Misr Chemical Industries

Misr Chemical Industries
Starting 2012 with a Clean Slate
Misr Chemical Industries (MICH) (MICH.CA) is one of the four producers of caustic
10 January 2012
soda, chlorine and their by-products in Egypt. From an equity portfolio perspective,
the firm offers exposure to a small-cap deep value play catering for the demand of
Sector Chemicals
fairly defensive sectors, including government-owned water and power generation
Price per Share (9th Jan. 2012) EGP 4.6 stations. The firm also offers indirect positive exposure to crude oil prices, since the
Fair Value Estimate EGP 8.1 largest cash cost component for any caustic soda producer is electricity and electricity
prices are sensitive to hydrocarbon prices internationally. From a company-specific
Valuation Gap 75.7%
perspective, weak industry dynamics and a highly leveraged balance sheet imposed
Recommendation BUY pressure on free cash flow to equity up to early 2010 but the firm successfully launched
No. Shares 50.0 m a capital increase in late 2010 and will fully settle its legacy debt by April 2012. Post
debt settlement, exposure to the risks of financial leverage and EUR/US$ swings
Market Capitalisation (EGP) 230.5 m
(given that part of the debt is EUR-denominated) will seize to exit and management
Market Capitalisation (US$) 38.2 m will likely opt to replenish reserves and increase dividends beyond FY2012. We initiate
Reuters MICH.CA coverage on MICH with a fair value estimate of EGP 8.1 per share and a "BUY"
Bloomberg MICH EY
recommendation. In November 2012, we expect the firm to distribute EGP 0.61/share,
implying a dividend yield of 13.2%.
Exchange Rate (US$/EGP) 6.03
Av. Daily Turnover (12 M) EGP 0.91 m Over the past three years, MICH enjoyed strong operating metrics, including 1) limited
Av. Daily Turnover (12 M) US$ 0.15 m revenue volatility, 2) low degree of operating leverage, 3) average EBITDA margin of 56.0%
and 4) high average ROAE of cc 25.0%. During 5M-FY2012, revenues remained stable y/y
Year High-Low EGP 8.1 - 4.5
amid recovery in caustic soda exports to Libya and Tunisia coupled with higher caustic soda
Price Performance (2011-2012) prices. In 2012, the outlook for caustic soda prices remains solid as chemicals majors have
9.0
already announced further price hikes amid significantly tight supply conditions.
MICH.CA
8.0
7.0
EGP m ( Year End June) FY2008A FY2009A FY2010A FY2011A FY2012F FY2013F
6.0
Revenues 124.3 167.1 143.3 164.7 176.3 187.5
EBITDA 67.7 97.9 82.0 86.0 95.8 101.4
5.0
EBITDA Margin (%) 54.4% 58.6% 57.2% 52.2% 54.4% 54.1%
4.0 Pre Tax Profits 25.3 57.4 43.5 55.1 71.8 79.2
EGX30**
Net Profits 25.3 57.4 43.2 44.0 53.9 59.4
3.0
12/29/2010
10/17/2011
10/31/2011
12/19/2011
1/13/2011
3/23/2011
4/20/2011
5/23/2011
6/20/2011
7/18/2011
8/16/2011
9/18/2011
10/2/2011
12/5/2011
4/6/2011
5/9/2011
6/6/2011
7/4/2011
8/2/2011
9/4/2011
11/17/2011
1/9/2012
Net Debt 139.3 112.0 99.6 23.2 (20.7) (52.7)

Shareholders' Equity 147.2 166.1 179.2 264.6 281.4 297.4
1 month 3 months 1 year PE (x)** 14.8 8.5 6.2 8.2 4.3 3.9
MICH (11.3%) (24.3%) (42.0%) P/BVPS (x)** 2.6 3.0 1.5 1.4 0.8 0.8
EGX30 (8.1%) (9.4%) (49.3%) P/CFPS (x)** 4.0 7.5 14.1 7.5 10.7 4.4
*Source: Reuters, Pharos Research. EV/EBITDA (x)** 7.6 6.2 4.5 4.5 2.2 1.8
**EGX30 Index rebased to MICH prices as of 9 Jan. 2011. D.Yield (%)** 4.3% 6.5% 9.0% 7.0% 13.2% 15.5%
Mona El Shazly *Source: Company Reports, Pharos Research **End of previous year prices up to FY2011
mona.elshazly@pharosholding.com
George Beshara In addition to stable operating dynamics, MICH balance sheet will be debt free by end
george.beshara@pharosholding.com FY2012. In late 2010, MICH successfully launched an EGP 72.0m capital increase to settle
legacy debt burden. By September 2011, MICH outstanding net debt had already fallen to
Shareholders' Structure 2.3% of equity (down from 94.4% in June 2008) and by the end of FY2012, MICH is expected
Chemical Industries Holding 53.1% to post its first net cash position in at least a decade.
Company
Banque Misr 15.7% We initiate coverage on MICH with a fair value estimate of EGP 8.1 per share and a "BUY"
Other Public Entities 2.7% recommendation. Our DCF-based valuation is based on conservative price and volume
Free Float 28.5% assumptions given intense competition in the local market. We have also shocked electricity
Corporate Calendar
prices, MICHs largest cash cost component, from EGP 0.187/kWh to 0.30/KWH and the
Q2-FY2012 Results February 2012
new FV estimate of EGP 7.1 per share still offers 53.6% upside potential. The company is
Last ex. Div. Date 13 November 2011
currently trading at FY2012 PE multiple of 4.3x and EV/EBITDA of 2.2x.
Subject to Attached Disclaimer.

10 Januar y 2012
Contents
I. Overview 3
I.A. Profile, Ownership and Corporate Structure 3
I.B. Product Portfolio and Revenue Mix 3
I.C. Value-added Chain 4
I.D. Capacity Utilization and Expansion Plans 7
I.E. Cornerstones of Operating Performance 7
II. Industry Analysis 8
II.A. Production and Sales Volume: Short-term Outlook 8
II.B. Product Prices: Short-term Outlook 11
II.C. Electricity Cost 13
II.D. Concluding Remarks 14
III. Financial Analysis 15
III.A. Revenues 15
III.B. Cost Structure 15
III.C. Profitability and Investment Efficiency 18
III.D. Indebtedness 18
III.E. Working Capital Management 19
III.F. Capital Expenditure 20
III.G. Dividend Policy 20
IV. Valuation 21
Subject to Attached Disclaimer. 2

