CSCT is
Celaneses China headquarters and houses more than 300 scientists, design engineers
and technical experts serving customers in China and Asia.
Celaneses China and Asian exposures are the highest of any US chemical company. In
2013, excluding sales from equity and cost investments, sales in China totaled
$863MM, up 18% YoY and 13% of total company sales (of $6.5B). An additional 19% of
2013 sales, or $1.2B, were generated in Asia outside of China (for a total of 32% of
sales from Asia). Including proportional sales from equity and cost investments, we
estimate Asia represented ~40% of Celanese 2013 sales.
On an earnings basis, we estimate ~40% of Celaneses earnings are generated in Asia
(including China). This includes Celanese 3 Chinese acetate tow JVs which in 2013
totaled ~$550MM in sales, contributed $92MM in dividends (vs $83MM in 2012), or
$0.58 in EPS (vs $0.52 in 2012), representing 13% of Celanese 2013 earnings from
operations of $4.50 (vs a similar 13% in 2012).
Within China, Celanese has diverse end market exposure with a mix of stable, high
growth, infrastructure-related, export, and local demand-oriented sales. The largest
end-market is Filter Media (acetate tow) (~35%), a very stable end-market. This is
followed by Paints & Coatings (~15%) and Adhesives (~12%).
Figure 148: Celanese sales by geography, 2013

Figure 149: Celanese sales in China by end market, 2010

Auto
8%

Asia-Pacific
32%

Page 112

Construction
6%

Europe &
Africa
36%

North
America
28%

Source: Celanese

Consumer &
Medical
10%

Textiles
8%

South
America
4%

Coatings
14%

Filter Media
32%
Other
10%

Adhesives
12%

Source: Celanese

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Celanese Nanjing Chemical Complex The heart of Celanese China operations


Celaneses Nanjing Integrated Chemical Complex, located at the Nanjing Chemical
Industrial Park in Nanjing, China, is Celaneses largest integrated manufacturing facility
in the world. Opened in 2007, the complex site has 9 production units including a
1.2MM m.t. acetic acid plant, a 300K m.t. vinyl acetate monomer (VAM) plant, a 275K
m.t. industrial ethanol plant based on Celanese proprietary TCX ethanol technology
(started up in mid-2013), a 100K m.t. acetic anhydride plant, a 120K m.t. emulsions
plant (which makes vinyl acetate/ethylene [VAE] emulsions for use in low VOC, low
emission paints). In addition, Ticona, Celanese engineering polymers business, has 2
facilities on the site including a 5K m.t. Celstran long-fiber reinforced thermoplastic
production unit and a GUR ultra-high molecular weight polyethylene production unit.
Carbon monoxide for acetic acid production at Nanjing is supplied by Wison (Nanjing)
Chemical Company, a wholly owned subsidiary of the Wison Group Holding Limited
(China). The feedstock for Wisons carbon monoxide production is coal which has an
approximately 25% cost advantage versus natural gas-based carbon monoxide
production. Methanol for acetic acid production at Nanjing is purchased in the
merchant market.
While Nanjing is Celaneses largest chemical complex, it is not its most profitable. This
is due low levels of profitability in acetic acid and zero ($0) profitability in ethanol. In
acetic acid, Celanese technology based advantages which provide Celanese with 2530% lower conversion costs, has been completely offset by its lack of integration into
coal-based methanol (which a number of its competitors have). In ethanol, while the
TCX technology is working as planned and the plant is running full-out, ethanol prices
have dropped ~20% since the project was first proposed, thereby eroding profitability.
Celanese has created multiple layers of protection for its intellectual property at
Nanjing. Celanese performed all engineering and design work and constructed all
critical equipment outside the country. Celanese also built 3 control rooms for the
acetic acid plant (versus the typical 1) in order to ensure that no single operator would
have complete knowledge of Celaneses proprietary process to manufacture acetic
acid. And lastly, security checks are performed on all key personnel, and labs and other
key areas are separated with limited rotation amongst these areas.
Figure 150: Nanjing integrated chemical complex plants and plant capacities (in m.t.)
Plant

Capacity

Start-Up

Comments

1.2 million

2007

40% to merchant, 20% to VAM, 20% to Anhydride


Expanded to 1.2MM m.t. from 600,000 .t. in 2009
Expandable to 1.5MM m.t. with AOPlus 2 technology
200kt is being converted to ethanol capacity (mid-2013 start-up))

Vinyl Acetate Monomer (VAM)

300,000

2008

90% to merchant, 10% to emulsions

Acetic Anhydride

100,000

2007

Emulsions

120,000

2008

Celstran

4,000

2007

Expandable to 8,000 tons

GUR

16,000

2008

Expandable to 32,000 tons

275

2013

Ethanol for industrial uses


Utilizes feedstock from the acetic acid plant
Based on Celanese proprietary TCX ethanol technology

Acetyls
Acetic Acid

Vinyl Acetate Emulsion


Expanded to 120,000 m.t. from original 60,000 m.t. in mid-2011

Ticona

TCX Ethanol
Ethanol

Source: Celanese

Deutsche Bank AG/London

Page 113

21 March 2014
Chemicals
China Chemicals Tour

Acetate tow: Stable and strong earnings generator


Celanese has a ~30% interest in three manufacturing ventures with the Chinese stateowned tobacco entity, China National Tobacco Corporation (CNTC), that produce
acetate flake and tow (for cigarette filters). CNTC is the largest producer of cigarettes in
the world. In 2013, these three joint ventures paid dividends of $92MM to Celanese, up
1% versus 2012, and equal to $0.58/share, or 13% of total company EPS.
Celanese is the largest producer of acetate tow in the world with a 40% combined
global market share (including JVs). Celanese has 22% global market share excluding
the joint ventures.
Acetate tow demand is relatively stable. Global demand for tow is around ~750K m.t.
with the primary end-use being cigarette filters. Globally, roughly 6 trillion cigarettes
were produced in 2013 with China totaling more than 40% of global consumption. In
2015, Asia represented an estimated 55% of global acetate tow consumption and 62%
of global cigarette consumption.
The global acetate tow industry is expected to grow 1-2%/year led by China at 3%-4%,
followed by 1-2% growth in Asia ex-China, (1-2%) in Europe, and (3-4%) in the
Americas. Celanese is well positioned to capture growth in China owing to its
partnership with CNTC that dates to the late 1980s. Proportional sales from its 3
Chinese joint ventures (with CNTC) were more than $250MM in 2013. One of the JVs
(in Nantong) expanded its acetate flake and acetate tow capacity each by 30kt (4% of
global demand) in 2012. This expansion adds roughly $15MM in annual dividends to
Celanese.
Figure 151: Acetate tow demand by region (2013E)
E Europe
17%

W. Europe
13%

Figure 152: Global acetate tow market share (2013E)

Other
4%

Daicel
13%

Celanese
23%

Rhodia
17%

Asia
54%

Americas
12%

Source: Celanese

Other
4%

Eastman
24%

China Nat'l
Tobacco
JVs
19%

Source: Celanese

Ethanol: Nanjing plant up and running but at breakeven economics


In 2013, Celanese completed modifications and enhancements to its integrated acetyl
facility in Nanjing to further advance its proprietary TCX ethanol process technology.
The modifications added approximately 275,000 tons of industrial ethanol production
capacity. This is Celaneses first commercial scale plant utilizing its TCX process
technology.
TCX is an advanced process that produces ethanol from hydrocarbon feedstocks for the
production of ethanol. The technology integrates new technologies with elements of
Celaneses proprietary acetyl technologies. Celanese believes its TCX technology is and
will be the lowest cost ethanol production in the regions in which it operates helped by
the fact that in most of these regions (including China and Indonesia) it will use low
cost coal as a primary feedstock.

Page 114

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

While the TCX ethanol technology is working as planned (evidenced by the plant
running at 100% capacity and producing on-spec industrial ethanol), profitability is
roughly zero ($0) owing to lower than expected ethanol prices. At the time the project
was first proposed, industrial ethanol prices were $1,000/m.t. in China. At that price
level, Celanese forecasted that TCX ethanol margins would be ~1000 bps higher than
its Nanjing acetic acid margins. However, ethanol prices are currently $800/m.t. in
China. As a result, Celanese $100MM-plus TCX ethanol plant in Nanjing is running at
breakeven economics.
The Nanjing industrial ethanol plant is the result of Celaneses effort to accelerate its
entry into the ethanol business in China. Initially, Celanese had announced (in 2010) its
intention to build 2 industrial ethanol production facilities in China utilizing its TCX
technology. In January 2011, Celanese announced it had signed letters of intent to
construct ethanol production facilities in Nanjing, at the Nanjing Chemical Industrial
Park, and in Zhhai, China, at the Gaolan Port Economic Zone. Initial capacity of each of
these units was expected to be 400,000 mt at a cost of around $300MM each with
expansion capability to 1.1MM m.t. (at a modest cost). Production was expected to
begin 30 months after project approvals. The units would utilize coal as the primary
feedstock. With the China industrial ethanol market totaling ~3MM m.t. with annual
growth of 8-10%, each Celanese industrial ethanol plant would have represented a
modest 1.3-1.7 years of market growth.
At a forecasted $900/m.t. price for ethanol, we estimated each 400,000 m.t. ethanol
plant would generate sales of $360MM, EBITDA of $110MM (30%-plus EBITDA
margins), EPS of $0.40 and an ROIC of 20%-plus. However, with the Nanjing industrial
ethanol plant running at break-even owing to lower than expected ethanol prices, these
2 industrial ethanol facilities are on hold.
While industrial ethanol development is on hold, Celanese continues to advance its TCX
technology for fuel ethanol applications in China in Indonesia. In August 2013 Celanese
entered a Memorandum of Understanding ("MOU") with PetroChina, the largest oil
producer and distributor in China, to advance the development of synthetic fuel ethanol
opportunities in China utilizing its TCX ethanol technology. Since the August 2013
singing of the MOU, progress has been slow as PetroChina evaluates a number of
different technologies for ethanol and methanol fuel blending production. We note that
Chinese gasoline demand is expected to total 130-140 million m.t. by 2020. If ethanol in
China was blended at the same ratio it was blended in the U.S. that would represent 1315MM m.t., or 13-15 world-scale TCX ethanol facilities.
Meanwhile, in March 2013, Celanese signed an MOU with Pertamina, the Indonesia
state-owned oil company, to begin the detailed project planning phase for the
development of a fuel ethanol project in Indonesia (the two parties had previously
signed a Joint Statement of Cooperation which involved the preliminary planning for a
fuel ethanol project in Indonesia). The MOU outlines the parties' intentions to establish
a JV under which Celanese would own a majority of the JV and license its TCX
technology to the JV under a separate technology licensing agreement. Since the
signing of the MOU, Celanese and Pertamina have been working on acquiring land for
the first fuel ethanol production facility. We estimate the first Indonesia-based TCX fuel
ethanol plant will be on-line in 2017-18.

Deutsche Bank AG/London

Page 115

21 March 2014
Chemicals
China Chemicals Tour

Current trends: Demand post the Lunar New Year muted


With respect to recent trends and the current business environment in China, Celanese
noted the following:

Acetic acid demand in China was weak the first two months of the year.

With supply ample as most producers operated without interruption, acetic acid
prices have weakened modestly with China acetic acid export prices falling on
average by $30, from $510/m.t. in January to $480/m.t. in February. Domestic prices
in China also fell, from an average of RMB 3,450/m.t. ex-works East China in
January to RMB 3,175/m.t. in February.

Acetate tow and Ticona performed well in China during the first two months of the
year.

