pakistan strategy 2016 · operation zarb-e-azb led to improving security situation crackdown by...

Pakistan Strategy | 2016Shaking off Pessimism; KSE100 Target 38,044!

Equity Brokerage, Research, Inter-Bank Brokerage, Forex & Corporate Financewww.arifhabibltd.com

Table of ContentTable of Content

Pakistan Politics 2016 3Pakistan Economy 2016 6Pakistan Capital Market 2016 15Pakistan Sectoral Strategies 2016 32

• Banks 33• Fertilizer 45• Exploration & Production 52• Cement 64• Power 70• Oil Marketing 75• Automobile & Parts 81• Textiles 85

Other Companies in Focus 91Recommendation Summary 93Disclaimer 94Annexure 95

• List of Abbreviation 95• Contact List 96

02

P a k i s t a n S t r a t e g y I 2 0 1 6

AbstractAbstractKSE Investment Thesis KSE Investment Thesis

Exhibit: AHL Universe Valuation Snapshot

2011 2012 2013 2014 2015E 5-Y Avg.

2016F

Earning Growth % 27.9 15.6 19.4 3.3 0.1 13.3 3.4 Earning Growth Ex. E&P % 25.8 16.3 24.4 8.6 17.2 18.5 4.4 E. Growth Ex. Banks % 30.6 14.8 23.7 (1.5) (3.5) 12.8 6.2 E. Growth Ex. Banks & E&P % 30.5 14.7 38.0 1.3 21.1 21.2 8.3 Price to Earning x 8.2 7.6 10.3 9.2 8.3 8.0 8.1 Dividend Yield % 5.1 5.7 4.3 5.6 6.1 5.8 5.9

Payout Ratio % 41.8 43.4 44.8 51.6 51.1 46.5 47.5 Source: Companies Financials, AHL Research

Exhibit: KSE100 Index Target Estimates 2016

Valuation Basis Target Weight BreakupJustified PE 39,049 20% 7,810

Average PE 34,090 10% 3,409 Regional PE* 33,777 5% 1,689

Earnings Growth 33,944 30% 10,183

Target Price Based 48,787 20% 9,757 Regional PBV* 35,398 5% 1,770

Regional DY* 34,262 10% 3,426 Weighted Target 2016 38,044 Index Closing Dec'15 32,816 Source: AHL Research, * On the basis of adjustments to historical discounts

03

Starting the year on a high, KSE-100 index lost steam midway into CY15,ending the year with a PKR-return of 2.2% ( Average return 26% / 23% inPKR and USD, during CY13-15). Foreign selling on a weak global scenariotook off the glitter from index performance. For CY16, we expect a recovery,with our estimate of 15.9% return. We base our assumptions on (i) improvingmacros such as historic low DR, improving external outlook, (ii) CPEC toenable a rerating of Pakistan, possibly catalyzing foreign investment fromother sources, (iii) MSCI’s probable reclassification of Pakistan in its EM indexto boost foreign investment, and (iv) an improving political scenario.

This year has been positive on the political front, with none of the havoc seenduring last year’s protests. Also, the military operations to combat militancyreaped massively positive results, with casualties down by ~50% in CY15. Areduction in political issues provided the government ample time to focus oneconomy, with major projects in process, including CPEC, North-SouthPipeline, TAPI Pipeline, to name a few. Other aspects on the political frontalso included successfully held LG Elections. On a whole, we believe thatmost of the political noise prevailing in CY14 has been all but wiped out inCY15, taking away a major thorn in the side of the capital markets, with noreason to believe that this may not continue going forward.

Our Investment Thesis is based on:o CPEC to unlock country’s earning potential going forwardo Probable reclassification into MSCI EM index o Record low interest rates could boost investmentso Attractive valuation ratios (Fwd. PER 8.1, DY: 5.9%)o DY/DR spread decreased to negligible levels (falling DR during CY15),

warranting a rerating of capital market. o Amalgamation of all 3 stock exchanges into a single platform (Pakistan

Stock Exchange) should help increase liquidity in the capital market

KSE100 is targeted at 38,044 levels in 2016, based on weighted average mythology (for details kindly see page # 30)

Politics | 2016The Never Ending Story



Entering a new era of political consolidation Following a year of drama, sit-ins and protests in 2014, the political scenario

improved largely during 2015, allowing the incumbent government to focusmore towards socio-economic matters.

The APS tragedy of 16th December-2014 caused all political forces toharmonize their strategy through the All Parties Conference (APC), which wasevident through Operation Zarb-e-Azb, a military initiative to rid the country ofall terror related elements. Needless to say, the move has been a resoundingsuccess, noted through a drastic decrease in civilian casualties in the country.According to the South Asia Terrorism Portal (SATP), total civilian casualtieshave nearly halved in the space of one year (down 49%), with peace beingrestored to a majority of the areas in the country.

Additionally, para-military forces led operations in crucial areas of the countryhave also minimized other crime related incidents in the country.

Foreign policy China: Pakistan enjoys better relations than ever with neighboring

superpower China, evident clearly through Chinese plans to invest USD 46bnin Pakistan for development of Gwadar port, energy projects, road and railnetworks and in various other sectors. The China-Pak Economic Corridor isexpected to take Pakistan’s economy to another level, creating hundreds andthousands of jobs and also help in bringing in foreign investment from otherchannels.

India: Relations with perennial arch-rivals India took a turn for the better whentheir FM visited Pakistan recently, with the aim of furthering dialogue forpeace and trade cooperation. Following the talks, there was renewed hope ofa revival of relations between the two countries, which would augur well forPakistan, if it eventually materializes.

Exhibit: A continuously improving security situation

Source: South Asian Terrorism Portal

Pakistan PoliticsPakistan PoliticsMoving into the next phase of political harmonyMoving into the next phase of political harmony

Exhibit: Numerous political achievements during 2015

Source: Media, AHL Research

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2011

2012

2013

2014

2015

Civilians/ Security Personnel Terrorists/ InsurgentsNumber of fatalities

PML(N) Gov't

New Political Setup

Initiation of Operation Zarb-e-Azbled to improving security situation

Crackdown by special forces against miscreants in targeted areas in the country

LNG deal finalized with Qatar, despite time delays

India FM visited, signaling improving relations on the cards

TAPI gas pipeline on the verge of launch

Important events during 2015

05


Afghanistan: Relations with neighboring Afghanistan have been patchy oflate, to say the least. Despite shared history of similar problems, bothcountries remain divided on political strategies. However, recently, with India’sincreased vested interests in Afghanistan, there might be pressure on bothPakistan and Afghanistan to maintain cordiality in order to receive access toIndian markets for trade and commerce.

Strategic Projects (ex-CPEC) TAPI Pipeline: There has been notable progress on the much awaited

Turkmenistan-Afghanistan-Pakistan-India (TAPI), through which energy richTurkmenistan will provide 1.3 BCF per day to Pakistan

LNG deal with Qatar: The USD 16bn LNG deal with Qatar will providePakistan with 1.5 MTPA of Liquefied Natural Gas (LNG), providing relief to thegas starved power, fertilizer and textile sectors, among others.

LNG deal with Russia: A deal has been signed with Russia for setting up aKarachi-Lahore LNG pipeline, dubbed as the North-South pipeline. In thisregard, Russian premier Vladimir Putin is expected to visit Pakistan early nextyear.