10 Januar y 2012
I. Overview
I.A. Profile, Ownership and Corporate Structure
Misr Chemical Industries (MICH) (MICH.CA) is an Egyptian joint stock company specialized in
the production of chlorine and caustic soda. The company was established in 1959 as a subsidiary
of the Chemical Industries Holding Company (CIHC) with an authorized capital of EGP 200.0m
and an issued and paid-in capital of EGP 128.0m. In August 2010, MICH raised its paid-in capital
to EGP 200.0m through the issuance of 18.0m shares at EGP 4.0/share.
MICH is a public sector company owned by CIHC (53.1%), Banque Misr (15.7%) and other public
financial and insurance companies (2.7%). At present, the free float stands at 28.5%. The firm
has no subsidiaries or associates.
I.B. Product Portfolio and Revenue Mix
MICH produces chlorine and caustic soda as the two primary products derived from the electrolysis
(passage of electric current) of salt solution. In addition to chlorine and caustic soda, the firm
produces hydrogen gas as well as a number of secondary products, namely; hydrochloric acid,
sodium hypochlorite and bleaching powder. In FY2011, the two primary products in addition to
sodium hypochlorite generated 91.2% of total revenues.
The company sells the bulk of its production in the local market and exports limited quantities
of caustic soda to neighboring countries, such as Libya, Tunisia and Sudan. Key clients include
government-owned water and power generation stations in addition to large, medium and small-
scale private sector producers of chemical products and detergents.
Figure 1: MICH Products and Applications
Primary Products Applications
In manufacturing of rayon, paper, soap, detergents, textiles,

Caustic Soda
oil refining, pottery and dyeing.
In sterilizing drinking water, sewage purification, bleaching and

Liquid Chlorine
as feedstock in chemical pesticides, plastics and petrochemicals.
In the production of fertilizers and to ignite heaters as a

Hydrogen Gas
substitute for natural gas in industrial processes.
Secondary Products
In the textile and paper industries, disinfectants and as a

Sodium Hypochlorite
bleaching agent for swimming pools and water tanks.
In manufacturing chlorinated salts, glue, gelatin, glucose,

Pure Hydrochloric Acid
metal cleaning and galvanizing, and refining of oil.
Bleaching Powder In bleaching processes for paper and oil refining operations
and drinking water.
*Source: MICH website, Pharos Research

10 Januar y 2012
I.C. Value-added Chain
MICH production process is based on the dissociation (separation) of salt molecules (sodium
chloride) into constituent elements; sodium (Na) and chlorine (Cl). As seawater salt is the primary
raw material, MICH headquarters and production facility are located in El-Mex industrial zone
in Alexandria. The zone is located almost midway between the ports of Alexandria and El Dekheila
along the Mediterranean Sea. Production of primary and secondary products takes place over
three stages as outlined below:
A- The First Stage: Purification of Salt
The company secures salt from El-Mex Saline Company, another subsidiary of CIHC. In FY2011,
the company bought 101,838 tons at EGP 75.2 per ton. The procured salt contains many impurities
and cannot be used in its raw state. So raw salt is washed with water and other chemicals to be
purified and ready for the production process.
B- The Second Stage: Production of Primary Products
The purified salt that resulted from the first stage enters in the second stage of production to
produce primary products, namely; 1) chlorine, 2) caustic soda and 3) hydrogen gas by electrolyzing
brine. A simplified exposition of the production process is outlined below:
The purified salt is dissolved in water to form salt solution or what is known as brine. Water (which
is composed of hydrogen and oxygen) is added to salt to ionize the elements of the salt molecule
and hence enable the separation of sodium and chlorine via a process known as electrolysis.
Electrolysis is a process by which a direct electric current (flow of electrons) is passed through
brine to support the separation of water and salt molecules into constituent elements. Salt (NaCl)
is split into sodium (Na+) and chlorine (Cl-) whereas water (H2O) is split into hydrogen (H+) and
Hydroxyl (OH-). The sodium and hydroxyl join to form caustic soda (NaOH) whereas the chlorine
and hydrogen gases are discharged to be compressed and sold whereas the remainder is later
used in the production of secondary products.

10 Januar y 2012
Figure 2: Production of Caustic Soda, Chlorine and Hydrogen Gas
Electricity
Water Brine Salt
Hydrogen Hydrogen/Oxygen Sodium Chlorine

(H) (OH) (Na) (Cl)
Hydrogen Gas Caustic Soda Chlorine Gas

H2 NaOH Cl2
*Source: Pharos Research
Based on the above, it is obvious that the main direct costs of production are salt, water and
electricity, which are all secured from the local market. Whereas salt is cheap and abundant
given the proximity of the firm to the Mediterranean Sea, electricity costs account for approximately
one third of cash production costs and could significantly alter production economics for chlorine
and caustic soda producers.
Based on industry sources, energy consumption per unit weight of caustic soda is not far below
that for steel manufacturing and greater than that used in the production of glass or cement, as
cc 2300 -3,000 kWh are required to produce one ton of caustic soda, depending on technology
used. The electrolysis process is energy intensive and hence electricity accounts for the bulk of
cash production cost. MICH is charged EGP 0.186/kWh (US$ 0.03 kWh) and it annually consumes
around 100.0 MWh of electricity to produce around 44,254 tons of caustic soda.
C- The Third Stage: Secondary Products
The portions of chlorine, caustic soda and hydrogen that were not consumed during the first
phase enter into the second phase to produce chlorine and caustic soda derivatives as secondary
products. Hydrogen gas combines with chlorine to produce hydrogen chloride gas, which is then
dissolved in water to form 33.0% concentrated hydrochloric acid. After that, the remaining amount
of chlorine that was not used to make liquid chlorine or hydrochloric acid is used to produce
sodium hypochlorite and bleaching powder.

10 Januar y 2012
Figure 3: Value-added Chain (Using FY2011 Actual Figures)
Regional Electricity
Company
Electricity
103.3 MWh
Water El-Mex
Water Salt (NaCl)
Brine Salines
Company 1,247 m3 101,838 tons Company
Membrane Cells
Salt is initially purified
By before mixing with
Electrolysis water
Primary Products
Chlorine Caustic Soda Hydrogen Gas

24,368 tons 34,641 tons 291.6 tons
20.9% of FY2011 43.5% of FY2011 2.0% of FY2011

Revenues Revenues Revenues
The produced chlorine
gas and hydrogen gases
are then compressed and
liquefied to be packed
and stored in tanks in Liquid Caustic Soda Caustic Soda Flakes
liquid form. Moreover, the 33,246 tons 1,395 tons
produced caustic soda is
liquefied or converted to
flakes to enhance
storability and
transportability.
Secondary Products
Hydrochloric Acid Sodium Hypochlorite Bleaching Powder

6,625 tons 113,200 tons 32.0 tons
6.7% of FY2011 26.8% of FY2011 0.1% of FY2011
Revenues Revenues Revenues
*Source: Company Reports, Pharos Research

10 Januar y 2012
I.D. Capacity Utilization and Expansion Plans
According to management, the maximum feasible production level ranges between 75.0% and
79.0% of nameplate capacity, due to the obsolescence of the plant. In FY2011, capacity utilization
stood at 78.3%. The following table depicts the production capacity of each product versus actual
production.
Table 1: Production Capacity by Product
Product Nameplate Capacity (tpa) Actual FY2011 (tons)
Primary Products
Chlorine 47,082 38,088
Caustic Soda 53,200 44,254
Hydrogen Gas 1,600 209.0
Secondary Products
152,000 113,200
Sodium Hypochlorite
10,000 -
Calcium Hypochlorite
8,233 6,625
Hydrochloric Acid
253.0 32.0
Bleaching Powder
I.E. Cornerstones of Operating Performance
Based on the business model outlined above, the primary drivers of MICH operating performance
are 1) domestic supply/demand balances, 2) international caustic soda prices and 3) electricity
cost. In the industry analysis section that follows, we will examine global and domestic industry
dynamics to determine how each of the above factors will affect the company's performance over
our forecast horizon.

