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REP-300

PAKISTAN INVESTMENT STRATEGY 2017


Re-Emerging Stronger

Best Domestic Equity


House

Top 25 Companies

Best Equity House

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Strategy 2017: Pakistan Equities
The Next Leg of Re-rating
Synopsis
Exhibit: KSE100 Index Target Estimates 2017
Yield Outlook: Pakistan equity market to potentially generate a yield in the range of Valuation Basis Target
17% - 21%. Target Price Based 52,185
Earnings Growth 52,815
Attractive Valuations: The local bourse will continue to amass strong returns in CY17
PE Re-rating 55,487
supported by our ongoing PER re-rating hypothesis. Currently the market is trading at a
CY17F PER of 9.1x, a discount of 22% and 34% to MSCI EM and Asia-Pacific region. Index Closing 09-Dec-16 45,387
Source: AHL Research
Re-rating: We expect the benchmark equity market to re-rate from 9.1x to 9.7x in 2017.
Our investment recommendation is premised on re-rating given:
o Reclassification into MSCI EM Exhibit: Country Macros vis--vis PSX PE
o Double digit earnings growth
2007A 2013A 2014A 2015A 2016E 2017F
o Attractive valuations
Price Earning (x) 13.2 9.0 9.1 8.4 10.7 9.1
o Strong domestic liquidity
Discount Rate (%) 8.00 9.00 10.00 6.50 6.25 6.75
o Strategic foreign investor in PSX plus flush of liquidity from divestment
GDP Growth 5.5% 3.7% 4.0% 4.2% 4.7% 5.1%
o Continuing economic growth
Fx Res. (USD bn) 15.6 11.0 14.1 18.7 21.2 20.2
o Chinese investment in Pakistans energy and infrastructure (CPEC)
Inflation (%) 7.9 7.4 8.6 4.6 2.9 4.7
o Political maturity
Source: SBP, PBS, Bloomberg, AHL Research
Index Target: Based on index methodology of earnings growth (16.4%), target price
mapping and PER rerating, the market can range between 53,000 - 55,000 in 2017. In
CY16 PSX leapt to record levels of over 45,000; returning a commendable 38.3%.
Remarkably, Pakistan remained Asias best performing market and the forth-best Exhibit: Trailing PER KSE100
performing market in the world.
(x) PE Average
15.0
Sectoral Preference (E&Ps, Banks, Cements and Autos): 13.2
o E&Ps: Key triggers are rising oil prices and production growth. 13.0
o Banks: Betting on loan growth and robust non-funded income. 10.9 10.7
11.0
Cements: Strong demand, pricing power, low interest rates, rising govt and 9.4 9.0 9.1
o 8.9 7.8 7.0
9.0 8.4
Chinese infrastructural expenditure.
o Autos: Launch of new models and robust demand fueled by low financing rates. 6.6
7.0
o Consumers: Rising disposable income and increasing urbanization level
5.0
2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016E
Favored Picks: includes HBL, UBL, BAFL, EFERT, FFBL, LUCK, DGKC, MLCF,
OGDC, POL, PSO, NML, INDU and HCAR alongside a sprinkling of high D/Y themes
(IPPs particularly HUBC, NPL and NCPL). Additionally, SEARLE, PNSC, DOL, HUMNL Source: AHL Research
as interesting names.
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Market Prices / Data are as of DecEquity
09, 2016
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Strategy 2017: Pakistan Equities
Next Leg of Valuation Re-rating
Resilient to Foreign
Earnings Growth: Outflows:
Double digit earning growth of Despite of outflows of USD
229mn, market remains best Improving Law & Order
16.4%, compared to negative Situation:
MSCI EM Inclusion growth of -0.3% in CY16E performing market in Asia
(CY16TD) Improvement in national
(May-17): security has been evident
To trigger decent inflows given significantly lower terror
related incidents than prior
years

Supportive Macro
High Investor Confidence: Environment:
Country Risk Premium at an Record Low Interest Rates,
all time low 383 bps, Record High FX Reserves,
compared to 480bps (Dec-15) Next Leg of Robust PSE growth, GDP
growth expected at 5.1%

Valuation
PSX Divestment:
To bring additional USD 90-
Re-rating Enhanced Debt Market:
100mn in equity market. More convenience for listed
Introduction of new products; companies to raise debt via
options, cash settle futures, TFCs.
weekly futures

Risk Factors: 1. Continued Foreign Outflows


2. Macro Indiscipline post IMF program
3. Deteriorating Law and Order situation
4. Higher volatility in commodity prices

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Diving into Details

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Table of Content

Key Investment Catalysts 06


Reclassification From FM to EM 07
Double Digit Earnings Growth 08
The Most Attractive in the Region 09
Flush of Domestic Liquidity 10
Politics - Evolving Dynamics 11
China-Pakistan Economic Corridor 12
CY16: KSE100 Index Review 13
Economy 17
China-Pakistan Economic Corridor 25
Sectoral Strategy 27
Banks 28
Fertilizer 36
Exploration & Production 43
Cement 53
Power 62
Oil & Gas Marketing 66
Textile Composite 70
Automobile Assemblers 74
Pharmaceuticals 81
Recommendation Summary 83
Annexure 84
List of Abbreviation 84
Contact List 86
Key Investment Catalysts

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#1: Reclassification From FM to EM
MSCI Story Gaining Traction
Pakistan remained in the MSCI Emerging Markets Index till 2008 with a weight of 0.12%. It
was relegated to FM during the financial crisis. At present, Pakistan has a weight of 9.63% as Exhibit: MSCI EM Companies
at Nov16 in the MSCI FM Index with 16 constituents.
Free-Float Free-Float Free-Float Mkt Cap
Company
In Jun16, MSCI announced that Pakistan will be included in the emerging markets index by Shares (mn) (%) ( USD mn)
May17. Pakistan will be represented in that index with a weight of 0.16% by two large cap
Large Cap Companies
firms (OGDC and HBL), and five mid-cap firms namely UBL, MCB, LUCK, ENGRO, and FFC.
HBL PA 660 45.0% 1,443
OGDC PA 645 15.0% 948
In addition, nineteen other small cap companies have also been shortlisted to be part of the
Mid Cap Companies
MSCI Pakistan EM Index: NBP, INDU, KAPCO, POL, FCCL, SEARL, MLCF, PKGS, FFBL,
UBL PA 490 40.0% 1,014
PSO, BAFL, APL, NML, PSMC, PAEL, IGIL, FEROZ, MTL and HUBC.
MCB PA 445 40.0% 936
LUCK PA 129 40.0% 911
We forecast the equity market up-gradation should bring in decent net inflows given the size of
ENGRO PA 262 50.0% 768
funds tracking EM stands at USD~1.4-1.7trn (of which ~USD 500-600bn are passive funds)
compared with USD 17-20bn of FM funds. Inflows could be even higher given FM active funds FFC PA 700 55.0% 699
may not redeem and stay invested in Pakistan since the market offers lucrative returns. We Small Cap Companies
forecast reasonable foreign inflows to start coming in near the time of the MSCI official HUBC PA 752 65.0% 792
inclusion expected in May17. POL PA 108 45.8% 486
PSO 127 46.8% 486
NBP PA 506 23.8% 353
SEARL PA 63 51.3% 333
KAPCO PA 440 50.0% 318
Exhibit: MSCI EM Expected Weight
FCCL PA 759 55.0% 283
Weight MLCF PA 237 45.0% 257
Large Cap Companies PKGS PA 31 35.0% 253
HBL PA 0.03% NML PA 176 50.0% 248
OGDC PA 0.02% BAFL PA 718 45.0% 238
Mid Cap Companies
MTL PA 22 50.0% 192
UBL PA 0.02%
MCB PA 0.03% INDU PA 13 16.9% 189
LUCK PA 0.03% FFBL PA 327 35.0% 165
ENGRO PA 0.02% PAEL PA 249 50.0% 165
FFC PA 0.01% APL PA 21 25.0% 135
Total 0.16% PSMC PA 22 26.4% 108
Source: MSCI, AHL Research IGIIL PA 37 30.0% 97
FEROZ PA 12 40.0% 89
Source: MSCI, AHL Research

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#2: Double Digit Earnings Growth
Earnings Growth at 16.4%
Index heavy weights to lead: Earnings growth in CY17 is estimated to be ~16.4%, the double
Exhibit: Corporate Earnings Growth: Trend & Forecast
digit growth is attributable to earnings growth in both heavy weight oil (27.6%) and banking
(8.4%), which have a cumulative ~57% weightage in KSE-100 index. Higher oil prices along (%) CY12 CY13 CY14 CY15 CY16E CY17F
with hydrocarbon additions shall stem growth in the E&P sector; whereas banking sector
E&P 14.8 13.1 (4.1) (31.7) (8.3) 28.4
profitability is betting on increase in loan growth (10.0% YoY) and robust non-funded income.
Higher-than-expected realization of capital gains may lead to surprises in earnings growth of Banks 18.4 5.5 21.8 8.5 0.6 8.4
the banking sector. OMCs should remain in the limelight due to improving demand of gasoline Fertilizer (30.9) 50.1 (3.7) 30.0 (25.7) 9.0
and diesel and the possibility of inventory gains in the wake of rising oil prices.
Cement 111.3 34.0 16.8 21.2 18.3 17.1
OMCs (7.8) 43.7 (14.8) (33.1) 40.8 23.2
Others also in the running: Ex-oil, ex-banks (AHL Universe) reveals profit growth of 14.9%. Autos 12.9 33.5 66.2 103.3 (6.7) 23.2
This is expected to be largely triggered by the following key sectors i.e. cement (+17.1%),
Power 56.2 31.1 47.9 25.4 4.4 9.9
fertilizer (+9.0%) and autos (+23.2%). Lower interest rates and higher economic activity should
lead to higher disposable incomes and higher spending, as a result of which consumer, auto Textiles 39.2 23.5 (23.7) (0.2) 27.6 15.3
and pharmaceutical sectors should also remain attractive. Total 15.5 19.7 4.3 (1.6) (0.3) 16.4
Source: Companies Financials, AHL Research
A spectrum of drivers: Our expectations for other key sectors are subject to a spectrum of
drivers; for instance, the cement sector should reap benefits from robust demand, pricing
power, low interest rates, higher infrastructure spending ahead of an election year, and CPEC-
related projects. Likewise, the steel sector (not under our formal coverage) should benefit from Exhibit: Growth Story
rising economic activity. Improving steel demand is apparent from the expansions announced
by both long and flat product producing companies. Earning Growth Return on Equity Payout Ratio

60% 53.4%
49.2%
50% 46.4%

40%

30% 18.6%
19.3% 17.4%
20% 16.4%

10%
-0.3%
-1.6%
0%
2015A 2016E 2017F
-10%

Source: Company Financials, AHL Research

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#3: Why Pakistan
The Most Attractive in the Region
Regional peers: Pakistani stocks are available at a forward 2017 P/E multiple of 9.1x,
Exhibit: Regional ROE vs Dividend Yield
compared to regional multiple of 13.9x, amounting to a discount of ~34% over regional peers
including the Philippines, Indonesia, India and China amongst others. Granted that a re-rating (ROE)
is imminent correcting the discount to other markets based on Pakistans re-classification to
20.0%
the MSCI EM index, PSX divestment and with other underlying fundamentals coming into play. Pakistan
18.0%
Although the PSX historically traded at a discount of ~40% to its regional peers between 2006- Indonesia
India
16, it is now trading at a solid discount of 34% to the same peers. Thus Pakistans market 16.0%
demands re-rating attributable to a forecasted high-growth period going forward and reasons Sri Lanka
aforementioned . 14.0% China
Vietnam Taiwan
Alluring Dividend Yield: DY of the PSX sits comfortably above other regional peers (5.1% vs 12.0%
2.6% in the region), offering an exciting investment opportunity. Philipines Thailand
10.0%
S. Korea (DY)
FM/EM advantage: PSX continues to impress with discounts to its FM peers (12% on P/E)
8.0%
while discounts to the EM index remain largely appealing as well (22% on P/E). Though 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%
regional markets, both emerging and frontier, are coming out of the red, the equity market in
Pakistan is at a alluring PER discount despite improving macroeconomic fundamentals. Source: Bloomberg, AHL Research

We expect the AHL Universe to deliver earnings growth of 16.4% during CY17, compared with
15.1% average earnings growth of regional peers. Earnings of Pakistan equities is above Exhibit: Historical Regional Discount
those of regional giants, in addition our EM and PSX divestment theme remains intact too.
Discout on PE Discout on DY
Thus, this shall enable the equity market to outperform the same way it did in CY16.
70%

Exhibit: Regional PER & DY (CY2017F) 60%

50%
(x) PER (%) DY
17.0 6.0 40%
15.0 5.0
16.2

5.1
15.2

13.0 4.0 30%


14.5
14.4
14.1
13.6

4.2
13.3
13.3

11.0 3.0
3.4
3.3

9.0 2.0 20%


10.0

2.8
9.1

2.2
2.0
1.9
1.9
1.9

CY09

CY10

CY11

CY12

CY13

CY14

CY15

CY16

CY17
7.0 1.0
5.0 -
Pakistan

Taiwan

India
Thailand
S.Korea

Vietnam
China

Malaysia
Philippines
Indonesia

Pakistan

Thailand
Taiwan

India
S.Korea
Malaysia

Vietnam

China
Philippines
Indonesia

Source: Bloomberg, AHL Research

Source: Bloomberg, AHL Research


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#4: Flush of Domestic Liquidity
PSX Sell off to Contribute Further
Pakistan equity market has remained resilient to foreign outflows in CY16TD (Net Foreign
outflow: USD229mn), apparent from a 38.3% return recorded during the year, as opposed to
Exhibit: Absorbing Foreign Selling Pressure
previous years when market was negatively impacted by foreign outflows. The solid
performance of the market can be explained by the high levels of liquidity available with the Net FIPI KSE100 Return
local investors, who have been absorbing the pressure of foreign selling. This could be reason (USD mn) (%)
enough for the market to potentially yield strong returns in the oncoming year; after all its 600 50
always better to follow the domestic investors who have their ear to the ground. 500
40
400
Pakistan embarked on the demutualization process of its local bourses at the beginning of 30
300
CY16. This was planned in phases to i) amalgamate the local bourses, and ii) find a strategic
200 20
investor for divestment of the stock exchange.
100
10
Jan16 marked commencement of a new era for the equity market in Pakistan with the -

2010

2011

2012

2013

2014

2015

2016TD*
successful integration of the Karachi, Lahore and Islamabad stock exchanges into a single (100) -
national stock exchange, renamed the Pakistan stock exchange (PSX). (200)
(10)
(300)
Economies of scale benefits were incurred along with an uptick in investment and trade. It also (400) (20)
makes it easier for the Securities & Exchange Commission of Pakistan to regulate the market,
leading to greater efficiency and transparency.
Source: Bloomberg, AHL Research
Companies will emerge as the biggest beneficiaries with i) retreating costs; paying listing fees
of one bourse instead of three, and ii) greater investor focus after amalgamation.
Exhibit: Flush of Liquidity
Pakistan is currently in the process of exploring potential strategic investors to conclude the
final stage of demutualization. PSX BV (PKR mn) 8,002
PSX no of shares (mn) 801
BVPS (PKR) 10
PSX plans to sell a stake of up to 40% with the major portion being taken by a foreign investor
Strategic offer (40%) - mn shares 320
and any remaining portion being given to selected local financial institutions. Any local
IPO offer (20%) - mn shares 160
institution cannot own more than 5% stake in the PSX. Moreover, the remaining 20% out of the
60% divestment will be offered as an initial public offering within six months after completion of Total Cash Flow to Brokers (USD mn)
the bidding process. At 2.0x PB 61.0
At 2.5x PB 76.2
This sell-off would yield additional foreign funding of an estimated USD 90mn, facilitate the At 3.0x PB 91.5
development of new products (options, weekly derivatives and other products), aid Source: Company Financials, AHL Research
technological upgradation, cross border listing, and access to international markets

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#5: Pakistan Politics
Evolving Dynamics
Political Maturity Exhibit: Improving Law and Order Situation
Number of Civilians/ Security Personnel
Pakistans political and institutional strength improved as new army chief succeeding
the out going chief as per schedule. It reflects maturing of democratic institutions and fatalities Terrorists/ Insurgents
civilian rule.
4,000
Major projects of the China-Pakistan Economic Corridor (CPEC) underway. The 3,500
Chinese government allocated an additional USD 8bn for CPEC, taking the total
investment to over USD 50 billion. 3,000

2,500
During the year, a major opposition party, held major protests against the Prime
Minister on account of corruption allegations that surfaced from the Panama leaks. 2,000
The rallies ended peacefully, with the responsibility of adjudication handed over to the
judiciary. 1,500

1,000
National security has visibly improved evidenced by the notably lower incidence of
terror attacks during the year. The militarys Zarb-e-Azb operation against militancy that 500
began in 2014 has shown solid results. 2011 2012 2013 2014 2015 2016

Karachi, Pakistans commercial capital, has seen a major improvement in security, law Source: Media, AHL Research,
and order through a sustained effort by security officials. This bodes well for
businesses in the city that generate the bulk of the countrys tax revenue.
Exhibit: Numerous political achievements during 2016
As Pakistans democratic forces take root, major impediments to growth and
investment stemming from political instability are being gradually eradicated through
structural changes, clearing the way forward for economic advancement.
Transfer of
The UK, Saudi Arabia, Turkey and Iran have all expressed interest to be part of CPEC; command
USD 2bn
these expanding ties overseas bode well for Pakistan. from one
North
Pakistan Army Chief
South gas
UK, Saudi courts to another.
Pakistans ties with Russia were notably strengthened during the year. The two formed
pipeline
countries signed an agreement to move forward on the USD 2bn North-South LNG Arabia, deal signed
During visit commissio
Turkey and with
pipeline project. to Pakistan, n to
Iran all Russia.
Iranian investigate
showed Joint army
President panama
intentions exercise
expressed case.
to be part carried out.
desire to
of CPEC
expand
trade.

Source: Media, AHL Research

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#6:China-Pakistan Economic Corridor
The Multiplier Effect
Impact On Economy: International Monetary Fund (IMF), Asian Development Bank (ADB) and World Bank (WB) revised up Pakistans forecast GDP growth for
FY17 to 5.0% (while previous estimates averaged between ~4.7% - 4.8%). Although this is a strong indication of the economy progressing towards greater growth,
we anticipate upcoming years to be even more fruitful once materialization of CPEC projects kicks in. In the following points we discuss briefly the impact on each
sector:

Power: Given most power projects under CPEC are inclined towards usage of coal / renewable energy sources (hydel, wind, solar) vis--vis oil / gas, generation
costs in the country are expected to recede amid lower tariff determination. Consequently, this bodes well for the intensity of circular debt position which stands to
subside given the government manages transmission and distribution losses of DISCOS and invests in various transmission lines alongside CPEC projects.

Cements: With expansion and upgradation of highways tagged with construction of dams and ports in process under CPEC, we anticipate demand for cement to
remain stellar driven by the need for i) median strips (concrete barriers made of cement to separate opposing lanes of traffic) on highways, and ii) massive dams to
create reservoirs for storage. While boom in construction (hotels / motels / restaurants) near highways to cater to the influx of traffic, shall also add to the already
growing cement demand.

Steel: We expect to witness a positive correlation in the demand of cement and steel over time. From use in bridges, as barriers on road sides, to being employed as
support to hold roofs of various buildings, demand for steel shall grow at an escalating trajectory similar to that of cement, with the advent of several CPEC projects.

Automobiles and OMCs: The Kashgar-Gwadar road route lies at the heart of CPECs success; its use to transport cargo will not only derive the demand for heavy
trawlers / 4x4 trucks etc., these vehicles may have to be refueled during the 3,000km journey hence, demand for diesel should trek.

Textiles: We can not overstate enough how during the last few years textile industries have observed a massive blow to their profitability owed to frequent power
cuts which lead to under utilization of capacities. Albeit, we site textiles to be a major indirect beneficiary of CPEC as electricity shortage issues are set to curtail
largely due to the power projects coming online in coming years.

Eradicating Risks To CPEC


Concerns in India: Several reports by the Indian media surfaced over the year claiming CPEC is a threat to its economy and sovereignty; in order to counter the
threat from Gwadar port, India announced an investment of USD 500mn for the development of Chabahar port in Iran. That said, given CPEC is part of a bigger
investment (OBOR) to revive trade routes and provide a platform for regional economic and diplomatic collaboration, India is likely to become one of the key
beneficiaries. On the other hand, with Iran expressing interest in CPEC to become strategic trade partners with China and the region, we foresee no obstacles to the
progress of CPEC .

Security Vulnerabilities: Growth in militancy and insurgency has been a vocal point of Pakistans post 9/11 problems and has often discouraged foreign investment
in to the country. Recently however, Pakistan armed forces have played a robust role in restoring peace in the country (particularly through Zarb-e-Azb and Karachi
operations). While a special force has been established to carefully monitor all CPEC projects under special guidance of country's top political and military leadership.
As per some news reports, close to 15k security personnel have been deployed to protect some 7k Chinese professionals working in Pakistan. As a result, smooth
transition under the surveillance of Pakistan army has been ensured.

