SABIC: Comprehensive Accounting and Financial Reporting Analysis

This report provides a comprehensive analysis of the Saudi Arabian Basic Industries Company (SABIC), a major player in the global petrochemicals industry. It begins with an overview of SABIC, its operations, and its diverse product portfolio, including petrochemicals, polymers, agri-nutrients, and metals. The report then dissects SABIC's business model, outlining its key partners, activities, value propositions, customer relationships, and segments. A key component is the application of Porter's Five Forces model to assess the competitive landscape, examining the threats of new entrants and substitutes, and the bargaining power of customers and suppliers, alongside competitive rivalry in both petrochemicals and polymers. VRIO analysis is employed to evaluate SABIC's resources and capabilities. Furthermore, the report addresses environmental, social, and governance (ESG) factors, recognizing the industry's environmental pressures and SABIC's circular economy solutions. The report evaluates SABIC's financial performance, including revenue, net income, and return on equity (ROE) trends over several years. Finally, it explores the implications of the Saudi Aramco-SABIC acquisition, offering a holistic understanding of SABIC's operations, strategy, and financial health.

Running head: SABIC- ACCOUNTING AND FINANCIAL REPORTING
SABIC- Accounting and Financial Reporting
Name of the Student
Name of the University
Author Note

1SABIC- ACCOUNTING AND FINANCIAL REPORTING
Table of Contents
Answer to Question 1.................................................................................................................2
Company’s Overview.............................................................................................................2
Answer to Question 2.................................................................................................................2
Porter’s Five Forces Model....................................................................................................4
VRIO Analysis.......................................................................................................................7
Environmental, Social and Governance.................................................................................8
Answer to Question 3.................................................................................................................9
SABIC’s Financial Performance............................................................................................9
Answer to Question 4...............................................................................................................14
Sustainable Competitive Advantage....................................................................................14
Answer to Question 5...............................................................................................................14
Saudi ARAMCO-SABIC acquisition..................................................................................14
Appendix..................................................................................................................................17
References................................................................................................................................20

2SABIC- ACCOUNTING AND FINANCIAL REPORTING
Answer to Question 1
Company’s Overview
Saudi Arabian Basic Industries Company (SABIC) is a public company situated in
Riyadh, Saudi Arabia. It is amongst the world's largest petrochemicals manufacturers. The
company has begun in the year 1976 (Sabic.com 2019). Currently, its operation is in more
than 50 countries with above 35,000 employees working within this company. The
company's 70% shares are with the government of Saudi Arabia, and the rest 30% is being
publicly traded on the Saudi stock exchange (Gashgari 2017). SABIC is a diversified
manufacturing company that is composed of four different strategic business units that are
Agri-Nutrients, Specialties, Metals and Petrochemicals. They support the customers through
packaging, construction, agri-nutrients, medical devices, transportation, electronics and clean
energy. SABIC used to develop a deep understanding of the customer's requirement and
engineer products at the right time. The SABIC, with their expertise, adapts the business
needs of the customers that allow them to prepare a product solution. This strategy helps
them to maximize the customer's advantage over the long-term (Alotaibi 2015). The products
and services of the company are extensive. SABIC's product portfolio involved within the
five primary industries that is Polymers, Agri-Nutrients, Chemicals, Specialists and Metals.
SABIC keep a good knowledge about such sectors in which the customers compete. This
allows them to find a way to increase the customer's market success.
Answer to Question 2
SABIC’s Business Model
Key Partners Key Activities Value
Propositions
Customer
Relationships
Customer
Segments
The government
of Saudi Arabia
Petrochemicals, Provide quality
products and
Create and Industries
different

3SABIC- ACCOUNTING AND FINANCIAL REPORTING
has owned 70%
shares,
Remaining 30%
shares is
publicly traded
on the Saudi
stock exchange,
Agriculture
industry,
Petrochemicals,
Affiliates and
Subsidiaries,
Oil,
Joint Ventures.
Metals,
Agri-nutrients,
Specialists,
Technology
acquired by
joint ventures,
Manufacturing,
Quality control,
Engineering
plastics and its
compounding,
Oil extraction,
Supply chain
management,
Research and
development,
services with
their continuous
innovation,
Sustain
maximum value
to their
shareholders,
Value-added
commodities,
Introduce more
than 150 new
products every
year.
Deliver,
Long-term
contacts,
Patent-attached
agreements,
Inspiring and
engaging,
Leadership,
Government-
backed
agreements.
vertical
markets:
Construction
Healthcare,
Agriculture,
Automotive.
Key Resources Channels
Highly qualified staff,
Manufactures on a global scale,
Support from the Saudi government,
Intellectual property, Natural resources,
21 technology and innovation centres, 12191
global patents. Hundreds of dedicated scientists
News and media,
Global website,
Reports, Videos,
Social Networks,
The dedicated team of Sales,
Account management