10 Januar y 2012
II. Industry Analysis
As outlined in Section I, the primary drivers for MICH operating profits over the short-term is 1)
domestic supply/demand balances, 2) increase in product prices and 3) stability in electricity
cost. Industry dynamics suggest that both volumes sold and product prices will likely recover in
2012. As for electricity cost, it is not yet clear whether the planned increase in administrative
electricity tariffs will apply to chemical firms or not. Accordingly, we conducted sensitivity analysis
to monitor the impact on operating cash flow and the estimated fair value of the firm. In Box 1
in the following page, we provide a brief overview on the chlorine/caustic soda industry.
II.A. Production and Sales Volumes: Short-term Outlook
In FY2011, MICH capacity utilization rate jumped to a cyclical high of 78.3%, primarily due to
recovery in domestic sales. While this rate seems low in absolute terms, management noted that
a capacity utilization rate in the range of 75.0%-79.0% is optimal given the age of the machinery
and equipment used.
Figure 4: Actual Capacity Utilization Rates (as a % of nameplate capacity)
100.0%
90.0%
77.0% 76.6% 78.3%
80.0% 72.0% 71.0%
70.0% 65.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
FY2006 FY2007 FY2008 FY2009 FY2010 FY2011
In the outset, it is critical to note that MICHs ability to operate at close to full practical capacity
is a function of domestic supply/demand balances, primarily due to the following two reasons:
First, chlorine, which accounted for 20.9% of sales in FY2011, is not an exportable commodity
due to its hazardous nature and high reactivity with other chemicals. In fact, for any chlorine and
caustic soda producer, domestic demand for chlorine has to be strong to justify the production
decision and hence the co-production of caustic soda. As will be discussed later, the steep decline
in chlorine demand during 2011 is already causing a shortage in co-product caustic soda.
Second, Egypt-based producers face stern competition from GCC producers. GCC chemical
giants already enjoy a significant cost advantage due to an extremely low electricity tariff, vertical
integration in the chlorine segment (via venturing into Polyvinyl Chloride - PVC), and presence
of global chemical majors. The latter has been manifested by the recent agreement between
Dow Chemicals, the worlds largest producer of chlorine and caustic soda, and Saudi Aramco
to jointly establish a US$ 20.0bn petrochemical complex (Sadara) to target the fast-growing Asian
markets. In addition, Libya may gradually emerge as a petrochemical giant particularly if the new
government opens up investment opportunities to hydrocarbons and petrochemical majors.

10 Januar y 2012
Box 1: Primer on the Chlor-Alkali Industry
The chlorine/caustic soda industry is known as the chlor-alkali industry. The chlor-alkali process starts
with the electrolysis of brine (salt solution), where a strong direct electric current is passed through the
salt/water solution. The process produces three highly useful chemical building blocks: chlorine, sodium
hydroxide and hydrogen. These building blocks react with other compounds to produce thousands of
vital products involved in the manufacturing of a wide variety of products used in everyday life.
There are three main electrolytic production technologies used in the chlor-alkali industry, namely;
1) diaphragm cell, 2) mercury cell and 3) membrane cell. The main difference between these
technologies lies in the manner by which the produced chlorine gas and the sodium hydroxide are
prevented from remixing, thus ensuring the generation of pure products. Versus mercury and
diaphragm cells the membrane technology is now the dominant in the industry because it is more
energy efficient and relatively considered environmentally friendly.
This electrochemical process leads to the production of a fixed ratio of 1.0 ton chlorine, 1.1 ton caustic
soda (sodium hydroxide) and 0.03 ton hydrogen gas.
Chlorine and Caustic Soda End Uses
Chlorine and caustic soda are among the top ten chemicals produced in the world and are involved
in the manufacturing of a wide variety of products used in everyday life. First, caustic soda is used
in the production of pulp and paper, textiles, soaps and detergents, bleach manufacturing, petroleum
products, aluminum, and the chemical processing industry. The pulp and paper and aluminum
industries are the largest two applications for caustic soda worldwide and collectively account for
almost 25.0% of global demand.
Chlorine can used as a final product or as an intermediate input, to produce other end-products. The
largest end-use for chlorine is ethylene dichloride (EDC), which is in turn used to make vinyl chloride
(VCM) and subsequently polyvinyl chloride (PVC). PVC is a type of plastic used mainly in the
construction and housing sector and in the automotive industry. It is used to produce pipes and
fittings, windows, roof tiles, fencing and cables and wires. The demand for PVC is closely linked to
spending on construction and housing build-ups, accordingly, the chlorine market is closely tied to
the construction sector cycle.
The following figure depicts the percentage of each of the end-uses of chlorine and caustic soda
Caustic Soda Chlorine
Pulp & Paper Other

14.0% EDC/VCM
Other 13.0% 38.0%
27.0% Water Treatment
5.0%
Alumina Pulp Bleaching
11.0% 1.0%
Inorganics
5.0%
Water
Treatment
5.0% Organics
17.0%
Inorganics Other Organics
12.0% 28.0% Chlorinated
Soaps &Detergents Intermediaries
15.0% 9.0%
*Source: ICIS, Electrochemistry Encyclopedia, Pharos Research
Currently, global caustic soda production capacity stands at around 80.0m dry metric tons (dmt).
China is the largest caustic soda producer globally, with a capacity of 30.0m dmt. In 2010, caustic
soda demand stood at 61.1m dmt An average growth of 4.0% across all end-user segments is
expected from 2012-2015, which will continue to support prices. However, alumina and detergents
and textiles are the fastest growing segments, recording growth rates of 5.9% and 5.5%, respectively.
Meanwhile, pulp and paper production is forecasted to grow by 2.2%.