12
CY16: KSE100 Index Review
All the Way Resilient

KSE Volume KSE100 Index (mn Shares)

Offshore club expands Supreme Court


44,500.00 as Bahamas Leaks takes over panama 350
PSX included in MSCI
names 150 more case.
Emerging Market
index. Pakistanis

42,500.00
300
Foreign inflows
coupled with
40,500.00 Market (E&P and possible up-
gradation in EM
Banks) retreated amid 250
index.
drop in WTI Price
below USD $30/barrel. Mellow sentiment
38,500.00 depicted in victory
speech by
President-elect Mr.
200
Trump
Rebound in oil
36,500.00
prices
Opposition party
threat to lockdown 150
Capital.
34,500.00

Brexit vote
100
32,500.00

50
30,500.00

28,500.00 -
Jan-16

Jun-16

Jul-16
Mar-16
Feb-16

Nov-16
Aug-16

Sep-16
Apr-16

May-16

Oct-16
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2016: High Rank in World Markets
PSX Rally Strongest In Asia-Pac Region
PSX leapt to record levels over 46,000; returning a commendable 41.3% in CY16TD (USD-
Exhibit: Pakistan Historical Returns & Ranking
based return of 41.2%). The index displayed a stunning run with several market tailwinds
coming into play; i) Jun16 MSCI reclassification announcement buoyed market sentiment Return Rank (RHS)
even though Pakistan will officially graduate to the Emerging Markets category in June17, ii) 50.0% 0
ongoing divestment of PSX expected to add liquidity to the market, iii) bottom-up approach 37.3%
intact with earnings accretion, iv) steady economic fundamentals including record low interest 38.0% 37.8%
40.0%
rates at 6.25%, low inflationary pressure at 3.8% YoY in Nov16 compared with 4.1% YoY in 33.3% 5
Jun16, improving law & order and a stable corporate environment. 30.0% 26.1%

Remarkably, Pakistan dethroned China to reign supreme as Asias best performing market in 10
20.0%
CY16; a first for the benchmark. Pakistans 37.3% return remains distinctively above the Asia-
Pacific average of 5.2% and a lot higher than Thailand at 19.7% and Indonesia at 19.6% who 10.0%
scored just below Pakistan. In comparison, it remained a tough year for China with a negative 15
-2.0%
return of 12% and Sri Lanka also recorded negative return of 11.1%. 0.0%

CY10

CY11

CY12

CY13

CY14

CY15

CY16TD*
PSX also exceeded all MSCI Developed, Emerging and Frontier markets barring Russia 20
-10.0%
(66.6%), Brazil (62.9%) and Venezuela (57.8%); ranking as the forth-best performing market -10.1%
in the world in 2016 amongst the countries tracked by MSCI. Average returns remained much -20.0% 25
lower than Pakistan; Developed (5.4% return), Emerging (10.7%) and Frontier (-2.7%).
Source: Bloomberg, AHL Research, *09-Dec-2016
Pertinently, Pakistan last achieved the third rank in 2014 after which it dropped to spot 23
before recovering to its current position.
Exhibit: Comparative Returns

KSE100 Index FM EM MSCI Pak

50.0%
Exhibit: Asia Pac Performance 38% 38% 37%
40.0% 33% 24%
30.0% 27%
(%) 2016TD* 2015 23%
21%
Pakistan 37.3 (2.0) 8%
20.0% 15%
Thailand 19.7 (21.4) -5% 11%
Indonesia 19.6 (21.1) 10.0% 5% 3%
Taiwan 16.3 (13.7) -2%
0.0%
Vietnam 14.1 0.9
CY12 CY13 CY14 CY15 CY16TD*
S. Korea 4.0 (4.9) -10.0%
India 0.5 (9.5) -5% -3%
-20.0% -17%
Philippines (4.5) (8.3)
-18%
Sri Lanka (11.1) (14.1) -30.0% -18%
China (12.0) 0.9
Source: Bloomberg, AHL Research, * 09-Dec-2016 Source: Bloomberg, MSCI, AHL Research, * 09-Dec-2016

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Equities: The Volumes Play
Saviors Of The Year: Small Caps
Trading volumes peaked at 903.2mn shares in Sept16 (where similar levels of volumes were
Exhibit: PSX Value Trade % of Free-Float Market Cap
last seen back in Mar05). Particularly noticeable was the fact that the year started with slow
pace and gradually gained momentum with volumes averaging 278.9mn shares vs. 247.4mn Avg. Traded Value
shares in 2015. Avg. Traded Value % of FF Mkt Cap
(USD mn)
Top volumetric positions were secured by banks, technology & communication, power, 160.0 1.7%
cements and oil marketing companies, drawing on average 35.7, 29.8, 27.1, 23.7 and 136.0
140.0 127.1 1.5%
14.8mn shares, respectively; making up to 45% of the cumulative market activity during the 114.8
year. KEL took the top position as volume leader (16.3mn shares), retaining its tittle from 120.0
1.3%
93.3
2015, and the scrips that followed were sideboard items like BOP (14.3mn), TRG (12.9mn), 100.0
DCL (9.1mn) and PACE (8.mn). 1.1%
80.0
59.4 0.9%
Average daily traded value increased to USD 136.0mn vis-a-vis USD 126.6mn in CY15, 60.0 51.7
44.1
exhibiting a 7.4% YoY increase as scrips in the limelight were from the second & third tiers. 40.0 0.7%
Prompted by economic development, the engineering sector generated a stunning return of
262.9% aided particularly by steel scrips including ISL. Meanwhile index-heavy banks 20.0 0.5%

CY10

CY11

CY12

CY13

CY14

CY15

CY16
(~24.2% weight) and E&Ps (~10.1% weight) returned a robust 32.4% and 41.1% respectively
whereby local investors played a key role to unlock value; favorites amongst the sector
remained BOP and POL. Other note-worthy performances were displayed by relatively
Source: PSX, AHL Research
smaller sectors: sugar (0.5% weight), automobiles (0.5% weight) and glass (0.2% weight)
gave a return of 90.4%, 93.8% and 83.2%, respectively. Meanwhile fertilizers, another
heavy-weight (14.5% weight) recorded a nominal increase of 3.3%, majorly underperforming Exhibit: Sector-wise Index Contribution (CYTD*)
the market because of excess inventory. Finally, infrequently traded leasing companies,
contracted by 13.9% YoY. Banks 2,650

The highest index contributors remained banks (2,650pts), cements (1,961pts), E&Ps Cement 1,961
(1,710pts) and OMCs (770pts) while the laggards were leasing (6pts) and modarabas E&P 1,710
(4pts). Companies leading the contribution charts include LUCK (910pts), UBL (787pts), FML
OMCs 770
(721pts), and HBL (714pts); on the flipside, FEROZ (68pts) and FFC (51pts) marked down
the index. Textile Weaving 721
Automobile Ass. 555
Power 520
Exhibit: Foreign Investor Portfolio Investment
Textile Composite 464
2010 2011 2012 2013 2014 2015 2016TD*
Avg. Volume mn Shr. 121.1 79.3 173.4 222.6 208.9 247.4 278.9 Pharmaceuticals 428
Avg. Traded Value USD mn 51.7 44.1 59.4 93.3 114.8 127.1 136.0 Fertilizer 425
Source: PSX, AHL Research, * 09-Dec-2016
- 500 1,000 1,500 2,000 2,500 3,000
Source: Bloomberg, AHL Research, * 09-Dec-2016

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Foreign Portfolio Investment
2016: Overseas Investors No Longer Lead
Local investors swept the benchmark index to highs as international investors remained net
Exhibit: Average Traded Value and Foreign Participation
sellers during CY16; net sell-off during CY16: USD 229mn vs. CY15: USD 315mn. Vulnerability
to startling global events in the second half of the year eroded positive flows the market had
Avg. Traded Value Avg. Foreign Participation (RHS)
attracted in prior months. Portfolio divestment by overseas stockholders was particularly
aggravated due to the political shift in Europe amid the Brexit referendum and Trumps surge to (USD mn)
victory in the US presidential election; foreigners have sold USD 159mn worth of shares at the 160.0 20.0%
PSX since FY17TD. 140.0 18.0%
By comparison, flows in the Asia-Pac region remained promising this year vis--vis last year as 120.0
16.0%
recovery from concerns over global economic deceleration set in; average inflows clocked in at
100.0
USD 3,429mn in contrast to outflows of USD 3,180mn in the same period last year. 14.0%
80.0
Foreign selling was particularly evident in i) fertilizers (USD 89mn) given apprehensions over 12.0%
60.0
surplus urea inventory, ii) E&Ps (USD 85mn) amid volatility in global oil prices, iii) banks (USD
10.0%
56mn) as the benchmark interest rate was cut in May16 rate along with the imposition of super 40.0
tax under the FY17 budget and the maturity of Pakistan investment bonds. Other sectors that 20.0 8.0%

CY09

CY10

CY11

CY12

CY13

CY14

CY15

CY16
remained ill-favored were food (USD 21mn), textiles (USD 16mn) and power (USD 11mn).
By another measure, value traded by foreigners as a percentage of total traded value
increased to 19% from 18% in 2015. Moreover, despite incessant selling at the bourse, the Source: PSX, NCCPL, AHL Research
outstanding position of overseas stockholders increased to USD 6.7bn from USD 6.6bn in
2015 as market capitalization exceeded the USD 23bn mark for the first time compared with
USD 19bn in 2015. International investment comprised 28% of the total free float cap. Exhibit: Sector-wise Net FIPI (CYTD*)
Compared with 34% in 2015. (USD mn)
We forecast foreign selling at the local bourse to fade as we get closer to Pakistans inclusion OMCs 68.4
in the MSCI Emerging Market- EM (Jun17). Cements 8.8
Telecom 4.5
(11.1) Power
Exhibit: Foreign Investor Portfolio Investment
(16.4) Textile
(USD mn) 2010 2011 2012 2013 2014 2015 2016TD* (20.8) Food
Gross Buy 1,214 684 936 2,000 2,409 2,659 2,849
(32.3) Other Sectors
Gross Sell 688 811 811 1,602 2,026 2,974 3,077
Net Buy / (Sell) 526 -127 126 398 383 -315 -229 (55.6) Banks
Source: NCCPL, AHL Research, * 09-Dec-2016 (84.9) E&P
(89.2) Fertilizer

(100.0) (50.0) - 50.0 100.0


Source: NCCPL, AHL Research. * 09-Dec-2016

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Economy

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Pakistan Economy
CY17 Growth Story Intact
Continuing The Growth... FY17 GDP Projected at 5.1% Exhibit: Trade Deficit Expected To Stay Under Pressure

Exports
Pakistans economy continued its fiscal consolidation with a strong GDP growth of 4.7% Imports
(USD bn)
(FY16), while global economics crawled out of recession with largest economies moving Trade Deficit (%GDP) - RHS
onto greener pastures. We hold a Positive outlook for CY17 with a forecasted GDP 50 7.0%
growth of 5.1%, along with the following key projections:
40 6.8%

Industrial Sector to Take Lead in GDP Growth: Contributing 21% of GDP, we 30 6.6%
expect Industrial sector to outperform, growing at a rapid 7.0% YoY in FY17, followed
by Services (contributing 60% of GDP) at 5.7%, and lastly Agriculture expected to 20 6.4%
pickup at 1.4% from a negative 0.2% due to an improved production in wheat, rice,
10 6.2%
and sugar.
Contractionary Policy Anticipated: Based on anticipated rise in inflation, continued 0 6.0%
growth in LSM, and pickup in private sector credit, we expect central bank to initiate FY13 FY14 FY15 FY16 FY17F
its rate hike as early as 1QCY17, followed by another increment contingent upon
economic growth. Our CY17 SBPs DR estimate stands at 6.8%, with an expected Source: MoF Pakistan, AHL Research
50bps hike.
External Sector Under Pressure: With the absence of IMF receipts, subdued growth Exhibit: Key Achievements Made Under IMF Program
in workers remittances (FY17 exp. 3% YoY), and struggling exports (exp. down 3%
FY16A FY16 Forecast in FY13
YoY), the external account is expected to stay under pressure, with an estimated
deficit of USD 5.1bn (1.7% of GDP). Moreover, overall imports are expected to rise 14 14
due to a surge in Machinery and Textile (Cotton). 12 12
10 10
Fiscal Consolidation to Get Tougher: Continuing the trend from FY16, GoP will be
8 8
pushing for further contraction in fiscal deficit in FY17. With that said, given the 6 6
election year around the corner, we expect, a much higher PSDP expenditure along 4 4
with tough revenue targets set under Budget FY17 that may not fully realize. Hence, 2 2
widening the fiscal deficit (FY17E 4.7%, compared to 4.3% FY16). 0 0
Investor Confidence to Boost FDI Post IMF Program Completion: Substantial -2 -2
-4 -4
targets (both Structural and Performance based) set under the USD 6.4bn program
-6 -6
were achieved while key challenges need to be addressed in order to sustain the Growth Inflation CAB Import Tax Rev Budget
economic growth achieved. Major challenges notified under the program included, i) (%) (%) (%GDP) Cover (%GDP) Bal
(%GDP)
Timely resolution of structural reforms such as to multi-year tariffs leading towards
privatization of DISCOs, and ii) Delayed privatization of loss making PSEs (PSM, and Source: IMF Staff Calculations, AHL Research
Pakistan Railways). Our estimates point towards a surge in FDI in 2HFY17

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Pakistan Economy
Continuing the Growth Story
CY17 Inflation to Settle Around 5.0% - 5.5% (FY17F : 4.5% - 5.0%) Exhibit: Eroding Low Base Effect Supporting Rise In CPI

CY15 CY16 CY17F


Based on our estimates, CPI based inflation for CY17F would fall within the range of
6.0%
5.0% - 5.5% (FY17 : 4.5%-5.0%), compared to CY16E inflation of ~3.8%, and 2.9% in
FY16. Our assumptions consider the impact of recent developments; i) rise in 5.0%
commodity prices along with eroding low base effect, ii) rising domestic demand, and iii)
4.0%
slashed cotton production by over 20%.
3.0%
Eroding Low Base Effect & Steadying Oil Prices: The recent inflation numbers
have witnessed a nominal impact of eroding low base effect, anticipated to be 2.0%
eliminated by early CY17 (Dec15 : 3.2% | Jan16 : 3.3%), pushing average 1QCY17F
1.0%
CPI to 4.8% compared to 1QCY16 CPI of 3.8% (2HCY16E : 4.1%), along with
sporadic seasonal fluctuations. 0.0%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
On the other hand, more stable/higher oil and other commodity prices in the global
markets will keep the MoM inflationary pressures in check. We expect oil prices to
average out at USD 50-55/bbl (Arablight) in FY17. Considering the elections Source: PBS, AHL Research
approaching, we do not expect GoP to take an unpopular stance of significantly
raising prices for POL products in the local market providing for more stability.
Exhibit: Lower Oil Prices To Keep Imports In Check
Mix Production of Local Crops: Cotton Crop Assessment Committee (CCAC) after
its third meeting expressed expectation of a production cut by 25% from its initial Total Imports Oil Imports
(USD bn)
estimate of 14.1mn bales to 10.5mn bales. Subsequently, imports of cotton products
have risen from USD 136mn (4MFY16) to USD 270mn (4MFY17). At such a rate, it is 50.00 40%
expected to come around USD 2.68bn in FY17 compared to USD 1.35bn in FY16. 35%
40.00
This shortage is expected to impact inflation via Clothing head which adds up to 6% to 30%
the overall CPI basket. 25%
30.00
On the flipside, Cotton production has been replaced with Rice and Wheat 20%
production which may provide some relief to the overall inflation, also comprising of 20.00 15%
~6% to the overall CPI basket.
10%
10.00
5%
- 0%
FY13 FY14 FY15 FY16 FY17TD
Source: PBS, AHL Research

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Pakistan Economy
More on the Growth Story
Contractionary Policy Around The Corner, With PKR To Remain Under Pressure Exhibit: Rise In CPI To Lead Contractionary Policy in CY17

CPI DR RiR
We forecast SBP to adopt a contractionary policy in CY17, with an estimated hike of
7.0% 6.0%
50bps in DR to settle at 6.8% by end of year. Consequently, we view, PKR/USD parity
to stay under pressure given both (i) US Fed Rate hike imminent and the resultant 6.0% 5.0%
volatility in regional currencies, and (ii) upcoming foreign payments coupled with 5.0%
4.0%
absence of IMF receipts. We anticipate PKR to close around 107 109 against 4.0%
3.0%
greenback by end of CY17. 3.0%
2.0%
2.0%
The Key Determinants For MP Reversal: As discussed earlier, with a gradual
1.0% 1.0%
pickup in inflation expected due to rise in commodity prices (specifically oil prices),
eroding low base effect, continued growth in large-scale manufacturing, and a pick up 0.0% 0.0%

Jul-15

Jul-16

Jan-17F
Aug-15
Sep-15

Jan-16

Jun-16

Aug-16
Sep-16

Dec-16F
Oct-15
Nov-15
Dec-15

Feb-16
Mar-16
Apr-16

Oct-16
Nov-16
May-16

Feb-17F
Mar-17F
in private sector credit, we expect the central bank to initiate a rate hike as early as
1QCY17, followed by another increment contingent upon economic growth. Our CY17
discount rate estimate stands at 6.8%, with an expected hike of 50 bps.
Source: PBS, AHL Research
SBP FX Reserves at Record High: Amidst noise surrounding overvalued PKR/USD
parity, we note the continuous buildup in Pakistans foreign exchange reserves in
excess of USD 23bn, with local banks contributing over USD 5bn, as a safe buffer Exhibit: Continuous Pickup in LSM and Advances Growth
offering over four months of import cover indicated by the latest CA data (4MFY17).
LSM Index ADV Growth (%)
While IMF receipts may be out of picture in CY17, GoP expects a strong support to 140 12%
come from Sukuk and Sovereign Bond issues as well as from commercial banks
(totaling ~USD 7.8bn). Furthermore, we expect, countrys domestic debt will be 120 10%
completely rolled-forward at the current lower rate translating into a cheaper servicing 100
cost going forward supportive of fiscal consolidation. 8%
80
Real Effective Exchange Rate (REER): Based on latest data, REER has remained 6%
moderately stable around 121.85 compared to last years level of 121.69. While there 60
may be some room for gradual depreciation due to the upcoming USD denominated 4%
payments (erosion of FX reserves), we expect 3% - 4% depreciation in FY17. 40

20 2%

0 0%
2011 2012 2013 2014 2015 2016TD

Source: PBS, SBP, AHL Research

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Pakistan Economy
CY17 External Account Under Pressure
Fingers Crossed For Lower Oil Prices To Support Current Account Exhibit: Trade Deficit Expected To Widen
CAB Exports of Goods
We expect FY17 Current Account Deficit (CAD) to settle at 1.7% of GDP (USD 9.02bn), (USD bn) Total Imports Workers' remittances
widening from 1.1% of GDP in FY16, while Trade Deficit is expected to widen to 6.9% of
GDP (USD 20.64bn) in FY17 from 6.7% in FY16. Similarly, adding to the pressure on CA, 50
remittances are expected to remain subdued at 3% YoY, USD 20.50bn.
40
Trade Deficit Expected to Widen: Overall we gauge the Trade Deficit to widen in
FY17 to 6.9% due to a mix of triggers. We expect (i) exports to remain down 3% YoY 30
(USD ~21.3bn) with possible relief packages, and (ii) imports to pick up on the back of
20
higher oil prices, ban on cheaper Indian imports (USD ~42.0bn, up 4% YoY).
Ever So Generous Remittances, Hurting: Given the global economic slowdown, 10
specifically in the GCC region, the historically strong workers remittances seem to
-
have lost their vigor. Remittances were up by a meager 6% YoY in FY16 compared to
an 18% YoY rise in FY15 (exp. at USD 20-21bn in CY16). Considering our (10) FY11 FY12 FY13 FY14 FY15 FY16 FY17F
assumption for oil prices to remain at current levels (USD 50-55/bbl Arablight), we
view remittances settling around USD 19.5bn - 20.5bn in CY17. Source: SBP, AHL Research
Magnetic Surge in FDI Expected: In light of impressive economic pickup, CPEC,
substantial improvement in security situation, and various structural enhancements Exhibit: Rising Oil Prices & Subdued Remittances to Pose
under IMFs EFF program, Pakistan has come under the limelight of foreign investors. Threat to External Account
Various significant FDI are expected to materialize across the board (next page Workers' remittances Arablight Avg
(USD/bbl)
shows a brief list of some of the major investments announced). (USD bn)

25 120

20 100

80
Key Risks To Our Estimates 15
60
10
Change in US Policy to discontinue CSF reimbursement to Pakistan, would noticeably 40
hurt CA balance.
5
Early recovery in GCC economies (modest recovery in oil prices) will provide for a 20
stronger remittances inflow, however; it will consequently hurt trade balance with
- -
expensive oil imports.
FY11 FY12 FY13 FY14 FY15 FY16 FY17F

Source: SBP, Bloomberg, AHL Research

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Pakistan Economy
CY17 Fiscal Consolidation To Get Tougher
When Going Gets Tough, Will The GoP Get Going? Exhibit: Hike in PSDP Expenditure Anticipated in FY17

We expect FY17 Fiscal Deficit to settle around 4.7% of GDP (USD 14.6bn) compared to (PKR bn) PSDP Tax Revenue
4.6% of GDP (USD 13.1bn) in FY16. We believe it to be a tough year for the ruling govt. PSDP (% of Tax)
4,000 40%
to manage its efforts of fiscal consolidation amidst anticipated rise in PSDP expenditure,
demand for relief packages for exporting industries, and slow growth in revenue sources. 3,500 35%
3,000 30%
Tougher Revenue Targets Set: FY16 turned out to be an astonishing achievement
for FBR where upwardly revised targets (PKR 4,333bn) were exceeded by a 2,500 25%
noticeable margin (with total realized revenue collection at PKR 4,447bn). For FY17, 2,000 20%
confident GoP has set another round of tough revenue target of PKR 4,442bn. With
that said, based on the data released for 1QFY17, FBR seems to be struggling in 1,500 15%
meeting its target with total collection at PKR 862bn, down 8% YoY. We expect the 1,000 10%
total revenue to register at PKR 4,675bn. 500 5%
Anticipated Hike in PSDP - Pre Election & Post IMF EFF: With the elections - 0%
around the corner, the norm has been to spend lavishly on infrastructure projects in FY11 FY12 FY13 FY14 FY15 FY16 FY17F
order to retain popular vote. In light of which we expect a prominent rise in PSDP
Source: MoF Pakistan, AHL Research
expenditure. Furthermore, with the completion of IMFs EFF program, the ruling govt.
will be free of checks and balances which may result in disregard for the various
structural and performance benchmarks set under the program. Based on our Exhibit: Tougher Fiscal Consolidation Expected in FY17
estimates, we foresee total expenditure rising by 7% YoY to PKR 6,198bn.
(% of GDP) Fiscal Deficit Total Revenue (% of GDP)
Multiple Burdens Added onto Fiscal Balance: Unannounced export relief package Total Expenditure External Debt
which may provide only a marginal relief to the external account, pressure on Domestic Debt
unchanged local POL prices while they continue to stabilize in the global markets, and 50.0% 10.0%
the lack of IMF receipts.
40.0% 8.0%

Key Risks To Our Estimates 30.0% 6.0%

20.0% 4.0%
Further decline in revenue collection in the next 3Qs in FY17 will significantly damage
countrys fiscal balance (similarly with higher than 7% rise in expenditure). 10.0% 2.0%
No material relief in exports even after the expensive tariff cut and export driven relief
package, predominantly due to the global economic slowdown. 0.0% 0.0%
FY11 FY12 FY13 FY14 FY15 FY16 FY17F

Source: SBP, MoF Pakistan, AHL Research

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Pakistan Economy
CY17 Key Economic Challenges
Key Challenges Exhibit: Hike in PSDP Expenditure Anticipated in FY17

Historically healthy support, 18% in FY15, from Foreign Remittances anticipated to (PKR bn) FY16 FY17
remain lackluster at 3% in FY17 (6% in FY16) 5,000
Trade Deficit expected to widen to 6.9% of GDP in FY17 (6.5% FY16). The increase in
trade deficit is driven by increasing oil prices and larger volume of oil imports, as well 4,000
as declining exports amidst global economic slowdown (primarily Textile and Agri
sectors). Textile exports being hampered due to relative strength of PKR compared to 3,000
other regional currencies depreciating
2,000
Continuous increase in outstanding Central Govt. Debt
1,000
o Domestic Debt of USD 134.7bn (11% YoY) 48% of GDP
o Foreign Debt of USD 61.3bn (12% YoY) 21% of GDP
-
Budgeted Amounts Revenue from Operations
Overvalued local currency (PKR) IMF est. an overvaluation of 20% against USD
(PKR/USD has depreciated only 2% since last 2 Yrs compared to regional average of
12%) Source: MoF, AHL Research
Agriculture sector contracted the GDP by 0.2% in FY16, compared to 2.8% average
growth observed in the last 5Yrs
Exhibit: Contribution to Gross profit
Mitigating Factors
(% of GDP) External Debt Domestic Debt