Page 116

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Eastman (Buy, Target: $95). Off to a Good Start in


China/Asia in 2014
We met with Michael Chung, Senior Vice President and Chief International
Ventures Officer for Eastman. Mr. Chung has spent more than 35 years with
Eastman, the majority of which was in Asia. Prior to his current position, Mr.
Chung served as Vice President and Managing Director, Asia Pacific Region.
Eastman is well positioned for growth in Asia Pacific. In 2013, the region
accounted for 28% of Eastmans global revenues with sales of $2.6B. In Asia
Pacific, sales were up 8% over in 2013 on a pro forma basis. Over the past 5
years (2009-13) Eastmans pro forma Asia Pacific sales have increased at 15%
CAGR. In Asia Pacific Eastman has over 1,700 employees, or 12% of its total
workforce, 11 manufacturing sites, including 6 in China, 17 sales offices and 2
technology centers (Shanghai and Singapore).
From a segment perspective, Eastman is well diversified in Asia Pacific with
30% in Fibers, 25% Advanced Materials, 20% Additives & Functional Products,
20% from Specialty Fluids and Intermediates and 5% in Adhesives &
Plasticizers. Eastman is also well diversified in the markets in which it serves
with 29% in Tobacco, 19% Transportation, 13% in Building and Construction,
and about 10% each in Durables and Consumables. As a result Eastman is
broadly exposed to several key trends in the region including energy efficiency
(light weighting cars), the emerging middle class (disposable diapers) and
health and wellness.
China/Hong Kong is Eastmans largest country in Asia Pacific with estimated
sales of $1.2B, or 11% of total company sales and 46% of Asia Pacific sales.
The next largest contributor in the region is Japan at roughly 11% of sales.
Over the past 5 years (2009-13) Eastmans pro forma China sales have
increased at 18% CAGR.
Eastman is investing aggressively in China. In October-2013, Eastman began
operations at its new acetate tow facility in Hefei province. The plant, a 45%
owned joint venture with China National Tobacco Corporation (CNTC), has
capacity of 30k m.t. metric tons of acetate tow (Eastmans global acetate tow
capacity is 210k m.t.). This new capacity is equal to ~3 years of Chinas
growth. Eastman supplies 100% of the acetate flake raw material for the JV
from its Kingsport, TN manufacturing site. The venture builds on Eastmans 20plus year relationship with CNTC and represents the companys first acetate
tow plant investment in China. Eastman expects to begin recognizing earnings
from the JV in 2014.
In 2012, Eastman announced a 50/50 joint venture with Sinopec Yangzi
Petrochemical Company Limited (YPC) to build a world scale, 50K m.t.
hydrogenated hydrocarbon resin plant in Nanjing. The facility will increase
Eastmans total capacity for hydrogenated resins by 50 percent and support
expected demand growth for disposable diapers and packaging products in
China and Asia. Startup is expected in late 2015. This will make Eastman the
largest supplier of hydrogenated hydrocarbon resins in the world. This venture
builds on an existing Eastman and Sinopec joint venture in Nanjing for the
production of Eastotac resins. The Nanjing manufacturing site will be
expanded for the new JV facility with the new joint venture leveraging the
proximity of YPCs integrated petroleum complex with Eastmans technology
and market positions.

Deutsche Bank AG/London

Page 117

21 March 2014
Chemicals
China Chemicals Tour

Figure 153: Eastmans Asia-Pacific Sales by Segment,

Figure 154: Eastmans Asia-Pacific Sales by End Market,

2013

2013

Additives &
Functional
Products
19%

Adheisves &
Plasticizers
5%
Fibers
31%

Electronics
Industrial
4%
Chemicals &
Processing
8%

Other
7%
Tobacco
29%

Durable Goods
9%

Specialty Fluids
& intermediates
19%

Source: Eastman

Consumables
11%
Building &
Construction
13%

Advanced
Materials
26%

Transportation
19%

Source: Eastman

Acetate tow: A growing market in China


Eastman is the second largest producer of acetate tow in the world (behind
Celanese) with a 24% global market share. Asia Pacific accounts for 55% of
Eastmans total Fiber sales.
Acetate tow demand is relatively stable. Global demand for tow is around
~750K m.t. with the primary end-use being cigarette filters. Globally, roughly 6
trillion cigarettes were produced in 2012 with China totaling 42% of global
consumption. In 2012, Asia represented 54% of global acetate tow
consumption and 61% of global cigarette consumption.
The China acetate tow market totals ~330K m.t. with ~200K m.t. produced
domestically and 130K m.t. imported. Eastman is large importer of acetate
tow into China, primarily from its Kingsport, TN site (as its South Korea acetate
tow is primarily used to supply the local market.
The global acetate tow industry is expected to grow 1-2%/yr led by China at
3%-4%, followed by 1-2% growth in Asia ex-China, (1-2%) in Europe, and (34%) in the Americas.
Eastman looks well positioned to capture growth in China owing to its
partnership with CNTC that dates to the late 1980s when it first began
importing acetate tow into the country. Its new 45%-owned JV (versus 30% for
Celaneses 3 JVs), will produce 30K metric tons of acetate tow, equal to ~3
years of Chinas growth of ~10K m.t./yr.

Page 118

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

Figure 155: Acetate tow demand by region (2013E)


E Europe
17%

Figure 156: Global acetate tow market share (2013E)

Other
4%

W. Europe
13%

Daicel
13%

Celanese
23%

Rhodia
17%

Asia
54%

Americas
12%

Source: Celanese

Other
4%

Eastman
24%

China Nat'l
Tobacco
JVs
19%

Source: Celanese

Current trends:
With respect to recent trends and the current business environment in China,
Eastman noted the following:

Overall demand in Asia and China was good in the first 2-plus months of
2014.

Year-to-date Cytstex (insoluble sulfur for tires) demand is good in Asia.


Roughly 31% of global tires are made in China with another 31% made in
the rest of Asia. Roughly 70% of Crystex goes into commercial tires versus
30% for passenger car tires (as a commercial tire {truck, bus off-road} can
use up to 10 times as much Crystex as a passenger car tire.

Fibers is also off to a good start in China and Asia in 2014 with volumes up
slightly, positive pricing and lower raw material (pulp) prices.

Eastmans hydrogenated hydrocarbon adhesives business has stabilized in


China with isolated signs of improvement n early 2014.

Deutsche Bank AG/London

Page 119

21 March 2014
Chemicals
China Chemicals Tour

Appendix A: China Economic


Review
DB expects Chinese GDP of 8.6% in 2014 vs 7.7% in 13E
Following our recent trip to China, we believe the Chinese economy is poised to
accelerate in 2014 versus 2013. This follows an acceleration in growth from 7.5% in Q2
2013 to 7.8-7.9% in 2H 2013. Deutsche Banks China economics team expects China
GDP to grow 8.6% in 2014 and 8.2% in 2015. These forecasts are broadly in line with
the Chinese governments official GDP growth target of 7.5% (versus a target of 8% in
2005-11).
Through its growth target, China aims to promote steady and robust economic
development while keeping prices stable and guarding against financial risks (and
inflation) by keeping money and credit supply at appropriate levels. The Chinese
government has recently characterized its 2014 monetary policy as prudent and its
fiscal policy as proactive. Moreover, and consistent with its 12th Five Year Economic
Plan (announced in 2011), China maintains a strong focus on promoting consumer
demand in order to lower the economys dependence on exports. However, in 2014,
exports are expected to be a key driver of economic growth.
Investor concern surrounding recent weak macro data and credit worries are
overdone. While, recent tepid macro data (e.g. manufacturing PMI fell to a 6 month low
of 48.5 in February) and Chinas first ever onshore domestic bond default have spurred
growing fears that the rapid rise of credit in recent years will develop into a full-fledged
financial crisis, we believe these concerns are overdone. Deutsche Banks China
economics team believes China has sufficient policy flexibility and control over credit
flow to prevent an economic hard landing.
To this point, Deutsche Banks China economics team remains constructive on Chinese
growth with an acceleration in 2014 underpinned by five key drivers: 1) Rationalization
of capacity. Overcapacity in many industries is being rationalized after nearly two years
of PPI deflation and accompanying capacity reduction. A reduction in overcapacity
should engender rising pricing power for the companies, which in turn should improve
profitability and thus incentivize and enhance the ability for corporates to invest; 2)
Investment growth will accelerate. The large under-capacity in many sectors such as
healthcare, railway/subway, value-added telco services, new energies, vocational
training, entertainment and culture, together with aggressive deregulation by the
government, implies that investment growth in these sectors will accelerate; 3) Money
velocity is increasing. The governments efforts to reactivate money stock have
worked and money velocity is rising. A rise in velocity by 2% (half of which has been
achieved in recent months) should lead to an acceleration of nominal GDP growth by
2ppt without any change in monetary policy; 4) Exports will pick up. External demand
for Chinese exports will likely rise underpinned by the G3 economic recovery; 5) Higher
government spending. The pro-cyclical nature of fiscal policy implies that fiscal
expenditures will accelerate with a higher-than-expected multiplier in 2014.

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Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

In addition, Chinese has put in place reforms to enhance growth in 2014. These include
the raising of private investment in sectors such as railway, subway, healthcare
financial, new energy, and environmental. The "Decision on Major Issues Concerning
Comprehensively Deepening Reforms issued by the 3rd Plenum of Chinas Communist
Partys is by far the most profound in a decade, if not decades, measured by its scope
and depth, and has the potential to significantly raise Chinas growth in the years and
decades to come.
Risks to Deutsche Banks 2014 growth outlook include: 1) weaker-than-expected
external demand recovery; 2) faster-than-expected property price inflation in China,
which may result in harsher policy reactions from the government; 3) high volatility of
interbank rates in the transition from money targeting to interest rate targeting for
monetary operation; and 4) geopolitical risks.
Figure 157: Chinese real GDP (2005-2015E)
16.0%
14.2%
14.0%
12.0%

12.7%
11.3%
9.6%

10.0%

10.3%
9.2%

9.1%

8.0%

8.6%
7.8%

7.7%

2012

2013

8.2%

6.0%
4.0%
2.0%
0.0%
2005

2006

2007

2008

2009

2010

2011

2014E 2015E

Source: Deutsche Bank, Bloomberg Finance LP

Figure 158: YoY and QoQ Chinese real GDP growth forecasts
YoY%

QoQ%

2012Q1

8.1%

1.4%

2012Q2

7.6%

2.2%

2012Q3

7.4%

2.0%

2012Q4

7.9%

1.9%

2013Q1

7.7%

1.5%

2013Q2

7.5%

1.9%

2013Q3

7.8%

2.2%

2013Q4F

7.9%

2.0%

2014Q1F

8.3%

2.1%

2014Q2F

8.8%

2.1%

2014Q3F

8.6%

2.1%

2014Q4F

8.6%

2.0%

2015Q1F

8.5%

2.0%

2015Q2F

8.3%

2.0%

2015Q3F

8.1%

1.9%

2015Q4F

8.0%

1.9%

Source: WIND, Deutsche Bank

Deutsche Bank AG/London

Page 121

21 March 2014
Chemicals
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Five drivers of the cyclical recovery in 2014


1) Overcapacity is being reduced
While many posit that China is facing significant overcapacity and therefore believe its
economy will continue to deleverage (i.e., de-invest) and slow down, recent
developments in the economy suggest the opposite. There have been signs that
overcapacity is being reduced in several industries that have been habitually cited as
being oversupplied, most notably solar, cement, and shipbuilding.
According to one of the largest solar panel producers, total industry capacity has
already come down by 30% in the past 12 months, and there will likely be a further 2030% reduction in capacity in the coming 12 months. The reason for this is that capacity
in the solar sector becomes outdated quickly (i.e. capacity built a few years ago
becomes dated and unusable). Together with the rapid increase in domestic demand,
on the back of the governments push for clean energy, the supply/demand balance in
solar is tightening and the operating environment is quickly becoming very favorable. In
the shipbuilding industry, although the level of overcapacity remains high, new orders
received in the first half of 2013 rose 113% YoY, which should help balance
supply/demand. In the cement industry, Deutsche Banks sector analyst estimates that
new capacity additions in 2014 will be down 36% YoY as a result of new government
measures to rationalize new supply. Conversely, demand is poised to rise as a result of
economic recovery and the acceleration in Chinese urbanization.
On a macro level, recent sequential increase in PPI and acceleration in manufacturing
profit growth were confirmations that overcapacity is being reduced. From July to
October 2013, the PPI rose a cumulative 1.2%, compared with a 0.8% drop in the first
six months of the year. Manufacturing profit growth accelerated to 16.8% yoy in
September-October 2013, up from 12.8% in the first eight months of the year. Note that
only when overcapacity eases do companies gain pricing power (i.e., PPI would
increase), and thus see profits rise.
We believe the recent drop in Chinas manufacturing PMI in January (by 0.5pts to 50.5)
and February (by 2 pts to 48.5) has been misperceived as an indication of Chinas
economic weakness. Some have even said the EM sell-off was partially catalyzed by the
Chinese PMI number. We believe this is a gross exaggeration of the significance of a
monthly PMI figure, especially in January. Our China economics team notes that
historically, Chinese PMI could move by anywhere between -1.7pts to 0.2pts in January
(vs December) due to the pronounced effects of the Chinese New Year. In addition, at
the beginning of this year, some Chinese cities implemented emergency measures in
order to prevent a sharp rise in the air pollution index by tentatively suspending the
production of some coal-burning factories, which likely had a transitory negative effect
on the PMI.
We believe that concerns over Chinas first ever onshore domestic bond default and
subsequent fears that the rapid rise of credit in recent years will develop into a fullfledged financial crisis are overblown. We also note that certain credit tightening could
actually be a positive as it could help rationalize excess capacity in certain industries.