10 Januar y 2012
Although exports started to recover since mid 2011, the recovery came from a very low base due
to the political turmoil in Tunisia and Libya. Accordingly, despite the recovery, cumulative exports
during the first five months of FY2012 stood at EGP 2.3m versus EGP 3.4m recorded in FY2011.
Hence, we do not expect full year export volumes to significantly surprise on the upside.
Figure 5: MICH Exports
18.0 16.6
16.0
14.0 13.3
12.3
12.0
EGP m
10.0
7.7
8.0
6.3 6.3
6.0
4.0
2.0
0.0
FY2006A FY2007A FY2008A FY2009A FY2010A FY2011A
In terms of domestic sales, MICH sales volumes are also expected to linger around current levels
due to weak recovery in demand and intense competition from vertically-integrated producers.
MICH ranks third amongst four domestic producers in terms of production size, with the largest
producer being Indian TCI-Sanmar. According to MICH management, competition amongst the
four producers is intense given the small size of the market up to date. Management noted that
TCI-Sanmar Chemicals is by far the largest competitor in the local market.
TCI-Sanmar Chemicals is located in South Port Said production zone and has a production
capacity of 200,000 tpa of caustic soda (almost 4x MICH capacity). Furthermore, TCI is engaged
in the manufacturing of Ethyl Dichloride (EDC), Vinyl Chloride Monomer (VCM) and Polyvinyl
Chloride (PVC) as well. The company was established in 2001 as Trust Chemical Industries (TCI)
Company, but was later acquired by the Indian Sanmar Group in 2007 and changed to Sanmar-
TCI group. The company is currently stepping into the manufacturing of PVC. It is worth noting
that the firm has recently announced that it may go public.
In addition to TCI, there are two other players in the market, namely the Egyptian Petrochemical
Company (EPC) and El Nasr Company for Intermediate Chemicals. The Egyptian Petrochemical
Company (EPC) is a subsidiary of the Egyptian General Petroleum Corporation (EGPC) and is
the second largest producer in the market. The company was established in 1981 in Alexandria
and has a production capacity of 120,000 tpa of caustic soda. EPC is mainly engaged in the
production of PVC using internally produced chlorine and ethylene purchased from Sidi Kerir
Petrochemicals (SKPC.CA). Thus, caustic soda is treated as a by-product. Accordingly, it can
cut its selling prices compared to competitors without incurring major losses.
El Nasr Company, owned by the military, was established in 1975 and is based in Abu Rawash
area in Cairo. El Nasr Company is the smallest producer of caustic soda in the local market.
According to MICH MD&A, El Nasr currently produces cc 24,000 tons of caustic soda. The
company is engaged mainly in the production of fertilizers, household pesticides, medical gases
and intermediate chemicals, including caustic soda, chlorine and hydrochloric acid.

10 Januar y 2012
Based on the above, it is evident that MICH is the only non-vertically integrated producer in the
market and is hence unable to capture value added generated from end products particularly,
PVC. As such, competitors have historically enjoyed a stronger pricing power and have hence
limited MICH ability to expand market share.
II.B. Product Prices: Short-term Outlook
Based on our industry research, it is evident that the strong rally in caustic soda prices during
2011 will likely continue in 2012. According to ICIS data, caustic soda prices stood at US$480-
500 per dmt on a Southeast Asia basis as of December 2011. The figure implies an increase of
65.0% from US$290.0-310.0/ dmt recorded at the beginning of 2011. Furthermore, Dow Chemicals,
the world largest producers of caustic soda and chlorine, noted in late November 2011 that it will
raise caustic soda prices by EUR 50/ton to EUR 515/ton (cc EGP 4,042/ton). We remind readers
that MICHs average caustic soda selling price during FY2011 stood at EGP 2,030/ton.
Figure 6: International Chlorine and Caustic Soda Prices
Caustic Soda Asia

MICH Caustic Soda (Avg. Year)
600.0
US$ 516.0
500.0
400.0 US$ 385.0 US$ 369.0

US$ 350.0
US$/MT
300.0
200.0
100.0
0.0
01/11/07
01/11/08
01/11/09
01/11/10
01/01/11
01/03/11
01/05/11
01/07/11
01/09/11
01/07/07
01/09/07
01/01/08
01/03/08
01/05/08
01/07/08
01/09/08
01/01/09
01/03/09
01/05/09
01/07/09
01/09/09
01/01/10
01/03/10
01/05/10
01/07/10
01/09/10
*Source: Bloomberg, Company Reports, Pharos Research
Caustic soda prices rebounded in 2011, and will likely continue to increase in 2012 as noted
above, due to the following three reasons:
First, the asynchrony in the business cycles of chlorine and caustic soda implies that actual
production of caustic soda is unable to meet the current recovery in demand. While chlorine and
caustic soda are co-produced via the electrolysis of brine, each is demanded for different uses
and demand cycles may not move in sync. Approximately 40.0% of chlorine is used in the
production of PVC, which is primarily consumed by the cyclical construction industry in the form
of water pipes, windows and doors. Caustic soda, in contrast, is used in the production of aluminum
and in the production of pulp, the building block of the paper industry, as well as bleaching agents.
The divergence between the chlorine and caustic soda cycles is in fact acute at present, as demand
for PVC remains low post the burst of the real estate bubbles in the US and Western Europe
whereas demand for aluminum is recovering in tandem with the strong recovery in the car industry
globally. This has led to a tightness in the caustic soda market and helped push up prices.

10 Januar y 2012
Figure 7: International Chlorine and Caustic Soda Prices
600.0
Chlorine China
500.0 Caustic Soda Asia
400.0
US$/MT
300.0
200.0
100.0
0.0
01/11/07
01/11/08
01/11/09
01/11/10
01/01/11
01/03/11
01/05/11
01/07/11
01/09/11
01/01/07
01/03/07
01/05/07
01/07/07
01/09/07
01/01/08
01/03/08
01/05/08
01/07/08
01/09/08
01/01/09
01/03/09
01/05/09
01/07/09
01/09/09
01/01/10
01/03/10
01/05/10
01/07/10
01/09/10
*Source: Bloomberg, Pharos Research
Second, industry sources noted that product prices jumped during H1-2011 primarily due to the
devastating earthquake in Japan. The earthquake unexpectedly led to the shutdown of approximately
7.0% of global chlorine and caustic soda production capacity.
Third, the marginal cost of production in major production regions jumped during H2-2011,
primarily due to higher electricity prices. As noted in Part 1, electricity is the single largest cash
cost component of chlorine and caustic soda producers and in most producing countries electricity
cost is a function of crude oil, natural gas or coal prices. As such, electricity tariffs vary by region
as outlined below:
In the US, thermal power generation plants account for the bulk of electricity capacity and the
bulk of these plants rely on coal and abundant natural gas (Henry Hub trades at around US$
3.5/MMBTU at present) to generate electric energy. As such, energy cost in the US is one of the
cheapest in the G7.
In Western Europe excluding the UK, electricity generation plants also rely on natural gas, which
is imported from various regions, including Algeria and most importantly Russia. However, the
price of natural gas imported from Russia is benchmarked to crude oil prices based on a 40-year
old pricing agreement. As such, the price of natural gas in Europe hovers around US$ 12.0/MMBTU,
more than 3.0x the price in the US.
Finally, electricity generation plants in China primarily rely on coal. Whereas coal prices soared
over the past five years, electricity tariffs have been relatively inelastic due to tariff controls.
However, on 1 December 2011, the Chinese government decided to raise the electricity tariff to
industrial users to improve generation economics and ensure supply responsiveness during the
winter season.