With oil prices anticipated to stabilize, given the probable OPEC production freeze, we 50.0%
expect global economies (KSA & GCC) to stabilize also, giving rise in remittances,
earliest by end of FY17. 40.0%

Based on FY17 Budget, GoP will rollover all upcoming debt payments, both domestic 30.0%
and foreign, at a lower rate translating into lower servicing accordingly.
20.0%
On PKR being overvalued, IMF estimates were driven by the REER which, in our view,
has been skewed due to regional currencies being devalued in FY15-16 10.0%
Pakistan CDS has come down considerably (currently at 388bps compared to 687 0.0%
Nov-14), indicating recovery in investors confidence in Pakistan

FY11A

FY12A

FY13A

FY14A

FY15A

FY16A

FY17E
GoP announced PKR 35-40bn relief package for Agriculture sector.
GoP has been trying to implement various schemes (real estate amnesty scheme, Source: SBP, AHL Research
WHT on bank transactions, super tax implementation, higher taxation for non tax filers
etc.) in order to increase Tax base.
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Pakistan Economy
CY17 Key Economic Indicators
Key Indicators FY11A FY12A FY13A FY14A FY15A FY16A FY17E
Real
GDP (Real Growth %) 3.6% 3.8% 3.7% 4.0% 4.2% 4.7% 5.1%
Service Sector 3.9% 4.4% 5.1% 4.4% 5.0% 5.7% 5.7%
Industrial Sector 4.5% 2.5% 0.6% 4.5% 3.6% 6.8% 7.0%
Agricultural Sector 2.0% 3.6% 2.7% 2.7% 2.9% -0.2% 1.4%
GDP (USDbn) 214 224 231 244 271 285 299
Prices
CPI (% YoY) 13.7% 11.0% 7.4% 8.6% 4.6% 2.9% 4.7%
Discount Rate - Period end 14.0% 12.0% 9.0% 10.0% 7.0% 6.5% 6.8%
External Sector (USDbn)
Exports 24.8 24.7 24.8 25.1 24.1 22.0 21.3
Imports (ex oil) 28.1 25.2 25.3 26.9 29.1 32.7 34.1
Imports (oil) 12.1 15.2 14.9 14.8 12.1 7.6 7.8
Trade Terms (15.4) (15.8) (15.4) (16.7) (17.2) (18.4) (20.6)
Remittances 13.9 13.2 13.9 15.8 18.7 19.9 20.5
FX Reserves - Period end 18.2 15.3 11.0 14.1 18.7 21.2 20.2
Exchange Rate (average) 85.5 89.3 97.0 103.0 101.4 104.0 106.0
Depreciation /(Growth) (%) 4.4 8.6 6.1 (1.5) 2.5 1.9

Fiscal Accounts (% of GDP)


Total Revenue 12.8% 13.3% 13.4% 14.5% 14.2% 15.0% 15.6%
Tax Revenue 9.7% 10.6% 10.1% 10.2% 10.9% 12.4% 11.2%
Total Expenditure 18.5% 20.9% 22.4% 20.9% 19.4% 19.6% 19.8%
Development Expenditure 2.7% 4.0% 4.3% 4.7% 4.2% 4.4% 4.8%
Current Account Balance 0.1% -2.1% -1.1% -1.3% -1.0% -1.1% -1.7%
Trade Deficit 7.2% 7.0% 6.7% 6.8% 6.3% 6.5% 6.9%
Fiscal Deficit 5.6% 7.6% 9.0% 6.4% 5.3% 4.6% 4.7%
External Debt 31.0% 29.2% 26.4% 26.7% 24.0% 22.7% 22.7%
Domestic Debt 32.9% 38.1% 42.5% 43.5% 44.5% 40.4% 43.0%
Source: SBP, PBS, MoF, AHL Research
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China-Pakistan Economic Corridor
Key To One Belt, One Road (OBOR)
Older Routes, New Beginnings
Wonder Deal For Pakistan: Playing host to the momentous CPEC signatory event, Apr15
set in stone Pakistans fate with China in a historic display of Iron brotherhood. To a land
long deprived of its potential amid lack of energy and trade opportunities, this multi-project
trans-regional endeavor appeared to Pakistan as the chance of a lifetime.

An All Weather Encounter: CPEC plays a crucial role in the grand


scheme of one belt, one road (OBOR) Chinese project; an effort
to revive the ancient Silk Road to deepen regional ties and
facilitate greater connectivity. This humongous USD 51.5bn (previously
~USD 46.0bn) collaboration is set to connect China with Europe and
Middle East via Pakistan. What remains key to Chinas ambitious cause
is the development of Gwadar Port; this warm-water, deep-sea port situated
on the shores of the Arabian sea in the Baluchistan province gives
Pakistan an upper hand.

Prominence to China:
Shorter, More Secure Route:
1. China-Middle East: At present China procures around 60-80% of its oil imports
from countries on the Persian Gulf (Saudi Arabia, Iran, Iraq) via the Straits of Malacca.
While conveyance through this route can take up to 45 days and is vulnerable to piracy
and political risks, the Gwadar route will shorten up the transportation period to ~10 days.
2. China-European Union: Similarly, trade with European Union (Chinas biggest partner)
may also be catered through the same route, swapping the farther east Straits of Malacca
with the Gwadar-Kashgar route to save time and costs.

Prominence to Pakistan:
Investment in energy projects
Development of road / rail infrastructure
Accumulation of revenue by government in the shape of toll
fees/taxes collected at the Kashgar-Gwadar route.
Boom in trade
Greater regional connectivity and accessibility
Rising domestic demand and employment
Under-developed provinces to come under limelight (as per official Chinese Ambassador to
Pakistan Sun Weidong province-wise projects include: Baluchistan 16, KPK 8, Sindh 13 and Straits Of Malacca
Punjab 12)

25
China-Pakistan Economic Corridor
Gravitating Towards Trade Alliances
The Journey So Far
Gwadar Port Inauguration; Opening Up New Opportunities: Determined to pursue
work expeditiously, the PM of Pakistan and Chief of army staff (COAS) along with various
top officials inaugurated the Gwadar port in Nov16 with great hype as the first convoy of
300 containers reached Pakistan. The historic arrival of the first consignment through the
western CPEC route from Kashgar to Gwadar marked the port as fully operational for Exhibit: Allies Interested In CPEC
trade activities, a milestone achievement.

Chinese Conviction: As per Chinese Embassy Deputy Chief of Mission Zhao Lijian, UK
China has already poured in USD 14bn in 30 early-harvest projects with 16 of these under
construction. Though CPEC projects remain on-track, some of these high priority projects
will come online between CY17-20. While this is an indication of Chinas conviction and Russia
commitment to CPEC, other countries have also expressed interest to become a part of
CPEC.

Stronger Allies; Tactful Foreign Policy: Turkey


Iran
Strategic diplomatic block: While the Pak - US association has undergone some
turbulent times, continued alliance remained a topic of prominence throughout time.
Albeit, with President-elect Donald Trump set to take office in Jan17 and his friendly KSA
statements about India indicative of potential alliance, Pakistans bond with China shall
also act as a strong block in world politics.
Saudi Arabia - Pakistan: Saudi Arabia, which has been a close ally of Pakistan for long
sent a message through its Minister for Economic Planning Adil Al Faqih to Pakistani
Minister for Planning, Development and Reforms Ahsan Iqbal in a meeting in Riyadh
(Apr16) expressing desire to extend CPEC to the Red Sea and Africa.
Iran - Pakistan: Iranian President Hassan Rouhani lauded the pace of CPEC during an
informal session with PM Pakistan at the United Nations General Assembly visit and
noted the progress it shall make for the region. Moreover, Consul General of Iran
Mohammad Hossein Bani Assadi also voiced Irans interest in joining CPEC.
Turkey - Pakistan: Turkish President Recep Tayyip Erdogan advised businessmen in his Source: AHL Research
country to participate in CPEC projects terming it a game-changer for the region, not just
Pakistan.
Russia - Pakistan: Russia aspires to not only improve strategic defense ties with
Pakistan but also wants to become a part of CPEC; relative to this, last month Pakistan
permitted Russia to use the Gwadar port for its exports.
UK - Pakistan: British Secretary of State for Foreign and Commonwealth Affairs Boris
Johnson showed interest in CPEC and desired UK firm to contribute to its projects.

26
Sectors

www.arifhabibltd.com
Equity Brokerage, Research, Inter-Bank Brokerage, Forex & Corporate Finance
Banking
The Lending Act
Key Investment Theme Exhibit: High GDP Growth Era (2004-2008)
Advances Deposits
Deposit Mobilization: When GDP growth averaged 6.6% in 2004-08, the absolute GDP Growth % Adv Growth %
increase in deposits was PKR 1.6trn with an average growth of 16%. The bulk of (PKR trn) Dep Growth % (%)
deposits raised were deployed in advances.
Given a similar economic cycle at the current time, our core theme is hinged upon an 12.0 40
uptick in advances. With 8% growth already witnessed CYTD, our view is advances will 10.0 30
increase 10% growth in 2017. This will also act as a catalyst for spreads hovering a few
8.0
bps above KIBOR. 20
6.0
PIBs to T-Bills: Interest rate expectation is dictating the general strategy of moving 10
4.0
from PIBs to T-Bills. Falling investment yields are being covered by increasing balance 0
2.0
sheets, expected to rise by 6.9% in CY16E and 6.2% in CY17F.
Further to our assumption of a paradigm shift in the investment mix, the State Bank of - -10

CY-02
CY-03
CY-04
CY-05
CY-06
CY-07
CY-08
CY-09
CY-10
CY-11
CY-12
CY-13
CY-14
CY-15
CYTD
Pakistan issued a cumulative target of PKR 3.6trn from Oct-16-Mar-17 to borrow from
commercial banks. T-bills are to account for 90% (PKR 3.3trn) whereas PIBs will
constitute a mere 10% (PKR 0.3trn).
During the high GDP growth era from 2004-08 the average IDR was 28% whereas IDR
Source: SBP, AHL Research
average for the last 3 years has been 67% and YTD average is 71.8%. We expect the
trend to shift gradually as new deposits are allocated to advances.
Exhibit: Industry Investments and Advances
Profitability: Last year we had expected a decline of ~3% in the profitability of banks Investments Advances
for CY16. With a month to go and 9mo accounts in, a decline of a mere ~1.5% for % Growth Inv (RHS) % Growth Adv (RHS)
CY16 is in the offing. CY17 is expected to be brighter based on i) interest rate hike, ii) (PKR bn) (%)
higher spreads on advances, iii) higher fee income and iv) absence of super tax should
8,000 80.0
culminate in an increase of 10.8% in CY17. 70.0
7,000
6,000 60.0
5,000 50.0
40.0
4,000
30.0
3,000 20.0
Key Risks 2,000 10.0
1,000 -
Further decline in interest rates or a delayed hike. - (10.0)

CY09

CY10

CY11

CY12

CY13

CY14

CY15

CY16TD
Slower than expected development on the CPEC front.
Escalation of the ensuing price war on the lending front
NPL accretion as lending takes off
Stricter SBP regulations as BASEL III gets implemented
Source: SBP, AHL Research
Another round of super tax

28
Banking
The Lending Act
Key Investment Theme Exhibit: The Growing CA
Fixed Savings Current
NIMs: For AHL Universe, net interest margins were recorded at 4.5% in CY15, Others CASA (RHS)
expected to decline further in CY16 to 4.0% (9MCY16 4.2%). We are optimistic that
these numbers are as low as it gets, given the catalyst in the form of an encouraging PKR bn (%)
macroeconomic picture for the coming year which will benefit the banking sector. 12,000 80.0
10,000 75.0
Non Performing Loans: In the aftermath of the financial crisis the average infection
ratio for CY10-15 stood at 14.9%. Most banks embarked on stricter risk parameters 8,000 70.0
and focused on quality lending enabling the ratio to be brought down to under 12% by 6,000 65.0
CY16E. Going forward, despite higher growth in advances, we estimate 5yr average
infection ratio to stand at 11.8%. 4,000 60.0
2,000 55.0
Balance sheet growth: The increase in balance sheet size has primarily been driven
by deposit growth, more specifically accumulation of CAs. Resultantly, the cost of - 50.0

CY07

CY08

CY09

CY10

CY11

CY12

CY13

CY14

CY15

CYTD
deposits has come down, improving banks liquidity.

Source: SBP, AHL Research

Exhibit: Declining NPL Trend Expected

(%) Infection Ratio NPLs (PKR bn)


20 800
18 700
16
600
14
12 500
10 400
8 300
6
200
4
2 100
0 0

CY06A

CY07A

CY08A

CY09A

CY10A

CY11A

CY12A

CY13A

CY14A

CY15A

CY16E

CY17F
Source: SBP, AHL Research

www.arifhabibltd.com
Equity Brokerage, Research, Inter-Bank Brokerage, Forex & Corporate Finance 29
Habib Bank Limited
Gazing From The Top
Key Investment Theme
BUY
Solid Deposits: HBL has been propelled to the top by focusing on building a strong Target Price (Dec-2017) PKR 283.5
deposit base. The highest deposit base is made up of 47% savings, 37% current and Market Price PKR 242.8
15% fixed accounts bringing the CASA in at 85%. Going forward, we expect a three
year CAGR of 10.7% in deposits.
Upside % 16.7
PSX Code HBL
Subsiding Cost of Deposits: Growth of 18.4% in current accounts and 12.4% in Bloomberg Code HBL PA
savings over 9MCY16 against the SPLY has been integral in bringing the cost of
deposits down ~PKR 1.5bn in absolute terms over the past six quarters. Share Information
Market Capitalization USD mn 3,392
The Side Pot: For the past 3yrs NFI has accounted for 27.6% of the total income
earned by the bank on average. We forecast the weight to remain in a similar range Market Capitalization PKR mn 356,181
through CY16-18 after which a slight decline is expected. However, earnings should Outstanding Shares mn 1,467
strengthen on the back of higher interest on advances. We expect capital gains to Free Float % 45.0
normalize and fee income to be the key driver of NFI in CY17. 12M Avg. Daily Turnover mn Shr. 1.1
12M High | Low PKR 248.26 | 170.79
Loans: The optimistic view is that higher advances in CY17 are expected to ease the
price war in the industry. The change in this key dynamic is vital to the bank going
Major Shareholders Aga Khan Foundation
forward as we predict an average increase of 13% in interest on advances through
CY15-18E. Average increase of 9.5% is expected for advances through CY15-18E. Exhibit: Relative Performance
HBL KSE100
Key Initiatives: i) A term finance agreement with Mari Petroleum Company Limited
worth PKR 9bn at KIBOR+0.05% mark-up rate, ii) HBL is in the process of setting up a 145%
digital lab and an innovation center focused on digital banking, along with a refurbished
branchless banking platform due in 1QCY17, iii) Making their presence felt in the 130%
consumer segment through a car finance program with the lowest rate among all banks
and iv) the recently granted license to open a branch in China. 115%

100%

Key Risks
85%

NPL accretion as loan growth quickens, both from local and international book 70%
Backtracks related to CPEC

Jul-16
Jan-16

Jan-16

Jun-16

Aug-16

Sep-16
Mar-16

Mar-16

Apr-16

Oct-16

Nov-16
May-16
Controlling cost to income ratio

Source: Bloomberg, AHL Research

30
Habib Bank Limited
Financial Snapshot
Exhibit: Financial Highlights Exhibit: NFI Break-Up
PKR mn 2015A 2016E 2017F
Income Statement Fees, Comm & Brokerage Dividend Income
Mark-up Income 78,169 82,087 90,892 FX Income Share of JV
PKR bn
Non-Mark-up Income 36,584 30,635 33,384 Capital gain Others
Total Income 114,753 112,723 124,276 40.0
OPEX 49,959 54,654 59,996
30.0
Post Tax Profit 35,102 34,318 38,781
Balance Sheet 20.0
Advances 633,383 685,745 760,273
Deposits 1,634,944 1,821,455 1,946,752 10.0
Investments 1,244,887 1,437,244 1,374,236
-
Borrowings 314,319 364,291 214,143
CY12 CY13 CY14 CY15 CY16E CY17F
Total Equity TIER - II 180,928 202,564 215,230
Revaluation Surplus 22,576 30,429 26,318
Source: Company Financials, AHL Research Source: Company Financials, AHL Research

Exhibit: Ratio Analysis Exhibit: Cost of Deposits Deposit Mix

Ratio Analysis Unit 2015A 2016E 2017F PKR bn Fixed Savings PKR bn
Per Share Current Cost of Deposits 14.0
Earnings PKR 23.9 23.4 26.4 1,650
1,500 12.0
Dividend PKR 14.0 14.0 16.0
1,350
Book value PKR 123.3 138.1 146.7 10.0
1,200
Other Key Ratios 8.0
1,050
Price to Earning x 8.4 10.4 9.2
900
Price to Book x 1.6 1.8 1.7 6.0
750
ADR % 38.7 37.6 39.1 600 4.0
IDR % 75.1 78.0 70.0 450
2.0
NIMs % 3.9 4.1 4.3 300
ROE % 20.1 17.9 18.6 150 -
ROA % 1.7 1.5 1.6 2Q'CY15 3Q'CY15 4Q'CY15 1Q'CY16 2Q'CY16 3Q'CY16
Source: Company Financials, AHL Research Source: Company Financials, AHL Research

31
United Bank Limited
Ascending Still
Key Investment Theme BUY
Tuning the Deposit Engine: Over the past 3yrs UBL has comfortably outpaced peer Target Price (Dec-2017) PKR 252.9
banks in terms of deposit growth, posting an average growth of 11% compared to 8.2% Market Price PKR 226.8
for the big 5 (7.5% ex-UBL). CASA, which has been relatively stable around the 65% Upside % 11.5
mark, is likely to improve going forward given the focus on CA growth. 9M CA growth PSX Code UBL
~10% is expected to be higher by year-end. Renewed focus on CA growth in all
likelihood is to bring down the cost of deposits. A 3yr CAGR of 12.3% is expected for
Bloomberg Code UBL PA
deposit growth.
Share Information
Investment Yields Still High: UBL has largely been focused on maintaining its strong
PIB portfolio where the average age is ~3yrs and yield rests above an average of ~9%. Market Capitalization USD mn 2,644
The bank still has a handsome revaluation surplus on the PIB portfolio of PKR 20.6bn Market Capitalization PKR mn 277,656
which will provide buffer to the bottom-line. The investment mix is still tilted toward Outstanding Shares mn 1,224
PIBs for UBL compared to peer banks. Moving to T-Bills will inadvertently add to Free Float % 40.0
capital gains. 12M Avg. Daily Turnover mn Shr. 1.09
Cost Controls: During the trough, the bank has had time to re-assess and consolidate 12M High | Low PKR 226.81 | 143.69
internally by restructuring cost heads toward a more centralized system to improve Major Shareholders Bestway Group
control and efficiency. Our average cost to income ratio comes to 41.6% for the next 3
years better than the past 3yr average of 44.8%.
Exhibit: Relative Performance
The Forte Branchless Banking: The OMNI branchless banking system is currently
going through a transformation following change in certain regulations for remittances UBL KSE100
by the SBP. The end result is expected to be a flattish trend in the near term which will 175%
be covered by new account openings in this particular segment.
Key Initiatives: i) Collaboration with IFC on SME model should provide trigger in loan 150%
growth, ii) Trade finance rep office in China should open up avenues to generate new
lines of income iii) Omni agents to increase from 40k to 200k iv) Targeting rapidly
125%
growing yet safer Islamic banking to increase total market share

Key Risks 100%

75%
NPL accretion from the foreign loan book

Jul-16
Jan-16

Jan-16

Jun-16

Nov-16
Mar-16

Mar-16

Apr-16

Aug-16

Sep-16

Oct-16
May-16
Higher cost of funds relative to peers
Loss of branchless banking market share to possible entrants such as telecom
operators & other banks
Source: Bloomberg, AHL Research

32
United Bank Limited
Financial Snapshot
Exhibit: Financial Highlights Exhibit: Inv Mix Yields converging in line with Trend
PKR mn 2015A 2016E 2017F T-Bills PIBs Yield on Investments
Income Statement
Mark-up Income 57,859 59,576 62,127 (PKR bn) (%)
Non-Mark-up Income 23,687 25,174 28,107 700 10.5
Total Income 82,408 85,600 91,079 600 10.0
OPEX 35,137 35,928 38,961 9.5
500
Post Tax Profit 26,154 28,346 30,687 9.0
400 8.5
Balance Sheet 8.0
300
Advances 487,278 515,485 618,304 7.5
200
Deposits 1,119,953 1,214,303 1,380,424 7.0
100 6.5
Investments 747,599 905,287 980,293
- 6.0
Borrowings 164,232 182,145 138,042

CY11

CY12

CY13

CY14

CY15

CY16E

CY17F
Total Equity TIER - II 155,599 171,533 184,978
Revaluation Surplus 36,554 40,940 40,121
Source: Company Financials, AHL Research Source: Company Financials, AHL Research

Exhibit: Ratio Analysis Exhibit: UBL Market Share

Ratio Analysis Unit 2015A 2016E 2017F Industry UBL Market Share
Per Share (PKR bn) (%)
Earnings PKR 21.4 23.2 25.1 14,000 12.2
Dividend PKR 13.0 13.0 15.0 12,000 12.0
Book value PKR 127.1 140.1 151.1
10,000 11.8
Other Key Ratios
Price to Earning x 7.3 9.8 9.0 8,000 11.6
Price to Book x 1.2 1.6 1.5 6,000 11.4
ADR % 47.3 46.1 48.0 4,000 11.2
IDR % 64.9 73.7 70.6
2,000 11.0
NIMs % 4.9 4.3 4.1
ROE % 18.5 17.8 17.6 - 10.8
CY12 CY13 CY14 CY15 CY16E CY17F
ROA % 2.0 1.9 1.9
Source: Company Financials, AHL Research Source: Company Financials, AHL Research