4SABIC- ACCOUNTING AND FINANCIAL REPORTING
Cost Structure Revenue Streams
Manufacturing facilities,
Raw material,
Factories,
Research and Development,
Technology and innovation centres,
Distribution,
Economies of scale,
Legal,
Royalties,
Staff compensation.
Agri-nutrients and metals,
Chemicals,
Licensing in technology,
Service fees,
Commodity and high-performance plastics,
Sale of several products.
Porter’s Five Forces Model
Threat of New
Entrants
Bargaining
Power of
Buyers
Bargaining
Power of
Suppliers
Threat of
Substiututes
Industry
Rivalry

5SABIC- ACCOUNTING AND FINANCIAL REPORTING
(Source: Author)
Threat of New Entrants (Petrochemicals- Low and Polymers- Moderate to Low)
The threat of the new entrants for the petrochemicals industry is low. The company’s
initial capital, expenditure, its patented technology, economies of scale to sell their products
at a reasonable price, complex supply chain, favourable support of the environmental and
government regulations are highly managed. To enter the segment of such an industry, a
company will need to make a high investment (Leker and Bauer 2017). Therefore, the new
entrants find it not easy to enter the market.
Further, the government of Saudi also discourages the new entrants by regulating the oil
supply. The Polymers industry is having moderate to the low threat of new entrants, as the
company is still evolving. It requires a considerable capital investment, and the major
limitation is exposure to technology.
Threat of Substitute Products (Petrochemicals- Low and Polymers- Moderate to Low)
SABIC’s petrochemical companies used the produces materials into several sectors
such as food or beverages, construction, electrical, industrial and agricultural sectors. The
industries used to make indispensable products every day that required by people too
frequently in their life. Polythene is famous in its production because of low-cost
manufacturing and its use. Farmers mostly prefer the artificial fertilizers to manure due to its
reliability and readily availability. SABIC is a significant player in analyzing the trend and
positioned to cater at a speed that is not possible by other industry to meet such strategy soon.
Accordingly, the threat of its substitutes is too low.
Bargaining Power of Customers (Petrochemicals- Moderate to High and Polymers-
Moderate)

6SABIC- ACCOUNTING AND FINANCIAL REPORTING
The buyer of the Petrochemicals segment has high bargaining power because of its
availability of substitutes and low switching costs (Rehman and Al-Hadhrami 2014). The
prices of the petrochemical industry depend on the domestic and international market
demand. During the economic prosperity and expansion period, the buyer has limited
bargaining power due to its necessity. The polymer segment has moderate bargaining power
of the customer. The substitute’s availability is moderate to lower, which depends on the
ratings and variety of the polymers.
Bargaining Power of Suppliers (Petrochemicals- High and Polymers- Low)
The bargaining power of suppliers in the Petrochemicals industry is high. The reason
that increases the suppliers bargaining power is the forward integration. SABIC is the sole
supplier in the industry, and only a few petroleum companies can supply raw materials. The
price of the oil is used to be driven and set according to the government policies. The price of
the oil is a major threat that has the potential to influence the overall production cost and
ultimately, the company’s profit (Bardshaw, Van de Graaf and Connolly 2019). The main
source of input for the polymer companies is available to be provided by different chemical
producers. Addition to this, the switching cost is moderate. Therefore, this is limiting the
bargaining power of the suppliers.
Competitive Rivalry (Both Petrochemicals and Polymers- Moderate to High)
In the last two decades, there has been rapid economic growth in the Middle East and
Asia. This has led to the emergence of different petrochemical companies. The industry is
having a high competition. Some of the Asian countries are small, and thus the consumption
of the petrochemicals products is less (Volgy and Gordell 2019). This increased competition
in the international market. However, the market share is determined by a few major players
like SABIC that accounts to almost 95% of domestic chemical production. The high

7SABIC- ACCOUNTING AND FINANCIAL REPORTING
sensitivity of the customers for lower switching costs and to the price increase the intensity of
intense competitive rivalry. The companies with advance technology make them able to
capture the market share of the polymers (Jaconis et al. 2018). As technology enables them to
produce better products and thus, increase the competitive rivalry.
VRIO Analysis
Value: The joint ventures of SABIC support in increasing the capacity and
effectiveness in meeting the demands. There is a continuous emergence of intense
competition in the petrochemical industry that can affect profitability. However, the company
leverage is its strong origination and capability in the advanced technology that improves the
portfolio of the product.
Rarity: The share of SABIC of about 70% is with the Saudi government. The
company have the support of the government. But some decision in the interest of the
government can lead the company to a considerable expense. The royal family members hold
the key positions of the company as Chairperson is the prince of Saudi Arabia's Kingdom.
The company may lead to poor governance due to the conflict of interest.
Imitability: The environmental liabilities may lead to increase in substantial costs
and limits the production in the market of the USA and Europe (Olimat 2016). The low
economic growth rate affects the company’s performance by reducing demand for the
petrochemicals product. However, a well-formulated and implemented strategy of SABIC
results in improving its competitive advantage by meeting the customers' requirements.
Organizations: SABIC is highly focused on analyzing a long-term trend and
fulfilling society's expectations. It has remained profitable from the last five years, which
attracts local and international investors. It has additional capital to expand its operations.

