May 31, 2016

Pakistan Economy MORNING BRIEFING

Pakistan Investment Conference held
 ahead of MSCI announcement JS Research
js.research@js.com
KSE100 Index: Closing 36,234.69 ↓ (459.57) + 9221 111-574-111
Ext: 3118
 JS Global Capital Limited (JSGCL) held the ‘Pakistan Investment
Conference (PIC) 2016’ in London on May 23rd/24th, to garner support
from the international investor community to regain Pakistan’s MSCI
Emerging Market Status ahead of the MSCI announcement scheduled on
June 14, 2016.
 The Pakistan Corporate Sector at the Conference was represented by the
management of 14 companies (including two pre-IPO companies).
 The PIC 2016 was attended by top investment firms/funds, mostly
represented by key decision-makers who met with corporates.
 As per our estimates, participating investors represented about 15% of
global AUMs and most of the investors desired Pakistan to be upgraded
into the MSCI EM category.
 The underlying theme of the Conference revolved around the recent
turnaround in Pakistan’s macroeconomic indicators, with illuminating
discussions on investment opportunities under the China Pakistan
MSCI EM Classification Criteria
Economic Corridor (CPEC).
Sustainability of Eco Development No requirement
 We estimate that incremental inflows can amount to US$300mn to
Full Market Capitalisation $1,340mn
US$400mn as the investor size of emerging markets is estimated at
Free Float Market Capitalisation $670mn
US$1.35trn.
Security Liquidity 15% ATVR
PIC held ahead of MSCI announcement for PSX Openness to foreign ow nership Significant
JS Global Capital Limited (JSGCL) held the ‘Pakistan Investment Conference (PIC) Ease of capital flow s Significant
2016’ in London on May 23rd/24th, to garner support from the international investor Operational framew ork efficiency Good & Tested
community to help Pakistan regain the MSCI Emerging Market Status ahead of the Institutional framew ork stability Modest
MSCI announcement scheduled on June 14, 2016. The Privatisation Commission, Source: PSX
Ministry of Finance (MoF), Government of Pakistan and the Pakistan Stock
Exchange (PSX) were present and supported this grand event, where all put up
impressive efforts to back this initiative taken by JS Global, with its foreign partner,
Renaissance Capital.

Top Pakistan corporates met key global investors at PIC

The Pakistan Corporate Sector at the Conference was represented by the
management of 14 companies, including two pre-IPO companies. These included
Pakistan’s biggest Oil & Gas explorer, country’s largest Telecom company, two of
the largest Banks, two profound Fertilizer manufacturers, two of the top Cement
manufacturers, a growing Pharmaceutical company, country’s biggest
Conglomerate, a turnaround Auto Assembler, and one of country’s largest Power
Producers. Notably, seven out of nine potential companies to make their way into
the MSCI Emerging Market Index were present at the Conference.

Research Entity Notification Number: REP-084 JS Research is available on Bloomberg, Thomson Reuters, CapitalIQ and www.jsgcl.com
www.JamaPunji.pk Please refer to the important disclosures and disclaimer on the last page
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Corporate participants at the PIC - 2016

Total Market Cap Free Float 12M ADTO
Com pany Ticker
(US$ m n) (%age) (US$m n)
United Bank UBL PA 1,969 40% 1.74
Habib Bank HBL PA 2,519 45% 1.61
Fauji Fertilizer FFC PA 1,425 55% 1.57
Fauji Fertilizer Bin Qasim FFBL PA 498 35% 2.01
Hub Pow er HUBC PA 1,285 65% 0.82
Oil & Gas Development Co. OGDC PA 5,850 15% 2.31

Searle Pakistan SEARL PA 552 42% 2.27

Honda Car HCAR PA 399 20% 0.88
Lucky Cement LUCK PA 1,847 40% 2.11
DG Khan Cement DGKC PA 743 55% 4.29