Outlook There has been substantial progress in the socio-political scenario in the

country over the last year. As the situation continues to improve, the majorimpediments to growth and investment are being gradually eradicated throughstructural changes, clearing the road forward for economic advancement.

Pakistan PoliticsPakistan PoliticsMoving into the Next Phase of Political HarmonyMoving into the Next Phase of Political Harmony

06

Economics | 2016Turnaround Story in Play



Key global concerns setting stage for 2016

US Fed Funds rate hikeo Recent decision by US Federal Reserve to raise its interest rates by 25bps

may keep PKR/USD under pressure, compounded further by additionalhikes in CY16.

o Another pertinent point to consider, in the coming months of CY16, wouldbe the potential interest rate hikes by other major economies (other G7members), triggered by the US rate hike (e.g. United Kingdom). Such anenvironment of contractionary monetary policies may put significantpressure on global demand and emerging economies.

o Our estimates point towards a 4.25%-4.50% depreciation of local currencyagainst the greenback in CY16 (PKR 110.3 – 111.4), given no furtherdrastic depreciation/devaluation of regional currencies.

Global Oil Routo Global oil glut and its implications on global economics could not be over-

emphasized (for a more detailed analysis on the topic, please review‘Exploration & Production Companies’ on pg 54). With regards to CY16 andbeyond, a few key points that should not be overlooked are as follows:

o USD appreciation, due to recent Fed rate hike, will put further downwardpressure on oil prices (our estimate for FY16 stands at USD 43/barrel –Arab Light Crude).

o A continuous oversupply of oil by both OPEC and Non-OPEC countries,coupled with sluggish demand will add to the pricing turmoil. The supplyglut could be worsened through Iran adding another 0.5mn barrels/day,probably starting in early to mid 2016, as well as US lifting its 40 year oldban on exports of crude oil.

Exhibit: Interest Rates and PKR Depreciation - Timeline

Source: Bloomberg, AHL Research

Exhibit: Further USD Appreciation to Drive Down Oil Prices


Global EconomicsGlobal EconomicsKey Concerns for Regional MarketsKey Concerns for Regional Markets

0.0010.0020.0030.0040.0050.0060.0070.0080.0090.00100.00110.00120.00

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Jan-07

Nov-07

Sep-08

Jul-09

May-10

Mar-11

Jan-12

Nov-12

Sep-13

Jul-14

May-15

PK PR US DR UK DR PKR/USD

08

6.1 6.2 6.2 6.3 6.3 6.4 6.4 6.5 6.5 6.6

2025303540455055606570

Jan-

15

Jan-

15

Feb-

15

Mar

-15

Mar

-15

Apr

-15

May

-15

May

-15

Jun-

15

Jul-1

5

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Oct

-15

Nov

-15

Dec

-15

Dec

-15

Arab Light USD/CNY (RHS)USD/bbl


Key global concerns setting stage for 2016 continued…

China’s economic slowdown: Based on recent announcements made byPeople’s Bank of China (PBOC), Chinese economy expects a slowdown ingrowth to 6.8% (GDP) during CY16, compared to the double digit growth inlast two years, showing signs of susceptibility to the global slowdown.Furthermore, based on recent Chinese manufacturing data, the country isexpected to witness slowdown for the fourth consecutive quarter.o Based on market expectation consensus, CNY may shed another 6%-10%

in CY16 against the greenback.

Risks to our estimates US economy does not sustain its recent recovery (the latest GDP and

Housing report showing contraction in economy could be a harbinger, contraryto unemployment contraction to 40Yr low), pressing Fed to retract from itsinitial interest rate target for CY16 (1.25%-1.50%) with only a meager changein interest rates.

OPEC decides to stabilize oil pricing and cut back on further repletion ofglobal oil inventories.

Chinese economy recovers, with a strengthening Chinese Yuan, coupled byinclusion in IMF’s Special Drawing Rights (SDR) bucket.

Subsequent Positives USD appreciation would provide for a competitive edge to the hard hit exports

industry, suffering from the gas hikes and energy shortages. It would also support the sectors whose profitability is dollar sensitive such as

Power and E&P. Pakistan economy has been a beneficiary of globally declined oil prices as it

stays a net importer of oil products (USD 14.8bn in FY14, USD 11.7bn FY15).Hence, further stretch in global oil glut will only benefit the country’s CA andoverall macros.

Exhibit: China’s Slowdown to Drive Down Commodities Further

Source: Crisil, AHL Research

Exhibit: Oil Imports Expected To Be Down By Over 40% in FY16

Source: PBS, AHL Research

Global EconomicsGlobal EconomicsKey Concerns for Regional MarketsKey Concerns for Regional Markets

-15%

-18%

-7%

-9%

-7%

-8%

-31%

-23%

-17%

-14%

-8%

-10%

-35% -25% -15% -5%

Crude Oil

Hot-Rolled Steel

Australian Coking Coal

Australian Non-Coking Coal

Aluminium

Ethlene Naphtha spreadsDecline 200 bps Decline 100 bps

(USD/ton)

Premium low vol (USD/ton)

6,300 kcal (USD/ton)

LME + Premium (USD/ton)

South-east Asia (USD/ton)

Brent (USD/bbl)

2,000 4,000 6,000 8,000

10,000 12,000 14,000 16,000

FY12

FY13

FY14

FY15

FY16

F

FY17

F

Oil Imports(USD mn)

09


Outlook – CY16While the global economic slowdown in CY15 rocked other emerging economies, Pakistan managed to benefit from the collapse in oil prices. We hold a positive outlook for CY16 based on the following key projections:

Stable External Sector: Predominantly cushioned by plunge in oil price andcontinuous growth in workers’ remittances (exp. 8% YoY) and support fromIMF/CSF/ADB/World Bank inflows (USD ~5.3bn), we expect CY16 externalsector outlook to be stable/comfortable. Although, ex-oil imports are expectedto rise due to drop in local argi-produce (exp. -35%), a depreciated PKR(4.2% CY15TD) and several measures by GoP should support exports andkeep Current Account Deficit in check (0.3% of GDP).

Historic Low Inflation: Backed by slump in oil and commodity prices, MoMinflationary pressure is expected to stay soft for the 1QCY16, albeit; CPIbased inflation will continue to accelerate due to low base effect. Our CY16Eestimate stands at 6.0% (FY16E 3.5%).

Monetary Easing and Liquidity Management: CY15 witnessed anaggressive Monetary Easing adopted by the central bank, shedding 350bps inits Policy Rate to encourage private sector growth with cheapest borrowing onrecord. We expect central bank to initiate its rate hike by the end of 1HCY16,followed by gradual increments contingent upon economic growth. Our CY16Policy rate estimate stands at 7.0%, with an expected 100bps hike.

Marked Improvement in Security: Security situation has improved markedlyever since country’s military initiated its recent campaign against terrorism.,improving Pakistan’s image as an attractive investment destination.

China Pakistan Economic Corridor (CPEC): Promising antidote to chronicenergy shortages in the country with an investment of USD 40bn in theenergy and infrastructure sectors, providing unprecedented growthopportunities for years to come.