8SABIC- ACCOUNTING AND FINANCIAL REPORTING
Further, it has made a high investment in technology (Milne 2017). The firm is able to meet
the customer’s demand through its good brand image, high quality and reliability.
Environmental, Social and Governance
SABIC's environmental pressure has a threat to the industry's future. The industry is
highly dependent on oil for its production. The company uses oil as its raw material, and a
source of energy causes air pollution (Sabic 2015). This is ultimately affecting the
environment as well as society. However, the government of several countries discouraged
the company's practices. The products manufactured by the company, such as polythene and
chemicals, misbalance the ecology. Thus, it is being criticized by the government and society
as well. Accordingly, the government discouraged its production through high taxes
(Abdallah and Aljelly 2014). The US and Europe imposed quantitative restrictions on their
output. Tax policies and trade barriers are the most influential factors that affect the industry.
SABIC has analyzed such pressure that can influence its company’s profit. Therefore,
the company has prepared a circular economy solution by mapping the material priorities
with appropriate strategic planning within the sustainability issues. The sustainable goal
developed by the SABIC is concerned with the efficiency of the resource, circular economy,
climate change, innovation and sustainability, governance and integrity, environment, health,
safety and security.
‘SABIC’s Circular Economy Solutions’

9SABIC- ACCOUNTING AND FINANCIAL REPORTING
(Source: Sabic.com 2019)
Answer to Question 3
SABIC’s Financial Performance
SABIC has made impressive progress over the years. SABIC has recent figures for its
annual revenue of SR 169billion with Net Income of SR 21.5billion. The growth of SABIC
revelled in the year 2018 with an increase of 20.058% in their Gross profit as compare to the
previous year. Their operation profit has also shown an increase of 32.604% in the first three
quarters of 2018 as compared to the corresponding period of the previous year. However, the
company has faced a decrease of 6% in total revenue in the year 2019 as compared to the

10SABIC- ACCOUNTING AND FINANCIAL REPORTING
corresponding period of the previous year. Income from the operation has also decreased by
4%. A gap in the Net income decreased in the current year that has been sustained in the year
2018 by an increase of 14%
(Source: Sabic.com 2019)
The company believed that their long-term strategy with sustainability and innovation
would help them in developing the products that leverage SABIC (Barakat 2014). The
Growth of SABIC in the past few years comes with a mixed version of their profit and
expense. The last several years have shown tremendous profitability of the company.
Nevertheless, SABIC the reported revenues for the financial year 2018-19 of $45.1 billion
revenues and profits of $5.7 billion, which awarded it to the fourth position amongst the
chemical companies by Fortune Global 500, list of the year 2019.
Return on Equity=Net Income ÷ Sharholde r ' equity ×100
2018 2017 2016
Net income 21,520,678 18,430,236 17,838,843

11SABIC- ACCOUNTING AND FINANCIAL REPORTING
Shareholder’s Equity 173,084,380 163,921,633 163,047,895
ROE 12.43% 11.24% 10.94%
Return on Equity is a profitability ratio and considered as one of the measures of the
company's financial performance. This reveals the ability of the company in generating
profits through the investment of the shareholders. Return on Equity (ROE) is a sign or an
indicator of how effective the management is using equity financing so that to grow the
company and fund its operation. The return on equity of the last three years is generally
showing an increasing trend (Thibault et al 2017). The increasing rate of return on equity of
SABIC is reflecting the level of return that the company can generate. However, a good
return on the equity of a company is considered 15%-18%, which is less of SABIC. The
company is maintaining its return on equity year over year.
Net P rofit Margin=Net Income ÷Total Revenues ×100
2018 2017 2016
Net Income 21,520,678 18,430,236 17,838,843
Total Revenues 169,128,339 149,765,968 132,826,605
Net Profit Margin 12.72% 12.30% 13.43%
Net profit margin is one of the key indicators of the financial health of the company.
It helps the investors in assessing the company is generating enough profit from its expense
or not or whether the company is utilizing the operating and overhead costs. In simple words,
the Net profit margin reveals the revenue percentage left after deducting all the operating
expenses, taxes and preferred stock dividends (Almadi 2016). The company SABIC is having
an average net profit margin that means to be not so good and not too low. As a general rule
of thumb 20% margin is considered as good, and a 5% margin is too low. However, it varies