We initiate coverage on the Saudi Petrochemicals Sector with three names in focus – Advanced (APPC), Yansab (YANSAB), and Saudi Industrial Investment Group (SIIG). Our valuations are based on a mix of DDM (35% weight), EV/EBITDA (25% weight), P/E (25% weight) and DCF (15% weight). Globally, petrochemicals demand recovered in 2021 as economic activity rebounded from the lows of 2020 and appears to resume the super-cycle seen from 2010-2018. Petrochemical prices rose sharply in 2021 and especially during 2Q21, which we believe will correct from the multi-year highs, but still remain strong enough to maintain margins in spite of feedstock price rise. Capacity surplus overhang, which impacted sector performance in 2019, remains a key concern. We will be expanding our coverage to include more GCC petrochemical companies in due course. • Saudi Petrochemicals resilient amid Covid-19 and ride global economic recovery wave in 2021. The year 2021 witnessed global economic recovery after the lows of 2020 impacted by COVID-19. Along with the rise in crude oil prices (+43% YTD) to average over USD 70 per barrel, petrochemical prices have also risen between 25-35% over 2020. The price rise was driven by a rebound in economic demand as well as global supply chain bottlenecks. Saudi Petrochemicals industry rode this wave of rebound to post strong topline and bottom-line results in 2021 (9M) and looks set to continue the momentum into 2022. • Demand expected to continue from both the East (India, China) and the West (US, EU). The demand is coming from both developing economies like India but also those like US and China who had seen peak growth some time back. While crude as a source of fuel may be impacted by global environmental concerns, the widespread application of petrochemicals across industries – from packaging to construction to transportation – is likely to result in continued demand for the near to medium term at least. • Saudi Petrochemical companies demonstrate strategic advantage as the world’s lowest-cost producers. Middle East-based Petrochemical companies and more specifically Saudi petrochemical companies are among the low-cost producers on the cost curve, due to the lowest cost of oil extraction further flowing down the value chain. • Major product-feedstock spreads to remain steady after suffering from downcycle till 2020. Spreads across major pairs such as Polyethylene (PE)-Naphtha, Polypropylene (PP)-Naphtha, and Polypropylene (PP)-Propane have witnessed a rebound in 2021 and are likely to remain steady for the next few years due to continued economic recovery. Consequently, margins and cash flows of Saudi Petrochemical companies are also likely to sustain. We prefer Petrochemical companies that have significant market share in major petrochemicals product segments like PE and PP, have feedstock allocations from Aramco, and have low leverage (they stand to be insulated from expected rising interest rates). We have assumed demand, prices, and spreads to sustain till 2024. Risks to our valuations arise from renewed economic restrictions to halt the spread of new COVID-19 variants, which could negatively affect oil prices as well as demand from industrial segments like automotive.