33
Bank Alfalah Limited
Moving through the TIERs
Key Investment Theme
BUY
Plausible Deposit Target of 700bn: Over the past three years, an increase of PKR Target Price (Dec-2017) PKR 43.0
32.5bn, PKR 42.3bn and PKR 54.5bn respectively has been recorded in deposits Market Price PKR 35.3
during the last quarter. That makes the PKR 700bn mark a plausible target for CY16.
During 3Q, deposits of the bank have remained flattish showing a marginal gain of
Upside % 21.9
0.2% QoQ, however, during Sep16 a growth of 9.5% YoY has been recorded with PSX Code BAFL
focus on keeping cost of deposits low. This is also evident from the CASA movement Bloomberg Code BAFL PA
which has increased from 72% to 76% over the course of six quarters. Focus on
deposit growth translates into a 3yr forward CAGR of 10.3%. Share Information
Dwindling Costs: To gain a better perspective on implications of the changing mix, 3yr Market Capitalization USD mn 536
historic average cost of funds is at 5% whilst the 3yr forward average is expected to be Market Capitalization PKR mn 56,279
3.4%. Further, the cost of deposits from 3.4% in Dec15 has come down to 3.0% in Outstanding Shares mn 1,595
Sep16 (1QCY16 3.3%; 2QCY16 3.1%; 3QCY16 3.0%). Cost to income to hover
around 62% for the next 3 years.
Free Float % 45.0
12M Avg. Daily Turnover mn Shr. 1.4
Finding Quality in Loans : BAFL itself is determined to not get involved in the price
12M High | Low PKR 35.28 | 23.88
war and is focused on maintaining quality over quantity. Gross advances have risen
16% YoY but the infection ratio is near its lowest in the past six quarters at 5.4% in Major Shareholders Al-Nahayan Family
3QCY16 whilst coverage ratio is at 87.5%.
Exhibit: Relative Performance
Enter CPEC: A recent agreement was signed with the ICBC Bank with a focus on i)
joint syndication and project financing of Pakistan's priority projects, ii) recommending BAFL KSE100
trade finance businesses to each other, iii) mutual corporate lending and project 145%
financing, and iv) treasury related transactions.
130%
Key Initiatives: i) IFC has 14.98% stake in the bank bringing in a certain degree of
expertise through the board, ii) Pioneer in the credit card segment amongst local peers
and continuous innovation has kept the largest card user base intact iii) Revamping of 115%
the Islamic banking segment.
100%

Key Risks 85%

High OPEX to hit profitability 70%


NPLs from the consumer segment

Jul-16
Jan-16

Jan-16

Jun-16

Aug-16

Sep-16
Mar-16

Mar-16

Apr-16

Oct-16

Nov-16
May-16
Source: Bloomberg, AHL Research

34
Bank Alfalah Limited
Financial Snapshot
Exhibit: Financial Highlights Exhibit: CASA Rising
PKR mn 2015A 2016E 2017F
(PKR bn) Fixed Savings Current (%)
Income Statement
Deposits CASA
Mark-up Income 28,614 28,421 32,859 720 78.0
Non-Mark-up Income 9,103 9,155 10,230
600 76.0
Total Income 37,717 37,576 43,089
OPEX 22,773 24,126 26,796 480 74.0
Post Tax Profit 7,514 8,168 9,490
360 72.0
Balance Sheet
Advances 327,300 328,817 366,931 240 70.0
Deposits 640,137 701,365 755,104
Investments 397,516 470,406 505,337 120 68.0
Borrowings 172,393 112,218 98,164 - 66.0
Total Equity TIER II 54,093 61,593 64,227 2Q'CY15 3Q'CY15 4Q'CY15 1Q'CY16 2Q'CY16 3Q'CY16
Revaluation Surplus 10,943 12,200 7,200
Source: Company Financials, AHL Research Source: Company Financials, AHL Research

Exhibit: Ratio Analysis Exhibit: Asset Quality

Ratio Analysis Unit 2015A 2016E 2017F Advances - Net Advances - Gross
Per Share (PKR bn) (%)
Infection Ratio Coverage Ratio
Earnings PKR 4.7 5.1 6.0 350 5.4 345 5.4 100.0
5.7
Dividend PKR 1.0 1.0 1.5 340 334
Book value PKR 34.0 38.7 40.4 328 80.0
330 323
Other Key Ratios 5.9 6.0
320 60.0
Price to Earning x 6.1 6.9 5.9
310 304 302
Price to Book x 0.8 0.9 0.9 6.2
300 40.0
ADR % 51.1 46.9 48.6
IDR % 62.1 67.1 66.9 290
20.0
NIMs % 4.0 3.5 3.9 280
ROE % 15.2 14.1 15.1 270 -
ROA % 0.9 0.9 1.0 2Q'CY15 3Q'CY15 4Q'CY15 1Q'CY16 2Q'CY16 3Q'CY16
Source: Company Financials, AHL Research Source: Company Financials, AHL Research

35
Fertilizers

www.arifhabibltd.com
Equity Brokerage, Research, Inter-Bank Brokerage, Forex & Corporate Finance
Fertilizers
Fresh Support Pitched In
Key Investment Theme Exhibit: Historical Production and Offtake

Agriculture Sector Backbone of the Economy: The agriculture sector contributes (mn tons) Production Offtake
~21% to Pakistans GDP, simultaneously ensuring food security and providing
6.5
employment to 45% of the population. Over the past 10 years, fertilizer sector offtake
has grown at an average rate of 2%. Furthermore, average demand for urea is around
5.6mn tons while average production is 5.1mn tons. 5.5

Govt Support: On the back of declining commodity output process, GoP announced 4.5
an agriculture package for farmers in the FY17 budget that included subsidies on
fertilizer products of PKR 400/bag on urea & PKR 300/bag on DAP, which should
3.5
provide a cushion to fertilizer offtake.

International Prices on the Rise: International urea prices have recovered sharply to 2.5

2016TD
2010A

2011A

2012A

2013A

2014A

2015A
USD 245/ton, increasing by 18% in FY17TD, while a further hike is expected in the
coming months. Major uptick in urea prices is on account of Chinese production cut to
50% - 55% annual utilization levels; resulting in reduced annual production levels by
approx. 51mn tons. With rising urea prices in overseas markets, we expect pricing
Source: NFDC, AHL Research
pressure in the local fertilizer market to largely ease off.

Lucrative Export Opportunity: Urea inventory in Pakistan was around 1.7mn tons as Exhibit: Local and Intl Urea Prices
at 30th Nov16, while forecasted demand for Dec16 is expected between 1.0-1.2mn
(PKR/bag)
International Local
tons. With this, estimated inventory at year end shall arrive at ~1.5k tons. Assuming
local producers retain a buffer stock of ~0.4mn tons, we believe that 0.8mn tons will be Avg. Discount (RHS)
3,500 80%
available for exports with lucrative margins given the recent surge in intl urea price to
3,000 70%
USD 240/ton.
2,500 60%
50%
2,000
40%
1,500
30%
Key Risks 1,000 20%
500 10%
Downward pressure on local fertilizer prices
Gas tariff hike in feed stock / fuel stock - 0%

CY-08

CY-09

CY-10

CY-11

CY-12

CY-13

CY-14

CY-15

CY-16
Gas curtailment.

Source: Bloomberg, AHL Research

37
Engro Fertilizer Limited
Higher Payout Amid Diminishing Debt
Key Investment Theme
BUY
Inventory Levels: We believe the piled up urea inventory is expected to smoothen out Target Price (Dec-2017) PKR 80.9
by Dec16 as demand stemming from the Rabi sowing season peaks. Albeit, our Market Price PKR 68.2
estimates suggest that EFERT would hold ~200k tons of inventory by the end of CY16.
Furthermore, with fertilizer manufacturers engaged in discussion with the govt to seek
Upside % 18.5
permission for export of surplus inventory, we view that based on a pro-rata basis, PSX Code EFERT
EFERT would be able to export 80-100k tons of urea in the intl market. Bloomberg Code EFERT PA

Concessionary Gas Availability: The company remains immune to gas tariff hikes Share Information
given availability of concessionary gas at USD 70/mmbtu for 10 years. This makes
Market Capitalization USD mn 831
EFERT less sensitive to any potential decline in urea prices going forward.
Market Capitalization PKR mn 87,216
Synergies from Engro Eximp: Subsequent to the purchase of Engro Eximp, the DAP Outstanding Shares mn 1,331
trading arm of EFERT, the company is expected to import 450k tons of DAP annually, Free Float % 45.0
leading to an improvement in annualized after-tax earnings by PKR 2,203mn (EPS: 12M Avg. Daily Turnover mn Shr. 3.39
PKR 1.65). The current annual demand for DAP in Pakistan is around 1.6mn out of 12M High | Low PKR 85.83 | 61.45
which FFBL is expected to cater to 0.7mn, while the rest will be shared between
EFERT and other private importers.
Major Shareholders Engro Corporation

Lucrative Multiple Compared with Peers: The stock is currently trading at CY17F PE Exhibit: Relative Performance
of 7.9x compared with industry and market PER of 10.3x and 9.6x, respectively along
EFERT KSE100
with an alluring dividend yield of 11%.
140%

120%

100%

Key Risks 80%

For every reduction in urea prices of PKR 50/bag, bottom-line is eroded by PKR 60%

Jul-16
Jan-16

Jan-16

Jun-16

Aug-16

Sep-16
Mar-16

Mar-16

Apr-16

Oct-16

Nov-16
May-16
0.9/share.
Gas tariff hike in feed stock / fuel stock.

Source: Bloomberg, AHL Research

38
Engro Fertilizer Limited
Financial Snapshot
Exhibit: Financial Highlights Exhibit: Sales and Gross Margins
PKR mn 2015A 2016E 2017F Sales Gross Margins (RHS)
Income Statement (PKR bn) (%)
Sales 87,615 63,180 72,966 95.0 50.0
87.6
Gross Profit 32,180 19,229 21,447 85.0
Other Income 1,707 6,474 6,409 45.0
80.0 73.0
Finance Cost 4,588 3,147 2,288
40.0
Post Tax Profit 15,027 10,301 11,568 61.4 63.2
65.0
Balance Sheet 35.0
Shareholder's Equity 42,526 43,515 45,101 50.0
30.0
Current Liabilities 30,949 21,192 18,679
Trade and other payables 16,887 9,920 10,449 35.0 25.0
Non-Current Liabilities 31,907 23,221 18,316

CY14A

CY15A

CY16F

CY17F

CY18F
Current Assets 28,540 14,060 10,856
Non-Current Assets 76,842 73,868 71,240
Source: Company Financials, AHL Research Source: Company Financials, AHL Research

Exhibit: Ratio Analysis Exhibit: Declining Debt to Equity

Ratio Analysis Unit 2015A 2016E 2017F Equity Debt to Equity (RHS) (x)
(PKR bn)
Per Share 60.0 2.5
Earnings PKR 11.3 7.7 8.7
50.0 47.3 2.0
Dividend PKR 6.0 7.0 7.5 43.5 45.1
42.5
Book value PKR 32.0 32.7 33.9
40.0 34.5 1.5
Price Ratios
Price to Earning x 7.5 8.8 7.9 30.0 1.3 1.0
Dividend Yield % 7.1 10.3 11.0 0.9
Price to Book x 2.6 2.1 2.0 20.0 0.6 0.5
0.4
Profitability Ratios 0.2
10.0 -
Gross Margins % 36.7 30.4 29.4

CY14A

CY15A

CY16F

CY17F

CY18F
EBITDA Margins % 35.9 29.8 27.1
Net Margins % 17.2 16.3 15.9
Source: Company Financials, AHL Research Source: Company Financials, AHL Research

39
Fauji Fertilizer Bin Qasim Limited
Emerging From The Storm
Key Investment Theme
BUY
CY17 to Commence on a High Note: Although profitability during CY16 was Target Price (Dec-2017) PKR 64.4
unimpressive, the company is all set to post 100% YoY growth in earnings during Market Price PKR 53.1
CY17. Major drivers for growth: i) expected commissioning of the 118MW coal-power
plant in 1QCY17, ii) augmented urea production and sales aided by the agriculture
Upside % 21.5
package, and iii) improved DAP primary margins. PSX Code FFBL
Bloomberg Code FFBL PA
Wider Investment Base: FFBL owns a 21.57% stake in AKBL and we estimate that its
contribution to earnings shall clock-in at PKR 0.44/share and PKR 0.58/share in CY16 Share Information
and CY17, respectively. Fauji Meat Limited is expected to add another PKR 0.45/share
Market Capitalization USD mn 466
to the bottom-line in CY17. Additionally, the 118MW coal power plant being set up by
FFBL Power Limited (pertinently, ~52MW would be set aside for Karachi Electric Market Capitalization PKR mn 48,929
Limited - KEL), is expected to come online in 1QCY17; its projected positive impact on Outstanding Shares mn 934
earnings is ~PKR 1.62/share in CY17. The said plant is also set to save ~08-10mmcfd Free Float % 35.0
of fuel gas which may be used to produce a further ~100k tons of urea. Finally, FFBLs 12M Avg. Daily Turnover mn Shr. 1.79
35% stake in Foundation Wind Energy I-II will bring in an additional PKR 0.50/share in 12M High | Low PKR 57.26 | 46.19
CY17.
Major Shareholders Fauji Fertilizer Company
DAP margins to turn supportive: DAP primary margins (PM) declined 32% YoY to
USD 152/ton in CY16. However, with downturn in the prices of phos-acid, we expect Exhibit: Relative Performance
primary margins to grow 34% YoY to USD 203/ton in CY17E (PM clocked-in at USD FFBL KSE100
236/ton in 4QCY16). 140%

SoTP valuations: Our SoTP target price of PKR 64.4/share comprises of PKR 130%
40.83/share in core value and a portfolio value of PKR 23.62/share. 120%
110%
100%
90%
Key Risks
80%
For every reduction in DAP prices of PKR 100/bag, primary margins would shrink by 70%

Jul-16
Jan-16

Jan-16

Jun-16

Nov-16
Apr-16

Aug-16

Sep-16

Oct-16
Mar-16

Mar-16

May-16
USD 16/ton, translating into annual impact on bottom-line of PKR 0.68/share.
Delay in CoD of coal power plant.
Gas tariff hike in feedstock.
Source: Bloomberg, AHL Research

40
Fauji Fertilizer Bin Qasim Limited
Financial Snapshot
Exhibit: Financial Highlights Exhibit: Historical and forward margins
PKR mn 2015A 2016E 2017F (%) Gross Margins EBITDA Margins
Income Statement Net Margins
Sales 52,182 49,006 53,017 25.0
Gross Profit 7,214 4,435 8,461
20.0
Other Income 5,683 6,307 5,463
Finance Cost 1,868 2,427 2,733 15.0
Post Tax Profit 4,062 1,560 3,116
Balance Sheet 10.0
Shareholder's Equity 14,281 14,907 15,220
5.0
Current Liabilities 33,017 35,602 37,971
Trade and other payables 12,828 13,161 13,602 -
Non-Current Liabilities 12,109 15,425 10,075

CY14A

CY15E

CY16F

CY17F

CY18F
Current Assets 29,308 34,455 31,088
Non-Current Assets 30,099 31,479 32,178
Source: Company Financials, AHL Research Source: Company Financials, AHL Research

Exhibit: Ratio Analysis Exhibit: DAP Primary margins

Ratio Analysis Unit 2015A 2016E 2017F Long term DAP & Phosphoric Acid Prices
Per Share
CY15A CY16A CY17E CY18F
Earnings PKR 4.3 1.7 3.3
Dividend PKR 3.8 1.0 3.0 Phosphoric Acid 798 744 630 655
Book value PKR 15.3 16.0 16.3
Local DAP 623 501 500 510
Price Ratios
Price to Earning x 12.1 31.8 15.9 Primary Margins 248 152 203 232
Dividend Yield % 7.2 1.9 5.7
Price to Book x 3.4 3.3 3.3
Profitability Ratios
Gross Margins % 13.8 9.1 16.0
EBITDA Margins % 13.9 9.4 13.4
Net Margins % 7.8 3.2 5.9
Source: Company Financials, AHL Research Source: Bloomberg, AHL Research

41
Fatima Fertilizer Company Limited
Financial Snapshot
Being a group company, we dont cover Fatima Fertilizer.
Exhibit: Financial Highlights
NA
PKR mn 2014A 2015A 9MCY16A
Target Price (Dec-2017) PKR na
Income Statement
Market Price PKR 36.5
Sales 36,169 29,733 22,908
Upside % na
Gross Profit 21,461 17,122 11,966
PSX Code FATIMA
Other Income 624 574 532
Bloomberg Code FATIMA PA
Finance Cost 3,767 2,379 1,924
Post Tax Profit 9,258 9,254 6,371
Balance Sheet Share Information
Shareholder's Equity 36,757 40,229 43,974 Market Capitalization USD mn 730
Current Liabilities 14,575 25,948 30,570 Market Capitalization PKR mn 76,671
Trade and other payables 7,341 8,646 8,640 Outstanding Shares mn 2,100
Non-Current Liabilities 31,789 28,613 28,228 Free Float % 20.0
Current Assets 14,169 19,533 26,889 12M Avg. Daily Turnover mn Shr. 1.21
Non-Current Assets 68,952 75,257 75,884 12M High | Low PKR 44.07 | 30.00
Source: Company Financials, AHL Research Major Shareholders Fatima Group / AHCL

Exhibit: Ratio Analysis Exhibit: Relative Performance


FATIMA KSE100
Ratio Analysis Unit 2014A 2015A 9MCY16A
Per Share 145%
Earnings PKR 4.4 4.4 3.0 130%
Dividend PKR 2.8 - 1.3
115%
Book value PKR 17.5 19.2 20.9
100%
Price Ratios
Price to Earning x 8.1 10.2 na 85%
Dividend Yield % 7.7 - na 70%
Price to Book x 2.0 2.3 1.7 55%
Profitability Ratios 40%

Jul-16
Jan-16

Jan-16

Jun-16

Aug-16

Sep-16
Mar-16

Mar-16

Apr-16

Oct-16

Nov-16
May-16
Gross Margins % 59.3 57.6 52.2
EBITDA Margins % 56.0 53.3 47.3
Net Margins % 25.6 31.1 27.8
Source: Company Financials, AHL Research Source: Bloomberg, AHL Research

42
Exploration & Production

www.arifhabibltd.com
Equity Brokerage, Research, Inter-Bank Brokerage, Forex & Corporate Finance
Global Oil Prices
OPEC Production Cut
Key Investment Theme Exhibit: Historical OPEC Crude Oil Production

OPEC Slashes its Oil Production: After its semi-annual meeting in Austria, the cartel
(mn bpd)
announced its members will reduce oil production by 1.2mn bpd from approximately
34
34.2mn bpd in Nov16. Saudi Arabia agreed to reduce production by 0.5mn bpd. Iran,
country which was rapidly increasing oil production, will also freeze output at 3.8mn
33
bpd. During CY16, prices of Brent and WTI recovered by 48% and 39% respectively
and the recovery in prices during the year, was mainly driven by the news flows
32
revolving around OPECs production.
31
Others to Follow the Lead of OPEC: Russia, one of largest oil producers, has also
agreed to reduce production of 11.21mn bbl./day (Nov16) by 0.3mn bbl./day. The non 30
OPEC producers are expected to reduce their oil production by 0.6mn bbl./day. With
major oil producers limiting oil supply, it is expected that markets will rebalance in 29
1HCY17 with a near term reduction of ~1.8mn bpd to ~2.0mn bpd.

Oct'12

Oct'13

Oct'14

Oct'15

Oct'16
Apr'12

Apr'13

Apr'14

Apr'15

Apr'16
Jul'12

Jul'13

Jul'14

Jul'15

Jul'16
Jan'12

Jan'13

Jan'14

Jan'15

Jan'16
Demand Now a Bigger Question Than Supply: With the supply concerns addressed
by the recent output cut, demand now comes under limelight. Recently the International
Energy Agency reduced its forecast for global oil demand by 0.1mn bbl./day to 96.8mn Source: EIA, AHL Research
bbl./day, which is a cause of concern. The stimulus provided to global oil demand by
lower oil prices has started to subside primarily due to a reversal in oil prices. Exhibit: Global Oil Production Surplus vs. Arab Light Prices
Additionally apprehensions of a slowdown in demand stem from i) strengthening of
USD against other currencies and ii) slowdown in growth of major economies. Surplus/ (Deficit) - RHS Arab Light

Oil Assumption for AHL E&P Universe: We previously had an oil price assumption of (USD/bbl) (mn bpd)
USD 45/bbl. in FY17, USD 50/bbl. in FY18, USD 55/bbl. in FY19 and USD 60/bbl. 100 3.5
going forward. However in the light of recent oil production cuts, we have revised our 3.0
80 2.5
assumption to USD 55/bbl. in the remaining months of FY17, rising to USD 60/bbl in
2.0
FY18, USD 65/bbl. going forward. 60 1.5
40 1.0
Key Risks 0.5
20 0.0
-0.5
The production cut by OPEC can be quickly neutralized by an increase in production by 0 -1.0
US shale oil producers which are expected to be motivated by the Trump

Jul-14

Jul-15

Jul-16
Sep-14
Nov-14
Jan-15

Sep-15
Nov-15
Jan-16

Sep-16
Nov-16
Mar-15

Mar-16
May-15

May-16
Administration to increase their oil production.
A slowdown in oil demand from major oil consuming economies.
As seen historically, OPEC members can produce higher than the decided quota. With
Source: EIA, Bloomberg, AHL Research
no change in oil supply, prices are at a risk of reverting to earlier levels. (~USD 40-
45/bbl).