Exhibit: Improving Economic Indicators – Turnaround Story In Play

Source: MoF Pakistan , AHL Research

Exhibit: Slump in Oil Imports to Contract CAD in CY16

Source: PBS, SBP, AHL Research

Pakistan Pakistan EconomicsEconomicsCY16 CY16 –– Turnaround Story in PlayTurnaround Story in Play

(5,000)

(1,000)

3,000

7,000

11,000

15,000

FY11

FY12

FY13

FY14

FY15

FY16

F

Oil CAD(USD mn)

10

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

-

5.0

10.0

15.0

20.0

25.0

FY12A FY13A FY14A FY15A FY16F

Reserves (LHS) GDP CAD FAD

(USD bn)


Outlook Based on our estimates, CPI based inflation for CY16 would fall within

the range of 6.0-6.2%, compared to 3.5% in FY16E, and 2.6% in CY15A, inour view.

In our assumptions we consider the impact of recent developments; i) decline in oil prices and eroding high base effect, ii) slashed domestic cotton production by over 30%, as well as iii) raised regulatory duties of up to 20%.

Declining Oil Prices & Low Base Effect: The recent inflation numbers havewitnessed a nominal impact of eroding high base effect, predominantly drivenby the global oil glut from as early as Jul’14, which is expected to provide amore prominent thrust from early next year, pushing average 1QCY16 CPI to5.1% compared to 1QCY15 CPI of 3.2% (2HFY16 – 5.1%).

On the other hand, the recent slump in oil prices coupled with lowercommodity prices will keep the MoM inflationary pressure in check. Weexpect oil prices to stabilize in 2HFY16 taking the FY16 average to USD43/bbl (Arablight).

Slump in Cotton Production: Cotton Crop Assessment Committee (CCAC)recently revised down its cotton estimates by over 30% to 10.85mn from itsinitial estimates of 15.89mn bales. Subsequently, imports of cotton productsare expected to rise in the coming months, though cheap commodity pricingmay mute down the impact.

Imposed RDs: In an effort to meet its Fiscal tax revenue target, GoP raisedRegulatory Duties (RD) on 400 luxury items by up to 20%. Albeit, based onDec’15 SPI data, the impact has been marginal.

Aforementioned developments envisages over ~80% of the CPI basket (Foodhead ~35%, Housing/Electricity/Gas head ~29%, Clothing & Footwear ~8%,Transport ~7%, and Tobacco ~2%).

Pakistan EconomicsPakistan EconomicsEroding High Base Effect to Lift Inflation Eroding High Base Effect to Lift Inflation

Exhibit: Historic Monetary Easing and Low Inflation To Stop Here

Source: SBP, AHL Research

Exhibit: Eroding High Base Effect To Boost Inflation in CY16


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Feb-15

Apr-15

Jun-15

Aug-15

Oct-15

Dec-15

Feb-16

Apr-16

Jun-16

CPI DR RiR

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

FY15 FY16

11


Outlook In our view, PKR/USD parity may stay under pressure CY16, given the

volatility in regional currencies which could result in overplayed negativesentiments. We anticipate PKR to depreciate by 4.25%-4.50%, to close at110.3/greenback, end of CY16.

US Fed Rate Hike & Regional Currencies: Considering the impact of recentFed rate hike, PKR may stay under pressure against the USD, given theadditional hikes to follow. Furthermore, adaptation of similar policy by majorEuropean economies may put the regional currencies up on stage again.

SBP FX Reserves at Record High: Finally SBP’s efforts to raise FXReserves paid off, crossing the barrier of USD 21bn in Dec’15. With thelowered oil prices, stable use of FE-25 financing, and future expected inflowsunder IMF EFF (USD 1,602mn), CSF (USD 1,660mn) ADB (USD 1,205mn),World Bank (USD 1,200mn), the SBP Reserves are expected stay close tocurrent levels.

Successful Completion of IMF Program: With the IMF EFF program in itstail end, it would mark the first successful program to have completed its fullcourse. We believe it would further strengthen the currency down the line aspositive sentiments would attract further investment inflows.

SBP Intervention in FX Market: Amid recent volatility in the Open Market,SBP intervened to stabilize the PKR/USD parity. In the first week of Dec’15,SBP drove down USD to 103.7, with a 1.7% appreciation in PKR. Similarly, incase of any overplayed negative sentiments, we expect the central bank tostep in and stabilize PKR against greenback.

Real Effective Exchange Rate (REER): The recent appreciation in REERhas been largely the outcome of an unusually strong USD, and unusuallyweaker hard currencies (EUR,CNY) that are used to determine the rate. Withthe global currencies tumbled, the external benchmark (REER) may no longerserve as an effective indicator.

Pakistan EconomicsPakistan EconomicsLocal Currency Under Pressure In Spite of Record ReservesLocal Currency Under Pressure In Spite of Record Reserves

Exhibit: Movement in USD Against Key Currencies during 1HFY16


Exhibit: PKR Undergone Major Depreciation Making KSE-100 Attractive


-9.8%

1.5%

-4.4%2.1%

5.1%

5.3%

-2.9%

-15.0% -10.0% -5.0% 0.0% 5.0% 10.0%

CA

DE

UR

CH

FJP

YG

BP

AU

DP

KR

103.5

104

104.5

105

105.5

106

(1,500)

(1,000)

(500)

-

500

1,000

2-N

ov-1

5

9-N

ov-1

5

16-N

ov-1

5

23-N

ov-1

5

30-N

ov-1

5

7-D

ec-1

5

14-D

ec-1

5

21-D

ec-1

5

28-D

ec-1

5

Net Buy/(Sell) PKR/USD(PKR mn)

12


Pakistan EconomicsPakistan EconomicsInflation to Kick Start Contractionary Policy Inflation to Kick Start Contractionary Policy

Outlook We forecast Central Bank to adopt a contractionary policy in CY16, with an

estimated hike of 100bps to settle at 7.0% end of year. While we assume theCentral Bank/Monetary Policy Committee will maintain current rate for thenext two meetings, there may be an increment as early as Mar’16 contingentupon private sector growth, inflation, real interest rates, and PKR/USD parity.

CY15 Review: CY15 witnessed an aggressive Monetary Easing adopted bythe central bank, shedding 350bps in its Policy Rate to encourage privatesector growth with cheapest borrowing on record.

Is There Room For Another Rate Cut? While there has been an unusuallymuted response to the CY15 rate cuts; negative growth in credit to privatesector / marginal uptick in advances growth (-0.3%/1.5% in 4MFY16respectively), we believe that the impact is only delayed. In addition, LargeScale Manufacturing (LSM) posted a much encouraging growth of 4.2% in4MFY16. Although, we cannot rule out the possibility of another cut,contingent on Dec’15 economic indicators, we expect only a reversal inmonetary policy going forward, albeit, with a delayed hike.

Inflation & Real Interest Rates, The Key Determinants: In our view, therising inflation will be one of the key determinants to MP reversal in CY16.With the rapid acceleration in inflation due to the low base effect (expected tohover around 6.5%-7.0% in 2HCY16), SBP will need to raise its policy rate orface negative real interest rates.

Keeping Currency Pressure in Check: Another factor for the Central Bank /Monetary Policy Committee to consider during its next few monetary policieswould be the PKR/USD parity and the sentiments attached. In our assumptionof a rate hike of 100bps, we have assumed each hike to provide a softeningimpact on the parity.