2) Under-capacity + deregulation = stronger growth


While most are focusing on overcapacity as a downside risk to the economy, it is
increasingly evident that a shortage (under-capacity) is severe in many other sectors,
especially services. Examples of under-capacity include the health care, railway,
subway and clean energy sectors in which Chinas per capita service provision is only a
fraction of that in more developed countries.

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Given that the government intends to implement an unprecedented reform package


to deregulate the economy and permit private investors to enter most industries that
have previously been dominated by SOEs, these industries suffering from undercapacity will likely see a significant increase in private investment. In particular,
Deutsche Banks China economics team expects deregulation to attract RMB100-200bn
private investment into the railway and subway sectors next year. Major Internet
companies are likely to expand into the telecom and banking industries. Note that
about 30 major private investors, including a few internet companies, have already
applied for banking licenses. We expect most of these applications to be approved. In
the new energy sectors, potential new policies to increase subsidies for gas-fired
power, solar and wind, as well as to allow high-quality shale-gas reserves for private
bidding will also boost private investment. In the health care sector, one of the largest
private pharmaceutical companies is now planning to invest in 500 hospitals as the
government is relaxing controls on market access. Deutsche Banks China economics
team believes that these sectors could attract RMB300B in new private investment due
to deregulation in 2014, which is equivalent to about 0.5% of GDP.
Figure 159: Physicians per 1,000 people, 2010/2011

Source: Deutsche Bank, WDI

Figure 161: Clean energy consumption, tonnes oil


equivalent per capita, 2012

Source: BP Statistical Review of World Energy 2013, Deutsche Bank; Note: Clean energy include gas,
wind, hydro, solar, nuclear and other renewable

Deutsche Bank AG/London

Figure 160: Railway density, km per 1,000 people,


2011/2012

Source: Deutsche Bank, WDI

Figure 162: Subway density, km per m people, 2012/13

Source: Deutsche Bank, Urbanrai.com, company reports

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3) Reactivation of money stock is now working


The governments efforts to reactivate money stocks since July 2013 have worked
and are now improving money velocity. These efforts include announcing higher
spending targets and deregulation measures in major sectors such as railway/subway,
IT consumption, new energies, environment and banking. As a result, companies in
these sectors have begun to expect higher orders in 2014 and are therefore accelerating
their investment activities with existing cash in hand. This leads to an increase in the
velocity of money, which will allow corporate spending to rise faster even if money
supply growth remains unchanged. In 3Q 2013, trend-adjusted money velocity rose 1%,
after declining for nearly three years. We believe that the increase in velocity (after
trend adjustment) will be sustained going forward. The M0 growth acceleration in
October (by 2ppts to 8% YoY) indicates this to be the trend. We expect a cumulative 2%
rise in trend-adjusted money velocity between mid-2013 and mid- 2014, which would
lead to a 2% rise in nominal GDP growth. At the micro level, a rise in money velocity
implies that corporate spending can accelerate without an increase in money supply
growth.

4) Chinese export demand is rising


Improvement in global demand, especially from the G3, should boost demand for
Chinese exports. Deutsche Bank forecasts show that YoY G3 GDP growth (weighted by
Chinese exports to these destinations) will rise from 1.1% in 2013 to 2.1% in 2014. We
also highlight that Europe is poised to be a tailwind to Chinese exports in 2014 as GDP
growth is poised to turn positive for the first time in two years. Based on our Chinese
economic teams regression model, we predict that Chinas real export growth should
recover to around 12% in 2014, up from around 7% in 2013. Assuming that the unit
value of Chinese exports in USD terms will rise by 2% in 2014 (consistent with our
expectation of RMB appreciation vs. the USD), the export value should grow by 14% in
2014.
Our China economics teams model has taken into account a range of variables,
including external demand (G3 GDP growth), the rise in the unit labor cost, current
account balance, and the exchange rate (REER). The unit labor cost captures the
structural factor that tends to undermine Chinas export competitiveness. However,
despite the rising trend in Chinese labor costs, the strengthening of external demand as
well as the slowdown in REER appreciation (from about 6% in 2013 to our expectation
of 3% in 2014) would still support a stronger export sector next year.

5) Fiscal pro-cyclicality can magnify upward momentum


Higher government spending on infrastructure is poised to be another accelerant of
economic growth in 2014. The Chinese governments fiscal revenue is already
improving on rising corporate profitability. Late in 2013, fiscal revenue growth
accelerated sharply, to 16% in October from 13% in September and 8% in JanuaryAugust 2013. In China, the outperformance of revenue (over budget target) typically
translates into stronger government spending (mostly capex) a few months later. We
highlight that capex has a much stronger multiplier effect (around 2x) than
consumption on the economy (0.6x).

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Figure 163: Government revenue growth, percentage yoy

Source: Deutsche Bank, WND

Chinese Macro Policy Outlook


Deutsche Banks China economics team believes monetary policy in China will remain
stable in the first half of 2014, and move towards a tightening bias in the second half.
We expect a 2% RMB appreciation vs. the USD in 2014. On fiscal policy, we expect the
fiscal deficit as a percentage of GDP to fall to 1.8% in 2014 from 2.0% in 2013, but
given the revenue acceleration, fiscal policy in 2014 will become more expansionary.

Monetary policy: neutral in 1H and tighter in 2H


With regards to monetary policy, Deutsche Banks China economics team expects the
government to set an official target of 13% M2 growth for 2014, but the actual outcome
will likely be around 14%. This is very similar to the situation in 2013, when the target
was set at 13% and the outcome was slightly over 14% by end-November.
We believe that the overall tone of monetary policy in the first half of 2014 will be
labeled prudent and thus remain largely unchanged from 2013. This is because
inflation is within the governments comfort zone we expect CPI inflation to fall to
2.9% YoY in December 2013 due to the base effect, and YoY PPI will continue to post a
deflation of about 1%. Historically, the PBOC tended to start to hike interest rates when
both CPI and PPI inflation rates rose beyond 4%. By mid-2014, when the 3mma of YoY
CPI inflation reaches 3.5%, the PBOC will likely shift its policy stance towards a
tightening bias. We believe that the policy tools for 3Q 2014 will likely be open market
operations to soak up liquidity, while 4Q could witness the first benchmark interest rate
hike and mark the beginning of a new monetary tightening cycle.

Exchange rate: 2% appreciation for RMB in 2014


We forecast a 2% appreciation of the RMB vs. the USD in 2014 with an increase in its
two-way volatility. This pace of RMB appreciation is significantly more bullish than the
NDF market is implying (1% depreciation), but we believe it is justified by the following.
First, stronger economic growth, reforms to further open up the economy, and further
relaxation of the QFII scheme will likely result in higher net capital inflows into China.
Second, China will likely further reduce its daily intervention into the FX market, as
pointed out by PBOC governor Zhou Xiaochuan recently. This means that the
authorities will likely allow stronger capital inflows to push up the RMB exchange rate
in an economic up-cycle. Thirdly, the rise in CPI inflation towards 3.5-4% in 2H 2014
suggests that the PBOC will have an additional argument to tolerate more appreciation,
as a stronger RMB implies lower import prices.
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Fiscal policy: de facto expansion


We believe that the government will target a general government (central + local)
deficit of 1.8% of GDP in 2014, down slightly from 2.0% in 2013. This means that the
RMB amount of the fiscal deficit will remain largely unchanged. This prediction is based
on Premier Li Keqiangs statement of no expansion in fiscal policy (defined as no
increase in the RMB amount of the deficit) but also reflects the need to support many
sectors, such as environment, new energies, health care, railway and other
infrastructure, as well as the planned VAT reform. We believe that, within the general
government budget, the portion of central government deficit will fall, and the portion
of local government deficit will rise. This would allow an expansion of the local
government bond issuance program, in order to meaningfully implement the Decision
by the 3rd Plenum to develop the municipal bond market.
We believe that fiscal policy in 2014 will in fact be more expansionary. First, in the past
few months, fiscal revenue growth accelerated significantly and annual collection will
likely exceed the original target by 2% (actual growth of 10% vs. the target of 8%). This
would translate into revenue outperformance of RMB260bn. Based on Chinas budget
convention, we expect these extra revenues to be allocated for spending in 2014 (but
not officially counted as part of 2014 deficit). Second, given our forecast of stronger
GDP growth, fiscal revenue growth will likely accelerate to around 13% in 2014 (e.g., by
3%, equivalent to 0.6% of GDP). This means that the cyclically-adjusted fiscal deficit
will in fact rise by 0.4ppts of GDP (revenue improvement by 0.6% of GDP reduction in
official deficit/GDP ratio by 0.2ppts). In other words, fiscal policy in 2014 will be a
positive contributor to GDP growth acceleration in 2014.

Chinese Reforms and implications


The "Decision on Major Issues Concerning Comprehensively Deepening Reforms
issued by the 3rd Plenum of Chinas Communist Partys is by far the most profound in a
decade, if not decades, measured by its scope and depth, and has the potential to
significantly raise Chinas growth potential in the years and decades to come.

Content of Chinese reforms


Below we discuss 10 major reforms that Deutsche Banks China economics team
believes will have important implications for the economy and are most relevant to
investors:
1) Deregulation
According to the Decision, the private sector would be permitted to enter most
industries other than those relating to national security. The Decision specifically
mentioned that the government will create a level playing field for all market
participants, and adopt a negative list for a unified market access system (i.e., allow
all investors to start businesses without government approval, unless the companies
produce products/services on the negative list.)
We expect the government to issue specific policies in the near-term to further open the
following sectors to private investors: oil and gas, railway, subway, telco, banking,
insurance, medical services, education, and culture. For example, in the oil sector,
private investors will likely be allowed to engage in oil and gas exploration, trading
(imports and exports), and pipeline operations. Our view is that deregulation is by far
the most important part of the reform plan as it will significantly lift Chinas growth
potential. Our estimate shows that relative to the no-reform scenario, deregulation as
envisioned in the package will likely lift Chinas annual average real GDP growth
potential by 2ppts (and annual average private sector real output growth by 3ppts) for
the coming decade (see our report Deregulation and Private Sector Development
published on 13 September). As a result of deregulation, many service sectors (such as