10 Januar y 2012
Figure 8: Chlorine Cash Cost, US$/ Metric Ton (2010)
Crude Oil
500.0
450.0 Coal
400.0
350.0
Natural Gas
300.0
US$/MT
250.0
200.0
150.0
100.0
50.0
0.0
Middle East North America China North East Asia Western Europe
*Source: CMAI, Pharos Research
It is due to this sensitivity to electricity prices that chlorine producers worldwide are incurring
sizable capital expenditure to enhance efficiency. In fact, as will be discussed in the financial
section, MICH has incurred sizable legacy debt in the late 1990s primarily to shift from a diaphragm
technology to a membrane technology, which eventually reduced electricity consumption per ton
of caustic soda from cc 3,300 kWh to almost 2,300 kWh. At present, most international producers
of chlorine use the membrane technology for the same reason.
II.C. Electricity Cost
Building on the analysis outlined above, one of the key advantages of MICH is its electricity cost
advantage. At present, MICH pays EGP 0.186/kWh or approximately US$ 3 cents per kWh. This
is one of the lowest rates in the world and is only higher when compared to selected ultra low
cost producers, such as GCC producers.
Until recently, MICH was engaged in a dispute with the government over the electricity tariff. The
dispute was centered on the classification of MICH as a petrochemical rather than a chemical
firm. Based on the former classification, MICH was charged EGP 0.245/kWh and the firm has
accordingly built sizable provisions in FY2010. However, this dispute was resolved in favor of
the firm and accordingly the bulk of provisions was reversed in FY2011. Still, we do not rule out
future adjustments in electricity prices as will be discussed below.
Figure 9: MICH Production Cash Cost (FY2011A)
Services
3.5%
Electricity
29.7%
Wages
31.4%
Salt
11.9%
Utilities Water
21.6% 1.9%

10 Januar y 2012
Electricity sector dynamics in Egypt suggest that electricity prices will likely increase in the short-
term. In the middle of last decade, the previous government adopted a program to gradually
increase administrative natural gas and electricity prices charged to energy intensive industries
in an attempt to trim the budget gap. Although there have been delays in implementation post the
financial crisis and most recently post revolution, the current interim government has recently
announced its intention to phase out natural gas and electricity subsidies granted to energy-
intensive firms starting January 2012. No details have yet been provided on the scope or magnitude
of increase. Accordingly, we ran a sensitivity analysis to understand the implications on MICHs
production cash cost and fair value estimate if the decision applies to chemical firms. The result
of the sensitivity analysis is outlined in Section III.
II.D. Concluding Remarks
Based on the industry review outlined above, we believe that MICH is heading towards an
environment of gradual recovery in caustic soda prices possibly followed by recovery in volumes
sold. Management informed us that caustic soda prices have indeed increased from EGP 2,030
to EGP 2,700/ton over the past two months but volumes lagged due to temporary technical
bottlenecks. We integrate these views in our financial analysis and fair value estimates discussed
in Section III and IV.

10 Januar y 2012
III. Financial Analysis
III.A. Revenues
MICH primary products include; chlorine, caustic soda (liquid and flakes) and compressed
hydrogen gas, accounted for nearly 2/3 of the revenue line over the past two years. Meanwhile,
secondary products, which include hydrochloric acid, bleaching powder and sodium hypochlorite
represent the remaining revenue balance where sodium hypochlorite alone accounted for nearly
80.0% of the secondary products revenues in FY2011.
MICH is a predominantly local player and approximately half of its customers are government-
related entities. In FY2011, local sales accounted for 96.2% of revenues whereas only 3.8%
where exported to regional markets, including Libya, Tunisia and Sudan. Although export volumes
plunged post the outbreak of revolutions across the Middle East, the firm noted that exports
recovered starting mid 2011. Domestically, MICH's main clients are water companies, power
generation stations, detergent producers and textiles firms. According to management, state-
owned firms absorb cc 60.0% of sales, which has historically provided relative revenue visibility.
Table 2 below outlines the breakdown of revenues by market and by product segment.
Table 2: MICH Revenue Outlook
FY2009A FY2010A FY2011A FY2012E FY2013F FY2014F
Total Revenues (EGP m)** 165.6 142.0 163.2 171.0 182.1 192.6
Local Market Revenues (EGP m) 153.3 135.7 156.9 165.8 174.8 182.9
Export Revenues (EGP m) 12.3 6.3 6.3 5.1 7.3 9.7
Caustic Soda (liquid)
Volume (Tons) 32,520 30,012 33,246 31,500 32,340 33,180
Selling Price (EGP) 2,840 1,925 2,030 2,500 2,625 2,756
Revenues (EGP m) 92.4 57.8 67.5 78.8 84.9 91.5
Caustic Soda (flakes)
Volume (Tons) 421 738 1,395 200 800 1,000
Revenues (EGP m) 1.0 1.8 3.4 0.5 1.8 1.8
Chlorine
Volume (Tons) 22,227 23,109 24,368 21,724 22,303 22,883
Revenues (EGP m) 30.2 31.1 34.1 32.6 35.1 37.8
Secondary Products
Volume (Tons) 122,587 125,225 120,148 120,148 120,148 120,148
Revenues (EGP m) 42.0 51.3 58.2 59.1 60.3 61.5
*Source: Company Reports, Pharos Research **Excluding revenues from services
III.B. Cost Structure
As we noted earlier, salt and electricity account for more than 40.0% of the variable cash cost.
The company currently sources its electricity at a price of EGP 0.186/kWh. As for salt, MICH
procures its required salt volume from El-Mex Saline Company, another subsidiary of CIHC, at
a current price of EGP 81.0/ton.

10 Januar y 2012
The company has limited fixed costs, where quantity demanded of salt and electricity depends
on quantity of caustic soda and chlorine produced and demanded in the market. The third
component of cost is water used in dissolving salt, but water accounts for a minor share in total
cost.
Electricity Cost
MICH secures the required amount of electricity at a rate of EGP 0.1866/ kWh in FY2011, up
from EGP 0.168/kWh in the previous year. According to management, electricity costs amounted
to EGP 19.3m in FY2011. It is worth noting that the electricity company had reclassified MICH
to be included in the petrochemical sector, and accordingly wanted to charge MICH a higher rate
of EGP 0.245/kWh. However, this dispute was resolved in favor of MICH.
Salt
Salt is the key raw material in the chlor-alkali production process and is considered the second
major cost component after electricity. According to management, 2.3 tons of salt are required
to produce one ton of caustic soda. The conversion ratios depend on the type of salt used and
the degree of purity. MICH secures the required salt volume from El Mex Saline Company in
Alexandria.
Other Variable Costs
The other variable costs are low cost factors and vary with the amount of chlorine-caustic soda
produced. These costs include water, chemical treatment of salt and other utilities. Water is the
third raw material used in the production process and constitutes a very minor share of around
3.0% in total production cash cost.
Feedstock Cost Calculation
The cost structure of MICH rests on the quantity of caustic soda produced. First, each ton of
caustic soda requires approximately 2,320 kWh of electricity and 2.3 tons of salt. Therefore, to
calculate the required amount of electricity and salt required, we multiply the amount of caustic
soda produced by 2,320 kWh to estimate the amount of electricity used. Similarly, to estimate
the amount of salt, we multiply the amount of caustic soda by salt conversion ratio which is 2.3,
to arrive at the amount of salt utilized in the production process. The following table shows the
cash cost calculation method historically which will be used in our future forecasts as well.