44
Exploration and Production
Following the Oil Price
Key Investment Theme Exhibit: Movement of Sector Profitability with Oil Prices

Sector Re-Rated in Hope of Earnings Accretion: The AHL E&P sector is currently Sector Profit Arab Light Prices
trading at PER of 10.01x based on FY17E earnings expectations compared with a PER
(PKR bn) (USD/bbl.)
of 9.2x of the KSE-100 Index and a six year historical PER of 9.28x of the sector. The
E&P universe generated a return of 42% in CY16TD despite profitability of the sector 200 188 120
declining by 48.7% YoY in FY16. Higher returns can be attributed to expectations of
150 145 100
improving profitability going forward on the back of higher oil prices and production. 150 90 130
89
106 80
Additions to Corroborate Earnings: We expect some high profile production 87
additions will come online in FY17, including Mardankhel, Makori East-5 (both already 100 73 60
commissioned), Nashpa X-5, Kunnar Pasakhi Tando Allah Yaar Integration Project, 40
Makori deep-1 and Uch II. AHL E&P universe is projected to produce 66,153bpd of oil 50
20
and 2,323 mmcfd of gas in FY17 where additions represent 12.7% and 13.2% of oil
and gas production, respectively. - 0

FY12
FY08

FY09

FY10

FY11

FY13

FY14

FY15

FY16
Profitability to Imitate Oil Prices: Revenues of E&P companies are dependent on oil
prices, as a result of which the sectors profitability moves in tandem with oil prices. For
every USD 5.0/bbl. change in the oil price, the sector profitability in FY17 and FY18 Source: Bloomberg, Company Financials, AHL Research
changes by ~3.9% and ~7.3%. In our E&P universe POL is the most sensitive to
change in oil price assumption and stands to benefit the most in rising oil prices. The
Exhibit: Wells Targeted Vs. Actually Drilled
profitability of the our E&P universe is expected to surge by 28.1% YoY in FY17.
Planned Spudded Discoveries
Exploration Momentum to Continue: The local E&Ps spudded 81% of targeted wells (No. of Wells)
in FY16 (79% in FY15) which in absolute terms is 77 wells spudded against a target of 120 30
94 wells. In addition to aggressive seismic activities, the E&Ps made 15 new
discoveries during the year. We believe the momentum of exploration will continue next 100 25
year due to improving law & order and the governments commitment to improve
energy supplies. Previously untapped areas due to security concerns can now be 80 20
viewed as opportunities.
60 15
Key Risks 40 10

As revenues are highly reliant on oil prices, a decline in oil prices can hurt profitability. 20 5
Companies can incur significant drywell costs with continuous efforts to find new
hydrocarbon reserves or developing current reserves. 0 0
A delay in production coming online from recent discoveries and development wells. FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Source: PPIS, AHL Research

45
Exploration and Production
The Sensitivities
The Sensitivities

Base Case: Oil Prices Assumption (USD/bbl) and Fair Values


Price TP Upside EPS (PKR) DPS (PKR) P/E (x) DY (%) P/B (x) ROE (%)
Code Stance
9-Dec-16 Dec-17 (%) 2016 2017 2018 2016 2017 2018 2016 2017 2018 2017 2018 2017 2018 2017 2018
PPL 167.1 202.7 21.4 Buy 10.3 14.8 19.3 4.75 7.25 9.50 16.3 11.3 8.7 4.3 5.7 1.5 1.4 13.8 16.7

OGDC 156.4 185.1 18.3 Buy 13.9 16.8 21.2 5.20 6.25 8.00 11.2 9.3 7.4 4.0 5.1 1.3 1.1 14.3 16.3

POL 479.7 569.4 18.7 Buy 30.6 45.8 62.2 35.00 41.25 55.75 15.7 10.5 7.7 8.6 11.6 3.6 3.3 35.2 44.6
* Base case with USD 55/bbl in FY17, USD 60/bbl in FY18 and USD 65/bbl going forward

Bear Case: Oil Prices Assumption (USD/bbl) and Fair Values


Price TP Upside EPS (PKR) DPS (PKR) P/E (x) DY (%) P/B (x) ROE (%)
Code Stance
9-Dec-16 Dec-17 (%) 2016 2017 2018 2016 2017 2018 2016 2017 2018 2017 2018 2017 2018 2017 2018
PPL 167.1 191.7 14.7 Buy 10.3 14.3 18.0 4.75 7.00 8.75 16.3 11.7 19.7 4.2 5.2 1.5 1.4 13.4 15.7

OGDC 156.4 175.4 12.2 Buy 13.9 16.1 19.8 5.20 6.00 7.25 11.2 9.7 20.2 3.8 4.6 1.3 1.2 13.8 15.4

POL 479.7 538.8 12.3 Buy 30.6 43.7 57.1 35.00 39.25 51.25 15.7 11.0 12.0 8.2 10.7 3.6 3.3 33.7 41.6
* Bear case with USD 50/bbl in FY17, USD 55/bbl in FY18 and USD 60/bbl going forward

Bull Case: Oil Prices Assumption (USD/bbl) and Fair Values


Price TP Upside EPS (PKR) DPS (PKR) P/E (x) DY (%) P/B (x) ROE (%)
Code Stance
9-Dec-16 Dec-17 (%) 2016 2017 2018 2016 2017 2018 2016 2017 2018 2017 2018 2017 2018 2017 2018
PPL 167.1 213.8 28.0 Buy 10.3 15.2 20.5 4.75 7.50 10.00 16.3 11.0 19.7 4.5 6.0 1.5 1.4 14.3 17.7

OGDC 156.4 194.7 24.5 Buy 13.9 17.4 22.7 5.20 6.50 8.50 11.2 9.0 20.2 4.2 5.4 1.3 1.1 14.8 17.3

POL 479.7 600.0 25.1 Buy 30.6 47.9 67.2 35.00 43.00 60.50 15.7 10.0 12.0 9.0 12.6 3.6 3.2 36.6 47.5
* Bull case with USD 60/bbl in FY17, USD 65/bbl in FY18 and USD 70/bbl going forward

www.arifhabibltd.com
Equity Brokerage, Research, Inter-Bank Brokerage, Forex & Corporate Finance 46
Oil and Gas Development Company
Breaching 50k bpd Threshold
Key Investment Theme
BUY
Striking Price Performance of 36% in CY16TD: The scrip moved in tandem with Target Price (Dec-2017) PKR 185.1
international oil prices during the year and made its 52 week low in Jan-16. However Market Price PKR 156.4
with a recovery in oil prices, the stock price surged 68% from its low, and made its 52
week high in Dec-16. Despite volatile movements of the stock and international oil
Upside % 18.3
prices in CY16, the scrip generated a return of 36% in CY16TD. Going forward, in PSX Code OGDC
CY17 the direction of the stock will continue to be driven by oil prices. The stock Bloomberg Code OGDC PA
currently trades at the cheapest FY17 price earnings ratio of 9.4x vs. 10.01x of AHL
E&P universe. Share Information
Oil Production Surpasses 50k bpd: Oil production of the company has surpassed the
Market Capitalization USD mn 6,406
50,000 bpd barrier recently and additions from Mardankhel, KPD-TAY integration Market Capitalization PKR mn 672,579
project and Uch-II, among others, will further provide impetus to oil production. Each Outstanding Shares mn 4,301
1,000 bpd added to the production will augment the bottom line by ~PKR 0.17/share Free Float % 15.0
(annualized). 12M Avg. Daily Turnover mn Shr. 2.43
Maturing PIBs : Large portion of term finance certificates (PKR 41.0bn) coupled with 12M High | Low PKR 156.38 | 95.58
all the PIBs (PKR 51.3bn) are expected to mature within a year. However, the Major Shareholders Govt. of Pakistan
government may roll over these payments. The interest accrued on these investments
has increased to PKR 21.2bn as at Sep-16 compared with PKR 14.4bn as at Jun-15. Exhibit: Relative Performance
On the other hand, if the company receives the funds it can reinvest them into the
business and earn a higher ROE (16.3% in FY18). OGDC KSE100
145%
Piling Up Receivables The companys exposure to circular debt has also increased to
PKR82bn as at Sep-16 from PKR 77bn as at Jun-15, a cause of concern. The increase 130%
stemmed primarily from receivables of SNGPL and SSCG.
115%

100%

Key Risks
85%

Further accumulation in circular debt can put a strain on cash flows in the long-term. 70%
A retreat in oil prices can be detrimental for earnings as benchmark oil prices are used

Jul-16
Jan-16

Jan-16

Jun-16

Aug-16

Sep-16
Mar-16

Mar-16

Apr-16

Oct-16

Nov-16
May-16
to calculate revenue from both oil and gas.
The maturity of PIBs poses a reinvestment risk, while the interest accrued continues to
rise. Source: Bloomberg, AHL Research

47
Oil and Gas Development Company
Financial Snapshot
Exhibit: Financial Highlights Exhibit: The Barrels of Oil Equivalent Sold and EPS
PKR mn 2016A 2017E 2018F BoE Sold EPS
Income Statement (Mn BoE) (PKR)
Sales 162,867 191,691 230,541 120 30
Gross Profit 87,890 109,056 141,869 115
Other Income 14,703 15,006 15,361 110
25
Finance Cost 1,718 2,080 2,583 105
Post Tax Profit 59,971 72,062 91,363 100
Balance Sheet 95 20
Shareholder's Equity 478,633 529,200 589,259 90
Total Liabilities 110,933 122,343 146,430 85
15
Current Assets 254,801 306,751 376,093 80
Total Fixed Assets 215,368 225,395 240,199 75
70 10
Non-Current Assets 334,765 344,792 359,596
FY13 FY14 FY15 FY16 FY17 FY18
Total Assets 589,566 651,543 735,689
Source: Company Financials, AHL Research Source: Company Financials, AHL Research

Exhibit: Ratio Analysis Exhibit: Circular Debt Position of the Company

Ratio Analysis Unit 2016A 2017E 2018F Circular Debt Position % Change
Per Share (PKR bn)
Earnings PKR 13.9 16.8 21.2 100 120.0%
Dividend PKR 5.2 6.3 8.0
Book value PKR 111.3 123.0 137.0 80.0%
80
Price Ratios
40.0%
Price to Earning x 9.9 9.3 7.4
60
Dividend Yield % 3.8 4.0 5.1
0.0%
Price to Book x 1.2 1.3 1.1
Profitability Ratios 40
-40.0%
Gross Margins % 54.0 56.9 61.5
EBITDA Margins % 50.5 53.1 57.5 20 -80.0%
Net Margins % 36.8 37.6 39.6 Jun'12 Jun'13 Jun'14 Jun'15 Jun'16
Source: Company Financials, AHL Research Source: Company Financials, AHL Research

48
Pakistan Petroleum Limited
A Sound Bet
Key Investment Theme
BUY
Impairment; Blown Out of Proportion: PPL is expected to record an impairment of Target Price (Dec-2017) PKR 202.7
PKR 0-4bn of its subsidiary PPL Europe Limited in 4QFY16. Although the impairment Market Price PKR 167.1
can adversely impact profitability in FY16 (maximum impact PKR 1.4/share), it is
unlikely that this will spillover into FY17 amid international oil prices rebound.
Upside % 21.4
PSX Code PPL
Earnings, Up they Go: The company boasts a handsome 4-Yr earnings CAGR of Bloomberg Code PPL PA
24%. The company is expected to post 44% growth in earnings for FY17 (without
incorporating impairment in FY16). This surge in earnings is based on i) increase in oil Share Information
prices, ii) improving gas flows from Sui and Kandhkot iii) production additions from Tal
Market Capitalization USD mn 3,137
block and Gambat South block coming online.
Market Capitalization PKR mn 329,415
Production Picking Up Momentum: We expect oil and gas production of the Outstanding Shares mn 1,972
company to average around ~16,800bpd and 910 mmcfd in FY17 compared with Free Float % 24.4
~13,847bpd and 7,43 mmcfd in FY16, respectively. The increase in production is 12M Avg. Daily Turnover mn Shr. 1.08
attributed to a rise in gas production from Sui (up 2% YoY) and Kandhkot (up 30% 12M High | Low PKR 171.5 | 101.1
YoY). Furthermore, gas prices of Kandhkot and Sui, unlike other gas fields, are
uncapped and stand to benefit from rising oil prices. For every USD 5/bbl change in oil
Major Shareholders Govt. of Pakistan
price assumption the gas price changes by ~4.3%. Just to recall Sui and Kandhkot,
collectively represent ~74% of total gas production of the company. Exhibit: Relative Performance
PPL KSE100
PIBs to Mature in CY17: The PIBs worth PKR 22bn will be maturing in 1QFY18. The
160%
bonds currently contribute ~PKR 0.72/share to the bottom line. The company currently
generates a 10% yield. Alternatively, if the funds are utilized within the company a
140%
higher ROE of 163.7% (FY18) can be generated going forward.
120%

100%

Key Risks 80%

With aggressive efforts to increase hydrocarbon production, the company can write off 60%

Jul-16
Jan-16

Jan-16

Jun-16

Aug-16

Sep-16
Mar-16

Mar-16

Apr-16

Oct-16

Nov-16
May-16
significant amounts as dry wells costs (12 drywells in FY16 vs. 7 in FY15).
No further extension in Sui Mining Lease which expires in May17; unlikely in our view.
The re-investment risk on the funds from matured PIBs.
Source: Bloomberg, AHL Research

49
Pakistan Petroleum Limited
Financial Snapshot
Exhibit: Financial Highlights Exhibit: Movement of Sui Gas Price with Arab Light
PKR mn 2016A 2017E 2018F Arab Light Price Sui Gas Price (RHS)
Income Statement
(USD/bbl) (USD/MMBTU)
Sales 76,429 92,030 117,597
Gross Profit 44,386 56,914 77,192 120 2.4
5,440 6,011 5,780 110
Other Income 2.2
100
Finance Cost 532 593 654
90 2.0
Post Tax Profit 20,212 29,105 37,983
80
Balance Sheet 70 1.8
Shareholder's Equity 202,788 217,653 237,051 60
Total Liabilities 52,246 57,597 65,539 50 1.6
Current Assets 84,739 98,722 118,419 40 1.4
Total Fixed Assets 107,847 114,079 121,723 30
Non-Current Assets 170,296 176,528 184,171 20 1.2
FY12 FY13 FY14 FY15 FY16 FY17 FY18
Total Assets 255,034 275,250 302,590
Source: Company Financials, AHL Research Source: Company Financials, AHL Research

Exhibit: Ratio Analysis Exhibit: Oil and Gas Production (mn BOE)

Ratio Analysis Unit 2016A 2017E 2018F (mn BOE)


Per Share 72.0
Earnings PKR 10.3 14.8 19.3 70.0
Dividend PKR 4.8 7.3 9.5 68.0
Book value PKR 102.8 110.4 120.2 66.0
Price Ratios 64.0
Price to Earning x 15.1 11.3 8.7 62.0
Dividend Yield % 3.1 4.3 5.7 60.0
Price to Book x 1.5 1.5 1.4 58.0
Profitability Ratios 56.0
Gross Margins % 58.1 61.8 65.6 54.0
EBITDA Margins % 51.9 58.3 58.6 52.0
Net Margins % 26.4 31.6 32.3 FY14 FY15 FY16 FY17 FY18
Source: Company Financials, AHL Research Source: Company Financials, AHL Research

50
Pakistan Oilfields Limited
Right Blend of Price & Yield
Key Investment Theme
BUY
Recovery from Rock Bottom: Similar to stock prices of other E&P companies, the Target Price (Dec-2017) PKR 569.4
scrip generated a stellar return of 99% in CYTD16. The stock price, after making its 52 Market Price PKR 479.7
week low in Jan-16, nearly doubled and made its 52 week high, post OPEC production
cut and rose 180% from its low. The stock currently trades at FY17 price earnings ratio
Upside % 18.7
of 10.9x compared with a 4-Yr average PER of 11.0x. PSX Code POL
Bloomberg Code POL PA
Earnings Growth of 50% in FY17: Increase in the bottomline is primarily attributable
to i) improved average Arab Light price, ii) our expectation of oil and gas production Share Information
increasing by 10% and 28% respectively with additions from Tal block and iii) full year
Market Capitalization USD mn 1,081
impact of favorable gas pricing. The company has a 5-Yr earnings CAGR (FY16-20) of
21%. Importantly, our FY17 earnings estimate of PKR 45. 8/share is most sensitive Market Capitalization PKR mn 113,478
(among AHL E&P universe) to change in oil prices. For every USD 5.0/bbl. change in Outstanding Shares mn 237
oil price assumption the EPS estimate changes by ~9.0%. Free Float % 45.8
12M Avg. Daily Turnover mn Shr. 0.72
Highest Dividend Yield in E&P Universe: The stock offers a healthy dividend yield of 12M High | Low PKR 479.73 | 189.67
9.3%; a spread of 3.3% from the return offered by the 1-Yr Treasury Bill. Furthermore
the company has been maintaining a payout ratio of more than 100% for two years
Major Shareholders Attock Oil Company
(FY15:112%, FY16: 115%). This phenomenon can be explained by the high proportion
of non cash expenses in the income statement which were 53% of NPAT in FY16. Exhibit: Relative Performance
POL KSE100
High Reliance on Tal Block: The company relies heavily on a single asset namely the
220%
Tal Block for its hydrocarbon production (Tal block represents 87% and 78% of total oil
and gas production, respectively). As seen historically, a drop in production from Tal 200%
block also adversely impacts profitability of company. However the majority of additions 180%
to production going forward also belong to same block. 160%
140%
120%

Key Risks 100%


80%
High reliance on Tal Block, less diversification as compared to peers. 60%

Jul-16
Jan-16

Jan-16

Jun-16

Aug-16

Sep-16
Mar-16

Mar-16

Apr-16

Oct-16

Nov-16
May-16
Being most sensitive to oil prices in our E&P universe, profitability is most vulnerable to
volatile oil prices.

Source: Bloomberg, AHL Research

51
Pakistan Oilfields Limited
Financial Snapshot
Exhibit: Financial Highlights Exhibit: A Comparison of EPS and DPS
PKR mn 2016A 2017E 2018F
(PKR) EPS DPS
Income Statement
70
Sales 24,848 31,497 39,879
Gross Profit 11,243 16,492 23,021
60
Other Income 1,411 1,576 1,541
Finance Cost 1,022 1,160 1,161
50
Post Tax Profit 7,234 10,827 14,705
Balance Sheet
40
Shareholder's Equity 30,154 31,378 34,593
Total Liabilities 25,564 27,831 30,524
30
Current Assets 20,176 23,105 28,661
Fixed Assets 9,629 10,180 10,619
20
Non-Current Assets 35,542 36,103 36,456
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Total Assets 55,717 59,208 65,117
Source: Company Financials, AHL Research Source: Company Financials, AHL Research

Exhibit: Ratio Analysis Exhibit: Hydrocarbon Production (mn BoE)

Ratio Analysis Unit 2016A 2017E 2018F (mn BOE)


Per Share
9.0
Earnings PKR 30.6 45.8 62.2
Dividend PKR 35.0 41.3 55.8 8.5
Book value PKR 127.5 132.6 146.2
Price Ratios 8.0
Price to Earning x 11.4 9.7 7.1
7.5
Dividend Yield % 10.1 9.3 12.6
Price to Book x 2.7 3.3 3.0 7.0
Profitability Ratios
6.5
Gross Margins % 45.2 52.4 57.7
EBITDA Margins % 55.2 57.6 57.7 6.0
Net Margins % 29.1 34.4 36.9 FY14 FY15 FY16 FY17 FY18
Source: Company Financials, AHL Research Source: PPIS, Company Financials, AHL Research

52
Cements

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Equity Brokerage, Research, Inter-Bank Brokerage, Forex & Corporate Finance
Cements
Construct, Create, Grow
Key Investment Theme Exhibit: Historical PSDP and Cement Dispatches
PSDP The Key Demand Driver: The governments expenditure on infrastructure (PKR bn)
Actual PSDP
(mn tons)
through the Public Sector Development Program (PSDP) remains a major demand Cement Dispatches (RHS)
driver for the cement industry. PSDP spending and cement demand are strongly knit 1,600 40.0
together, visible via a strong positive correlation of 0.97. With a generous federal PSDP
target under Budget FY17 at PKR 800mn (and an additional PKR 875mn under 1,400
provincial), we expect the rising trajectory of cement demand to continue in the medium 38.0
1,200
to long term with a focus on infrastructure development prior to upcoming elections in
2018 and a gradual materialization of CPEC-related projects. 1,000 36.0

Govt Focused on Strategic Projects: Meanwhile other strategic projects of the govt, 800
in-line with vision 2025, would create new avenues of demand. Federal authorities 34.0
have already undertaken various Hydel energy projects, including Diamir Bhasha and 600
Dasu Dam.
400 32.0
FY-12 FY-13 FY-14 FY-15 FY-16
Lowest Per Capita Consumption in the Region: Pakistans cement consumption per
capita of 139kg is ~50% lower than the regional average and one of the lowest in Asia.
Source: MoF, APCMA, AHL Research
Low utilization coupled with factors like steady economic growth, a growing middle
class, a young population (with 55% of the population under the age of 24 years), and
an accelerated pace of urbanization will keep the prospects of long term cement growth Exhibit: Cement Consumption per Capita
bright.
Kg/Capita
Housing Demand Expected to Remain Upbeat: It is pertinent to note that the current 2,000 1,805
housing shortage in Pakistan is ~9mn units/annum, according to the World Bank.
Addressing the issue, high-end housing projects underway across the country by 1,600
construction giants such as Bahria (4 current and 6 upcoming projects including Bahria
Town Lahore) and DHA (4 current and 5 upcoming projects including DHA 1,200
Lahore/Karachi), as well as several small scale projects bode well for cement demand. 699 694
800
521 464
400 246 204 203
Key Risks 140 118 110
0
Ascent in coal prices and/or downwards pressure on cement prices.