Pakistan Telecom PTC PA 567 16% 0.71

Daw ood Hercules DAWH PA 617 70% 0.34

Source: PSX CPEC Projects

Esim tated Cost
MW
The PIC 2016 was attended by top investment firms/funds, mostly represented by (US$m n)
their key decision-makers, from UK, European/Scandinavian and the USA. As per Energy Priority
10,400 21,486
estimates, participating investors represented about 15% of global AUMs, where Projects
most of the investors desired Pakistan to be upgraded into the MSCI EM category Energy Actively
6,645 12,927
in order to allocate greater funds to this lucrative story. Promoted Projects
Transport Infrastructure
CPEC at the forefront of discussions Sector Projects
9,790

The underlying theme of the Conference revolved around the recent turnaround in Gw adar Port Related
793
Projects
Pakistan’s macroeconomic indicators, with discussions on the investment
opportunities being offered under the China Pakistan Economic Corridor (CPEC). Other Projects 44
Bulk of CPEC projects are expected to materialize during the next three years as
Total 45,040
part of government’s commitment to free this country from power load-shedding
Source: Ministry of Planning, Development
before the general elections of 2018. Once the energy crisis in the country is
and Reforms
resolved, a turnaround in LSM sector can be expected. We believe, this in turn will
spur the capital markets of the country in the near future with a direct and a positive
impact on sectors like Banks, Cements, Steel and Asphalt manufacturer (28% of
market capitalization). Furthermore, sectors like OMCs and Autos (8% of market
capitalization) would benefit from the snowball impact of expansion witnessed on
account of CPEC projects.

Key takeaways of Investor-Corporate meetings at PIC Macroeconom ic Indicators

The improving investment story of Pakistan, including the recent turnaround FY13 FY14 FY15
observed in country's macros, such as (1) decade-low interest rates, (2) multi- GDP (%) 3.65% 4.03% 4.24%
decade low inflation, (3) improving fiscals and (4) stable externals given the soft
CPI (YoY %) 8.62% 8.70% 4.80%
commodity price outlook were underlined. Impressive corporate results were also
CAD, % of GDP -1.10% -1.30% -1.00%
flagged, which were appreciated by investors. The sector-wise takeaways of
investor meetings with corporates are as follows: Ext. debt, % of GDP 26.40% 26.80% 24.10%
Source: JS Research
Banking sector: Investors were keen to understand long-term perspectives of the
banking sector, which revolved around implications of the CPEC on the sector. The

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MORNING BRIEFING

banking sector’s advantage of loan growth, on account of project financing, was not
new to investors; however, the key point discussed was the timing of
materialization of those projects. Furthermore, solution of the ongoing energy crisis
also remained a focal point of discussions, where the installed level of circular debt
gave investors some respite, which would lead to lower risks for Pak Banks on the
project financing extended to manufacturing sectors. Investors understood that
apart from direct CPEC projects, banks would witness loan growth from a
magnifying impact on the construction sector as well. Our Top Pick in the Banking
sector is UBL (TP: Rs217).
Cement sector: Investors remained upbeat on the growth of Pakistan’s cement
sector as they agreed with increase in cement demand from CPEC projects
directly, as well as from local infrastructure developments to be executed prior to
CPEC projects. Furthermore, investors’ interest was brought in by the
diversification in investments by cement manufacturers, which balanced their risk
portfolio. DGKC (TP: Rs240) remains our Top Pick in the Cement sector.

Power sector: Pak Power was one of the key interests of investors at the
Conference where investors were keen to know about the new JVs with the
Chinese, coal projects under the CPEC and source of financing for the upcoming
mega projects. However, concerns regarding the ongoing circular debt issue and
materialization of transmission and distribution lines projects were a prominent part
of the discussions. Investors understood the risk profile of Pakistan and remained
positive on the benefit of lower oil prices to the country’s economy in general and
the Power sector, in particular. We favor HUBC in the Power sector with a TP of
Rs121.