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financials, telecom, railway, subway, new energy and health care), and will likely grow
significantly faster than before, due to the removal of supply-side policy restrictions.
Deregulation will likely result in a gradual reduction of the market share of major telco
and oil sector SOEs, but the macro impact is that the overall efficiency of the economy
would be enhanced and consumers would benefit.
2) Opening up
The reform plan states that China will grant foreign investors greater market access to
many services industries, and hints that China would eventually move towards a preestablishment national treatment system (part of TPP requirement). The sectors
specifically named in the Decision to be open to foreign investments (e.g., via lifting
the foreign ownership limits) include financials, education, health care, culture,
accounting and auditing, logistics, nursery, elderly care, construction design, and ecommerce. We believe that the important background is Chinas growing interest in
joining negotiations for high standard FTAs such as TPP. At the end of September,
China submitted its application to join the negotiations for the Trade-In-Service
Agreement (TISA), a move that surprised many observers who continue to believe
China is reluctant to open up its market. This application was echoed by the Decision,
which highlights that China should use opening up to promote domestic reforms. The
key economic benefits for China in joining these high standard FTAs is that it will open
up new markets for China, expand the opportunities and returns for Chinas global
investments, and help accelerate the growth of Chinas service industry. The more
important benefit is that it will serve as a commitment device for China to push forward
many difficult reforms, such as deregulation. On the other hand, opening up means
increased competition for some large SOEs with monopoly or near-monopoly positions
in the market.
3) Financial liberalization
The reform plan states that the government will encourage private investors to establish
small- and mid-sized financial institutions, accelerate interest rate deregulation, and
accelerate the reform towards capital account convertibility. We expect a few thousand
privately-owned banks to be set up in the coming five to seven years as a result of this
reform. We believe that interest rate deregulation will likely be completed within the
next two to three years. The specific steps in coming years will likely include the
introduction of CDs, further lifting the caps on deposit rates, and eventually the
cancellation of the deposit rate ceilings. On capital account liberalization, we expect
further relaxation of the QDII and QFII quota systems for institutional investors,
permission for individuals and companies to freely convert between currencies within
more relaxed annual limits, relaxation of restrictions on cross-border RMB flows under
the capital account, and the establishment of prudential regulations on cross-border
capital flows to replace administrative controls. We believe that China will be able to
achieve basic RMB convertibility within three to five years. During the process, the
Shanghai Free Trade Zone will play an important role as a pilot program via establishing
an RMB offshore market in Shanghai. Other financial reforms that are included in the
reform package include: 1) establishing a multi-layer capital market; 2) establishing the
bank deposit insurance scheme; and 3) establishing a government bond yield curve
which better reflects market demand and supply. Overall, we believe these financial
reforms will be positive for brokers, insurance companies and FX banks, and most
positive for privately-owned financial firms.
4) Land and Hukou reforms
According to the reform plan, the government will grant farmers the legal titles of land
use rights (LURs) as well as the rights to transfer (sell and buy) LURs, receive rents on
LURs, and pledge LURs as collateral. The Hukou system will be further relaxed and
social services to be enhanced for migrant workers in cities via fiscal reforms. We
believe that this reform will substantially increase the mobility of the 700 farmers
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(including those already migrated to cities but without Hukou) in China, increase their
income, and help speed up the pace of urbanization. The implications are positive for
developers and rural-based banks.
5) Resource pricing reform
The Chinese government aims to complete the resource pricing reform in the coming
few years. As a result of this reform, we expect natural gas and water prices to be
raised substantially, on-grid power tariffs to become largely competitive, and refined oil
prices to move in line with global prices. We believe that the natural gas sector will
likely benefit the most, followed by hydro power and water suppliers, while the oil
refining business will enjoy a more stable margin outlook.
6) SOE reform
As we had expected, the government decided to separate non-commercial functions
from SOEs, to list unlisted SOEs on the stock market, to establish several state asset
management agencies to run the SOE portfolios, and to use the managerial labor
market to recruit professional SOE managers. These reforms should help enhance the
efficiency and resource allocation of the SOEs and improve the incentives of SOE
managers.
In addition to the above expected reforms, two other reforms announced in the
Decision exceeded our expectation. First, the Decision explicitly requires an
increase in the SOE dividend payout ratio to 30% by 2020. Second, the Decision
includes a provision to transfer SOE shares to the social security fund. This is a major
reform that has been debated for more than a decade. Its final adoption will
substantially improve the financial sustainability of the pension system.
7) Fiscal reform
According to the Decision, the property (holding) tax legislation process will
accelerate. We believe the property tax will become a key part of the long-term
property stabilization mechanism. This tax will provide a more stable source of local
revenue and help reduce the reliance of local governments on land sales and incentives
to push up land prices. The introduction of the property tax in a greater number of cities
may initially be viewed by some investors as negative for developers, but would be
positive for the sector in the long term, in our view, as it helps mitigate the likelihood of
property bubbles. Other fiscal reforms announced in the Decision include the
expansion of the VAT reform to other service sectors, increasing taxes and levies on
pollution industries, and improving the transparency of government budgets.
8) Social security reform
The government decided to consolidate the civil servant pension scheme with the
enterprise pension scheme, to transfer SOE shares to the pension system, and to
prepare a plan for raising retirement ages. These reforms should improve the fairness
and the sustainability of the pension system in the longer term.
At the product level, the government decided to use tax deferral to incentivize the
development of annuities (as a supplement to the basic pension pillar), and to develop
critical illness insurance (as part of the health insurance reform) and catastrophe
insurance. These reforms will be positive for the insurance sector by adding new
product lines. The promotion of private hospitals and the reform of public hospitals are
also highlighted by the Decision, which will benefit companies with hospital assets
and the entire healthcare industry via raising demand for pharmaceuticals and medical
equipment.
9) Developing a municipal bond market
According to the reform plan, the government will permit local governments to issue
(municipal) bonds independently, to gradually replace the current financing
mechanisms of LGFVs. We expect the Ministry of Finance to be in charge of the
qualification of the local governments to issue bonds, and these local governments will
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be required to publish their government balance sheets and obtain credit ratings. This
reform will be highly positive for banks as it helps remove a major overhang on banks
NPLs.
10) Relaxing the one-child policy
The Decision states that the government will loosen its decades-long one-child policy
by allowing each couple to have two children if either the husband or the wife has no
siblings. The Decision also mentions that the government will further adjust and
improve its population policy going forward, implying that a genuine two-child policy
will become possible a few years later. This reform will enhance Chinas long-term
growth potential by slowing the decline in the working age population. In the shortterm, the reform will benefit sectors such as infant formulas, diapers, baby care
products, strollers, clothing, and education. We expect the number of newborn babies
to rise by 1.6m per annum during 2014-16 as a result of the reform.

Impact of Chinese reforms


With regards to the impact of these reforms, we see two major implications. This first is
that many reforms, especially deregulation, will improve the growth potential of the
country, and the impact will likely be felt as soon as 2014.
The second implication is that reforms will help reduce macro risks and result in a more
stable (sustainable) growth trajectory and less volatile EPS growth going forward. The
specific reforms that can reduce macro risks include: a reduction in LGFV risk to banks,
due to the development of the local government bond market, lower demand for nonstandardized WMPs, due to interest rate deregulation, a more stable property market,
due to the introduction of the property tax, better fiscal sustainability, due to improved
fiscal transparency, and improved pension sustainability, due to the transfer of SOE
shares to the pension system as well as the increase in retirement ages.
Reform and anti-corruption efforts have begun to have a positive effect
Chinas leadership set out accelerate the pace of economic reforms and take more
aggressive steps to combat corruption. Deutsche Banks China economics team had
previously written that a number of early indications in 2013 suggested such action was
forthcoming. For example, premier Li Keqiang emphasized that reform is the biggest
dividend for China, indicating that efforts would be made to expedite economic
reforms. Party secretary Xi Jinping and anti-corruption Chief Wang Qishan stated
repeatedly that if unchecked, corruption will cause the collapse of the party and fall of
the state. Additionally, in a recent consultation meeting organized by Wang Qishan, a
proposal for the public disclosure of officials wealth garnered a great deal of attention
and support.
Since early 2013, Chinas political situation has become more stable, partly due to the
success of the anti-corruption program, while other EM countries, such as Thailand,
Turkey, South Africa, India and Brazil, are now either experiencing serious political
challenges and/or facing very uncertain election outcomes. The recent Edelman Trust
Barometer survey, which measures trust in government among 27,000 people online in
27 countries, reported that China ranked No. 1 in public trust in 2013 and its score
improved by 4 points from 2012.

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Distrusters

Neutral

Trusters

Figure 164: Edelman Trust Survey: Score of Public Trust in Government


Global

57

China

80

Singapore

76

India

71

Mexico

68

Hong Kong

67

UAE

66

Malaysia

64

Canada

62

Indonesia

62

U.S.

59

Netherlands

59

Brazil

55

Germany

55

France

54

Sweden

54

UK

53

Italy

51

Australia

50

Poland

48

S. Korea

47

Ireland

46

Argentina

45

Spain

42

Turkey

42

Japan

41

Russia

36

Source: Deutsche Bank

Chinese Anti-Pollution Initiatives


In Deutsche Banks 28 February 2013 report, Big bang measures to fight air pollution,
our China economics team predicted that the government would soon introduce very
aggressive measures to reduce conventional coal consumption, promote clean
energies, expand the use of clean-coal technologies, enforce tougher standards on fuel
and car emissions, and promote public transportation such as subways.
In June 2013, the State Council issued Chinas Clean Air Action Plan, and it was
followed by even more aggressive local action plans in major areas such as Beijing,
Shanghai, Hebei and Tianjin during October and November. Deutsche Banks
predictions were prescient, and in some areas the announced measures were even
more aggressive than we suggested in our Big Bang list. For example, the State
Council decided that the PM2.5 (air pollution index) will need to fall by 25% within the
next five years in all cities; the Beijing municipal government announced a plan to
reduce conventional coal consumption by 35% by 2017 and reduce the annual growth
rate of car ownership to 3% p.a. in the coming years from 9% in the past five years.
Below is 1) Deutsche Banks latest thinking on the desirable and likely new policies in
the coming few years, beyond those already announced by the government; and 2) an
outlook for new environmental areas of stronger growth potential which are not yet
fully appreciated by investors. These include gas-fired power generation and
transportation, IGCC, and environmental monitoring instrument. Our conclusion is that
the government should and will likely raise taxes on coal (e.g., by hiking the resource
tax on coal), increase levies on SO2 and NOx, introduce a carbon tax, increase subsidies
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to new energies such as gas and IGCC, introduce limits to car ownership growth in
major cities, and raise the industrial land prices (to increase costs of polluting industrial
activities and shift resources to services). These reforms should benefit the gas-related
sectors, other new energies, as well as the railway/subway sectors.
Ten new policies in sight to mitigate environmental pollution in China
The governments action plans to reduce air pollution contain many detailed policies
(e.g., 88 measures in Beijing) but largely in the areas of enforcing standards for SO2 and
NOx emission by power plants and industrial firms, tougher fuel quality and car
emission standards, as well as mandatory requirement for scraping sub-standard cars
and boilers. Although structural changes in the energy mix and transport mix are also
discussed, there have not yet been concrete measures that would change the
incentives of producers, investors and consumers.
Our follow-up study on the topic of economic policies for PM2.5 reduction finds that
for China to achieve its 2030 target of reducing city average PM2.5 to 30 (from the
current 65), emission control measures (such as those already announced) alone will
not be sufficient. Specifically, we estimate that these measures can only reduce the city
average PM2.5 level to 46 by 2030. In order to reach the target, a package of economic
and fiscal policies will be required to change the industrial structure, energy mix and
transport mode. The linkages between these structural changes and PM2.5 reduction
are the following. First, China has the highest industrial value added to GDP ratio (40%)
and the highest heavy manufacturing to GDP ratio (30%) among major global
economies. The pollution intensity of manufacturing (emission per unit of output) is four
times that of the service sector, and the pollution intensity of heavy manufacturing is
nine times that of the service sector. Therefore, reducing the weight of the industrial,
and especially the heavy manufacturing, sector is critical in controlling pollution.
Second, Chinas clean energy consumption is only 13% of primary energy consumption,
vs. 40-50% in major OECD countries. And clean energy generates only one-tenth of
emissions compared with coal, which represents 68% of primary energy consumption
in China. So, raising the share of clean energy in total energy consumption is also
critical in Chinas fight against air pollution. Third, subway transport generates only onetenth of emission compared with transportation with private cars, but subways account
for only 7% of urban transport in China vs. 70% in global cities. Therefore, changing the
transport mode also is key to cutting air pollution.
Deutsche Banks China economics team proposes ten economic policies to change the
three structures industrial structure, energy mix and transport mode by correcting
the distortions in the economy and the mis-pricing of the true costs of pollution. These
ten measures are:
1) Reform the indirect tax system so that the effective tax rate on manufacturing will
rise and the effective tax rate on services will fall. This will help direct more resources to
develop the service sector while containing the growth of the manufacturing sector.
2) Raise resource tax rates. This will increase the costs of heavy manufacturing.
3) Create new mechanisms to lift industrial land prices. The ratio of Chinas industrial
land prices to residential and commercial land prices is about 15%, about 1/2 to 1/3 of
those in developed economies. This distortion to land prices has created incentives for
excessive industrial development. Our proposed new mechanisms include a reduction
in industrial land supply, and local legislation on land price ratios between different
usages.
4) Increase discharge fee of pollutants such as SO2 and NOx
5) Introduce the carbon tax.