Iran

Iraq

India
Thailand

Sri Lanka

Pakistan
China

Malaysia

Afghanistan

Bangladesh
Nigeria
Price war post materialization of additional capacities.
Loss of sales on the export front.
Electricity and gas tariff hikes.
Source: World Bank, AHL Research

54
Cements
Promising Outlook
Key Investment Theme Exhibit: Historical cement dispatches

Demand Outlook - Given the strong infrastructure-led economic performance, we Local Exports Growth (RHS)
(mn tons)
foresee total industry demand to grow at a CAGR of 8.6% by FY20 mainly on account
60 40%
of greater PSDP utilization, realization of energy projects, urban housing schemes, and
revival of the private sector credit offtake. This will be fueled by strong house financing 50 30%
amid rising housing demand and low interest rates.
40 20%
Production Outlook - With strong demand expected, 9 companies have announced
capacity expansion amounting to 22.46mn tons which is 49% of the current installed 30 10%
capacity of 45.6mn tons. We forecast that current utilization level of 96% may dip to 20 0%
77.6% in FY19 when major capacities come online. However, it will improve going
forward given robust local dispatches and a rebound in cement exports in the medium 10 -10%
to long term. Announced capacities and details are listed below:
0 -20%

FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17F
FY18F
FY19F
FY20F
Exhibit: Announced Capacities
Type of Capacity Outlay
Company Region FY17E FY18F FY19F FY20F
expansion (mn/ton) (USD mn) Source: APCMA, AHL Research
Cement Industry

ACPL Brownfield South 1.20 120 2HFY18 Exhibit: Cement demand and capacity utilization
CHCC Brownfield North 1.30 120 3QFY17
(mn tons) Total Dispatches Capacity
DGKC Greenfield South 2.80 300 1HFY19 Utilization (RHS)
80.0 100.0%
DGKC Brownfield North 2.20 220 (Est) 2HFY19 70.0 95.0%
60.0 90.0%
GWLC Brownfield North 2.40 250 (Est) 2HFY19
50.0 85.0%
KOHC Brownfield North 2.30 220 (Est) 2HFY19 40.0 80.0%
LUCK Brownfield South 1.25 30 2HFY18 30.0 75.0%
20.0 70.0%
LUCK Greenfield North 2.30 230 (Est) 2HFY20 10.0 65.0%
MLCF Brownfield North 2.30 230 1HFY19 - 60.0%

FY04A
FY05A
FY06A
FY07A
FY08A
FY09A
FY10A
FY11A
FY12A
FY13A
FY14A
FY15A
FY16A
FY17F
FY18F
FY19F
FY20F
PIOC Brownfield North 210 (Est) 2HFY19
2.10
POWER Brownfield South 2HFY19
2.31 220
Source: World Bank, AHL Research
Source: PSX announcements, AHL Research

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Equity Brokerage, Research, Inter-Bank Brokerage, Forex & Corporate Finance 55
Lucky Cement
The Game of Thrones
Key Investment Theme
BUY
Industry Leader: Lucky Cement (LUCK) is the 2nd largest cement manufacturer in Target Price (Dec-2017) PKR 1,043.5
Pakistan with an installed capacity of 7.75mn tons. The company operates two cement Market Price PKR 856.1
plants, strategically located in Pezu, close to the Afghanistan border and Karachi, a
coastal city in Pakistan. This location gives the company freight advantage over its
Upside % 21.9
competitors in exporting cement to Afghanistan and via sea routes. LUCK has the PSX Code LUCK
largest market share of 24% in exports and the second biggest local market share of Bloomberg Code LUCK PA
16%.
Earnings Growth Set at 23%: We expect the company to post gross margins at a Share Information
healthy average of 34% over the next 5 years due to strong cement demand, steady Market Capitalization USD mn 2,637
local pricing outlook and range-bound coal prices. Moreover, our solid earnings outlook Market Capitalization PKR mn 276,835
implies a 23% CAGR over FY16-20F. Outstanding Shares mn 323
Aggressive Expansion Plans: LUCK is undertaking major expansion and Free Float % 40.0
diversification projects including i) Greenfield cement plant with nameplate capacity of 12M Avg. Daily Turnover mn Shr. 0.32
2.30mn tons located in Northern Region, ii) 1.25mn tons greenfield expansion at 12M High | Low PKR 856.08 | 448.88
Karachi plant, iiI) 1.2mn tons/annum greenfield project in Democratic Republic of
Major Shareholders Tabba Family
Congo, iv) 50MW Wind power plant in Jhimpir (Sindh), v) 660MW coal-based power
plant at Port Qasim (Sindh) vi) Investment up to PKR 12.0bn in associated company for
the assembling of KIA motors in Pakistan, and vii) Increase in Iraq grinding facility to Exhibit: Relative Performance
1.74mn tons. The company is expected to spend PKR 48bn during FY17-19 to invest in LUCK KSE100
these projects. 175%
SoTP Valuations: Our valuation is based on a 14.1% cost of equity and 3 year 160%
adjusted beta of 1.1 for the core business of LUCK. Moreover, we have valued the Iraq
project (50% LUCK stake) and DR Congo plant (50% equity stake) on DCF basis, while 145%
Lucky Cement Electric Power Company (100% indirect stake) and Yunus energy (20% 130%
stake) on DDM basis. Moreover, we have marked to market the investment in ICI
Pakistan Limited (56% indirect stake) into LUCKs portfolio with a 25% portfolio 115%
discount. Moreover, we have used RoE based valuation for equity stake in KIA motors . 100%

85%
Key Risks
70%
Decline in cement prices; every change of PKR 5.0/bag drags the bottom-line down by

Jul-16
Jan-16

Jan-16

Jun-16

Aug-16

Sep-16

Nov-16
Mar-16

Mar-16

Apr-16

Oct-16
May-16
PKR 0.9/share.
Upswing in coal prices; every increase of USD 5.0/ton, cuts EPS by PKR 1.1.
Delay in materialization of long term investments. Source: Bloomberg, AHL Research

56
Lucky Cement
Financial Snapshot
Exhibit: Financial Highlights Exhibit: Historical and Forward EPS (Consolidated)
PKR mn 2016A 2017E 2018F
EPS Growth (RHS)
Income Statement (PKR)
Sales 82,150 89,609 98,476 65.0 25.0%
Gross Profit 27,903 30,297 33,490
60.0 21.3%
Other Income 1,478 2,862 3,639 20.0%
55.0
Finance Cost 790 845 622 16.8%
Post Tax Profit 15,991 17,749 20,531 50.0 15.7% 15.6% 15.0%
Balance Sheet 45.0
Shareholder's Equity 81,459 97,561 112,549 40.0 10.0%
8.1%
Current Liabilities 22,166 22,801 21,679 35.0
5.0%
Trade and other payables 18,533 14,009 15,318 30.0
Non-Current Liabilities 18,729 14,083 9,573 25.0 0.0%
Current Assets 51,846 58,959 55,777 FY14A FY15A FY16A FY17F FY18F
Non-Current Assets 70,508 75,485 88,023
Source: Company Financials, AHL Research Source: Company Financials, AHL Research

Exhibit: Ratio Analysis Exhibit: Historical and Forward Margins

Ratio Analysis Unit 2016A 2017E 2018F Gross Margins Net Margins EBITDA Margins
Per Share 60.0%
Earnings PKR 46.0 52.6 60.4
Dividend PKR 10.0 11.0 12.0
Book value PKR 251.9 301.7 348.0 50.0%
Price Ratios
Price to Earning x 14.1 16.3 14.2 40.0%
Dividend Yield % 1.5 1.3 1.4
Price to Book x 2.6 2.8 2.5
30.0%
Profitability Ratios
Gross Margins % 34.0 33.8 34.0
EBITDA Margins % 32.6 34.6 35.8 20.0%
Net Margins % 18.1 19.0 19.8 FY14A FY15A FY16A FY17F FY18F
Source: Company Financials, AHL Research Source: Company Financials, AHL Research

57
DG Khan Cement
Time To Spread Footprint
Key Investment Theme
BUY
Prominent Position in the Industry: DGKC is the 3rd biggest cement manufacturer Target Price (Dec-2017) PKR 258.3
by capacity in the cement industry. The company has an 11.3% share in the local Market Price PKR 214.7
market and a10.8% share in total exports.
Upside % 20.3
Profitability to Jump at a 3-year CAGR of 5.3%: With stable cement pricing power PSX Code DGKC
prevalent at the moment coupled with cost savings from gas-based power generation, Bloomberg Code DGKC PA
we anticipate DGKCs profitability to grow at a 5-year CAGR of 10%.
Share Information
Expansion in Both Regions: To mark its footprint in the southern region, cater to
Market Capitalization USD mn 896
exports via sea route and tap into demand of CPECs western route, the company is in
the process of setting up a 2.8mn tons greenfield cement project in Hub, Baluchistan. Market Capitalization PKR mn 94,082
The project is expected to come online between FY18-FY19. Moreover, to cater to the Outstanding Shares mn 438
growing demand and maintain its market share in Punjab, the company has also Free Float % 55.0
announced brownfield expansion of 2.2mn tons. 12M Avg. Daily Turnover mn Shr. 2.39
12M High | Low PKR 214.74 | 143.77
Strong Investment Portfolio: The company has a strong portfolio with investment in
NML, NCL, MCB and AICL, translating into a marked to market investment value of
Major Shareholders Nishat Mill Limited
~PKR 25.2bn while we value the portfolio investment at PKR 17.6bn (PKR 40.4/share)
after applying a 30% portfolio discount. Exhibit: Relative Performance

DGKC KSE100
SoTP Valuations: Our SoTP target price of PKR 258.3/share comprises core and 160%
portfolio value of PKR 212.9/share and PKR 45.34/share, respectively.
145%

130%

115%

Key Risks 100%

Decline in cement prices; every change of PKR 5.0/bag drags down the bottom-line of 85%

Jul-16
Jan-16

Jan-16

Jun-16
Apr-16

Aug-16

Sep-16

Oct-16

Nov-16
Mar-16

Mar-16

May-16
DGKC by PKR 0.5/share.
Increase in coal prices; every increase of USD 5.0/ton negatively impacts EPS of
DGKC by PKR 0.6.
Source: Bloomberg, AHL Research

58
DG Khan Cement
Financial Snapshot
Exhibit: Financial Highlights Exhibit: Margins: Historical & Forecasted
PKR mn 2016A 2017E 2018F Gross Margins EBITDA Margins
Income Statement Net Margins
Sales 29,704 31,963 36,448 55.0%
Gross Profit 12,668 13,920 15,074 50.0%
Other Income 12,668 13,920 15,074 45.0%
Finance Cost 130 514 542
40.0%
Post Tax Profit 8,790 9,319 10,068
Balance Sheet 35.0%
Shareholder's Equity 65,783 72,036 79,037 30.0%
Current Liabilities 10,057 6,546 11,729 25.0%
Trade and other payables 5,366 5,065 5,776
20.0%
Non-Current Liabilities 7,578 28,118 23,100
Current Assets 30,836 37,686 28,508 15.0%
FY14 FY15 FY16 FY17E FY18F
Non-Current Assets 52,583 69,014 85,359
Source: Company Financials, AHL Research Source: Company Financials, AHL Research

Exhibit: Ratio Analysis Exhibit: Cement Dispatches


Industry DGKC % Share
Ratio Analysis Unit 2016A 2017E 2018F
Per Share (000 tons)
Earnings PKR 20.1 21.3 23.0 40,000 30%
Dividend PKR 6.0 7.0 7.0 35,000
25%
Book value PKR 150.1 164.4 180.4 30,000
20%
Price Ratios 25,000
Price to Earning x 9.5 10.1 9.3 20,000 15%
Dividend Yield % 3.1 3.3 3.3 15,000
10%
Price to Book x 1.3 1.3 1.2 10,000
Profitability Ratios 5%
5,000
Gross Margins % 42.6 43.6 41.4 - 0%

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16
EBITDA Margins % 48.8 48.9 46.0
Net Margins % 29.6 29.2 27.6
Source: Company Financials, AHL Research Source: APCMA, AHL Research

59
Maple Leaf Cement
Trust In North Intact
Key Investment Theme
BUY
Dominance in North: The company is a north-based cement manufacturer with plant Target Price (Dec-2017) PKR 143.4
located at Iskandarabad District (Mianwali, Punjab). MLCF is 5th biggest player by Market Price PKR 117.8
capacity with market share of 8.2% in local market and 9.4% in exports.
Upside % 21.8
Earnings to Grow at a 5-year CAGR of 10%: Our theme of solid cement demand, PSX Code MLCF
healthy gross margins, and shrinking finance costs will allow MLCF to yield a strong 5- Bloomberg Code MLCF PA
yr CAGR of 10% in earnings from PKR 4.9bn (EPS: PKR 9.22) in FY16E to PKR 7.2bn
(EPS: PKR 13.62) in FY20F. Share Information
Market Capitalization USD mn 592
Energy Saving Through Coal Based Power Plant: Maple Leaf Power Limited
(MLPL), a wholly owned subsidiary of MLCF has been formed to set up a 40MW Market Capitalization PKR mn 62,162
captive coal power plant at its existing site with expected commercial production by Outstanding Shares mn 528
2QFY18. We expect this project to add PKR 1.36/share to our FY18F earnings forecast Free Float % 45.0
by abetting margins with cheaper energy costs. 12M Avg. Daily Turnover mn Shr. 1.88
12M High | Low PKR 121.73 | 75.81
Joining Expansion Race: MLCF has also joined the ongoing race to expand capacity
by announcing brownfield expansion of 2.3mn tons. With a total capital outflow of
Major Shareholders Kohinoor Textile Mill
~USD 230mn, targeted commercial production is in FY19. With adequate quarry
available on its existing site, the expansion will bode well for the company with major Exhibit: Relative Performance
demand from govts strategic projects, including Diamir Basha Dam and Dasu
hydropower project, being handled by the company. MLCF KSE100
175%

160%

145%

130%

115%
Key Risks
100%

Decline in cement prices; every change of PKR 5.0/bag drags down the bottom-line of 85%

Jul-16
Jan-16

Jan-16

Jun-16

Nov-16
Apr-16

Aug-16

Sep-16

Oct-16
Mar-16

Mar-16

May-16
MLCF by PKR 0.6/share.
Upsurge in coal prices; every increase of USD 5.0/ton, shrinks EPS by PKR 0.1.

Source: Bloomberg, AHL Research

60
Maple Leaf Cement
Financial Snapshot
Exhibit: Financial Highlights Exhibit: Sales and Net Margins
PKR mn 2016A 2017E 2018F Sales Net Margins
(PKR bn)
Income Statement
30 35%
Sales 23,433 26,085 28,309
Gross Profit 10,022 11,787 13,393
30%
Other Income 36 40 44 25
Finance Cost 436 270 323
25%
Post Tax Profit 4,885 6,273 7,262
20
Balance Sheet
20%
Shareholder's Equity 21,337 26,027 31,705
Current Liabilities 5,027 6,859 10,982 15
Trade and other payables 3,194 3,421 3,569 15%
Non-Current Liabilities 5,657 14,100 20,007
Current Assets 8,478 8,923 12,010 10 10%
FY14A FY15A FY16A FY17F FY18F
Non-Current Assets 23,544 38,063 50,684
Source: Company Financials, AHL Research Source: Company Financials, AHL Research

Exhibit: Ratio Analysis Exhibit: EPS and Growth

Ratio Analysis Unit 2016A 2017E 2018F EPS Growth (RHS)


(PKR)
Per Share
Earnings PKR 9.3 11.9 13.8 14.0 50.0%
Dividend PKR 4.0 3.0 3.0 12.0 41.4% 40.0%
Book value PKR 40.4 49.3 60.1 10.0 30.0%
Price Ratios 22.1% 21.6%
8.0 20.0%
Price to Earning x 11.4 9.9 8.6
6.0 12.5%
10.0%
Dividend Yield % 3.8 2.5 2.5
Price to Book x 2.6 2.4 2.0 4.0 0.0%
Profitability Ratios 2.0 -10.0%
-12.2%
Gross Margins % 42.8 45.2 47.3
- -20.0%
EBITDA Margins % 39.2 41.9 44.0 FY14A FY15A FY16A FY17F FY18F
Net Margins % 20.8 24.0 25.7
Source: Company Financials, AHL Research Source: Company Financials, AHL Research

61
Power Generation & Distribution

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Power Generation & Distribution
Megawatt Inflow
Key Investment Theme Exhibit: Source-wise Installed Capacity

Intensifying Demand: There is a current electricity shortage of 5,000 MW, which is (MW)
expected to grow given a ~2.0% p.a. population growth rate on average over FY15-20.
2015
CPEC Theme For Power Sector: The funding comprised USD 33.7bn (73% of the
total funding), for energy projects to rid the energy-starved country of its key bottleneck. 2014
We believe, massive investments in several power projects will shift electricity
generation from expensive oil-based plants to more efficient power plants operating on 2013
coal and hydro-energy. This will curb the shortage of electricity and reduce circular
debt worth billions of rupees owed to lower cost of generation and tariff determination. 2012

Yield Play: In the backdrop of gradually rising inflation and a lower discount rate, IPPs 2011
are offering much higher dividend yields of 9%-12%, as compared to yields on
government papers (1-yr T-Bill at 5.98%). Further, tariff for IPPs has a built-in immunity - 5,000 10,000 15,000 20,000 25,000
against PKR depreciation and inflation (both local and US). Therefore, depreciating
PKR/USD parity should increase the ROE component in the medium to long term. In Hydel Thermal (WAPDA) Thermal (KEL) Thermal (IPPs) Nuclear
the short term the opposite will prevail as domestic inflation slows with a stable local
Source: NEPRA, AHL Research
currency.

Exhibit: Electricity Supply & Demand: Actual & Forecasted


NTDC Peak Demand
(MW) Power Generation Capacity (MW)
31,000 Deficit / Surplus (RHS) 2,000
29,000 1,000
27,000 -
25,000 (1,000)
23,000 (2,000)
Key Risks 21,000 (3,000)
19,000 (4,000)
Further accumulation of circular debt.
17,000 (5,000)
Appreciation in PKR against the greenback.
15,000 (6,000)
2015 2016 2017 2018 2019 2020

Source: NEPRA, AHL Research

63
Hub Power Company Limited
Coal: The Way Forward
Key Investment Theme
BUY
Defensive Play: With a pre-established dividend stream similar to a bond, secured Target Price (Dec-2017) PKR 123.1
tariff structure against inflation and PKR devaluation/depreciation and sovereign Market Price PKR 113.6
guarantees of fuel supply, the stock offers a 9.7% dividend yield against the 12Ms T-
Bill yield of 5.98%.
Total Return % 18.5
PSX Code HUBC
HUBC Imported Coal Plant: HUBC is planning to invest in 2x660MW power plants at Bloomberg Code HUBC PA
its Hub plant. However, with the govt requiring improved CoD, potential implications
could shrink the project by half. In our view, the company will be successful for Share Information
2x660MW as strategic advantages of the project include i) the company owns 1,500
Market Capitalization USD mn 1,252
acres land, ii) the plant site is ideally located along with Arabian Sea coast and feasible
for coal transportation, and iii) the government approved the transmission line subject Market Capitalization PKR mn 131,430
to financial close. If the project is shelved, the sunk cost borne by the company would Outstanding Shares mn 1,157
be around USD 10 -12mn (EPS impact: PKR 0.91 1.09). Free Float % 65.0
12M Avg. Daily Turnover mn Shr. 0.91
Thar Energy Limited: The company is also planning to invest in Thar Energy Limited 12M High | Low PKR 132.34 | 98.80
which will operate 1x330MW local coal-based power plant. The equity requirement for
the project would be USD 125mn and the targeted financial closure will be Dec17. Our
Major Shareholders Dawood Group
initial estimates suggest it would have a target price impact of PKR 9.9/share.
Exhibit: Relative Performance
Narowal Demerger: Narowal Energy Limited has been incorporated to take over
HUBC KSE100
assets and liabilities of the plant. Subsequent to demerger of Narowal plant, HUBCs
D/E will be lower, benefitting the company in case of additional debt requirement for 145%
financing other coal-based power projects.
Cash proceeds in case of potential divestment of some stake may also be utilized for 130%
coal power plants.

115%

Key Risks 100%

Further accumulation of circular debt. 85%


Appreciation in PKR against the greenback.

Jul-16
Jan-16

Jan-16

Jun-16

Aug-16

Sep-16
Mar-16

Mar-16

Apr-16

Oct-16

Nov-16
May-16
Cancellation or delay of coal projects.

Source: Bloomberg, AHL Research

64
Hub Power Company Limited
Financial Snapshot
Exhibit: Financial Highlights Exhibit: Sales & Net Margins: Historical & Forecasted
PKR mn 2016A 2017E 2018F
Sales Net Margins
Income Statement (PKR bn)
Sales 91,595 105,019 115,826
175 15%
Gross Profit 18,582 19,688 20,041
EBITDA 22,355 22,223 22,480 155
Finance Cost 4,135 3,667 2,481 135
10%
Post Tax Profit 11,903 13,672 14,899
115
Balance Sheet
Shareholder's Equity 33,245 39,409 42,569 95
Current Liabilities 92,207 95,722 115,765 5%
75
Trade and other payables 68,904 74,612 103,774
55
Non-Current Liabilities 28,396 20,434 15,768
Current Assets 96,089 101,044 123,096 35 0%
FY14A FY15A FY16A FY17F FY18F
Non-Current Assets 57,759 54,521 51,006
Source: Company Financials, AHL Research Source: Company Financials, AHL Research

Exhibit: Ratio Analysis Exhibit: Dividend Yield: Historical & Forecasted

Ratio Analysis Unit 2016A 2017E 2018F (%)


Per Share
12.0
Earnings PKR 10.3 11.8 12.9
Dividend PKR 11.00 10.50 11.25 11.2
Book value PKR 28.7 34.1 36.8 11.0
10.4
Price Ratios 10.2
Price to Earning x 11.7 9.6 8.8 10.0 9.7
Dividend Yield % 9.2 9.2 9.9
9.2
Price to Book x 4.2 3.3 3.1
9.0
Profitability Ratios
Gross Margins % 20.3 18.7 17.3
EBITDA Margins % 24.4 21.2 19.4 8.0
Net Margins % 13.0 13.0 12.9 FY14A FY15A FY16A FY17F FY18F
Source: Company Financials, AHL Research Source: Company Financials, AHL Research

65
Oil & Gas Marketing Companies

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Oil & Gas Marketing
Volumes: The Driving Force
Key Investment Theme Exhibit: Sales Volumes of POL products

Robust Volumes in FY17: Sales of petroleum products will grow by 4.2% YoY in (Mn Tons) FO HSD MS
FY17 to 24.23mn tons compared 23.3 in FY16. The growth in the volumes will be 25
primarily driven by gasoline and diesel. The increase in demand for these products can
be attributed to i) the ongoing period of low prices, ii) increasing automotive sales and 20 8.1
iii) growing infrastructure activities in the country due to CPEC. In addition, the upward 8.4
8.7
revision in OMC margins in retail products will also corroborate earnings going forward. 9.10
15 9.4
8.5
Demand for Furnace Oil Fading Away: The majority of upcoming power plants will 8.1
8.5
10 7.7
use either coal or gas as fuel for electricity generation. Since furnace oil-based plants 7.38
are less efficient, we forecast demand for FO to fall by 4% YoY to 8.39mn tons in 6.8 6.8
5
FY17. As the market leader in furnace oil, PSO stands to lose. 6.7 7.7
4.71 5.8
3.4 3.8
Introduction of RON 92: The government has introduced a better quality gasoline in -

FY13

FY14

FY15

FY16

FY17

FY18
Nov-16. The senior management of PSO has hinted toward deregulation of motor gas
and diesel prices which will help companies better manage the transportation cost,
margins and profitability.
Source: AHL Research
Inventory Losses Nowhere to Found: With recent production cut deals among major
oil producing countries, we expect oil will head north and therefore it is unlikely local
OMCs will incur heavy inventory losses in FY17. However recent efforts to enhance Exhibit: Petroleum Consumption by Sector
storage capacities will amplify the effects of any changes in ex-refinery prices. An
optimistic view can also be formed on inventory gains given the recent rise in oil prices. 120%
Others Power Transport Industrial

Margins Revised: The government has approved the revision in OMC margins on 100% 2% 2% 2% 2%
gasoline and diesel by CPI of last year. In FY17, margins were revised upward by 2.6%
and the increment represents ~2.2% and ~1.6% of EPS of PSO and APL, respectively. 80% 41% 40% 41%
43%

60%

Key Risks 40%


50% 51% 49% 51%
Rise in product prices can adversely impact product demand. 20%
Rise in oil prices can worsen circular debt.
A depreciation in the value of PKR against USD can lead to exchange losses 0% 8% 7% 6% 6%
FY12 FY13 FY14 FY15
Source: Energy Year Book 2015, AHL Research

