Contents
Investment thesis .....................................4
Competitive landscape ...........................10
Industry overview and structure.............. 16
End-market profiles .................................26
Geographic profiles .................................49
Air Products & Chemicals overview......... 55
Praxair overview...................................... 62
Valuation .................................................69
Risks....................................................... 76
Appendix................................................. 78
Financial model .......................................79
Glossary of terms.................................... 85
Disclosure appendix................................ 93
Disclaimer................................................ 96

Summary

The industrial gases sector has witnessed a re-rating over the last few years, as industrial gas companies have outperformed the broader market in terms of growth and returns, leading to a premium over the market multiple. While there is concern about a reversion to the mean in terms of valuation, we believe that there has been a structural change in the industry in terms of investment focus and capital discipline. The oligopolistic nature of the industry and high barriers to entry, coupled with an attractive annuity stream earnings model for on-site projects, provide the industry with stable returns, unlike the rest of the chemical sector. Furthermore, strong secular end-market growth trends and an improving asset mix should help drive strong earnings growth over the medium term. Given this backdrop, we believe that the gases sector's premium over the broader market should continue to expand, driven by stronger earnings growth. We prefer Praxair over Air Products & Chemicals, given Praxair's relatively superior combination of cash generation and earnings growth. We are initiating coverage of the US industrial gases space with an Overweight rating and USD100 target price on Praxair shares and a Neutral rating and USD105 target price on Air Products shares.