Fertilizer sector: Analysing the sector’s maturity stage and least association with
CPEC projects, investors’ remained neutral towards Pak Fertilizers. Potentially
rising unfavorable gap between input-output prices was seen as a key concern
while diversification of some of the Fertilizer manufacturers into the food and power
segments were seen favorably. EFERT remains our Top Pick in Pak Fertilizer with
a TP of Rs105.

Oil & Gas sector: Recent recovery in oil prices rejuvenated investors’ interest in
the Oil and Gas sector. Moreover, promising oil and gas flows that are expected in
the near future, boosted investors’ confidence in Pak E&P space. Key concerns
regarding the sector, circular debt and reserve life, were also addressed, where the
latter may witness upgrade post new oil and gas flows. It was highlighted that
accessibility and significantly improving law & order situation in Baluchistan for the
smooth execution of the CPEC projects has also opened the doors of the said
region for Oil and Gas sector for fresh drilling, which were not easy to operate in
earlier.

Auto sector: Investors remained upbeat on growth in the Auto sector, which would
further be supported by launch of new models by various assemblers, while low oil
prices with considerably soft interest rate environment should encourage higher
consumer financing. Furthermore, increase in demand is also anticipated from
trickle down impact of infrastructure and other CPEC projects. Our top pick in the
Auto sector remains INDU with TP of Rs1,173.

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Telecom sector: The ongoing price war in the Telecom sector of the country was a Pakistan m arket statistics (May 30, 16)

concern highlighted by investors. It was acknowledged that an optimistic sentiment KSE-100 Index 36,234.69
may be developed if the sector further consolidates as it would result in economies Previous KSE-100 Index 36,694.26

of scale and boost profitability of the sector. Change from last closing -459.57
Change from last closing (%) -1.25%
Pharma sector: The ongoing transition of setting a pricing formula in the Pharma PSX Market Cap. (Rs. bn) 7,391.00
sector was well-known to all investors; however, lack of information with regards to PSX Market Cap. (US$ bn) 70.48
the sector’s products was a concern. Investors were on the same page on the Total Volume (Shares mn) 205.45
bright prospects of overall growth in the Pharma sector. Traded Value (Rs. bn) 9.19
Traded Value (US$ mn) 87.64
What does MSCI review hold for Pakistan? KSE-30 Index 20,913.02
As per the MSCI simulated list, nine companies namely OGDC, HBL, MCB, UBL, Change from last closing -330.25
LUCK, FFC, ENGRO, HUBC and PSO are likely to make part of the MSCI Change from last closing (%) -1.55%
Emerging Market, whereas 19 other companies are expected to be considered for Futures Volume (Shares mn) 39.87
the MSCI Emerging Market Small Cap Index. Even though the MSCI Pakistan Futures Value (Rs. mn) 2,701.89

Index is likely to have a weight of 0.19% in Emerging Markets (vs. ~9% weightage Futures Spread 7.43%

in Frontier Markets), we estimate that incremental inflows can amount to Source: PSX

US$300mn to US$400mn (from index trackers/passive funds alone) as the investor

size of emerging markets are estimated at US$1.35trn. Recall that, the Qatar and
the UAE markets witnessed a rerating of ~40% post the announcement of a similar PSX valuations
upgrade during May 2013 and May 2014, respectively. KSE-100 is currently trading 2014A 2015A 2016E
at 2016E P/E of 8.0x, reflecting a discount of 40% to regional peers. Our current P/E (x) 8.6 8.3 8.0
top picks in the MSCI simulated list include MCB, UBL, LUCK, ENGRO and HUBC. P/BV (x) 1.6 1.5 1.4
Div. Yield (%) 6% 6% 7%
Earnings grow th 9% 3% 4%
Also in Focus Source: JS Research

FED to be increased on Cements, relief for Textiles

The government is likely to increase FED on cements from 5% currently to Rs1/kg
tax. Furthermore, textile sector may be moved to ‘No Tax No Refund regime' in
Budget FY17. Under this regime, the purchase of energy i.e. electricity, gas,
furnace oil and coal, would be subjected to zero-rate of sales tax.

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