Exhibit: SBP OMO Injection On the Rise – Monthly Averages


Exhibit: LSM and Private Sector Growth Slowed Down


0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%10.0%

20,000

30,000

40,000

50,000

60,000

70,000

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

SBP OMO Injection Cut-Off(PKR bn)

-

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

(60)(40)(20)

-20 40 60 80

100 120 140

June

-14

July

-14

Aug

-14

Sep

t-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

June

-15

July

-15

Aug

-15

Sep

t-15

P.S. growth LSM Index (RHS)(PKR bn)

13


Pakistan EconomicsPakistan EconomicsImproving External SectorImproving External Sector

Outlook Based on estimates, FY16 current account deficit (CAD) will stand at 0.3% of

GDP, contracting by 72%YoY. Remittances are expected to grow at 7.5%YoYto USD 20.1bn, along with a 25% expansion in services and income deficit.

Notable Cushion Through Remittances: Following the historic trend,Pakistanis abroad are expected to provide a generous cushion to the externalsector with remittances anticipated to grow at 7.5% crossing the USD 20bnmark. It should provide ample boost to the country’s current account viasecondary income while the other cash transfers are expected to stayrelatively same as last FY.

Lowest Oil Prices in Decades: Pakistan being a net importer of oil (USD14.8bn in FY1, and USD 11.7bn in FY15), it has been a keen beneficiary ofthe global oil glut and subsequent decline in commodity pricing. Net oilimports are expected to decline by over 40% in FY16 with a drop in quantity(partially due to IPPs’ switch to gas from furnace oil) but mostly due to theslump in prices.

FX Reserves at Record High: Considering the longstanding efforts of thecentral bank to raise its reserves (IMF EFF NIR requirement), SBP reservesreached an all time high of over USD 16bn, taking total FX Reserves overUSD 21bn. Going forward, with the expected inflows from IMF, CSF, ADB,and World Bank estimated at over USD 5bn, reserves are bound to stay closeto current record level.

Risks Net outflow in Foreign Portfolio Investments (5MFY16 at USD 239mn),

triggered by further PKR/USD depreciation, among other factors. Drastic reversal in oil products and commodity pricing. Stretch in oil slump could hinder remittances growth via GC countries.

Exhibit: Notable Growth in Remittances Amidst Global Slowdown


Exhibit: Record High FX Reserves – FY16E: USD 21.2bn


40 50 60 70 80 90 100 110 120

1.1

1.2 1.3

1.4

1.5 1.6

1.7

1.8

1QC

Y13

2QC

Y13

3QC

Y13

4QC

Y13

1QC

Y14

2QC

Y14

3QC

Y14

4QC

Y14

1QC

Y15

2QC

Y15

3QC

Y15

Home Remittances Crude Oil Prices (RHS)(USD bn) (USD/bbl)

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

FY12

FY13

FY14

FY15

FY16

E

FY17

F

FX Rerves(USD mn)

14

SBP76%

Banks24%

Pakistan EconomicsPakistan EconomicsKey Macroeconomic IndicatorsKey Macroeconomic Indicators

15

Key Indicators FY11A FY12A FY13A FY14A FY15A FY16F FY17F Real GDP (Real Growth %) 3.6% 3.8% 3.7% 4.0% 4.2% 4.5% 4.8%Service Sector 3.9% 4.4% 5.1% 4.4% 5.0% 5.2% 5.5%Industrial Sector 4.5% 2.5% 0.6% 4.5% 3.6% 4.5% 4.9%Agricultural Sector 2.0% 3.6% 2.7% 2.7% 2.9% 2.5% 2.6%

GDP (PKRbn) 18,277 20,047 22,489 25,402 27,702 29,913 33,552 Population (mn) 175 179 183 186 190 194 198 Per Capita Income (USD) 1,222 1,254 1,267 1,326 1,438 1,435 1,501 Prices CPI (% YoY) 13.7% 11.0% 7.4% 8.6% 4.6% 3.5% 6.5%Policy Rate - Period end 13.5% 12.0% 9.0% 10.0% 7.0% 6.5% 7.5%External Sector (USDbn) Exports 24.8 24.7 24.8 25.1 24.1 21.0 20.5 Imports (ex oil) 28.1 25.2 25.3 26.9 29.2 29.8 30.0 Imports (oil) 12.1 15.2 14.9 14.8 12.1 6.8 7.4 Trade Terms (15.4) (15.8) (15.4) (16.7) (17.2) (15.7) (16.8)Remittances * 13.9 13.2 13.9 15.8 18.7 20.1 21.9 FX Reserves - Period end 18.2 15.3 11.0 14.1 18.7 21.2 22.4 Exchange Rate (average) 85.5 89.3 97.0 103.0 101.4 107.5 112.9 Fiscal Accounts (% of GDP) Total Revenue 12.3% 12.8% 13.3% 14.5% 14.4% 15.1% 15.3%Tax Revenue 9.3% 10.2% 9.8% 10.2% 11.0% 11.5% 11.8%Total Expenditure 18.9% 19.6% 21.6% 20.0% 19.7% 19.6% 19.3%Current Expenditure 16.1% 15.9% 16.5% 16.0% 16.2% 15.6% 15.5%Development Expenditure 2.8% 3.7% 5.1% 4.9% 3.5% 4.0% 3.8%Current Account Deficit 0.1% -2.1% -1.1% -1.3% -1.0% -0.3% 0.0%Trade Deficit -7.2% -7.0% -6.7% -6.8% -6.3% -5.6% -5.7%Fiscal Deficit 6.6% 6.8% 8.3% 5.5% 5.3% 4.5% 4.0%External Debt 31.0% 29.2% 26.3% 26.5% 23.8% 23.2% 20.9%Domestic Debt 32.9% 38.1% 42.5% 43.5% 44.5% 41.3% 45.4%Source: SBP, PBS, MoF, AHL Research * Remittances growth may get suppressed due to slowdown in GCC countries.

Capital Markets | 2016Equities to Fare Better Next Year


KSE100 IndexKSE100 IndexThe The GoodGood, the , the Bad Bad = Volatility= Volatility

-

100

200

300

400

500

600

700

800

900

28,500

29,500

30,500

31,500

32,500

33,500

34,500

35,500

36,500

37,500

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

KSE Volume KSE100 Index (mn Shares)

Policy rate cut to 42 year low

SBP chops off 100bps from policy rate

FY16 budget announced

Foreign selling on speculations of FED rate hike dulls volumes and index performanceForeign hedge fund

went into liquidation due to its unfortunate currency positions.

Chinese president’s visit to sign landmark USD 46bn CPEC deal

Reversal in oil prices

PM announces Kissan (Farmer's) package

Chinese Yuan devaluation leads to PKR depreciation and foreign selling

MSCI announces Pak equities possible re-entry into its EM index

17


Exhibit: Pakistan Equities vs MSCI

Source:: MSCI, Bloomberg, AHL Research

Exhibit: Sector (KSE100) performance CY15 (Winners and losers)


Equities Remain Resilient Despite Global Volatility Equities Remain Resilient Despite Global Volatility 2015: Remarkable 2015: Remarkable SStagnation tagnation WWhilst hilst EEconomic conomic PParanoia aranoia

38% 38%33%

-2%5%

21%

3%

-18%

15%

-5%

-5%

-17%

23% 27%

8%

-18%-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

CY12 CY13 CY14 CY15TD

KSE (USD) FM EM Msci (Pak)

-52.1%-40.6%

-30.8%-21.3%

-16.9%

55.4%

58.7%

74.0%

179.2%

919.1%

-200% 0% 200% 400% 600% 800% 1000%

Synthetic

Modarabas

Textile

E&P

Chemical

Cables

Inv. Banks

Pharma

Vanaspati

Jute

18

The KSE-100 index has been unable to replicate the laudable performance ofthe past few years (41.9% average return during CY12-14), dipping right backto a single digit return of +2.2% (USD-based -2.0%) to close marginally overlast year’s levels at 32,816 points. The growth stagnation was not purely self-inflicted, as retracting commodity prices and ripple effects of the globaleconomic deceleration persisted throughout the year, (FIPI net outflows CY15USD 315mn) eroding the sizeable positives that could have otherwiseaugured well for the market. These included steady fundamentals, improvedcurrent account position (down by 59% YoY), low price levels (2.2% during1HFY16 compared to 6.1% in 1HFY15), record low interest rates and largelyimproving political environment.