67
Pakistan State Oil
Inventory Losses: Disappearing Act
Key Investment Theme
BUY
Circular Debt Starting to Reappear: While the circular debt position was relatively Target Price (Dec-2017) PKR 495.3
contained in FY16 (power sector receivables of PKR 147bn as at Jun16 vs. PKR Market Price PKR 407.0
152bn as at Jun15),the issue has begun to escalate amid a rebound in international oil
prices. The power sector receivables of the company as at Sep-16 were PKR 156bn as
Upside % 21.7
compared to PKR 136bn as at Sep-15. PSX Code PSO
Bloomberg Code PSO PA
LNG to support profitability: The government plans to shift the RLNG business to a
Special Purpose Vehicle by the end of this year. The business currently contributes Share Information
~9% to the topline and ~ 10% to the bottom line of the company. However we await the
Market Capitalization USD mn 1,053
official announcement before incorporating this into our calculations.
Market Capitalization PKR mn 110,579
PIBs Maturing in 2017: PIBs worth PKR 46bn (classified as held to maturity) will Outstanding Shares mn 272
mature on July 19, 2017 and the management has yet to disclose investment plans for Free Float % 46.8
the receipts after maturity. The government may roll over payments of these PIBs in 12M Avg. Daily Turnover mn Shr. 0.73
which case the company can continue receiving interest income. Currently these PIBs 12M High | Low PKR 424.97 | 306.67
contribute PKR ~10/share to the bottom line of the company.
Major Shareholders Govt. of Pakistan
Earnings growth of 57% in FY17 : Earnings will be driven by i) 3% growth in sales
volumes ii) an upward revision in OMC margins on sale of gasoline and diesel (up Exhibit: Relative Performance
2.6% YoY), iii) higher margins of furnace oil and iv) possible absence of inventory
PSO KSE100
losses (previously recorded at PKR 7.8bn in FY16).
145%
Largest OMC, Cheapest Multiple: The stock currently trades at PER of 6.9x as
compared to 6-Yr historical PER of 8.1x and forward FY17 PER of 13.7x of APL. 130%
Furthermore HASCOL and SHEL (not in coverage) have CY16 extrapolated PER of
33.0x and 11.3x, respectively.
115%

Key Risks 100%

Further accumulation in circular debt can strain cash flow. 85%

Jul-16
Jan-16

Jan-16

Jun-16

Aug-16

Sep-16
Mar-16

Mar-16

Apr-16

Oct-16

Nov-16
May-16
Declining furnace oil volumes may be unfavourable for earnings.
Separation of LNG business.
Retreat in oil prices can cause inventory losses.
Source: Bloomberg, AHL Research

68
Pakistan State Oil
Inventory Losses: Disappearing Act
Exhibit: Financial Highlights Exhibit: Power Receivables of PSO
PKR mn 2016A 2017E 2018F (PKR bn) Total Power (PKR bn)
Income Statement 200 170
Sales 677,967 694,184 791,582 190
Gross Profit 22,863 32,278 36,624 160
180
Other Income 12,798 13,219 12,406
Finance Cost 7,150 9,454 10,556 170 150
Post Tax Profit 10,273 16,106 17,491 160
Balance Sheet 140
150
Shareholder's Equity 91,581 102,363 114,072
Total Liabilities 250,737 256,778 272,471 140
130
Current Assets 274,255 291,220 318,754 130
Trade Debts 178,271 183,819 209,610
120 120
Fixed Assets 6,607 6,465 6,333
Jun'15 Sep'15 Oct'15 Dec'15 Mar'16 Jun'16 Sep'16 Oct'16
Non-Current Assets 68,064 67,921 67,789
Source: Company Financials, AHL Research Source: Company Presentations, AHL Research

Exhibit: Ratio Analysis Exhibit: Contribution to Gross profit


120%
Ratio Analysis Unit 2016A 2017E 2018F Others Mogas HSD FO
Per Share 100% 3.1%
Earnings PKR 37.81 59.28 64.38 16.7% 12.7%
15.2% 25.4%
Dividend PKR 12.50 17.50 20.00 80% 20.8%
Book value PKR 337.09 376.77 419.87 28.6%
30.6% 22.6%
Price Ratios 60%
Price to Earning x 9.93 6.87 6.32 30.4%
Dividend Yield % 3.33 4.30 4.91 40%
30.7%
Price to Book x 1.11 1.08 0.97 51.1% 56.3%
20% 36.1%
Profitability Ratios
21.3%
Gross Margins % 3.37 4.65 4.63
0%
EBITDA Margins % 3.51 4.79 4.55 FY13 FY14 FY15 FY16
Net Margins % 1.52 2.32 2.21
Source: Company Financials, AHL Research Source: Company Financials, OGRA, AHL Research

69
Textile Composite

www.arifhabibltd.com
Equity Brokerage, Research, Inter-Bank Brokerage, Forex & Corporate Finance
Textiles
Overcoming the Hurdles
Key Investment Theme Exhibit: Yarn Margins

More ladders to climb: The textile sector outperformed PSX with a return of 70% in Yarn Price Cotton Price Primary Margins (RHS)
CYTD16 compared with its 38% return. There are four companies (NML, NCL, GATM (USD/kg) (USD/kg)
and KTML) that drove the performance of textile sector in CY16.
3.00 0.95
0.90
Lackluster textile exports: During FY16, textile exports clocked in at USD 12,456 mn, 2.50
0.85
down 7% YoY, attributable to i) Poor law and order in Pakistan, ii) high input costs, iii)
2.00 0.80
dwindling textile demand from Europe and U.S., iv) reduction in product prices, and v)
0.75
lower local cotton production. This trend continued in 4MFY17 as textile exports posted 1.50
0.70
a decline of 4% to USD 4,082mn in contrast to USD 4,268mn in SPLY. 1.00 0.65
0.60
Cotton production a cause of concern: The cotton production target for FY17 has 0.50
0.55
been revised down to 10.54mn bales (FY16: 10.07mn) half-way through the year. Main - 0.50
reasons for this include 20% less area in Punjab for the cotton crop given low prices

Jul-16
Nov-15

Dec-15

Jan-16

Jun-16

Aug-16

Sep-16
Mar-16

Apr-16

Oct-16
Feb-16

May-16
last year and smaller return on cotton compared to other competing crops. Hence,
cotton arrival in 5MFY17 has settled in at 9.78mn bales, up 13.3% YoY.
Source: PBS, AHL Research
Upward mobility: We believe the ongoing financial year will prove to be much better
for the textile sector given stable cotton prices and higher output. Furthermore,
availability of gas/RLNG/electricity, rising product prices and good quality of available Exhibit: Category wise Exports Numbers
cotton will bode well for the sector and help in mapping out a competitive strategy
against neighboring countries. Others Knitwear
(USD mn)
Readymade Garments Cotton Yarn
Export-friendly approach: The incumbent government has taken several steps to 14,000
boost textile exports by providing relief in the form of i) zero rated tax status, ii) lowering 2,201 1,991 1,849
12,000 2,253 1,262
LTFF rates, iii) releasing pending tax refunds. Another positive in the pipeline may be a 1,795
1,774 1,956 2,095
government incentives package for textiles. 10,000 1,635 1,800 2,196
2,306 2,258 2,406
8,000 1,974 2,043 2,369
6,000
Key Risks
4,000 7,507 7,534 7,103
6,953 6,952 6,628
Higher cotton prices. 2,000
Further delay in export package.
Higher prices of RLNG vis--vis gas prices. -
FY11 FY12 FY13 FY14 FY15 FY16
Appreciation of PKR against USD and other major currencies.
Source: PBS, Company Financials, AHL Research

71
Nishat Mills Limited
Rerated; Still Alluring
Key Investment Theme
BUY
Greater margin segment rescued from rainy days: During FY16, topline of the Target Price (Dec-2017) PKR 185.8
company receded by 6% YoY while the bottom-line posted a growth of 26%. Growth in Market Price PKR 148.2
profitability was attributed to improved margins of the value-added segment amid
higher demand from Europe and the U.S. NMLs management is focusing primarily on
Upside % 25.4
the value-added segment; it is setting up a new denim factory which will increase total PSX Code NML
production to 1.3mn garments per month. The company also paying close attention to Bloomberg Code NML PA
technological upgradation by replacing outdated machinery with new state-of-the-art
equipment. The new denim plant and upgradation process will boost the contribution of Share Information
garments to total revenue by 10% / 11% in FY17 / FY18 from 8% in the prior year.
Market Capitalization USD mn 496
Doing what needs to be done: The spinning segment was under pressure in the Market Capitalization PKR mn 52,107
preceding year owing to poor quality cotton and supply constraints. This resulted in Outstanding Shares mn 352
lower margins and dismal sales volume. Steps taken by the company such as setting Free Float % 50.0
up a 9.6MW (tri-fuel) power plant and relocating the spinning segment from its current 12M Avg. Daily Turnover mn Shr. 1.49
location to the Faisalabad Special Economic Zone will allow the company to gain from
tax exemptions. These measures will corroborate margins going forward. 12M High | Low PKR 157.87 | 86.83
Major Shareholders Mansha Group
Portfolio value soaring to an all-time high: During CY16, NMLs portfolio value
surged by 11% from PKR 170/share to PKR 189/share. Currently the company holds a Exhibit: Relative Performance
stake in leading companies of Pakistan namely DGKC, MCB, NPL, NCL, AICL, and in
other sectors like dairy, real estate and health care; with economic growth expected to NML KSE100
continue its upward trajectory, we forestall NMLs portfolio to post further gains. 175%

Incentive package will lift earnings: The upcoming package is based on drawback of
150%
local taxes and levies whereby spinning /grey fabric /processed cloth and garments will
get rebates of 3%/3%/4% and 8%, respectively. The rebate will be available on the
entire sales value which will boost earnings. 125%

100%
Key Risks

Withdrawal of zero-rated tax status. 75%

Jul-16
Jan-16

Jan-16

Jun-16

Aug-16

Sep-16
Mar-16

Mar-16

Apr-16

Oct-16

Nov-16
May-16
Attractive credit terms offered by the company to lure new customers can lead to
higher overdue receivables and ultimately increase working capital requirement.
Delay in reimbursement of pending tax refunds.
Source: Bloomberg, AHL Research

72
Nishat Mills Limited
Financial Snapshot
Exhibit: Financial Highlights Exhibit: Contribution in Total Revenue
PKR mn 2016A 2017E 2018F
Processed Cloth Weaving Spinning Garments
Income Statement
100%
Sales 47,999 49,336 52,166 9% 8% 8% 10% 11%
Gross Profit 6,264 6,931 7,075
80% 25% 24% 23% 23% 22%
Other Income 4,079 4,248 4,712
Finance Cost 1,046 923 980
60%
Post Tax Profit 4,923 5,735 6,065 23% 24% 24% 23% 22%
Balance Sheet
40%
Shareholder's Equity 82,155 85,935 90,067
Total Liabilities 24,444 25,377 26,348
20% 43% 43% 44% 44% 45%
Short term Borrowing 10,476 10,921 11,643
Trade Debts 2,253 2,466 2,623
0%
Current Assets 25,851 30,538 35,416 FY14 FY15 FY16 FY17F FY18F
Non-Current Assets 80,748 80,774 80,998
Source: Company Financials, AHL Research Source: Company Financials, AHL Research

Exhibit: Ratio Analysis Exhibit: NML's Portfolio Value


Investment Portfolio Value Contribution
Ratio Analysis Unit 2016A 2017E 2018F
DGKC 27,101 41%
Per Share
MCB 18,745 28%
Earnings PKR 14.0 16.3 17.3
NPL 9,953 15%
Dividend PKR 5.0 5.5 6.0
Others 3,456 5%
Book Value PKR 233.7 244.4 256.2
PKGP 2,594 4%
Price Ratios
LPL 2,408 4%
Price to Earning x 7.7 9.1 8.6
NCL 1,902 3%
Dividend Yield % 4.6 3.7 4.0
AICL 6 0%
Price to Book x 0.5 0.6 0.6
Total Value 66,164 100%
Profitability Ratios
Value after (30%) Discount 46,315 70%
Gross Margins % 13.1 14.0 13.6
Number of Shares 352
EBITDA Margins % 19.3 20.3 20.2
Portfolio Value/share 132
Net Margins % 10.3 11.6 11.6
Source: Company Financials, AHL Research Source: Company Financials, AHL Research

73
Automobile Assemblers

www.arifhabibltd.com
Equity Brokerage, Research, Inter-Bank Brokerage, Forex & Corporate Finance
Automobile Assemblers
Paradigm Shift
Key Investment Theme Exhibit: Auto sales vs GDP Growth

Game-changer Auto-policy 2016: While the incumbent government took several (Units)
Cars Sales GDP Growth
years to draft the official automobile policy, it has finally started bearing fruit since its 250,000 4.8%
Mar16 announcement. Status of the Japanese oligopoly stands to swing in coming
years; i) Renault is set to commence local assembly by 2018 at the GHNL plant with a 4.6%
USD 100mn investment, ii) German auto giant Audi has also submitted an application 200,000 4.4%
to set up a plant through its authorized importer-Premier Systems Private Limited, iii) 4.2%
South Korean KIA Motors is exploring investment opportunities in collaboration with the 150,000
4.0%
Yunus Group, and iv) BMW may step-up its association with DFML to potentially
commence local assembly. 3.8%
100,000
3.6%
Existing players ready to dodge competition and support volumes: Existing 3.4%
players appear mindful of likely competition going forward hence the sudden influx of 50,000
new models with matching features as per global standards. INDU recently launched 3.2%
the new Hilux REVO / Fortuner, while HCAR is still relishing the attention received by - 3.0%
its 10th generation Civic and a new City is expected to hit the road in 2018. Likewise 2011 2012 2013 2014 2015 2016
introduction of Celerio in 2017 and Alto in 2018 by PSMC seems probable. This shall
Source: PAMA, MoF, AHL Research
keep auto demand buoyant in the forthcoming years, we view.

Yen woes to subside: With the odds stacked in favor of a Dec16 FED hike, the USD Exhibit: Currency Movement (PKR, USD, JPY)
has finally started ticking higher against a basket of currencies, including the Yen which
PKR-USD JPY-USD
has lost 7% against the USD since announcement of the US Presidential election 130.0
result. Renewed interest comes in the wake of Donald Trumps surprise win indicating
expectations of tax cuts and abundant fiscal disbursement which will spur growth and
120.0
trigger an uptick in inflation. Hence with local auto assemblers prone to fluctuations in
the JPY, a sigh of relief may be heaved if a slide in Yen persists over the coming
months. 110.0

100.0
Key Risks
90.0

2QCY15

3QCY15

4QCY15

1QCY16

2QCY16

3QCY16

4QCY16TD
Volatility in USD and JPY.
Unexpected movement in steel & commodity prices.
Delay in introduction of new cars.
New players grabbing market share of current assemblers.
Source: Bloomberg, AHL Research

75
Automobile Assemblers
Auto Policy: Inducing New Players
Key Investment Theme Exhibit: Auto Policy Summary

Salient features of the Auto Policy: Aimed at attracting new investment and Duty Incentives Previously AIDB (16-21)
enhancing competition, the Automotive Development Policy applicable over a medium
term horizon (2016-2021) ensures preferential treatment for new entrants. We highlight Existing Players
prominent features effective since Jul16:
Localized parts 50.00% 45.00%
1. Incentives under Category A (Greenfield- for production of vehicles of make not
already being manufactured / assembled in Pakistan) comprise of a tariff structure Non-localized parts 32.50% 30.00%
with a 25% customs duty (CD) on import of localized parts (subject to completely
knocked-down units-CKDs) albeit, CD for non-localized CKDs was set at 10% for a
period of 5 years. Plus, duty-free import of plant and machinery for setting up the New Entrants
assembly on a one-time basis.
Greenfield (incentives for 5
2. The above concessionary duties are identical for Category B (Brownfield- suggesting
years)
revival of assembly / production of vehicles whose production was halted before 30 th
Jun13) except the time period which was cut short to 3 years. Localized parts 25.00%
3. Meanwhile benefits for existing OEMs who plan to introduce new models in the
Non-localized parts 10.00%
country are limited to a reduced tariff charge on import of CKD units for a period of 5
years beginning in Jul16 (non-localized parts may be imported at a rate of 30% vs.
Source: OCAC, AHL Research
32.5% and CD on localized parts shall be cut to 45% from the former 50%).
Brownfield (incentives for 3
4. Continuity in import of used cars policy, retaining the age limit of 3 years for cars, by
years)
expatriate Pakistanis under three schemes: i) personal baggage scheme (once in Exhibit: PKR, USD, JPY
two years), ii) transfer of residence scheme, and iii) gift scheme (once in two years). Localized parts 25.00%
Non-localized parts 10.00%
Imminent threat: While new players in the industry pose a threat to existing OEMs
(please check list below), we do not anticipate any immediate arrivals. However, in Source: AHL Research
the long-run these will inevitably lead to greater quality and efficiency in the sector.

Exhibit: Potential New Entrants


Brand Origin Expected Collaboration Investments Status Online Expected Competition
Renault French GHNL ~USD 100mn Notified via KSE 2018 INDU, HCAR & PSMC
BMW German DFML Undecided Under discussion Undecided INDU & HCAR
Kia South Korean LUCK ~USD 285-380mn* Under discussion Undecided PSMC
Audi German Premier Systems Private Limited Undecided Letter submitted to BOI; Land purchased Undecided INDU & HCAR
FAW Chinese Al-Haj FAW Motors (Pvt.) Ltd. Undecided Undertaking expansion at the moment Dec'16 PSMC
Source: KSE Notices, News Reports, AHL Research; *approximate figure
Source: OGRA, Company Financials, AHL Research

76
Indus Motor Company
Revo/Fortuner The Margin Game
Key Investment Theme
BUY
New launches a harbinger for growth: Recent launch of the new Hilux Revo / Target Price (Dec-2017) PKR 2,050.8
Fortuner remains a key catalyst for growth with vehicle delivery commencing in Dec16 Market Price PKR 1,591.6
/ Feb17. While the full-year impact of these models will crystalize in FY18, earnings for
the current year will be set around PKR 12.52bn (EPS: PKR 159.23) vis-a-vis PKR
Upside % 28.9
11.46bn (EPS: PKR 145.74) from SPLY. PSX Code INDU
Bloomberg Code INDU PA
Corollas potential facelift: Although Corolla faces slight competition from Hondas
new 10th generation Civic, INDUs management remains optimistic about plans to Share Information
tackle this competition. A potential facelift as early as the beginning of FY18 shall
Market Capitalization USD mn 1,191
instigate a new life to the companys flagship Corolla.
Market Capitalization PKR mn 125,099
Plant debottlenecking to ease plant utilization: Currently INDU operates overtime Outstanding Shares mn 79
despite utilizing its double-shift capacity. Albeit, with planned debottlenecking of its Free Float % 16.9
paint shop scheduled to be completed by FY18, capacity will surge to~65,000 units 12M Avg. Daily Turnover mn Shr. 0.04
from its current capacity of 54,800 units. This will not only reduce delivery time but also 12M High | Low PKR 1,670.1 | 899.7
improve plant efficiency.
Major Shareholders House of Habib/Toyota Corp
Comfortable cash position: As per latest financials, INDU sits on massive piles of
cash and cash equivalents of PKR 37bn. A mixed portfolio of term deposits, PIBs/T- Exhibit: Relative Performance
Bills and mutual funds are a solid cushion for INDU and create ample room for stunning
dividend pay-outs (FY17: PKR 115) and investment in capacity expansion. INDU KSE100
190%
Cheapest in the Auto universe: At current price levels, INDU trades at a 2017 PER 175%
multiple of 10.00x in contrast to PSMC / HCAR which are trading at 15.87x / 13.8x. 160%
Along with this, INDU offers the highest dividend yield at an attractive 7%.
145%
130%
115%
Key Risks 100%
85%
Fluctuations in PKR and JPY; every 1% change in the said currencies has a ~PKR 70%
0.30-0.35/share impact on the bottom-line of INDU.

Jul-16
Jan-16

Jan-16

Jun-16

Nov-16
Apr-16

Aug-16

Sep-16

Oct-16
Mar-16

Mar-16

May-16
Unexpected movement in steel / commodity prices.
New players grabbing market share.
Source: Bloomberg, AHL Research

77
Indus Motor Company
Financial Snapshot
Exhibit: Financial Highlights Exhibit: Rising Earnings and Payout Trend

PKR mn 2016A 2017E 2018F EPS DPS Payout (RHS)


Income Statement (PKR mn)
Sales 108,759 110,711 123,197 200.0 90%
EBITDA 17,305 18,113 19,991
Other Income 3,164 3,303 3,586 160.0

Finance Cost 77 82 87 60%


120.0
Post Tax Profit 11,455 12,515 14,240
Balance Sheet 80.0
30%
Shareholder's Equity 27,630 31,106 35,128
Interest Bearing Liabilities - - - 40.0
Total Liabilities 29,907 31,696 33,139
0.0 0%
Current Assets 47,381 52,693 58,391

FY10A

FY11A

FY12A

FY13A

FY14A

FY15A

2016A

2017E

2018F
Non-Current Assets 10,156 10,108 9,876
Total Assets 57,537 62,802 68,267
Source: Company Financials, AHL Research Source: Company Financials, AHL Research

Exhibit: Ratio Analysis Exhibit: FY18 to Add New Life to Overall Sales

Ratio Analysis Unit 2016A 2017E 2018F Sales Units Sales (RHS)
(000)
Per Share 66
70 57 64 62 80%
Earnings PKR 145.7 159.2 181.2
60
Dividend PKR 100.0 115.0 130.0 60%
Book value PKR 351.5 395.8 446.9 50
Price Ratios 40 34 40%

Price to Earning x 6.4 9.3 8.2 30 20%


Price to Book x 2.7 3.8 3.3 20
Dividend Yield % 10.6 7.7 8.8 0%
10
Profitability Ratios
0 -20%
Net Margins % 10.5 11.3 11.6

FY14A

FY15A

2016A

2017E

2018F
Pay out ratio % 68.6 72.2 71.8
ROA % 21.2 20.8 21.7
Source: Company Financials, AHL Research
Source: Company Financials, AHL Research

78
Honda Atlas Cars
All New Titans Raising The Bar
Key Investment Theme
BUY
Recapturing lost market share: HCAR is set to reclaim its lost market share in the Target Price (Dec-2017) PKR 754.8
current year aided by the launch of its new 10 th Generation Civic which has been Market Price PKR 586.9
greeted by a boisterous reception since its Jul16 launch. Sales have undergone a
stunning 37% growth in 4M17; this coincides impeccably with our annual sales growth
Upside % 28.6
forecast for the current year of 35,278 units (ME16: 25,759). PSX Code HCAR
Bloomberg Code HCAR PA
Honda City launch on the cards: While City has played a key role in driving the
company forward volumetrically, HCAR has deferred the launch of its new model for Share Information
quite some years. Although market grapevine suggests a new model launch this year,
Market Capitalization USD mn 798
our interaction with the management reveals no such plans. Hence, we conservatively
anticipate the new City to hit the roads in Jan18 whereby demand outlook appears Market Capitalization PKR mn 83,814
encouraging. Outstanding Shares mn 143
Free Float % 20.0
Margins to remain elevated: With exposure to the JPY at 30% of the total import 12M Avg. Daily Turnover mn Shr. 0.31
costs, the company is set to benefit from the recent reversal in the JPY. Whereas 12M High | Low PKR 611.82 | 231.90
recovery in the sales of Civic, duty concessions under the auto policy and benefits from
large scale economies all bode well for company margins, going forward.
Major Shareholders Honda Motor Japan/Atlas Group