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6) Double the fiscal subsidies for clean energies as a percent of total government
spending.
7) Provide a regular subsidy program for Integrated Gasification Combined Cycle
(IGCC). This will allow the conversion of a substantial part of conventional coal to gas
for power generation.
8) Introduce the car plate auction system in major cities. This will be the most effective
way to limit the car ownership growth in major cities and can create a substantial
source of revenue for local governments.
9) Introduce congestion fees to major cities. This system is similar to that in London,
which can substantially reduce the usage rate of cars in the cities;
10) Allocate the proceeds from car plate auctions and congestion fees to subway
construction. We estimate that for large cities, these two revenue sources could
amount to RMB10bn per year, which is similar to a major citys annual budget for
subway investment.
While these ten policies are still at the proposal stage, Deutsche Banks China
economics team believes that the probability of their eventual adoption is high. In
particular, raising the coal resource taxes, increasing levies on SO2 and NOx,
introduction of a carbon tax, granting higher subsidies for new energies (especially
gas), increase industrial land prices are highly likely policy actions in our view. In the
following, we discuss three less-known sectors/subsectors that will benefit government
policies including those already introduced and those forth coming. These are gas-fired
power generation and transportation, IGCC, and environmental monitoring devices.
Specific listed companies are mentioned in the discussion.

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Appendix B: Global valuation


Figure 165: Global sector valuations
Rating

Cur.

Price
18/03/2014

Target
Price

Est. Earnings
FY14E
FY15E

Buy
Buy
Hold
Hold
Hold

EUR
EUR
EUR
EUR
GBp

79.8
77.8
51.3
110.8
271.1

98.0
94.0
49.0
108.0
245.0

7.0
6.6
2.7
7.7
22.6

Buy
Buy

EUR
EUR

96.5
141.3

115.0
170.0

Buy
Hold
Hold
Hold
Hold
Buy
Hold
Hold
Sell
Hold
Buy
Sell

EUR
GBp
GBp
CHF
EUR
GBP
EUR
EUR
EUR
EUR
GBP
EUR

58.6
324.8
401.7
17.7
26.9
3135.0
11.3
42.2
19.3
35.9
1844.0
92.8

Buy
Hold
Hold
Buy

GBP
EUR
CHF
EUR

Hold
Sell
Hold
Buy
Sell

P/E^

EV/EBITDA
FY14E
FY15E

Mkt Cap
(US$ m)

FY14E

FY15E

8.1
7.6
3.4
8.9
24.6

11.4
11.7
19.0
14.5
12.0

9.8
10.2
15.0
12.4
11.0

6.3
7.8
7.9
7.8
8.7

5.6
7.0
7.0
7.0
7.5

6,951
99,554
5,949
12,838
1,532

5.8
8.7

6.6
9.9

16.5
16.2

14.7
14.2

8.9
9.0

8.0
8.2

41,742
36,507

67.0
320.0
403.5
17.0
29.0
3650.0
12.0
43.5
14.0
37.0
2050.0
55.0

4.0
24.9
0.3
1.1
1.8
193.0
0.8
1.8
0.0
1.9
96.9
1.5

4.6
26.7
0.4
1.3
1.9
218.3
1.0
2.9
0.5
2.2
108.3
2.5

14.5
13.1
20.1
16.1
14.8
16.2
13.4
23.5
459.6
18.7
19.0
61.7

12.8
12.2
17.6
14.1
13.9
14.4
11.8
14.4
37.3
16.1
17.0
37.2

8.7
9.3
11.2
8.3
8.1
10.9
7.4
7.8
12.2
9.7
12.8
6.3

7.6
8.6
10.2
7.5
7.7
9.6
6.8
6.7
9.9
8.6
11.3
5.4

19,805
1,500
2,545
6,747
17,428
10,566
2,388
1,561
878
5,562
2,587
6,423

2393.0
46.6
1377.0
36.6

2850.0
47.0
1320.0
39.0

142.7
3.1
72.4
1.9

159.2
3.5
77.1
2.1

16.8
14.8
19.0
19.2

15.0
13.1
17.9
17.3

11.1
8.3
13.2
12.4

10.0
7.6
12.5
11.2

5,387
11,290
14,470
6,019

USD
EUR
EUR
USD
NOK

30.1
23.0
263.0
323.0
246.1

29.0
15.0
275.0
400.0
220.0

0.6
1.1
13.7
21.4
21.8

0.7
1.1
15.2
25.8
23.7

12.8
21.2
19.2
17.3
11.3

11.5
20.5
17.3
14.3
10.4

9.9
9.4
9.5
11.9
5.8

9.2
9.8
8.5
10.2
5.2

11,059
6,129
2,417
33,962
11,446

Buy
Hold

EUR
CHF

95.3
94.20

110.0
85.0

6.04
5.8

6.89
6.3

15.8
16.2

13.8
14.9

10.9
9.3

9.5
8.4

109,741
5,613

Buy
Hold
Buy
Buy
Buy
Buy

$
$
$
$
$
$

54.5
49.7
66.8
84.9
198.0
90.7

60.0
48.0
70.0
95.0
210.0
92.0

5.0
2.8
4.3
7.0
9.8
7.1

5.2
3.2
4.8
7.7
10.2
8.3

10.9
17.4
15.5
12.1
20.2
12.7

10.5
15.5
14.1
11.0
19.4
10.9

7.0
7.5
9.1
7.9
10.5
7.7

6.9
7.2
8.5
7.3
11.4
7.2

8,442
58,123
61,126
13,004
27,155
47,539

Hold
Buy

$
$

48.5
114.3

48.0
130.0

3.9
5.3

NA
5.9

12.6
21.8

NA
19.4

7.8
12.3

NA
11.3

20,185
59,838

Buy
Buy
Hold

$
$
$

121.8
132.8
107.8

121.0
145.0
115.0

5.8
6.5
5.6

6.5
7.2
NA

21.0
20.4
19.1

18.6
18.3
NA

11.1
12.1
9.9

10.3
11.3
NA

25,082
38,723
7,933

Hold
Hold
Buy
Buy

$
$
$
$

64.8
95.7
93.6
74.0

70.0
95.0
100.0
86.0

4.3
5.8
5.0
4.2

4.8
6.2
NA
4.7

15.1
16.6
18.8
17.8

13.4
15.3
NA
15.6

9.6
9.6
11.7
11.1

8.9
8.6
NA
10.0

5,170
3,399
7,618
6,425

Buy
Buy
Buy

KRW
KRW
KRW

244500
182000
23200

330000
230000
27000

18889
13163
1564

23514
15245
NA

12.9
13.8
14.8

10.4
11.9
NA

6.7
5.2
9.3

5.9
4.7
NA

16928
5741
888

EUROPE: MAJORS

Arkema
BASF
Lanxess
Solvay
Synthomer
EUROPE: INDUSTRIAL GAS

Air Liquide
Linde
EUROPE: INDUSTRIAL SPECIALTY

AkzoNobel
Alent
AZ Electronic Materials
Clariant
Evonik
Johnson Matthey
Kemira
Lenzing
Tessenderlo
Umicore
Victrex
Wacker
EUROPE: CONSUMER SPECIALTY

Croda
DSM
Givaudan
Symrise
EUROPE: AGROCHEMICALS

ICL
K+S
KWS Saat
Syngenta
Yara
EUROPE: PHARMA CHEMS

Bayer
Lonza
US: MAJORS

Celanese
Dow
DuPont
Eastman
PPG
LyondellBasell
US: AGROCHEMICALS

Mosaic
Monsanto
US: INDUSTRIAL GAS

Air Products
Praxair
Airgas
US: SPECIALTY

Albemarle
Cytec
IFF
Valspar
ASIA

LG Chem
Lotte Chemicals
Huchems

Source: Datastream, Deutsche Bank estimates. Syngenta Share price is in Swiss Francs but reporting is in US dollars, ICL report in US$ while the stock price are in ILS. *For Johnson Matthey FY14E is March ending 2015. KWS
SAAT FY14E is June ending 14. For Airgas FY14E is March ending 2015. For Mosaic FY14E is May ending 2015. For Monsanto FY14E is Aug ending 2014. For additional information on all stocks mentioned here please refer to our
website at: http://gm.db.com