Hitherto, the KSE-100 remained in the top slot in Asia-Pac in 2014 with aUSD based 33.3% return, however, current year’s -2.0% USD-based returnpales in comparison. Although in contrast to other regional markets and howthey weathered global economic instability (avg. -9.9% return), KSE managedto hold its ground a lot more firmly; while China sustained its peak positionwith a positive 1.0% return.

The KSE-100 index not only exceeded the Asia-Pac average in CY15, itoutshone substantially the returns of Frontier (-18%) and Emerging markets (-17%), that emulated the sluggish performance of most global equity marketsin the wake of brewing economic chaos. In spite of this, the KSE now ranks asthe 23rd best performing world market of 2015, dropping 20 ranks since lastyear’s 3rd spot. This is a big push downwards considering the market ranked18th back in 2011, 8th in 2012 and 11th in 2013.


Exhibit: Sector wise Index Contribution during the year


Exhibit: Average Sector Volume (mn Shares)


Equities Remain Resilient Despite Global Volatility Equities Remain Resilient Despite Global Volatility BreakingBreaking--down Index Performancedown Index Performance

32

27 25 24

17 17 15 11 11 10

5

10

15

20

25

30

35

Cem

ent

Pow

er

Bank

s

Tech

nolo

gy

Inv.

Ban

ks

Ferti

lizer

Cab

le

Tran

spor

t

Ref

iner

y

OM

Cs

(1,366)

(773)

(151)

(85)

(49)

163

224

632

635

1,011

(1,500) (1,000) (500) - 500 1,000 1,500

E&P

Banks

Food

OMCs

Paper

Autos

Pharma

Power

Cement

Fertilizer

19

Even though the market kick-started on a high note in CY15 (average monthlyvolumes in 1HCY15 hovered around USD 257mn), it switched gears half-waythrough the year due to the factors mentioned earlier, with volumes dipping by7% in the latter half to ~USD 239mn (USD 165mn in 4QCY15). Thoughmarket volumes touched peak levels of USD 448mn in July-15, on a full yearbasis they were adequately up by 20% YoY to USD 252mn.

Further dissection revealed Cement, Power, Banks and Technology &Communication scoring top volumetric positions, attracting on average 32, 27,25 and 24mn volumes, respectively, cumulatively making up 43% of the totalmarket activity. Company-wise though KEL was the volumetric market leader(USD 17mn), followed by JSCL, PAEL (USD 12mn each) and TRG (USD11mn) amongst other actively-traded scrips.

While average traded value/day jumped to USD 128mn compared to USD115mn in CY14, exhibiting a 12% YoY escalation as some sectors remainedshielded from the outside noise and fetched alpha returns, despite theincessant scale-back in favorable sentiments. Infrequently traded sectors likeJute and Vanaspati & Allied Industries yielded leading returns set at 919%and 179%, respectively; while the index-dominant sector like Banking(~25.4% weight) returned -4%, Fertilizers (~14.8%) produced a muchsatisfactory 24% return. On the extreme negative end of the spectrum though,recoiling global oil prices (touching 11-year low) with no bottom in sightcontinued to cause investor stampede, contracting market capitalization of theE&P sector (~9.9% weight) by a massive 21%; nonetheless, Synthetic andRayon sector eroded the most (52%) in value.

With this, the top index contributors remained Fertilizers (1,011pts), Cements(635pts) and Power generation and distribution (632pts), while E&P’s(1,366pts), Banks (773pts) and Food & personal care products (15pts) werelaggards. Whereas scrip-wise leading companies were HUBC (536pts),ENGRO (316pts) and DAWH (294pts); on the other hand, OGDC (961pts),MCB (534pts) and PPL (395pts) managed to mark down the index.


Exhibit: Total Traded Value – KSE and Foreign Investors


Exhibit: Increasing Foreign Exposure in KSE…

Source: SBP, Bloomberg, AHL Research

Market Liquidity on the Go!Market Liquidity on the Go!Foreigners’ Dictate Market amid Slugged Global Economy Foreigners’ Dictate Market amid Slugged Global Economy

85%

86%

88%

85%

84%

82%

15%

14%

12%

15%

16%

18%

40%

50%

60%

70%

80%

90%

100%

110%

CY-10 CY-11 CY-12 CY-13 CY-14 CY-15

FIPI-Traded Value KSE-Traded Value

0%

5%

10%

15%

20%

25%

30%

35%

40%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

CY-

04

CY-

05

CY-

06

CY-

07

CY-

08

CY-

09

CY-

10

CY-

11

CY-

12

CY-

13

CY-

14

CY-

15

Outstanding Investment

%age of F.F Market Cap

(USD mn)

20

Resilience of the local bourse while all hell broke loose in international equitymarkets over slowdown in global economy, coupled with concerns over rout incommodities and FED rate hike in the U.S., has been remarkable. Whileforeign net outflows of USD 315mn (2014: net inflows of USD 383mn) reflectcynicism, the local bourse sustained a minor blow in comparison to otherregional markets (Asia-Pac net outflows: USD 846bn); we view this to be aone-off event.

Further dissection of FIPI on a sector-wise basis revealed major selling waswitnessed in (i) electricity (USD 100mn) including KEL Private Book Building(USD 65mn), (ii) commercial banks (USD 70mn) owed to unsupportivemonetary policy for banking spreads, (iii) E&P companies (USD 54mn) amidretreating oil prices, and (iv) Cements (USD 36mn) on the back of dwindlingcommodity prices.

Yet, foreign participation in the benchmark KSE index continued to intensifyduring the year, visible via the augmented overseas investment in the bourse,comprising ~18% (2014: 16%) of the total traded value (which crossed theUSD 31bn mark in CY15); while contribution to market cap rose to 9.9% from8.5% in 2014. Given the rising interest, foreigners’ amassed greater holdingsin Pak equities as evident in the portfolio investment of ~USD6.5bn (up 4%YoY) which adds up to 34.2% of the free float market cap (USD 19bn; down11% YoY), comparing positively to the 29.2% last year.

While current year trajectory indicates retraction from foreign investors, weview the odds against another year of volatility in equities as KSE-100managed to absorb the initial shock of global economic stagnation (buyingmainly witnessed by mutual funds and NBFC of USD 172mn and 104mn,respectively), to a great extent. Though the impact of further global economicunrest on Pak equities should be negligible owed to our low correlation toFrontier and Emerging markets. Going forward, with improving fundamentals,low inflationary pressures amid weak commodity prices, potentialreclassification to the MSCI EM index and CPEC fetching foreign attention,we view equities to fare better next year.


