Global Industrial Gases
Secular growth: More than just hot air; initiating coverage
on European industrial gases
Global Chemicals
June 2008
Disclosures and Disclaimer This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, that form part of it
In the current uncertain economic environment, the industrial gas sector provides
investors with exposure to an array of broad-based secular growth markets and a
defensive earnings stream. The consolidated industry structure, high barriers to entry,
and an attractive annuity stream earnings model for on-site projects provide a
combination of strong returns on capital and robust earnings growth – unlike any
other in the broader chemical sector.
We are expanding our coverage of the global industrial gas sector by adding the
European names – Air Liquide and Linde – to our existing US coverage of Air Products
and Praxair. The key driver of returns within the gas business is geographic
concentration, in our view; Linde, with its unmatched exposure to emerging markets,
is our preferred play in the space. We look for a combination of growth exposure to
end markets and regions with a focus on returns on capital. We are also cautious of
the threat of likely overinvestment and loss of capital discipline.
We are initiating coverage on Linde shares (target price EUR120) with an Overweight
rating and on Air Liquide stock (target price EUR100) with a Neutral rating. We are also
downgrading Praxair shares (target price USD100) to Neutral from Overweight on
valuation concerns, while we reiterate our Neutral rating on Air Products stock (target
price USD110, previously USD105).

In the current uncertain economic environment, the industrial gas
sector provides exposure to an array of broad-based secular growth
markets and a defensive earnings stream. The consolidated industry
structure, high barriers to entry, and an attractive annuity stream
earnings model for on-site projects provide a combination of strong
returns on capital and robust earnings growth – unlike any other in
the broader chemical sector.
We are initiating coverage on Linde shares (target price EUR120)
with an Overweight rating and on Air Liquide stock (target price
EUR100) with a Neutral rating. We are also downgrading Praxair
shares (target price USD100) to Neutral from Overweight on
valuation concerns, while we reiterate our Neutral rating on Air
Products stock (target price USD110, previously USD105).

The key themes underpinning our investment views on the industrial gas sector are secular growth,
defensive earnings, and regional concentration. The industrial gas business provides investors with
exposure to strong end-market demand growth, driven by secular demographic trends such as cleaner
fuels, an aging population base in the developed world, and increased consumerization of electronics.
These secular trends provide growth opportunities that are broadly independent from the underlying
economic uncertainties that we witness today. The on-site business model incorporates long-term take-orpay
contracts with raw material pass-throughs that can be considered as annuity streams, providing strong
visibility and a defensive earnings stream. Strong revenue growth trends, a consolidated industry structure
( with just four companies accounting for three quarters of the market), an increased focus on core
geographies, and higher investment discipline should allow companies to exhibit earnings growth of
between 10-12% over the next five years, in our opinion.
While all four gas companies should exhibit strong earnings growth in the medium term, the critical
factor driving investment returns in the gas business is local market concentration, in our view. The
Industrial gas market is essentially a local business, with a strong regional footprint allowing companies
to maximize the incremental returns on investment in a region. Gas companies invariably earn their
highest profits in regions where they have the highest market shares. We therefore prefer to identify
winners within the industrial gas space as a function of the best regional growth footprint, rather than the
best end-market exposure. Our preferred name in the sector is Linde, which has the strongest business
portfolio in markets that are likely to exhibit the strongest growth – Asia, Eastern Europe, and Latin

America. We are initiating coverage on Linde with an Overweight rating and a EUR120 target price,
which provides 28% total potential return.
Linde (Overweight, EUR120)
Linde is our preferred play in the industrial gas sector on account of its leading market positions in Asia,
Eastern Europe, and the Middle East, with a strong number two position in Latin America. Linde has
dramatically altered its portfolio over the last two years, moving from an industrial conglomerate with no
Asian exposure, to the second-largest global gas company with a leading Asian presence and a
complementary engineering business. In our view, this portfolio transformation has not yet been reflected
in the company’s valuations as it still trades at a sharp discount to its peer group, despite having the best
growth footprint. We expect this valuation gap to close in the medium term and initiate coverage on
Linde shares with an Overweight rating and a EUR120 target price.
Air Liquide (Neutral, EUR100)
We are initiating coverage on Air Liquide shares with a Neutral rating and a EUR100 target price. While
Air Liquide should also benefit from the strength of the global gas market, our cautious view on the stock
stems from the sharp ramp-up of the company’s capital spending plans. The company has committed to a
capex spend of EUR10bn through 2011, which accounts for about 40% of the estimated combined capital
spending of the four gas majors. We believe this level of capital spending could lead to a drop in returns
and estimate that the company’s earnings growth will lag that of its peer group over the next five years.
Air Products (Neutral, USD110 [from USD105])
We reiterate our Neutral rating on Air Products shares off of our higher target price of USD110 per share,
from USD105 before. Air Products has excellent market positions in US Gulf Coast hydrogen and
electronics, and is very well positioned to benefit from strength in both markets. The biggest
differentiator for Air Products relative to its peer group, in our opinion, is its exceptionally strong
positioning for the growth of the coal gasification market. While we are bullish on the longer-term
prospects for gasification, we do not expect revenues from this business to be material within our fiveyear
forecast horizon, leading to our cautious view on the stock.
Praxair (Neutral [from Overweight], USD100)
Praxair has a proven track record of being the best capital allocator within the industrial gas space, with
its emphasis on core geographies leading to margins and returns on capital that are 300-400bp in excess
of its peer group. The company trades at a significant premium to its peer group – a premium that is
warranted, in our opinion, given history and the strong likelihood of continued margin and ROC
outperformance. However, we do not see a case for this valuation premium to expand further given
similar earnings growth profiles for both Linde and Air Products. Our USD100 target price for Praxair
stock does not allow enough total potential return to justify an Overweight rating under our research
model. Hence, we are downgrading Praxair to Neutral from Overweight on valuation concerns.

目录

Investment thesis 5
Investment controversies 13
Competitive landscape 18
Industry overview and
structure 24
Company profiles 37
Linde 38
Air Liquide 49
Praxair 56
Air Products 63
Valuation 71
Risks to investment thesis 78
Financial models 81
Appendices 95
End market profiles 96
Geographic profiles 122
Disclosure appendix 130
Disclaimer 136