Deutsche Bank AG/London

Page 133

Price

Target

P/E

EV/EBITDA

EV/Sales

FCF Yield %

Dividend Yield%

18/03/14

14E

15E

16E

14E

15E

16E

14E

15E

16E

14E

15E

16E

14E

15E

16E

11.7
9.8

10.3
8.6

7.7
6.3

6.8
5.6

6.1
4.9

1.0
1.0

1.0
0.9

0.9
0.8

4.5%
5.6%

7.9%
8.0%

7.8%
9.3%

2.7%
2.6%

3.0%
3.0%

3.3%
3.5%

Bulk
Arkema

6,951

Buy EUR

79.8

98.0

13.7
11.4

BASF

99,554

Buy EUR

77.8

94.0

11.7

10.2

9.0

7.8

7.0

6.1

1.2

1.3

1.2

5.3%

6.0%

8.6%

3.8%

4.1%

4.4%

Lanxess

5,949

Hold EUR

51.3

49.0

19.0

15.0

12.4

7.9

7.0

6.3

0.7

0.7

0.6

1.6%

6.5%

5.7%

1.2%

1.7%

1.8%

Solvay

12,838

Hold EUR

110.8

108.0

14.5

12.4

11.3

7.8

7.0

6.4

1.2

1.1

1.0

4.0%

5.9%

7.9%

3.1%

3.3%

3.6%

Synthomer

1,532

Hold GBp

271.1

245.0

12.0

11.0

10.3

8.7

7.5

6.9

1.0

0.9

0.8

6.0%

13.3%

7.5%

2.5%

3.0%

3.2%

14.5
14.7

12.8
13.1

9.0
8.9

8.1
8.0

7.3
7.2

2.1
2.2

2.0
2.1

1.8
1.9

3.4%
3.5%

4.6%
4.9%

5.5%
5.5%

2.6%
2.9%

2.9%
3.3%

3.2%
3.7%

Industrial Gases
Air Liquide

41,742

Buy EUR

96.5

115.0

16.3
16.5

Linde

36,507

Buy EUR

141.3

170.0

16.2

14.2

12.5

9.0

8.2

7.3

2.0

1.9

1.7

3.3%

4.2%

5.6%

2.2%

2.4%

2.6%

14.4
12.8

12.9
11.6

9.4
8.7

8.3
7.6

7.6
6.9

1.9
1.1

1.8
1.0

1.7
1.0

1.8%
1.9%

2.9%
3.5%

4.9%
4.3%

2.5%
2.5%

2.7%
2.6%

2.8%
2.6%

Ind. Specialties"
AkzoNobel

19,805

Buy EUR

58.6

67.0

17.0
14.5

Alent

1,500

Hold GBp

324.8

320.0

13.1

12.2

11.3

9.3

8.6

7.9

2.3

2.2

2.0

5.1%

6.0%

6.5%

2.7%

2.9%

3.1%

AZ Electronic Mat

2,545

Hold GBp

401.7

403.5

20.1

17.6

15.0

11.2

10.2

9.1

3.6

3.3

3.0

3.8%

4.5%

5.5%

2.0%

2.1%

2.4%

Clariant

6,747

Hold CHF

17.7

17.0

16.1

14.1

12.5

8.3

7.5

6.8

1.2

1.1

1.0

4.7%

5.5%

6.3%

2.1%

2.2%

2.3%

Evonik

17,428

Hold EUR

26.9

29.0

14.8

13.9

12.9

8.1

7.7

7.0

1.2

1.2

1.1

-0.3%

0.4%

3.7%

3.7%

4.1%

4.5%

Johnson Matthey

10,566

Buy GBP

3135.0

3650.0

16.2

14.4

13.2

10.9

9.6

8.7

2.2

2.0

1.8

5.0%

4.5%

5.6%

2.4%

2.7%

2.9%

Kemira

2,388

Hold EUR

11.3

12.0

13.4

11.8

11.0

7.4

6.8

6.4

0.9

0.9

0.8

2.4%

6.8%

6.9%

4.7%

4.7%

4.7%

Lenzing

1,561

Hold EUR

42.2

43.5

23.5

14.4

na

7.8

6.7

na

0.9

0.9

na

1.3%

-2.1%

na

4.1%

4.1%

na

Sell

19.3

14.0

459.6

37.3

22.8

12.2

9.9

8.4

0.7

0.7

0.7

-5.3%

-3.7%

0.4%

0.0%

0.0%

0.0%

Tessenderlo

878

EUR

Umicore

5,562

Hold EUR

35.9

37.0

18.7

16.1

13.4

9.7

8.6

7.4

1.8

1.7

1.6

-0.3%

1.6%

4.0%

2.8%

3.2%

3.9%

Victrex

2,587

Buy GBP

1844.0

2050.0

19.0

17.0

15.4

12.8

11.3

9.9

6.0

5.4

4.8

1.4%

3.8%

5.2%

2.6%

2.8%

3.1%

Wacker

6,423

Sell

92.8

55.0

61.7

37.2

29.0

6.3

5.4

4.8

1.0

0.9

0.8

1.5%

3.9%

5.9%

0.4%

0.7%

0.9%

15.8
15.0

14.5
13.5

11.3
11.1

10.3
10.0

9.5
8.9

2.5
3.2

2.3
2.9

2.1
2.7

4.3%
4.0%

5.4%
4.6%

6.2%
6.7%

3.1%
2.9%

3.4%
3.2%

3.8%
3.6%

EUR

Cons. Specialties"
Croda

5,387

Buy GBP

2393.0

2850.0

17.5
16.8

DSM

11,290

Hold EUR

46.6

47.0

14.8

13.1

12.3

8.3

7.6

7.1

1.1

1.0

1.0

4.3%

7.3%

7.3%

3.6%

3.8%

3.9%

Givaudan

14,470

Hold CHF

1377.0

1320.0

19.0

17.9

16.5

13.2

12.5

11.8

3.0

2.8

2.7

4.5%

4.8%

5.2%

3.7%

4.1%

4.9%

Symrise

6,019

Buy EUR

36.6

39.0

19.2

17.3

15.6

12.4

11.2

10.2

2.6

2.4

2.2

4.4%

5.0%

5.6%

2.2%

2.5%

2.7%

13.4
11.5

12.3
11.0

9.3
9.9

8.6
9.2

8.0
8.8

1.7
2.1

1.6
2.0

1.5
2.0

1.0%
3.9%

1.8%
4.6%

4.7%
6.2%

2.8%
5.5%

3.2%
6.1%

3.5%
6.4%

Deutsche Bank AG/London

Agrochemicals
ICL

11,059

Hold USD

30.1

29.0

15.1
12.8

K+S

6,129

Sell

EUR

23.0

15.0

21.2

20.5

18.6

9.4

9.8

9.6

1.7

1.8

1.8

-13.3%

-15.7%

-5.7%

0.0%

0.9%

1.3%

KWS Saat

2,417

Hold EUR

263.0

275.0

19.2

17.3

15.7

9.5

8.5

7.6

1.4

1.3

1.2

0.3%

3.5%

4.4%

1.2%

1.3%

1.4%

Syngenta

33,962

Buy USD

323.0

400.0

17.3

14.3

12.6

11.9

10.2

9.0

2.4

2.2

2.0

4.4%

5.5%

6.2%

3.4%

4.0%

4.5%

Yara

11,446

Sell NOK

246.1

220.0

11.3

10.4

10.0

5.8

5.2

4.9

0.8

0.7

0.7

9.9%

11.2%

12.1%

3.7%

3.9%

4.1%

14.4
13.8

12.3
12.3

10.1
10.9

8.9
9.5

8.5
8.5

2.0
2.2

1.9
2.1

1.9
1.9

5.9%
5.0%

5.9%
5.8%

6.5%
6.5%

2.3%
2.4%

2.5%
2.7%

3.1%
3.1%

14.9

na

9.3

8.4

na

1.9

1.7

na

6.8%

5.9%

na

2.3%

2.3%

na

Sector Average
16.0
14.0
12.5
9.4
8.4
7.7
1.8
1.7
1.6
2.8%
4.2%
5.7%
2.8%
Notes: 1) FCF defined as free cashflow before acquisitions, dividends and share buyback programmes but after restructuring payments. 2) FCF Yield is defined as FCF / Market Cap

3.1%

3.4%

Hybrids
Bayer
Lonza

109,741

Buy EUR

95.3

110.0

16.0
15.8

5,613

Hold CHF

94.2

85.0

16.2

Source: Deutsche Bank estimates, Syngenta Share price is in Swiss Francs but reporting is in US dollars, ICL report in US$ while the stock price are in ILS. *For Johnson Matthey FY14E is March ending 2015. For Victrex FY14E is September ending 2014. KWS FY14E SAAT is June ending
14. "Industrial and Consumer Specialty

21 March 2014

Cur

Chemicals

Mkt Cap US$ Rec.

China Chemicals Tour

Page 134

Figure 166: European Valuations


Company

14E

15E

Arkema (Euro)

6,335

6,683

BASF (Euro)

71,144 68,483

EBIT Margin

EBITDA Margin

CFRoA

RoCE

RoE

16E

14E

14E

14E

14E
10.9

15E
12.4

16E
13.4

14E
15.7

15E
17.5

16E
18.5

14E
16.7

15E
17.8

16E
19.1

14E
14.7

15E
15.8

16E
17.5

14E
18.4

15E
19.0

16E
19.2

7,003

850

Bulk
0.9

39.5

10.5

11.3

11.7

15.5

16.1

16.4

18.3

19.2

20.3

15.5

16.7

18.1

16.7

16.9

16.9

71,573 11,728

1.0

32.5

11.4

13.2

14.4

16.0

18.1

19.3

17.7

18.9

20.4

15.7

16.8

18.6

20.4

21.0

21.2
10.6

Lanxess (Euro)

8,599

8,988

9,274

1563

1.8

29.7

4.9

5.4

5.9

9.9

10.3

10.8

11.7

12.8

13.8

8.9

10.6

12.1

7.8

9.4

Solvay (Euro)

10778

11245

11733

991

0.6

98.9

9.7

10.4

10.9

16.7

17.3

17.7

10.1

10.9

11.6

8.5

9.5

10.4

7.7

8.7

9.2

Synthomer (GBP)

1,106

1,165

1,211

113

0.9

1.0

10.1

10.4

10.4

11.9

12.1

12.1

15.8

17.4

17.5

19.8

21.5

22.8

22.3

20.9

19.5

16.0

16.5

17.0

25.0

25.4

25.7

16.4

17.1

17.9

14.9

15.7

16.6

14.2

14.7

15.2

Air Liquide (Euro)

16,013 17,283

18,677

5,968

1.4

35.7

17.9

18.4

18.7

26.0

26.5

26.8

16.4

17.2

17.9

14.7

15.6

16.5

15.7

16.2

16.5

Linde (Euro)

17,432 18,658

20,028

8,074

1.9

71.2

13.8

14.4

15.0

23.9

24.2

24.5

16.4

17.1

18.0

15.2

15.8

16.7

12.5

13.1

13.6

12.5

13.0

13.6

17.4

18.0

18.6

16.7

17.5

18.4

16.2

17.2

18.2

14.9

15.6

16.0

14,783 15,286

15,747

1,446

0.7

49.5

9.6

10.5

11.1

13.8

14.6

15.2

20.5

21.9

22.8

18.7

20.5

21.6

17.1

18.0

18.1

Industrial Gases

Ind. Specialties"
AkzoNobel (Euro)
Alent** (GBp)

432

448

464

75

0.7

119.7

22.6

23.0

23.6

24.8

25.2

25.6

18.0

18.2

18.5

22.4

22.7

23.1

10.5

10.7

11.1

AZ Electronic (US$)

768

811

857

182

0.7

1.9

18.4

19.5

20.7

31.8

32.4

33.2

19.6

21.6

24.1

14.8

17.1

19.7

17.6

19.2

21.2

Clariant (CHF)

6,357

6,636

6,926

1,112

1.2

8.5

10.0

10.5

10.8

14.6

15.0

15.3

10.1

10.7

11.2

9.3

10.2

11.0

10.7

11.5

12.1

Evonik (Euro)

13,193 13,983

14,867

152

0.1

15.0

9.9

9.9

10.1

14.7

15.1

15.6

12.7

13.0

13.8

12.5

12.3

12.9

11.9

12.1

12.5

JMAT (GBp)

3,331

3,636

3,861

639

1.0

898.8

15.5

15.8

16.1

19.9

20.3

20.7

18.3

19.2

20.0

21.0

22.1

23.0

21.5

21.3

20.5

Kemira (Euro)

2,173

2,189

2,269

204

0.8

7.7

8.4

9.0

9.2

12.4

13.0

13.2

13.9

14.5

14.9

11.6

13.1

13.6

10.9

11.7

11.8

Tessenderlo (Euro)

1,479

1,549

1,616

240

2.7

6.7

1.6

2.8

3.7

6.0

7.2

8.1

9.5

11.6

13.2

4.7

8.9

11.8

-20.0

-1.6

13.4

Umicore (Euro)

2,502

2,666

2,846

296

0.6

16.0

12.1

13.5

15.4

18.6

20.0

21.7

12.7

13.6

14.9

11.5

12.9

15.0

11.8

12.9

14.5

245

270

297

-77

-0.7

426.1

42.5

42.6

42.7

47.3

47.8

48.4

37.7

36.1

36.9

38.4

36.2

36.8

24.3

23.7

22.9

14.9

15.4

16.1

20.3

20.5

20.7

17.3

18.2

18.9

17.8

18.9

19.7

19.2

19.0

18.9
35.2

Victrex (GBp)
Cons. Specialties"
Croda (GBp)

1,110

1,175

1,251

168

0.5

342.0

25.3

26.2

26.9

28.5

29.4

30.2

31.6

32.8

34.1

35.5

37.0

38.5

41.7

38.0

DSM (Euro)

9,251

9,601

9,908

1,821

1.5

35.0

7.8

8.1

8.2

13.3

13.5

13.6

10.6

11.2

11.5

8.7

9.4

9.8

8.0

8.8

9.0

Givaudan (CHF)

4,551

4,741

4,939

609

0.6

384.2

16.3

17.0

18.2

22.7

22.7

22.7

16.7

17.5

18.1

18.6

19.6

20.4

19.1

19.6

20.2

Symrise (Euro)

1,928

2,039

2,157

308

0.8

8.5

15.9

16.5

16.9

20.7

21.2

21.4

19.0

20.3

21.4

17.8

19.3

20.5

21.0

20.8

20.6

14.1

15.1

15.8

18.9

19.9

20.5

14.9

16.0

16.7

16.1

17.7

18.9

16.4

17.9

18.2

ICL (US$)

6,151

6,394

6,603

1,874

1.4

3.0

16.3

17.4

17.5

21.2

22.2

22.3

16.2

16.8

16.8

15.7

16.4

16.3

20.8

21.6

21.1

K+S (Euro)

3,636

3,714

3,893

766

1.2

18.4

10.3

11.0

11.5

17.7

18.7

19.2

8.8

8.4

8.4

7.7

7.0

6.8

5.9

5.7

5.9

Syngenta (US$)

15,456 16,617

17,815

2,350

0.8

108.3

15.5

16.9

17.9

19.9

21.3

22.2

15.5

17.2

18.6

18.5

21.3

23.4

19.0

21.4

22.1

Yara (NOK)

91,676 95,353

96,708

3,937

0.3

209.5

9.7

9.9

9.9

14.1

14.3

14.3

14.9

15.5

15.6

13.7

14.2

14.3

10.1

10.3

10.1

13.2

14.1

14.9

19.0

20.0

20.6

16.4

17.3

18.3

15.6

16.7

17.9

16.6

17.3

17.6

Agrochemicals

Sector Average
Notes:

Page 135

1) BV/Share adjusted for previously written-off goodwill. 2) EBITA and EBITDA margins shown on an underlying basis where possible
3) CFRoA is defined as EBITDA divided by Total Assets (adjusted for Goodwill write-offs) minus Cash. 4) RoCE defined as EBITA divided by Total Shareholder Funds (adjusted for Goodwill write-offs), Net Debt and other long-term items.
5) RoE defined as pre goodwill net income divided by Total Shareholder funds (adjusted for Goodwill write-offs)
Source: Company data, Deutsche Bank estimates, Syngenta Share price is in Swiss Francs but reporting is in US dollars, ICL report in US$ while the stock price are in ILS. Croda BV/Share is in Pence. *For Johnson Matthey FY14E is March ending 2015. For Victrex FY14E is September
ending 2014.**sales excluding precious metals ."Industrial Specialties and Consumer Specialties