10 Januar y 2012
Table 3: Cash Costs Calculation
(EGP m) FY2009A FY2010A FY2011A FY2012E FY2013F FY2014F
Caustic Soda (Tons) 43,120 42,896 44,240 42,000 43,120 44,240

Electricity (kWh) x 2,320 100,038 99,519 102,637 97,440 100,038 102,637
Electricity 21.4 17.0 19.2 18.2 18.7 19.2
Salt (Tons) x 2.3 99,176 98,661 101,752 96,600 97,176 101,752
Salt 6.4 6.6 7.7 7.8 8.4 9.1
Water (Cubic Meters) 1,155 1,149 1,170 1,185 1,170 1,140
Water (EGP) 1.2 1.2 1.2 1.2 1.2 1.2
Production Costs 15.6 11.0 13.9 15.0 16.2 17.5
Variable Cash Costs 44.6 35.8 42.0 42.2 44.5 47.0
Wages 13.7 16.7 20.2 24.3 26.7 29.4
Services 1.7 1.7 2.2 2.4 2.5 2.6
Total Cash Costs 60.1 54.2 64.4 68.8 73.7 79.0
Depreciation 27.7 26.5 26.2 24.8 25.3 25.9
Other Indirect Costs 0.2 0.1 0.2 0.2 0.2 0.2
Total Costs 88.0 80.8 90.8 93.8 99.2 105.1
Change in Inventory 0.3 1.5 (2.2) - - -
COGS 87.7 79.3 93.0 93.8 99.2 105.1
Cost Sensitivity Analysis:
After reviewing the cost structure of MICH, we can conclude that the three main factors that play
a role in determining the marginal cost of production are; electricity cost, salt cost and capacity
utilization rates. The cost of electricity and salt directly affect the variable cost of production of
caustic soda and chlorine. The capacity utilization rate affects per unit fixed cost which is incurred
regardless of the level of the production.
Since electricity is the largest cost component, production costs are sensitive to changes in kWh
rate charged. Post revolution, the government has decided to raise energy prices charged to
energy-intensive industries. Accordingly, we opted to run a sensitivity analysis to study the impact
of increasing the kWh rate charged on COGS, by taking FY2011 as our base case. If we increase
the rate from the current rate of EGP 0.186 to EGP 0.30/kWh, we find that COGS increases by
12.5% as shown below. It is worth noting that since the latest upward adjustment from EGP 0.168
kWh in FY2010, the company has not been notified of any potential increase in electricity rates.
Figure 10: Impact of Change in Electricity Rates on COGS (FY2011A)
106.0 104.6
104.0
101.9
102.0
100.0 99.0
EGP m
98.0 96.9
96.0 94.8
94.0 93.0
92.0
90.0
88.0
86.0
0.186 0.204 0.225 0.245 0.273 0.300
EGP/kWh

10 Januar y 2012
III.C. Profitability and Investment Efficiency
Generally, caustic soda enjoys the highest profitability across MICH's product portfolio. Historically,
caustic soda price tag has been marked at a premium of nearly 40.0% over the chlorine product.
In FY2012, we expect EBITDA margins to slightly expand to 54.4% level from 52.2% in FY2011,
due to the increase in caustic soda prices coupled with the stability in electricity price.
Over the past four years, MICH's return on invested capital (ROIC) was relatively volatile due to
the fluctuation in operating margins. In FY2011, MICH posted a ROIC of 20.5%, the highest ROIC
in the past four years. Going forward, we expect ROIC, which will primarily reflect ROE in the
absence of debt beyond FY2012, to hover around the 20.0% mark. While this is not value accretive
in the short-term due to the significant surge in the cost of equity, it is value accretive over the
medium-term once political conditions return to normal.
Figure 11: Return on Invested Capital
450.0 Invested Capital 23.0%

ROIC 20.5% 20.2% 20.2% 19.6% 21.0%
400.0
350.0 19.0%
17.2%
Invested Capital EGP m
15.9% 17.0%
300.0
15.0%
250.0
13.0%
ROIC
200.0 11.1%
11.0%
9.3%
150.0
9.0%
100.0 5.8% 7.0%
50.0 5.0%
0.0 3.0%
FY2007A FY2008A FY2009AFY2010A FY2011A FY2012E FY2013F FY2014F FY2015F
III.D. Indebtedness
The company's balance sheet has been highly leveraged since the overhaul of the production
facility in the late 1990s. To finance the overhaul process, MICH secured three loans from three
banks, namely; National Bank of Egypt, Banque Misr and German Reconstruction Bank. The first
loan amounted to EGP 2.4m, out of which EGP 1.164m has been fully repaid by September 2011.
The remaining amount, equivalent to EGP 1.27m will be fully paid by FY2013, after deducting
EGP 0.484m as a grant.
The second loan, sourced from Banque Misr, amounted to EGP 378.0m and has been fully settled
in September 2011. The third EUR-denominated loan was sourced from the German Reconstruction
Bank and has historically exposed the firm to FX losses during periods of EGP weakness. The
current outstanding portion of the debt, which is the last installment, is equivalent to EGP 37.4m
and will be fully paid by April 2012.
Thus, the company's total outstanding interest bearing debt balance currently stands at EGP
38.9m, out of which 37.8m will be paid this year whereas the remaining EGP 1.1m will be fully
paid in FY2013.

10 Januar y 2012
In 2010, the company had faced a liquidity squeeze due to the size of debt obligations. As a
result, the company opted to resort to a capital increase to secure the needed liquidity. In August
2010, MICH successfully raised its paid in capital through a rights issue of 18.0m shares at a par
value of EGP 4.0 per share. The proceeds of the capital increase were directed to payoff MICH
debt obligations. Throughout our forecast period, we do not expect MICH to raise any debt
financing as management highlighted that it will not pursue any expansion plans over the forecast
horizon. As of September 2011, MICHs net debt position came in at EGP 6.2m. The chart below
shows MICH's net debt evolution during the past period.
Figure 12: Net Debt to EBITDA
120.0 Net Debt (LHS) 4.0