Capital MarketsCapital MarketsEquities Equities –– A cut above the Rest A cut above the Rest

Exhibit: KSE100 (nominal & real) and other assets classes returns

(%) KSE (PKR based)

KSE100(USD based) Gold T-Bills DSC* Bank

Dep.US$ PKR PIBs

CY01 -16.1 -19.1 1.6 8.1 15.0 5.6 3.6 12.9CY02 112.2 118.2 26.3 4.1 12.9 4.2 -2.7 8.5CY03 65.5 68.6 19.0 2.3 9.3 1.6 -1.8 5.4CY04 39.1 34.2 5.5 4.5 8.1 1.3 3.7 4.5CY05 53.7 52.8 17.9 8.7 9.5 2.6 0.6 5.9CY06 5.1 3.2 23.2 9.0 10.3 3.4 1.8 8.5CY07 40.2 38.5 31.0 9.4 10.2 3.6 1.2 8.5CY08 -58.3 -67.5 5.8 14.2 12.2 6.0 28.3 8.3CY09 60.0 50.1 24.4 12.1 12.2 6.1 6.6 13.5CY10 28.1 26.1 29.5 13.7 12.6 5.8 1.6 13.0CY11 -5.6 -10.1 10.1 12.1 13.1 6.0 5.0 13.0CY12 49.0 38.0 7.1 9.3 11.9 5.8 8.0 11.5CY13 49.4 37.8 -28.0 10.2 11.5 5.1 8.5 12.8CY14 27.2 33.3 -0.4 9.4 11.1 4.9 -4.5 10.6CY15 2.1 -2.0 -11.6 6.4 8.7 3.5 4.3 9.3Average 30.1 26.8 10.7 8.9 11.2 4.4 4.3 9.7Source: Bloomberg, SBP, National Savings* Defense Savings Certificate

Investment Class Absolute Return CAGR Sharpe Ratio

Equities (KSE100) 243% 13.1% 0.50

Gold 105% 7.5% 0.05

DSC* 193% 11.4% 0.69

Pak Inv. Bonds (PIBs)^ 181% 10.9% na

T-Bills^ 173% 10.5% na

US$ PKR** 75% 5.8% (0.74)

Bank Deposits** 63% 5.0% (3.40)

* Defense Savings Certificate** Return even lower than average RF rate ̂PIBs, T-Bills considered as risk-free rates

21

Amongst the different asset classes available domestically , Pak equities havealmost always outperformed other asset classes by a wide margin. During thelast 15 years, KSE-100 index has exhibited an impressive average return of30%, with gold a distant second over an average return of 11%. Moreover,Sharpe ratio of equities has historically been on the higher side, highlightinggreater return per unit of risk (history of quick recovery and reversals).

Real return of KSE-100 (inflation-adjusted) on average has remained 21.96%during the last 15 years compared to adjusted returns of 2.99% on DSC,0.64% on T-Bills, 1.47% on PIB’s, 2.75% on Gold (safe haven). Otherinvestment assets recorded negative real return during the same period.Going forward, we expect equities are set to outperform other asset classes,supported by improving macros and a vastly improved law & order situation.

With improving economic fundamentals, improved corporate profitabilityexpectations, the market is expected to remain upbeat, especially withhistorical low interest rates.


Exhibit: UAE (ADSMI Index) & Qatar (DSM Index) historical PE


ReRe--Rating Rating on the on the CardsCards! ! #1: Potential #1: Potential ReRe--classification to EM from FM classification to EM from FM

5 7 9

11 13 15 17 19 21 23 25

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jun-13

Dec-13

Jun-14

Dec-14

Jun-15

Dec-15

DSM Index ADSMI Index

Exhibit: Expected Companies in EM from Pakistan

Company Total MktCap (USD bn)

Free float MktCap (USD bn)

Expected Weight in EM

HBL 2,796 1,398 0.04%MCB 2,299 919 0.03%HUBC 1,131 848 0.03%FFC 1,430 786 0.02%OGDC 1,807 723 0.02%UBL 4,806 721 0.02%ENGRO 1,394 697 0.02%Total 0.18%

Potential other entrants in EMLUCK 1,525 610 0.02%PPL 2,287 558 0.02%Total 0.21%Source: Bloomberg, MSCI ,AHL Research

22

As per the Jun-15 MSCI Market Classification Review, the MSCI PakistanIndex was added to a review list for the 2016 Annual Market ClassificationReview, rendering a probable re-classification to the Emerging Markets Index.Qualitative developments at the KSE-100 index such as improved operationalframework of the market via restriction in the Negotiated Deal Market (NDM)and launch of the Pakistan Unified Corporate Action Reporting System(PUCARS), were quoted as key reasons for this.

Given strong market fundamentals in place, with improving liquidity in themarket (noticeable via the 12% YoY growth in the ADTV to USD 128mn),Pakistan offers a strong call for potential MSCI reclassification, we view thisshall aid in re-rating our market going forward.

To recall, Pakistan remained in the MSCI Emerging Markets Index till 2008(last weight: 0.12%). It was excluded from the MSCI EM Index on account ofthe infamous August 2008 floor rule which was imposed during the financialcrisis. At present, Pakistan secures 8.68% weight in the MSCI FM Index with16 constituents. These are expected to drop to 6 (32% market capcontraction), post reclassification to the EM index. Currently free-float marketcap in the FM index hovers around ~USD 75bn, whereas the total free-floatmarket cap of the EM index as at Nov-end was USD 3.38trn.

Our top picks to enter the EM index would be: HBL, MCB, HUBC, FFC,OGDC, UBL and ENGRO, whose cumulative free-float adds up to USD 6.1bn.This constitutes to 0.18% of the market cap of EM index (USD 3.384trn),which we assume shall be our weight subject to Pakistan’s classification tothe EM index.

Taking cue from both UAE and Qatar markets, which exhibited re-rating intheir PE multiples 12 months post the announcement (May-14) of upgradationfrom FM to EM, there is no reason in our view that Pak equities would notundergo the same.


“Community of common destiny”- President Xi Jinping on China and Pakistan The implied connotation of a joint-dream fast became a reality when authenticated by

the visit of the Chinese Premier to his neighboring western country: Pakistan in April-15. Determined to fortify bilateral relations, China and Pakistan signed 51 MOU’sunder the “China-Pakistan Economic Corridor” worth a stunning USD 46bn; endorsinga diverse assortment of energy and infrastructure projects. Spread across a period of15 years, these projects are expected to bring out the full potential of the Pakistanieconomy with USD 40bn Chinese investment flowing in the economy by 2020. Thiseffectively gives a cumulative investment to GDP (PKR 27trn) ratio of 15%.

What the China-Pakistan Economic Corridor entails?Energy - On its way to greater efficiency The funding encompassed USD 33.7bn (comprising 73% of total funding), for energy

projects to rid the energy-starved country of its key bottleneck; we believe massiveinvestments in several power projects will shift electricity generation from theexpensive oil-based plants to more efficient power plants operating on coal and hydro-energy. This will curb the shortage of electricity that is currently around 6,000MW andreduce the intensity of the circular debt on the government amid savings worth billionsowed to lower cost of generation and tariff determination; allowing the power sector toget timely payments and run operations more effectively.

Infrastructure - Build and strengthen Highways, railways, dams, ports and other projects under the CPEC are progressing

at full pace and so is the expected demand for construction materials and cement.This has already been well understood as major expansion plans by several largecement and steel manufacturers have already been announced, anticipating demandgrowth and expressing willingness to fill the gap locally.