21 March 2014

Net Net Debt


BV/Share
debt /EBITDA

Sales

Chemicals

Company

China Chemicals Tour

Deutsche Bank AG/London

Figure 167: European chemical sector financial performance

Mkt Cap
($MM)

P/E Ratio
2014E
2015E

P/E Rel. to S&P 500


2014E
2015E

EV/EBITDA
2014E
2015E

Specialty Chemicals
Albemarle
Ashland
Cabot
Chemtura
Cytec
Ecolab
Ferro
H.B. Fuller
W.R. Grace
3M
Minerals Technologies
NewMarket Corp.
OM Group
Polyone
RPM
A. Schulman
Valspar
Specialty Chemical Average

ALB
ASH
CBT
CHMT
CYT
ECL
FOE
FUL
GRA
MMM
MTX
NEU
OMG
POL
RPM
SHLM
VAL

Hold
Buy
Hold
Hold
Buy
Buy
Hold
Hold
Buy

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

65
96
56
26
96
110
15
48
103
133
60
388
34
38
43
35
74

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

70
101
56
28
97
112
15
53
105
140
61
390
38
38
44
37
76

$
57 $
$
72 $
$
32 $
$
19 $
$
69 $
$
78 $
$
6 $
$
36 $
$
72 $
$ 103 $
$
38 $
$ 255 $
$
22 $
$
21 $
$
29 $
$
25 $
$
59 $

5,203
7,469
3,590
2,525
3,408
32,120
1,300
2,411
7,944
88,218
2,063
5,025
1,089
3,592
5,688
1,015
6,626

15.1
16.7
15.3
21.1
16.7
26.2
20.8
15.5
22.0
17.9
22.8
20.2
23.8
21.6
19.1
15.6
17.8
19.9

13.5
13.3
12.7
15.1
15.4
23.2
15.0
13.3
18.7
16.2
19.8
19.0
19.1
16.0
17.0
14.1
15.6
16.5

0.95
1.05
0.96
1.33
1.05
1.64
1.31
0.97
1.38
1.12
1.43
1.27
1.49
1.35
1.20
0.98
1.12
1.25

0.93
0.92
0.87
1.04
1.06
1.59
1.03
0.92
1.28
1.11
1.36
1.31
1.31
1.10
1.17
0.97
1.07
1.14

9.7
9.2
8.6
9.3
9.8
13.2
8.2
8.9
10.5
10.9
9.2
12.3
7.2
9.3
11.9
8.0
11.5
9.8

Coatings
PPG
Sherwin Williams
Valspar
RPM
Coatings Average

PPG
SHW
VAL
RPM

Buy
Buy
-

$
$
$
$

198
205
74
43

$ 201
$ 209
$
76
$
44

$ 131 $
$ 162 $
$
59 $
$
29 $

27,452
20,503
6,626
5,688

20.2
24.3
17.8
19.1
20.4

19.4
19.8
15.6
17.0
17.9

1.27
1.52
1.12
1.20
1.28

1.33
1.36
1.07
1.17
1.23

11.5
12.6
11.5
11.9
11.9

Source: Deutsche Bank estimates, Thomson Reuters for all non-covered companies

FCF Yield
2014E
2015E

P/FCF
2014E
2015E

Div.
Yield

Net Debt/
'14E EBITDA

9.1
8.7
7.7
8.1
8.9
12.0
6.7
7.9
9.6
10.3
8.5
11.7
6.3
7.8
11.0
7.5
10.5
8.9

4.7%
8.5%
4.2%
4.2%
1.4%
3.5%
(1.9%)
1.1%
13.6%
5.3%
4.1%
3.8%
6.0%
4.9%
2.3%
3.1%
4.8%
4.3%

4.9%
2.7%
4.6%
5.0%
2.6%
3.8%
(1.9%)
6.7%
16.5%
5.9%
4.5%
3.9%
6.9%
6.4%

21.1
11.7
23.5
23.6
71.3
28.9
(52.1)
92.0
7.4
18.8
24.7
26.1
16.7
20.2
43.9
32.1
20.9
25.2

20.2
37.4
21.6
20.2
37.8
26.6
(52.1)
15.0
6.1
17.1
22.1
25.8
14.5
15.6

1.5%
1.2%
1.4%
0.5%
0.8%

1.0
2.6
2.3
1.2
1.4
2.3
1.6
1.1
1.1
0.4

11.8
10.9
10.5
11.0
11.0

4.2%
2.8%
4.8%
2.3%
3.5%

4.4%
4.4%
5.8%

23.7
36.1
20.9
43.9
31.2

5.8%
5.3%

4.8%

0.8%
1.9%
0.3%
1.0%

17.3
16.3

0.6%
2.1%
2.2%
1.2%
1.2%

1.6
1.7
0.6
2.0
1.6

23.0
22.9
17.3
-21.1

1.2%
1.0%
1.2%
2.1%
1.4%

0.7
0.8
2.0
1.7
1.3

21 March 2014

52-Week
Range

Rating

Chemicals

Price
3/18/14

Symbol

China Chemicals Tour

Page 136

Figure 168: Chemicals valuation ratios


Market Segment/
Company

Deutsche Bank AG/London

Mkt Cap
($MM)

P/E Ratio
2014E
2015E

P/E Rel. to S&P 500


2014E
2015E

EV/EBITDA
2014E
2015E

FCF Yield
2014E
2015E

P/FCF
2014E
2015E

Div.
Yield

Net Debt/
'13E EBITDA

30.8
27.4

1.5%
2.2%
1.8%
1.8%

2.6
1.7
2.2
2.2

15.9
30.8
17.2
26.0
15.7

14.4
25.3
18.9
28.3
14.0

1.0%
2.6%
2.7%
0.7%
1.5%

2.7%
5.0%
4.9%

37.2
23.7
23.8

43.5
20.1
23.5

1.2%
1.6%

1.4
1.4
0.5
1.4
1.9
1.0
2.6
0.7
1.4

4.9%

4.0%
7.0%
8.0%
5.6%

12.5%
5.8%

18.4%
6.3%

25.0
14.2
12.5
17.7
5.4
15.0

3.8%

5.7%
5.0%
5.3%
12.1%
8.3%

20.6
(2.6)
17.5
20.1
19.0
8.3
12.0
8.0
12.9

1.2%
2.2%

1.2

-0.3
0.5
0.5
0.2

Industrial Gases
Airgas
Air Products
Praxair
Industrial Gases Average

ARG
APD
PX

Hold
Buy
Buy

$
$
$

108
122
133

$ 113
$ 124
$ 135

$
93 $
$
84 $
$ 108 $

7,953
25,824
39,120

22.6
21.0
20.5
21.4

19.1
18.6
18.3
18.7

1.42
1.32
1.28
1.34

1.31
1.28
1.26
1.28

11.0
11.1
12.1
11.4

9.9
10.2
11.2
10.4

3.5%
0.2%
2.5%
2.1%

4.2%
1.1%
3.2%
2.8%

28.3

23.9

40.4
34.4

Differentiated Chemicals
Celanese
Dow Chemical
Dupont
FMC
Eastman Chemical
Kraton
OMNOVA Solutions
PPG
Differentiated Chemical Average

CE
DOW
DD
FMC
EMN
KRA
OMN
PPG

Buy
Hold
Buy
Buy
Buy
Buy

$
$
$
$
$
$
$
$

54
50
67
79
85
27
11
198

$
59
$
50
$
68
$
84
$
89
$
29
$
11
$ 201

$
42 $
$
30 $
$
48 $
$
55 $
$
63 $
$
18 $
$
6 $
$ 131 $

8,475
60,670
62,108
10,513
12,955
867
519
27,452

10.8
17.6
15.6
47.6
12.0
15.3
16.9
20.2
19.5

10.4
15.6
14.1
14.4
10.9
10.8
13.7
19.4
13.7

0.68
1.10
0.98
2.98
0.75
0.96
1.06
1.27
1.2

0.71
1.07
0.97
0.99
0.75
0.74
0.94
1.33
0.9

7.0
8.3
9.3
12.1
8.0
7.1
5.9
11.5
8.6

7.0
7.9
8.7
10.4
7.5
6.2
5.4
11.8
8.1

6.3%
3.2%
5.8%
3.8%
6.4%

6.9%
4.0%
5.3%
3.5%
7.1%

0.2%
4.2%
4.3%

Commodity Chemicals
Kronos
Kraton
LyondellBasell
Methanex
Olin
Petrologistics
TPC Group
Tronox
Westlake Chemical
Commodity Chemical Average

KRO
KRA
LYB
MEOH
OLN
PDH
TPC
TROX
WLK

Hold
Buy
Hold

$
$
$
$
$
$
$
$
$

16
27
91
66
28
13
30
24
68

$
$
$
$
$
$
$
$
$

$
$
$
$
$
$
$
$
$

1,875
867
49,572
6,367
2,178
1,790
1,438
2,755
4,522

15.9
15.3
12.7
10.8
14.8
11.7
12.9
-13.3
13.3

14.0
10.8
11.0
10.5
14.2
10.7
10.5
-12.7
11.8

0.99
0.96
0.80
0.68
0.93
0.73
0.81
-0.83
0.8

0.96
0.74
0.75
0.72
0.98
0.73
0.72
-0.87
0.8

8.2
7.1
7.7
7.1
6.2
9.8
6.4
7.5

7.5
6.2
7.2
6.7
6.3
9.2
5.8
3.5
6.5

19
29
92
73
30
15
30
27
69

14
18
55
37
22
10
15
19
38

$
$
$
$
$
$
$
$
$

2.2%
1.2%
2.9%

0.7
1.0
0.2
0.4
0.8
1.3
2.3

Ag Biotech
Monsanto
Syngenta
Dupont
Ag Biotech Average

MON
SYNN-CH
DD

Buy
Buy

$
$
$

114
323
67

$ 118
$ 407
$
68

$
94
$ 302
$
48

$
$
$

60,309
30,080
62,108

21.7
16.6
15.6
18.0

19.3
14.6
14.1
16.0

1.36
1.04
0.98
1.1

1.33
1.00
0.97
1.1

12.0
11.2
9.3
10.8

11.0
10.1
8.7
9.9

3.5%
4.5%
5.8%
4.6%

4.3%
4.6%
5.3%
4.7%

28.8
22.3
17.2
22.7

23.4
21.7
18.9
21.3

1.4%
2.5%
2.7%
2.2%

Agchems/Fertilizers
CF Industries
Compass Minerals
Intrepid Potash
Mosaic
Potash Corp.

TSX:agu
CF
CMP
IPI
MOS
POT

Hold
Hold
Hold

$
$
$
$
$

255
83
15
49
35

$ 268
$
92
$
20
$
65
$
44

$ 169 $
$
64 $
$
11 $
$
40 $
$
29 $

14,125
2,779
1,152
20,874
29,733

13.1
19.8
187.5
14.6
20.9

12.0
16.1
42.9
10.5
16.5

1.24
0.92
1.31

1.11
0.72
1.13

7.1
11.0
15.5
7.2
11.6

6.8
9.5
10.6
6.1
9.7

(1.0%)
4.1%
4.6%
2.4%
3.0%

0.3%
5.5%
5.3%
5.3%
5.3%

24.3
21.7
41.6
33.1

18.1
19.0
18.8
18.9

2.6%

Ag/Fertilizer Average

38.7

18.2

1.2

1.0

10.5

8.6

2.6%

4.3%

30.2

18.7

2.6%

0.7

Chemical Average (ex-Ag.)

18.6

15.3

1.2

1.1

9.5

8.6

0.0

0.1

23.5

18.8

0.0

1.4

15.9

14.6

S&P 500

SPX

$1,872.25

Source: Deutsche Bank estimates, Thomson Reuters for all non-covered companies

$ 1,884 $ 1,536 $ 16,768,660

1.3
1.1
1.0
-0.9
1.2

21 March 2014

52-Week
Range

Rating

Chemicals

Price
3/18/14

Symbol

China Chemicals Tour

Deutsche Bank AG/London

Figure 169: Chemicals valuation ratios cont.