Huge cash pile-up undeniable: Robust sales outlook tagged with company's advance Exhibit: Relative Performance
booking policy boosts a likely possibility of HCAR amassing buffer cash reserves.
While this shall hoist the annual payout (ME17E: PKR 15.00 vis--vis PKR: 7.00 in HCAR KSE100
275%
ME16), the company is also in the process of identifying potential opportunities in
another car segment. In the interim, HCAR may follow industry norm and invest surplus 250%
cash in bank deposits/PIBs/T-Bills to generate steady other income. 225%
200%
PEG ratio pins value stock: That said, HCAR has the lowest 2017 PEG ratio in the 175%
sector at 0.19 indicating ample room for value to unlock (INDU / PSMC 1.11 / 1.44). 150%
125%
Key Risks
100%
75%
Fluctuations in USD and JPY; every 1% change in the said currencies has a ~PKR

Jul-16
Jan-16

Jan-16

Jun-16

Aug-16

Sep-16
Mar-16

Mar-16

Apr-16

Oct-16

Nov-16
May-16
0.10-0.15/share impact on the bottom-line of HCAR.
Unexpected movement in steel / commodity prices.
Entry in a new car segment poses an upside risk to our thesis.
New players grabbing market share. Source: Bloomberg, AHL Research

79
Honda Atlas Cars
Financial Snapshot
Exhibit: Financial Highlights Exhibit: Improving Utilization to Aid Large Scale Economies

PKR mn *ME16A ME17E ME18F Civic City Capacity Utilization


Income Statement (Units)
Sales 40,086 61,400 60,535 75%
35,000
Gross Profit 6,047 9,962 9,596 65%
30,000
EBITDA 5,841 9,554 9,325
25,000 55%
Other Income 310 539 630
20,000 45%
Post Tax Profit 3,556 6,075 6,050
Balance Sheet 15,000
35%
Shareholder's Equity 7,941 11,874 15,640 10,000
25%
Interest Bearing Liabilities - - - 5,000
Total Liabilities 8,264 12,880 12,331 - 15%

ME13A

ME14A

ME15A

ME16A

ME17E

ME18F
Current Assets 12,338 18,818 19,572
Non-Current Assets 3,867 5,936 8,398
Total Assets 16,205 24,754 27,971
Source: Company Financials, AHL Research
Source: Company Financials, AHL Research, *ME: March-ending year

Exhibit: Ratio Analysis Exhibit: Margins Appear Supportive


Ratio Analysis Unit ME16A ME17E ME18F
Sales (LHS) Gross Margin Net Margin
Per Share
(PKR mn) 18%
Earnings PKR 24.9 42.5 42.4
80,000
Dividend PKR 7.0 15.0 16.0 16%
70,000 14%
Book value PKR 55.6 83.2 109.5
60,000 12%
Price Ratios 50,000 10%
Price to Earning x 10.1 13.5 13.6 40,000
8%
Dividend Yield % 2.8 2.6 2.8 6%
30,000
4%
Price to Book x 4.5 6.9 5.3 20,000 2%
Profitability Ratios 10,000 0%

ME13A

ME14A

ME15A

ME16A

ME17E

ME18F
Net Margins % 8.9 9.9 10.0
Payout Ratio % 28.1 35.3 37.8
ROA % 23.6 29.7 23.0
Source: Company Financials, AHL Research
Source: Company Financials, AHL Research

80
Pharmaceutical
Searle: The Right Medicine
Pharma Prospects Looking Bright
NA
Pharmaceutical Sector
Target Price (Dec-2017) PKR na
Industry Dynamics: The local industry, with sales of ~USD 2.7bn, has around 400 Market Price PKR 599.9
manufacturing units licensed, including 350 local and over 20 MNCs. Three primary Upside % na
challenges concerning pharma industry have remained; i) pricing ceilings enforced by PSX Code SEARL
the Drug Regulatory Authority (DRAP), ii) lengthy registration process for New Bloomberg Code SEARL PA
Chemical Entities (NCE), and iii) obtaining patents.

The Dispute: In 2013, DRAP allowed the pharmaceuticals to raise drug prices by Share Information
15%, which was later reversed. In response to which, pharmaceuticals sorted to Market Capitalization USD mn 701
judiciary and successfully obtained stay order against the decision as well as against Market Capitalization PKR mn 73,637
hardship cases (drugs incurring losses). Outstanding Shares mn 123
Free Float % 51.3
The Temporary Resolution: Recently DRAP allowed the local pharmaceuticals to
12M Avg. Daily Turnover mn Shr. 0.58
raise the prices of scheduled drugs by 50% of CPI annually (capped at 4%), while
non-scheduled drugs could be priced according to the provided schedule. 12M High | Low PKR 599.88 | 312.85
Nevertheless, the policy along with stay orders received on pending hardship cases Major Shareholders International Brands Ltd
has provided pharmas some breathing space; translating into a substantial
improvement in their profitability. Our favorite scrip from the sector is SEARLE due to
the following fundamental triggers: Exhibit: Relative Performance

SEARL KSE100
The Searle Company Ltd
180%
Volumes Moving Up the Ladder: Going ahead, the revenue growth is expected to
settle around ~20% in the next few years where we expect half of the growth to 160%
materialize from price surge (7% to 8% for regulatory drugs and ~10% to 12% for non-
regulatory drugs) while the rest to be supported via volumetric growth. 140%

120%
Improving Margins : In the last year, company recorded revenue growth of 26%
YoY, where 10% was due to price hike, 10% due to volumetric growth, and the rest 100%
came from new initiatives. In addition the company continues to maintain its gross
margins (highest in the industry) of ~43%. 80%

Jul-16
Jan-16

Jan-16

Jun-16

Aug-16

Sep-16
Mar-16

Mar-16

Apr-16

Oct-16

Nov-16
May-16
Exploring New Horizons: Worth mentioning, SEARL is venturing into nutraceuticals
and biologicals business which should pave the way for exponential volumetric growth
going forward. Overall the management expects net margins to stabilize at 20%.
Source: Bloomberg, AHL Research

81
The Searle Company
Financial Snapshot
Exhibit: Financial Highlights Exhibit: Improving Margins

PKR mn 2014A 2015A 2016A Gross Margins Net Margins


Income Statement 50%
Sales 7,609 7,582 9,525
Gross Profit 3,394 3,332 3,714 40%
Other Income 118 806 1,806
Finance Cost 216 190 110 30%
Post Tax Profit 876 1,405 2,089
Balance Sheet 20%
Shareholder's Equity 3,843 4,845 8,477
Total Liabilities 2,815 3,134 3,029 10%
Property, plant and equipment 560 687 809
Trade Debts 1,702 2,183 2,578 0%
Current Assets 3,407 4,248 5,506 FY12 FY13 FY14 FY15 FY16
Non-Current Assets 3,252 3,730 6,001
Source: Company Financials, AHL Research
Source: Company Financials, AHL Research

Exhibit: Ratio Analysis Exhibit: Sales & Growth


Ratio Analysis Unit 2014A 2015A 2016A Net Sales Growth
Per Share (PKR mn)
Earnings PKR 6.6 11.7 17.3 12,000 30%
Dividend PKR - 2.0 5.0 25%
10,000
Book value PKR 27.5 34.6 60.6
20%
Price Ratios 8,000
x 15%
Price to Earning 28.0 27.5 30.9 6,000
Dividend Yield % - 0.6 0.9 10%
Price to Book x 6.8 9.3 8.9 4,000
5%
Profitability Ratios 2,000 0%
Gross Margins % 44.6 43.9 39.0
EBITDA Margins % 18.2 25.8 27.6 - -5%
FY12 FY13 FY14 FY15 FY16
Net Margins % 11.5 18.5 21.9
Source: Company Financials, AHL Research
Source: Company Financials, AHL Research

82
Recommendation Summary
Price TP EPS (PKR) DPS (PKR) P/E (x) Div. Yield (%) P/B (x) ROE (%)
Code Company Upside (%) Stance
9-Dec-16 Dec-17 2016 2017 2018 2016 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018
Exploration & Production
PPL Pakistan Petroleum Ltd. 167.1 202.7 21.4 Buy 10.3 14.8 19.3 4.8 7.3 9.5 11.3 8.7 4.3 5.7 1.5 1.4 13.8 16.7
OGDC Oil and Gas Dev Co. 156.4 185.1 18.3 Buy 13.9 16.8 21.2 5.2 6.3 8.0 9.3 7.4 4.0 5.1 1.3 1.1 14.3 16.3
POL Pakistan Oilfields Ltd. 479.7 569.4 18.7 Buy 30.6 45.8 62.2 35.0 41.3 55.8 10.5 7.7 8.6 11.6 3.6 3.3 35.2 44.6
Commercial Banks
UBL United Bank Ltd.** 226.8 252.9 11.5 Buy 23.2 25.1 28.5 14.00 15.00 17.00 9.0 8.0 6.6 7.5 1.5 1.4 17.2 18.0
BAFL Bank Alfalah Ltd.** 35.3 43.0 21.9 Buy 5.1 6.0 6.1 1.00 1.25 1.75 5.9 5.8 3.5 5.0 0.9 0.8 15.1 14.2
MCB MCB Bank Ltd.** 232.8 225.3 (3.2) Hold 21.0 22.0 24.5 16.00 16.00 18.00 10.6 9.5 6.9 7.7 1.7 1.6 16.4 17.3
HBL Habib Bank Ltd.** 242.8 283.5 16.7 Buy 23.4 26.4 29.9 14.00 14.00 16.00 9.2 8.1 5.8 6.6 1.7 1.5 18.6 19.6
ABL Allied Bank Ltd.** 106.0 119.7 12.9 Buy 13.4 13.4 14.4 7.00 7.00 7.00 7.9 7.4 6.6 6.6 1.2 1.2 16.1 16.5
Fertilizer
ENGRO Engro Corporation** 319.2 359.2 12.5 Buy 23.5 23.7 27.2 25.00 25.00 16.00 13.5 11.8 7.8 5.0 2.0 1.8 16.1 16.1
FFBL Fauji Fert. Bin Qasim 53.1 64.4 21.5 Buy 1.7 3.3 4.34 1.00 3.00 3.00 15.9 12.2 5.7 5.7 3.3 3.0 20.7 25.6
EFERT Engro Fertilizer 68.2 80.9 18.5 Buy 7.7 8.7 9.68 7.00 7.50 8.00 7.9 7.1 11.0 11.7 2.0 1.9 26.1 27.9
FFC Fauji Fertilizer Co. 105.4 121.6 15.4 Buy 10.0 10.3 12.42 9.00 9.00 11.00 10.2 8.5 8.5 10.4 4.4 4.2 44.6 50.8
Cement
LUCK Lucky Cement Ltd. 856.1 1,043.5 21.9 Buy 46.0 52.6 60.4 10.00 11.00 12.00 16.3 14.2 1.3 1.4 2.8 2.5 19.0 18.6
FCCL Fauji Cement Company 42.1 51.9 23.3 Buy 4.0 2.8 4.8 2.75 1.50 3.00 14.9 8.8 3.6 7.1 2.8 2.5 19.5 30.4
ACPL Attock Cement Ltd. 331.5 372.0 12.2 Buy 25.2 27.0 31.6 12.50 13.00 14.00 12.3 10.5 3.9 4.2 3.2 2.7 27.5 27.8
DGKC D.G. Khan Cement Co. 214.7 258.3 20.3 Buy 20.1 21.3 23.0 6.00 7.00 7.00 10.1 9.3 3.3 3.3 1.3 1.2 13.5 13.3
KOHC Kohat Cement Company 274.9 317.2 15.4 Buy 28.5 31.6 36.0 6.00 8.00 9.00 8.7 7.6 2.9 3.3 2.4 2.0 31.3 28.5
MLCF Maple Leaf Cement 117.8 143.4 21.8 Buy 9.3 11.9 13.8 4.00 3.00 3.00 9.9 8.6 2.5 2.5 2.4 2.0 26.5 25.2
Oil & Gas Marketing
PSO Pakistan State Oil 407.0 495.3 21.7 Buy 37.8 59.3 64.4 12.50 17.50 20.00 6.9 6.3 4.3 4.9 1.1 1.0 16.6 16.2
APL Attock Petroleum Ltd. 671.4 699.2 4.1 Hold 46.2 48.8 54.9 40.00 42.50 47.50 13.7 12.2 6.3 7.1 3.7 3.6 27.8 30.0
Automobile Assembler
PSMC Pak Suzuki Motor Co. 521.7 414.5 (20.5) Sell 29.8 32.9 35.7 7.00 7.00 8.00 15.9 14.6 1.3 1.5 1.5 1.4 9.8 9.9
INDU Indus Motor Company 1,591.6 2,050.8 28.9 Buy 145.7 159.2 181.2 100.00 115.00 130.00 10.0 8.8 7.2 8.2 4.0 3.6 42.6 43.0
HCAR Honda Atlas Cars (Pak) Ltd. 586.9 754.8 28.6 Buy 24.9 42.5 42.4 7.00 15.00 16.00 13.8 13.9 2.6 2.7 7.1 5.4 61.3 44.0
Power Generation & Distribution
KEL K-Electric Ltd. 9.5 10.8 14.2 Buy 1.1 1.3 1.3 - - - 7.5 7.3 - - 1.4 1.1 19.8 16.9
HUBC Hub Power Company*** 113.6 123.1 18.5 Buy 10.3 11.8 12.9 11.00 11.50 11.00 9.6 8.8 10.1 9.7 3.3 3.1 37.6 36.3
NCPL Nishat Chu. Power Ltd.*** 55.8 50.2 11.1 Buy 7.5 8.2 8.3 7.25 7.25 8.00 6.8 6.7 13.0 14.3 2.7 2.6 40.2 39.7
NPL Nishat Power Limited*** 59.7 47.0 (2.8) Hold 8.1 9.3 8.1 6.00 6.25 7.75 6.4 7.4 10.5 13.0 1.6 1.6 25.7 21.3
Textile Composite
NML Nishat Mills Ltd. 148.2 185.6 25.2 Buy 14.0 16.3 17.25 5.00 5.50 6.00 9.1 8.6 3.7 4.0 0.6 0.6 6.8 6.7
NCL Nishat (Chunian) Ltd. 57.8 64.6 11.9 Buy 5.5 8.3 9.67 2.50 2.50 3.00 6.9 6.0 4.3 5.2 1.1 1.0 17.1 17.5
Chemicals
LOTCHEM Lotte Chemical Pak Ltd. 8.3 6.9 (16.7) Sell (0.1) 0.9 1.0 - - - nm 8.3 - - 1.3 1.3 13.5 15.7
EPCL Engro Polymer & Chem. 15.0 17.4 16.3 Buy 0.7 0.64 0.24 - - - 23.2 61.9 - - 1.6 1.6 7.1 2.5
Cable & Electrical Goods
PAEL Pak Elektron Ltd. 68.9 82.8 20.2 Buy 8.1 8.5 8.5 3.00 4.00 4.00 8.1 8.1 5.8 5.8 1.3 1.1 20.2 18.4
Source: Bloomberg, AHL Research, * Group Company: No estimates are given, **Earning Consolidated Basis, *** Upside is Total Return
Note: Price Earning, Dividend Yield & Price to Book is calculated on current prices.

83
List of Abbreviations

1H First Half EU European Union NIM Net Interest Margins


ADB Asian Development Bank EV Enterprise Value NIR Net International Reserve
ADIP Auto Industry Development Policy Ex Excluding NPL Non Performaning Loans
ADR Advances Deposit Ratio FIPI Foreign Investor Portfolio Investment O&M Operations & Maintance
AHL Arif Habib Limited FM Frontier Markets OMCs Oil Marketing Companies
bbl Barrel FMCGs Fast Moving Consumer Goods OMO Open Market Operation
BEER Bond Equity Equivalent Ratio FO Furnace Oil OPEC Oil Producing and Exporting Countries
BoE Barrels of Oil Equivalent FX Foreign Exchange Reserves PAT Profit After Tax
bpd barrels per day FY Fiscal Year PBS Pakistan Bureau of Statistic
CAC Cotton Crop Assesment Committee GBP Great Britian Pound PBV Price to Book Value
CAGR Compounded Annual Growth Rate GDP Gross Domestic Product PER Price Earning Ratio
CAR Capital Adequacy Ratio GENCOs Power Generation Companies PIB Pakistan Investment Bonds
CASA Current Account Saving Account GSP Generalised Scheme of Preferences PKR Pakistan Rupee
CG Central Government ICH International Clearing House POL Petroleum Products Prices

CKD Complete Knock Down ICT Information & Communications Technology PP Petroleum Policy

CNG Compressed Natural Gas IDR Investment Deposit Ratio PR Policy Rate
CNY Chinese Yuan IFC International Finance Corporation PSX Pakistan Stock Exchange
CPEC China Pakistan Economic Corridor IMF International Monetary Fund RDs Regulatory Duties
CPI Consumer Price Index IPPs Independent Power Producers REER Real Effective Exchange Rate
CSF Coalition Support Fund JPY Japanese Yen RGDP Real Gross Domestic Product
CY Calendar Year KO Kerosene Oil ROA Return on Assets
DAP Di-ammonium Phosphate KSE Karachi Stock Exchange ROE Return on Equity
DPS Dividend Per Share LNG Liquified Natural Gas SBP State Bank of Pakistan
DR Discount rate LSM Large Scale Manufacturing SME Small Medium Enterprises
DY Dividend Yield LTFF Long Term Financing Facility T&D Transmission & Distribution
E&P Exploration & Production ME Middle East USD US Dollar
EBITDA Earning Before Interest, Taxes & Amortization MMBTU Metric Million British Thermal Unit VSS Voluntary Separation Scheme
ECC Economic Coordination Committee MPC Monetary Policy Committee WAPDA Water & Power Development Authority
EFF Extended Fund Facility MS Motor Spirit
EGrow Earning Growth MSCI Morgan Stanley Composite Index
EM Emerging Markets MW Mega Watts
EPS Earrings Per Share NFA Net Domestic Assets

84
Disclaimer
Analyst Certification: The research analyst(s) is (are) principally responsible for preparation of this report. The views expressed in this research report accurately reflect the personal views of
the analyst(s) about the subject security (ies) or sector (or economy), and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific
recommendations and views expressed by research analyst(s) in this report. In addition, we currently do not have any interest (financial or otherwise) in the subject security (ies).
Furthermore, compensation of the Analyst(s) is not determined nor based on any other service(s) that AHL is offering. Analyst(s) are not subject to the supervision or control of any employee
of AHLs non-research departments, and no personal engaged in providing non-research services have any influence or control over the compensatory evaluation of the Analyst(s).

Equity Research Ratings


Arif Habib Limited (AHL) uses three rating categories, depending upon return form current market price, with Target period as December 2016 for Target Price. In addition, return excludes all
type of taxes. For more details kindly refer the following table;
Rating Description
BUY Upside* of subject security(ies) is more than +10% from last closing of market price(s)
HOLD Upside* of subject security(ies) is between -10% and +10% from last closing of market price(s)
SELL Upside* of subject security(ies) is less than -10% from last closing of market price(s)

Equity Valuation Methodology


AHL Research uses the following valuation technique(s) to arrive at the period end target prices;
Discounted Cash Flow (DCF)
Dividend Discount Model (DDM)
Sum of the Parts (SoTP)
Justified Price to Book (JPTB)
Reserved Base Valuation (RBV)

Risks
The following risks may potentially impact our valuations of subject security (ies);
Market risk
Interest Rate Risk
Exchange Rate (Currency) Risk

Disclaimer: This document has been prepared by Research analysts at Arif Habib Limited (AHL). This document does not constitute an offer or solicitation for the purchase or sale of any
security. This publication is intended only for distribution to the clients of the Company who are assumed to be reasonably sophisticated investors that understand the risks involved in
investing in equity securities. The information contained herein is based upon publicly available data and sources believed to be reliable. While every care was taken to ensure accuracy and
objectivity, AHL does not represent that it is accurate or complete and it should not be relied on as such. In particular, the report takes no account of the investment objectives, financial
situation and particular needs of investors. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent
with this information. This information is subject to change without any prior notice. AHL reserves the right to make modifications and alterations to this statement as may be required from
time to time. However, AHL is under no obligation to update or keep the information current. AHL is committed to providing independent and transparent recommendation to its client and
would be happy to provide any information in response to specific client queries. Past performance is not necessarily a guide to future performance. This document is provided for assistance
only and is not intended to be and must not alone be taken as the basis for any investment decision. The user assumes the entire risk of any use made of this information. Each recipient of
this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document
(including the merits and risks involved), and should consult his or her own advisors to determine the merits and risks of such investment. AHL or any of its affiliates shall not be in any way
responsible for any loss or damage that may be arise to any person from any inadvertent error in the information contained in this report.
Contact List

Shahid Ali Habib Chief Executive Officer shahid.habib@arifhabibltd.com +92 -21-3240-1930

Research Team

Shahbaz Ashraf, CFA Head of Research shahbaz.ashraf@arifhabibltd.com +92-21-3246-2589


Tahir Abbas AVP- Senior Investment Analyst tahir.abbas@arifhabibltd.com +92-21-3246-2589
Syed Fawad Basir AVP- Investment Analyst fawad.basir@arifhabibltd.com +92-21-3246-2589
Rao Aamir Ali Investment Analyst amir.rao@arifhabibltd.com +92-21-3246-2589
Syed Shiraz Zaidi Investment Analyst shiraz.zaidi@arifhabibltd.com +92-21-3246-1106
Muhammad Waleed Rahmani Investment Analyst waleed.rahmani@arifhabibltd.com +92-21-3246-1106
Misha Zahid Investment Analyst misha.zahid@arifhabibltd.com +92-21-3246-1106
Arsalan M. Hanif Investment Analyst arsalan.hanif@arifhabibltd.com +92-21-3246-1106
Muhammad Hasnain Madni Officer- Database hasnain.madni@arifhabibltd.com +92-21-3246-1106
Minhal Shahid Management Trainee mt.research@arifhabibltd.com +92-21-3246-1106

Equities Sales Team

Azhar Javaid VP- International Sales azhar.javaid@arifhabibltd.com +92-21-3246-8312


Usman Taufiq Ahmed AVP- International Sales usman.ta@arifhabibltd.com +92-21-3246-8285
M. Yousuf Ahmed SVP- Equity Sales yousuf.ahmed@arifhabibltd.com +92-21-3242-7050
Syed Farhan Karim VP- Equity Sales farhan.karim@arifhabibltd.com +92-21-3244-6255
Farhan Mansoori VP- Equity Sales farhanmansoori@arifhabibltd.com +92-21-3242-9644
Afshan Aamir VP- Equity Sales afshan.aamir@arifhabibltd.com +92-21-3244-6256
Atif Raza VP- Equity Sales atif.raza@arifhabibltd.com +92-21-3246-2596
Furqan Aslam AVP- Equity Sales furqan.aslam@arifhabibltd.com +92-21-3240-1932