Textiles - Ignored but not forgotten Despite being of crucial importance for the economy of Pakistan (generating millions

in FX reserves through exports), the textile sector has continuously suffered in thepast due to power-shortage limiting production and resulting in underutilized capacityfollowed by lost sales. With CPEC set to restrict energy deficiency faced by industriesin Pakistan, the textile sector is expected to be a major indirect beneficiary wherebyrevival of production at optimal capacity will enable it to regain its gloried days.

ReRe--Rating on Rating on the the CardsCards! ! #2: CPEC #2: CPEC -- A Dream Becoming a Reality! A Dream Becoming a Reality!

23

CPEC(USD 46bn)

CPEC(USD 46bn)

Power Generation Projects

(USD 16.5bn)

Power Generation Projects

(USD 16.5bn)

Road Network (USD 6.1bn)

Road Network (USD 6.1bn)

Railway Network (USD 3.7bn)

Railway Network (USD 3.7bn)

Investments in Gwadar (USD 2.8bn)

Investments in Gwadar (USD 2.8bn)

Other Energy and Infrastructure projects

(USD 16.9bn)

Other Energy and Infrastructure projects

(USD 16.9bn)


Key Risks to the China-Pakistan Economic Corridor Occurrences of terrorism and law & order uncertainty, however, they have

been widely addressed by the Pakistan army to the satisfaction of its Chinesecounter-part. In addition, a team of 10,000 security personnel will be put inplace to secure the “one-belt” region and closely administer all projects.

CPEC-Investments Type Estimated Cost (USD bn)

Power Generation ProjectsSolar (1,000 MW) Energy 1.35

Hydro (1,590 MW) Energy 3.22

Coal (8,880 MW) Energy 11.26

Wind (300 MW) Energy 0.63

Nawabshah - Gawadar LNG project Energy 2.00

Road Infra 6.10

Rail Infra 3.70

27.1 KM Orange Line Metro Train-Lahore Infra 1.62

Pak-China optic fibre project Tech 0.44

Transmission Lines Energy 3.00

DTMB, Digital Television Tech 0.44

Nuclear power reactors (2x1100 MW) Energy 6.50

Dry Port Havelian Infra 0.40

18.9 KM East-Bay Expressway Infra 0.14

Investments in Gawadar Check table on right 2.30

Pakistan and China Radio Channel FM-98 Entertainment Undetermined

China-Pakistan Joint Marine Research Center R&D Undetermined

China Cultural center Pakistan Infra Undetermined

Total 46 Source: Govt. of Pakistan, Channel checks, AHL Research

CPEC CPEC -- A A Dream Becoming Dream Becoming a a RealityReality!!ReRe--Rating on the Rating on the CardsCards! !

Investments in Gwadar TypeEstimated

Cost (USD bn)

Gwadar International Airport Infrastructure 0.23

Facilities of Fresh Water Treatment Gwadar Infrastructure 0.11

Infrastructure Development Gawadar International Export Development Authority Infrastructure 0.16

Infrastructure Development for Export Processing Gwadar Infrastructure 0.50

Infrastructure Development for free zone Gwadar Infrastructure 0.12

Construction of Breakwater Gwadar Port Infrastructure 0.13

Comprehensive Feasibility Study for upgradation of Mainline R&D 0.01

Dredging of berthing areas and channels Gwadar Infrastructure 0.27

Acquisition of Land for free zone of Gwadar Port (2,282 acres of land) Development 0.65

Pak-China Technical Vocational Institute Gwadar Education 0.01

China-Pak Friendship Hospital Gwadar Healthcare 0.10

Total 2.30 Source: Govt. of Pakistan, Media, AHL Research

24


High Priority projects under CPEC Various high priority power projects of ~$15.5bn (deemed vital for the

fulfilment of CPEC) have already achieved financial closure, (like thesignificant $1.2bn Engro Thar Coal project) and work is progressing on a fast-track basis. These projects will come online between CY16-18 under the“early-harvest” period of the CPEC (please see the table below for details).

CPEC CPEC -- A A Dream Dream BBecoming ecoming a a RealityReality!!

High Priority Power Projects Under CPEC generating 10,400 MW MW Estimated Cost

(USD bn)Tentative

completionImported coal-based power project at Port Qasim, Sindh 1,320 1.98 2018

Engro coal-fired power project / 3.8mtpa coal mining at Thar Block II 660 1.85 2018

SSRL coal-based power plant / 6.5mtpa coal mining at Thar Block I 1,320 1.30 2018

Coal-fired power plant Gawadar, Balochistan 300 0.36 Jun-17Coal-based power project at Rahim Yar Khan, Punjab 1,320 1.60 2017

Coal-based power project at Muzaffargarh, Punjab 1,320 1.60 na

Coal-based power project at Sahiwal, Punjab 1,320 1.60 2017

Suki Kinari Hydropower at River Kunhar, KPK 870 1.80 Jun-20Karot Hydropower project at Jhelum River, Punjab 720 1.42 2020

UEPL wind power project at Jhimpir, Sindh 100 0.25 2016

SUNEC wind project at Jhimpir, Sindh 50 0.13 Mar-16

Sachal Wind power plant at Bhambore, Sindh 50 0.13 Mar-16

Dawood wind plant at Gharo, Sindh 50 0.13 Mar-16Quaid-e-Azam Solar Power Park at Bahawalpur, Punjab 1,000 1.35 Mar-16

Total 10,400 15.5 Source: Govt. of Pakistan, Media, AHL Research

ReRe--Rating on the cards! Rating on the cards!

25


Exhibit: Historical discount on PE & DY to regional peers


Exhibit: Regional ROE vs Dividend Yield


ReRe--Rating on the Rating on the CardsCards! ! #3: Deep Discounts Brand #3: Deep Discounts Brand KSE KSE Attractive RegionallyAttractive Regionally

30%

35%

40%

45%

50%

55%

60%

65%

CY09 CY10 CY11 CY12 CY13 CY14 CY15

Discout on PE Discout on DY

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%

Regional ROE vs Dividend Yield

Taiwan

Pakistan

ThailandPhilipinesS. Korea

China

IndonesiaIndia

Sri Lanka

(ROE)

(DY)

Vietnam

26

Region peers: Access to Pak equities is available at a forward (2016) P/Emultiple of 8.1x, compared to regional multiple of 13.2x, amounting to amassive discount of ~40% over regional peers (including Philippines,Indonesia, India and China amongst others). Granted that with our positivestance on KSE re-classification to the MSCI EM index along with otherunderlying fundamentals coming into play, we believe this merits an imminentre-rating, correcting the prevailing discounts to regional and other markets.

Further discounts: PBV analysis revealed a similar trend with KSE yieldinga ~24% discount to regional peers. While KSE trades at a pricing discount,dividend yield sits comfortably above other regional peers (KSE DY of 5.9%vs regional DY of 2.6%) as well, offering an alluring investment opportunity.

FM/EM advantage: KSE continues to impress with discounts to its FM peers(9% on P/E) while discounts to the EM index remain largely appealing as well(26% on P/E). Though regional markets (emerging and frontier) are decliningin the wake of deteriorating macros, the equity market in Pakistan is at ahistoric PER discount despite improving macros. Moreover, MSCI Pakistantraded at a PER of 17.34x during CY07 in contrast to forward (CY16) PER of12.81x (discount of 26%); we anticipate this discount to narrow betting on theimproved economic activity.