Market Segment/
Company

Page 137

Coatings
PPG
Sherwin-Williams
Valspar
RPM

Rating

Price
3/18/14

ALB
ASH
CBT
CHMT
CYT
ECL
FOE
FUL
GRA
MMM
MTX
NEU
OMG
POL
SHLM
VAL

Hold
Buy
Hold
Hold
Buy
Buy
Hold
Hold
Buy

$ 65.00
$ 96.00
$ 56.00
$ 26.00
$ 96.00
$ 110.00
$ 15.00
$ 48.00
$ 103.00
$ 133.00
$ 60.00
$ 388.00
$ 34.00
$ 38.00
$ 35.00
$ 74.00

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

70
101
56
28
97
112
15
53
105
140
61
390
38
38
37
76

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

57
72
32
19
69
78
6
36
72
103
38
255
22
21
25
59

$
5,203 $ 5,890
$
7,469 $ 10,436
$
3,590 $ 5,083
$
2,525 $ 3,045
$
3,408 $ 3,977
$ 32,120 $ 38,750
$
1,300 $ 1,593
$
2,411 $ 2,749
$
7,944 $ 8,238
$ 88,218 $ 92,092
$
2,063 $ 1,673
$
5,025 $ 5,135
$
1,089 $
971
$
3,592 $ 4,218
$
1,015 $ 1,103
$
6,626 $ 7,986

$4.30
$5.75
$3.65
$1.23
$5.75
$4.20
$0.72
$3.10
$4.69
$7.45
$2.63
$19.20
$1.43
$1.76
$2.24
$4.15

$4.82
$7.20
$4.40
$1.72
$6.25
$4.75
$1.00
$3.60
$5.52
$8.20
$3.03
$20.37
$1.78
$2.38
$2.49
$4.75

6%
(13%)
26%
95%
20%
19%
53%
20%
8%
12%
11%
9%
20%
36%
20%
17%
34%

12%
18%
21%
40%
9%
13%
38%
16%
18%
10%
15%
6%
24%
35%
11%
14%
20%

$7.57
$14.49
$9.11
$3.37
$11.23
$9.40
$1.98
$6.05
$10.17
$12.69
$5.32
$32.23
$4.22
$4.77
$4.76
$7.98

$8.30
$16.64
$10.22
$3.90
$12.36
$9.40
$2.41
$6.79
$11.19
$13.75
$5.76
$33.69
$4.78
$5.68
$5.07
$8.96

$
$
$

3.08
8.18
2.38
$1.10
$
1.35
$
3.81
$
(0.29)
$
0.52
$14.00
$
7.08
$2.43
$14.87
$2.04
$1.88
$1.09
$3.53

$
$
$

PPG
SHW
VAL
RPM

Buy
Buy
-

$ 198.00
$ 205.00
$ 74.00
$ 43.00

$
$
$
$

201
209
76
44

$
$
$
$

131
162
59
29

$ 27,452
$ 20,503
$
6,626
$
5,688

$9.80
$8.44
$4.15
$2.25

$10.20
$10.37
$4.75
$2.53

18%
10%
17%
14%
15%

4%
23%
14%
12%
13%

$18.35
$14.96
$7.98
$4.35

$18.54
$17.32
$8.96
$4.70

Source: Deutsche Bank estimates, Thomson Reuters for all non-covered companies

52-Week
Range

Mkt Cap
($MM)

EV
($MM)

$
$
$
$

29,372
18,873
7,986
6,872

Earnings Per Share


2015E
2014E

EPS Change
2014E
2015E

EBITDA Per Share


2014E
2015E

FCF Per Share


2014E
2015E

8.35
$5.68
$
3.53
$0.98

3.22
2.57
2.59
$1.29
$
2.54
$
4.14
$
(0.29)
$
3.21
$17.00
$
7.79
$2.71
$15.04
$2.35
$2.43
$
4.27

8.62
$8.96
$
4.27
-

21 March 2014

Specialty Chemicals
Albemarle
Ashland
Cabot
Chemtura
Cytec
Ecolab
Ferro
H.B. Fuller
W.R. Grace
3M
Minerals Technologies
NewMarket Corp.
OM Group
Polyone
A. Schulman
Valspar
Specialty Chemical Average

Symbol

Chemicals

Market Segment/
Company

China Chemicals Tour

Page 138

Figure 170: Chemicals valuation metrics

Deutsche Bank AG/London

Rating

Price
3/18/14

Industrial Gases
Airgas
Air Products
Praxair
Industrial Gases Average

ARG
APD
PX

Hold
Buy
Buy

$ 108.00
$ 122.00
$ 133.00

$
$
$

113 $
124 $
135 $

Differentiated Chemicals
Celanese
Dow Chemical
Dupont
FMC
Eastman Chemical
Kraton
OMNOVA Solutions
PPG
Differentiated Chemical Average

CE
DOW
DD
FMC
EMN
KRA
OMN
PPG

Buy
Hold
Buy
Buy
Buy
Buy

$ 54.00
$ 50.00
$ 67.00
$ 79.00
$ 85.00
$ 27.00
$ 11.00
$ 198.00

$
$
$
$
$
$
$
$

59
50
68
84
89
29
11
201

KRO
KRA
LYB
MEOH
OLN
PDH
TPC
TROX
WLK

Hold
Buy
Hold

$
$
$
$
$
$
$
$
$

16.00
27.00
91.00
66.00
28.00
13.00
30.00
24.00
68.00

$
$
$
$
$
$
$
$
$

19
29
92
73
30
15
30
27
69

MON
SYNN-CH
DD

Buy
Buy

$ 114.00
$ 323.00
$ 67.00

CF
CMP
IPI
MOS
POT

Hold
Hold
Hold

$ 255.00
$ 83.00
$ 15.00
$ 49.00
$ 34.73

Commodity Chemicals
Kronos
Kraton
LyondellBasell
Methanex
Olin
Petrologistics
TPC Group
Tronox
Westlake Chemical
Commodity Chemical Average

52-Week
Range

Mkt Cap
($MM)

EV
($MM)

93
84
108

$
7,953
$ 25,824
$ 39,120

$ 10,440
$ 30,583
$ 48,150

$4.78
$5.80
$6.50

$5.65
$6.55
$7.25

10%
5%
10%
8%

18%
13%
12%
14%

$12.73
$12.84
$13.53

$14.06
$14.01
$14.83

$3.81
$0.27
$3.29

$4.52
$1.29
$4.32

$
$
$
$
$
$
$
$

42
30
48
55
63
18
6
131

$
$
$
$
$
$
$
$

8,475 $ 10,473
60,670 $ 72,837
62,108 $ 65,734
10,513 $ 12,294
12,955 $ 17,051
867 $ 1,083
519 $
638
27,452 $ 29,372

$5.00
$2.85
$4.30
$1.66
$7.07
$1.76
$0.65
$9.80

$5.20
$3.20
$4.75
$5.47
$7.78
$2.49
$0.80
$10.20

11%
23%
10%
0%
5%

4%
12%
10%
230%
10%
23%
4%
42%

$10.05
$8.14
$8.30
$8.88
$15.13
$5.33
$2.55
$18.54

$3.40
$1.62
$3.90
$3.04
$5.42
($10.40) $0.30
$8.35

$3.75
$1.98
$3.54
$2.79
$6.05

31%
18%
14%

$9.63
$7.47
$7.68
$7.63
$14.00
$4.61
$2.31
$18.35

$
$
$
$
$
$
$
$
$

14
18
55
37
22
10
15
19
38

$
1,875
$
867
$ 49,572
$
6,367
$
2,178
$
1,790
$
1,438
$
2,755
$
4,522

$
$
$
$
$
$
$
$
$

$1.01
$1.76
$7.15
$6.11
$1.89
$1.11
$2.33
NM
$5.12

$1.14
$2.49
$8.30
$6.31
$1.97
$1.22
$2.87
NM
$5.35

$2.14
$4.61
$12.71
$10.30
$5.22
$1.57
$6.67
NM
NM

$2.34
$5.33
$14.57
$10.96
$5.13
$1.66
$7.33
NM
$19.81

$0.78
($10.40) $5.19
$3.28
$1.47
$1.57 $2.50 $8.50

$0.64

$12.54

$
$
$

118 $
407 $
68 $

94
302
48

$ 60,309
$ 30,080
$ 62,108

$ 59,078
$ 31,654
$ 65,734

$5.25
$19.46
$4.30

$
$
$
$
$

268
92
20
65
44

169
64
11
40
29

$ 14,125
$
2,779
$
1,152
$ 20,874
$ 29,733

$
$
$
$
$

$19.54
$4.20
$0.08
$3.35
$1.66

2,039
1,083
50,986
7,051
2,561
2,130
2,052
3,889
4,586

Earnings Per Share


2014E
2015E

EPS Change
2014E
2015E

EBITDA Per Share


2014E
2015E

FCF Per Share


2014E
2015E

$0.25
$9.86

5%
31%
(10%)
(27%)
35%

16%
3%
4%
10%
23%

(9%)
4%

4%
10%

$5.90
$22.10
$4.75

15%
8%
10%
11%

12%
14%
10%
12%

$9.34
$29.89
$7.68

$10.29
$33.82
$8.30

$3.96
$14.51
$3.90

$4.88
$14.87
$3.54

$21.31
$5.15
$0.35
$4.67
$2.11

(15%)
11%
(81%)
23%
(19%)

9%
23%
338%
39%
27%

$40.62
$8.36
$1.1
$6.23
$3.29

$42.40
$9.66
$1.6
$8.07
$3.92

($2.67)
$3.42
$0.69
$1.18
$1.05

$0.88
$4.59
$0.79
$2.61
$1.84

Ag/Fertilizer Average

(15%)

27%

Chemical Average (ex-Ag.)

14%

13%

8%

10%

Ag Biotech
Monsanto
Syngenta
Dupont
Ag Biotech Average
Fertilizers
CF Industries
Compass Minerals
Intrepid Potash
Mosaic
Potash Corp.

S&P 500

SPX

Source: Deutsche Bank, Thomson Reuters for all non-covered companies

1,872

1,884

$
$
$
$
$

1,536

15,874
3,098
1,286
18,606
33,042

$117.40

$128.58

$6.41
$5.28
$1.58

21 March 2014

Symbol

Chemicals

Market Segment/
Company

China Chemicals Tour

Deutsche Bank AG/London

Figure 171: Chemicals valuation metrics cont.

Page 139

21 March 2014
Chemicals
China Chemicals Tour

Appendix 1
Important Disclosures
Additional information available upon request
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this
research, please see the most recently published company report or visit our global disclosure look-up page on our
website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the
subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive
any compensation for providing a specific recommendation or view in this report. Tim Jones/David Begleiter
Equity rating key
Buy: Based on a current 12- month view of total
share-holder return (TSR = percentage change in
share price from current price to projected target price
plus pro-jected dividend yield ) , we recommend that
investors buy the stock.
Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the
stock
Hold: We take a neutral view on the stock 12-months
out and, based on this time horizon, do not
recommend either a Buy or Sell.
Notes:
1. Newly issued research recommendations and
target prices always supersede previously published
research.
2. Ratings definitions prior to 27 January, 2007 were:

Equity rating dispersion and banking relationships


1600
1400
1200
1000
800
600
400
200
0

49 %

45 %

40 %

32 %
6%

Buy

Hold

Companies Covered

20 %

Sell

Cos. w/ Banking Relationship

Global Universe

Buy: Expected total return (including dividends)


of 10% or more over a 12-month period
Hold:
Expected
total
return
(including
dividends) between -10% and 10% over a 12month period
Sell: Expected total return (including dividends)
of -10% or worse over a 12-month period

Page 140

Deutsche Bank AG/London

21 March 2014
Chemicals
China Chemicals Tour

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Page 141

David Folkerts-Landau
Group Chief Economist
Member of the Group Executive Committee
Guy Ashton
Global Chief Operating Officer
Research
Michael Spencer
Regional Head
Asia Pacific Research

Marcel Cassard
Global Head
FICC Research & Global Macro Economics

Ralf Hoffmann
Regional Head
Deutsche Bank Research, Germany

Richard Smith and Steve Pollard


Co-Global Heads
Equity Research

Andreas Neubauer
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Equity Research, Germany

Steve Pollard
Regional Head
Americas Research

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