1) Relatively low complexity, weaker competitive position: With a complexity factor of 5.5 (Nelson’s index), SPC has a weaker competitive position vs. more complex refineries in the region, which can convert lower priced and lower quality (i.e. heavy and sour) crudes into a higher proportion of high-value oil products.

2) Deregulated market provides no shelter in downturn: Operating in a deregulated market where fuel prices are not government-controlled also means that SPC’s profit margins may decline more sharply than competitors in regulated markets such as China and India. For example, even though refineries in China and India are generally less complex and higher cost, government-controlled product prices have not been reduced as quickly as the drop in international crude prices, and so refineries in China and India have benefited from widening spreads. Conversely, in an oil price upturn, de-regulated refiners such as SPC benefit from higher earnings leverage as product price increases are not limited by government control.

3) Upstream assets are high cost: We believe SPC’s investments in the upstream E&P sector are a long-term positive, as the barriers to entry are higher vis-à-vis the downstream refining business. However, in the near term, we note that costs are relatively high (we estimate all-in costs of about US$40/bbl, of which US$17/bbl is cash-cost). In part this is because SPC acquired these assets at a relatively late stage of development and so returns are lower.

4) Decline in Singapore complex GRM: Current Singapore complex GRM is US$9.9/bbl, but as new capacity comes online we expect a sharp decline to our 2009E average estimate of US$2.5/bbl.

5) Disappointing quarterly results: Our 2009E net profit is 66% below Bloomberg consensus.

6) SPC is currently trading at 0.8X 2008 P/B, versus MSCI Singapore at 1.1X and Thai Oil at 0.7X. Our 12-month target price of S$1.60 is based on 0.5X P/B, in line with the 2001 trough. While the 1997 trough P/B was lower at 0.3X, we believe this is less appropriate as gearing levels were significantly higher at that time.

7) Rebound in oil prices or refining margins (a 5% increase in 2009E GRM and WTI could boost our 2009E EPS by 9% and 11%, respectively).