3.7 x EBITDA (LHS)
110.0 3.5
Net Debt/EBITDA (RHS)
100.0
3.0
Net Debt / EBITDA

90.0
80.0 2.5
EGP m
2.0 x 2.1 x
70.0 2.0
60.0 1.5
50.0 1.1 x 1.2 x
1.0
40.0
30.0 0.5
0.3 x
20.0 0.0
III.E. Working Capital Management
MICH has a relatively short cash collection cycle, since the difficulty and cost incurred to store
end products (particularly chlorine) imposes a limit on how far the firm can produce in excess of
current demand. As such, the firm does not have to expend cash or borrow to invest in current
assets. Historic receivables, inventory and payables turnover ratios are stable and translate into
a cash conversion cycle of cc 20 days. Management noted that intense competition is forcing
producers to extend favorable sales terms and hence we do not expect a substantial decline in
the receivables turnover ratio going forward.
Figure 13: Days on Hand
120.0
Receivables Days on Hand
100.0 Inventory Days on Hand
Payable Days on Hand
80.0
Days on Hand
60.0
40.0
20.0
0.0
FY2008A FY2009A FY2010A FY2011A FY2012E FY2013F FY2014F

10 Januar y 2012
III.F. Capital Expenditures
The company overall maintenance capital expenditures since 2006 represented an average of
3.5%-4.0% of total revenue. We expect maintenance capex/revenue ratio to remain within this
range as management is not expected to announce any expansion plans at least over the coming
three years.
III.G. Dividend Policy
As we noted earlier, MICH is considered a value stock rather than a growth stock. The company's
average payout ratio over the past three years has been around 56.0%. We expect this trend to
continue in FY2012 until the company fully pays off its outstanding debt by April 2012. In addition,
management indicated that there are no imminent expansion plans particularly given the slow
growth in domestic consumption and presence of intense competition. Accordingly, we expect
the average payout ratio over the coming three years to hover around the 60.0% mark.

10 Januar y 2012
IV. Valuation
We initiate coverage on MICH with a "BUY" investment recommendation and a target price of
EGP 8.1 per share. Our fair value estimate is derived from the DCF valuation approach. We
utilized a discount factor of 19.5% based on a risk free rate, market risk premium and beta of
12.5% 7.0% and 1.0x, respectively. The cost of capital fully reflects the cost of equity since the
company is almost debt free. Our utilized perpetual growth rate is 3.0%. The table below depicts
the details of our DCF valuation model.
Table 4: DCF Valuation Assumptions
EGP m FY2011A FY2012E FY2013F FY2014F FY2015F
EBIT 72.6 71.0 76.1 80.1 81.9

Less Tax Adjustments 11.5 17.8 19.0 20.0 20.5
(+) Depreciation and Amortization 26.2 24.8 25.3 25.9 26.6
(+) Provisions (12.8) - - - -
CAPEX 6.9 (7.1) (11.3) (15.8) (17.5)
Change in Working Capital 5.2 0.3 (2.0) (6.5) (0.8)
Free Cashflow to the Firm 86.6 71.3 69.1 63.7 69.7
Terminal Value 450.2
Cumulative PV of Future Cash Flows 218.7
PV of Terminal Value 193.1
Enterprise Value 411.8
Net Cash Position (September 2011) 32.7
Outstanding Debt (September 2011) 38.9
Equity Value 405.6
Outstanding Shares (m) 50.0
Equity Value per Share (EGP) 8.1
Table 5: Sensitivity Analysis
Weighted Average Cost of Capital
18.0% 18.5% 19.0% 19.5% 20.0% 20.5% 21.0%

2.0% 8.6 8.3 8.1 7.9 7.6 7.4 7.3
Perpetual Growth Rate
2.5% 8.7 8.5 8.2 8.0 7.8 7.6 7.4

3.0% 8.9 8.6 8.4 8.1 7.9 7.7 7.5
3.5% 9.1 8.8 8.5 8.3 8.0 7.8 7.6
4.0% 9.3 9.0 8.7 8.4 8.1 7.9 7.7
4.5% 9.5 9.1 8.8 8.6 8.3 8.0 7.8
5.0% 9.7 9.3 9.0 8.7 8.5 8.2 7.9
*Source: Pharos Research

10 Januar y 2012
Table 6: Summary Income Statement
EGP m FY2009A FY2010A FY2011A FY2012E FY2013F FY2014F
Revenues 167.1 143.3 164.7 176.3 187.5 198.1

Gross Profit 79.8 64.2 71.7 82.5 88.3 93.0
Gross Profit Margin (%) 47.8% 44.8% 43.5% 46.8% 47.1% 47.0%
EBITDA 97.9 82.0 86.0 95.9 101.4 106.6
EBITDA Margin (%) 58.6% 57.2% 52.2% 54.4% 54.1% 53.3%
Operating Income 65.3 39.4 72.6 71.0 76.1 80.1
Operating Income (%) 39.1% 27.5% 44.1% 40.0% 40.6% 40.5%
Net Interest (14.8) (11.2) (4.1) 0.8 2.6 4.5
Profit Before Tax 57.4 43.5 55.1 71.8 79.2 84.6
Minority Interest - - - - - -
Tax - 1.5 8.7 18.0 19.8 21.2
Attributable Profit 57.4 43.2 44.0 53.9 59.4 63.5
Table 7: Summary Balance Sheet
Fixed Assets 349.5 327.2 301.0 281.9 267.9 257.8

Current Assets 129.5 79.2 107.3 82.8 117.9 145.8
Cash 65.5 18.8 47.7 21.5 52.7 76.3
Accounts Receivable 15.4 12.8 14.4 15.5 16.4 17.4
Inventory 34.3 36.0 33.3 32.4 34.5 36.6
Due From Related Entities 9.4 7.3 7.9 8.7 9.2 10.3
Other Debit Balances 4.9 4.3 4.0 4.7 5.0 5.3
Total Assets 479.0 406.5 408.3 364.7 385.7 403.6
Current Liabilities 163.7 168.5 141.6 80.8 88.3 89.3

Accounts Payable 7.3 12.4 8.3 12.9 13.6 10.1
Due to Related Parties 2.6 4.8 13.7 10.3 10.9 11.5
Bank Overdraft - - - - - -
CPLTD 101.0 91.8 70.1 0.9 - -
Provisions 2.0 17.3 5.3 5.3 5.3 5.3
Other Credit Balances 50.8 42.3 44.3 51.5 58.6 62.5
Long Term Liabilities 149.2 58.8 2.1 2.4 - -
Loans 76.6 26.7 0.9 - - -
Other 72.7 32.1 1.2 2.4 - -
Total Liabilities 312.9 227.3 143.7 83.2 88.3 89.3
Paid-in Capital 128.0 128.0 200.0 200.0 200.0 200.0
Reserves 28.5 45.7 64.0 77.2 90.6 105.5
Retained Earnings 9.6 5.5 0.6 4.2 6.8 8.8
Shareholders' Equity 166.1 179.2 264.6 281.4 297.4 314.3

10 Januar y 2012
Table 8: Summary Cash Flow
Net Profit 57.4 43.2 44.0 53.9 59.4 63.5

Depreciation & Non-cash items 30.8 43.2 4.5 24.8 25.3 25.9
Change in Working Capital 10.6 11.2 5.2 0.3 (2.0) (6.5)
Operating C/F 98.8 97.6 53.7 79.0 82.7 82.9
Purchases of Fixed Assets (9.5) (4.5) 8.6 (5.7) (11.3) (15.8)
Other LT Investments 0.0 (1.1) 1.2 - - -
Investment C/F (9.5) (5.6) 9.8 (5.7) (11.3) (15.8)
Change in Debt (55.6) (59.0) (47.6) (70.1) (0.9) -
Change in Equity 0.0 0.0 72.0 - - -
Change in Other Long-term Liabilities (62.0) (79.6) (59.0) (29.4) (39.4) (43.4)
Financing C/F (117.6) (138.6) (34.6) (99.4) (40.3) (43.4)
Change in Cash (28.3) (46.7) 28.8 (26.2) 31.1 23.7
Cash Balance B.o.P 93.8 65.5 18.8 47.7 21.5 52.7
Cash Balance E.o.P 65.5 18.8 47.7 21.5 52.7 76.3
Table 9: Financial Ratios and Share Data
EPS (EGP) 1.8 1.3 0.9 1.1 1.2 1.3

DPS (EGP) 1.0 0.8 0.5 0.6 0.7 0.8
BVPS (EGP) 5.2 5.6 5.3 5.6 5.9 6.3
CFPS (EGP) 2.0 0.6 1.0 0.4 1.1 1.5
PE (x)** 8.5 6.2 8.2 4.3 3.9 3.6
D.Yield (%)** 6.5% 9.0% 7.0% 13.2% 15.5% 16.5%
P/BVPS (x)** 3.0 1.5 1.4 0.8 0.8 0.7
P/CFPS (x)** 7.5 14.1 7.5 10.7 4.4 3.0
EV/EBITDA (x)** 6.2 4.5 4.5 2.2 1.8 1.5
EV/Sales (x)** 3.6 2.6 2.3 1.2 0.9 0.8
Gross Margin (%) 40.6% 47.8% 44.8% 43.5% 46.8% 47.1%
EBITDA Margin (%) 58.6% 57.2% 52.2% 54.4% 54.1% 53.5%
Effective Tax Rate (%) 0.0% 3.4% 15.8% 25.0% 25.0% 25.0%
Net Margin (%) 34.4% 30.1% 26.7% 30.5% 31.7% 32.0%
ROAE(%) 36.7% 25.0% 19.8% 19.7% 20.5% 20.8%
ROAA (%) 11.3% 9.8% 10.8% 13.9% 15.8% 16.1%
Payout Ratio (%) 55.7% 55.6% 56.9% 57.0% 60.0% 60.0%
Debt/Equity (%) 106.9% 66.1% 26.8% 0.3% 0.0% 0.0%
Net Debt /Equity (%) 67.4% 55.6% 8.8% -7.3% -17.7% -24.3%
Current Ratio (x) 0.8 0.5 0.8 1.0 1.3 1.6
Quick Ratio (x) 0.5 0.2 0.4 0.5 0.8 1.0
Inventory Turnover (x) 67.3 36.4 51.7 83.9 57.6 53.6
*Source: Company Reports, Pharos Research **End of previous year prices up to FY2011

10 Januar y 2012

PHAROS SECURITIES
Sales and Trading
Mohamed Radwan
Head of Equities
+202 27393680
mohamed.radwan@pharosholding.com
Essam Abd El Hafiez

Local Institutional Sales
+202 27393687
essam.hafiez@pharosholding.com
Chamel Fahmy
Gulf Sales
+202 27393679
chamel.fahmy@pharosholding.com
7, Abu El Feda Street, Zamalek,

Cairo, Egypt. 11211
T: +(202) 273 93670 F: +(202) 273 50661
www.pharosholding.com
Disclaimer
This Report is compiled and furnished solely for informative purposes to be considered by the intended recipients who have the
knowledge to assess the information contained herein. Pharos Research ('Pharos') makes no representation or warranty, whether
expressed or implied, as to the accuracy and/or completeness of the information contained herein or any other information that may
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Starting 2012 with a Clean Slate

Net Debt 139.3 112.0 99.6 23.2 (20.7) (52.7)

Subject to Attached Disclaimer.

I.A. Profile, Ownership and Corporate Structure 3

I.B. Product Portfolio and Revenue Mix 3

I.C. Value-added Chain 4

I.D. Capacity Utilization and Expansion Plans 7

I.E. Cornerstones of Operating Performance 7

II. Industry Analysis 8

II.A. Production and Sales Volume: Short-term Outlook 8

II.B. Product Prices: Short-term Outlook 11

II.C. Electricity Cost 13

II.D. Concluding Remarks 14

III. Financial Analysis 15

III.B. Cost Structure 15

III.C. Profitability and Investment Efficiency 18

III.E. Working Capital Management 19

III.F. Capital Expenditure 20

III.G. Dividend Policy 20

Subject to Attached Disclaimer. 2

I.A. Profile, Ownership and Corporate Structure

I.B. Product Portfolio and Revenue Mix

Figure 1: MICH Products and Applications

Primary Products Applications

In manufacturing of rayon, paper, soap, detergents, textiles,

In sterilizing drinking water, sewage purification, bleaching and

In the production of fertilizers and to ignite heaters as a

In the textile and paper industries, disinfectants and as a

In manufacturing chlorinated salts, glue, gelatin, glucose,

*Source: MICH website, Pharos Research

Subject to Attached Disclaimer. 3

I.C. Value-added Chain

A- The First Stage: Purification of Salt

B- The Second Stage: Production of Primary Products

Subject to Attached Disclaimer. 4

Figure 2: Production of Caustic Soda, Chlorine and Hydrogen Gas

Water Brine Salt

Hydrogen Hydrogen/Oxygen Sodium Chlorine

Hydrogen Gas Caustic Soda Chlorine Gas

*Source: Pharos Research

C- The Third Stage: Secondary Products

Subject to Attached Disclaimer. 5

Figure 3: Value-added Chain (Using FY2011 Actual Figures)

Chlorine Caustic Soda Hydrogen Gas

20.9% of FY2011 43.5% of FY2011 2.0% of FY2011

Hydrochloric Acid Sodium Hypochlorite Bleaching Powder

*Source: Company Reports, Pharos Research

Subject to Attached Disclaimer. 6

I.D. Capacity Utilization and Expansion Plans

Table 1: Production Capacity by Product

Product Nameplate Capacity (tpa) Actual FY2011 (tons)

*Source: Company Reports, Pharos Research

I.E. Cornerstones of Operating Performance

Subject to Attached Disclaimer. 7

II. Industry Analysis

II.A. Production and Sales Volumes: Short-term Outlook

Figure 4: Actual Capacity Utilization Rates (as a % of nameplate capacity)

*Source: Company Reports, Pharos Research

Subject to Attached Disclaimer. 8

Box 1: Primer on the Chlor-Alkali Industry

Chlorine and Caustic Soda End Uses

Caustic Soda Chlorine