Although the KSE-100 historically traded at a discount of ~40% to its regionalpeers between 2005-2015, it is now trading at a solid discount of 47% to thesame peers.

Going forward, we expect KSE to provide ex-E&P ex-banks (AHL Universe)earnings growth of 8.3% (AHL Universe growth of 3.4%) during CY16,compared to 13.2% average earnings growth for regional peers. Earnings ofPak equities may be lower than regional peers but the scenario coulddrastically change given Banks and E&P yield positive earnings surprises onthe back of higher than expected Capital Gains and earlier than expectedhydrocarbon additions.


Attractive ValuationsAttractive ValuationsMore Reasons for ReMore Reasons for Re--rating! rating!

Exhibit: KSE100 EY vs PIB Yields2009 2010 2011 2012 2013 2014 2015E 2016F

Avg. PIB Yield 12.4% 14.2% 12.8% 10.7% 12.1% 9.7% 7.9% 7.9%Earnigs Yield 14.5% 12.3% 13.8% 15.2% 13.5% 11.9% 12.0% 12.4%BEER 2.0% -1.9% 1.1% 4.5% 1.4% 2.2% 4.2% 4.6%Source: Bloomberg, AHL Research

Exhibit: Country Macros vis-à-vis KSE100 PE

2006A 2011A 2013A 2015E 2016F Policy Rate (%) * 9.0 13.7 9.9 7.0 6.5 Price Earning (x)* 11.3 7.2 7.4 8.3 8.1 Real GDP Growth 5.8% 3.6% 3.7% 4.3% 4.5%C/A (% GDP) -3.6 0.1 -1.1 -0.8 -0.3Fis. Def. (% GDP) 4.0 6.5 8.2 5.0 4.3 Fx Res. (USD bn) 13.1 18.2 11.0 19.1 21.2 Inflation (%) 8.8 13.3 7.4 4.6 3.5 Source: SBP, PBS, Bloomberg, AHL Research, *CY

Exhibit: Policy rate vs Dividend Yield


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2008

2009

2010

2011

2012

2013

2014

2015

Policy Rate DY

27

BEER Trend: Looking at the BEER trend (Bond-Equity Earnings Yield Ratio–a differential between equities’ earnings yield (EY) and secondary marketyield (SMY) of the fixed income benchmark instrument), EY of KSE-100 indexvs. SMY of the 5-10yr Pakistan Investment Bonds (PIB) in this case haswidened to the biggest gap since 2012. Wider positive BEER gap rendersequities to become more attractive. For instance, in 2012, KSE-100 averageEY stood at 15.2% while average SMY was 10.7%, yielding positive BEERgap of 4.5%, whereas the lowest BEER gap was recorded during the 2008crisis with negative BEER gap of 3.3%. Average BEER gap for 2009-14period stood at 1.6%. Average differential between EY and SMY for 2009-15stands at 1.9% while the forward differential stands at 4.6%, hinting towardspotential re-rating.

DR effect: On a matching note, DY and DR have always maintained a spread(rising DR resulted in a subsequent downward adjustment in DY). However,we have witnessed a certain anomaly whereby the 2016E DY (5.9%) hasstayed constant despite several policy rate cutes, indicating multiple re-ratingagain.

Theory of relativity: Similarly we can look at the relative levels of the KSE-100 average PE (last 10 years) and observe in comparative context to thecountry’s five key macro indicators e.g. FX Reserves, twin deficits (% ofGDP), policy rate and inflation, it reveals interesting insights. For instance, theKSE-100 traded at its highest average PER (11.3x in 2006), with most of thementioned macros not as encouraging back than, as they are today. And,more importantly, its direction was trending downwards as the economypeaked (GDP growth close to 5.8%) and fell further post the 2008 crisis. Thus,given ever-improving macros, the KSE-100 PER has to adjust to the levelsreflecting better macros, thereby narrowing market-macro dichotomy. The DRcompared to the PE and other macros also point towards re-rating of theMarket PE.


Exhibit: Economic growth vs Corporate Fundamental Growth


Sustained Gains amid EcoSustained Gains amid Eco--mktmkt Growth ConvergenceGrowth ConvergenceKSE KSE to go back to the “Topto go back to the “Top--down” styledown” style

Exhibit: Economic Indicators vs Earnings GrowthCountry RGDP CPI DR Egrow* RoE*S.Korea 2.7% 1.0% 1.5% 15.2% 8.8%India 7.4% 5.4% 6.8% 19.7% 16.2%Thailand 2.9% -1.0% 1.3% 15.3% 11.3%Philippines 6.0% 1.1% 4.0% 13.6% 11.6%Sri Lanka 4.8% 3.1% 6.0% 13.5% 13.8%China 6.9% 1.5% 4.4% 9.8% 13.8%Taiwan -0.6% 0.5% 1.6% 5.7% 13.7%Vietnam 6.8% 0.3% 6.5% 10.7% 13.5%Indonesia 4.7% 4.9% 7.5% 15.1% 16.7%Peer Average 4.6% 1.9% 4.4% 13.2% 13.7%Pakistan 4.5% 3.2% 6.0% 3.4% 18.1%Difference -0.1% 1.3% 1.6% -9.8% 4.4%Relative Value Parallel Higher Higher Lower BestSource: Bloomberg, AHL Research, * 2016 Estimated

0%

1%

2%

3%

4%

5%

-30%

-15%

0%

15%

30%

45%

2011 2012 2013 2014 2015 2016E

KSE Real Return (LHS) Real Earning Growth

RoE GDP Growth (RHS)

28

Effect of real GDP growth: Over the last several years, real earnings growthhave outpaced real GDP growth. Historically, KSE returns have followed theearnings growth trend, exhibiting a bottom-up story thus far. While goingforward both earnings growth and economic growth are complementary innature, contrary to previous years where economic growth remained subduedcompared to impressive earnings growth. Hence, 2016 is estimated to be atop-down story similar to the previous year (2015) and expectedly better.

Improved politics: In addition to the improved economic fundamentals,political harmony and sound security situation should set ground for improvedcorporate profitability performance, mainly owing to lower commodityprices/energy input prices, lower inflation and stable external outlook.

Input prices: Lower input prices should lead to margin expansion for thecement and steel sector in particular, alongside Paints. Refineries’ marginsshould also stay upbeat similar to growth exhibited in CY15.

Power woes expected to improve: Simultaneously, with fresh investmentbeing injected into the power sector, the severe energy bottleneck is expectedto be addressed, resulting in better outputs and earnings growth with higherpayouts during 2017-2018.

GDP, earnings and ROE: While Pakistan’s real GDP (4.5%) is in line withregional peers, earnings growth (3.4%) is lower than peers but ROE isoutpacing regional average, thus, Pakistan’s PE (8.1x; trading at a 40%discount to region) multiple warrants a stagnant if not rerating verdict, nottaking all other factors namely CPEC, low interest rates and reclassification toEM into consideration.


E&P/Banks to Remain Surprise CardsE&P/Banks to Remain Surprise CardsExEx--E&P exE&P ex--Banks Growth to Remain at 8.3%Banks Growth to Remain at 8.3%

Exhibit: Corporate Sector Earnings Growth: Trend & Forecast

Sector CY11 CY12 CY13 CY14 CY15E 5-Y Avg. CY16F

E&P 30.6 14.8 13.1 (4.1) (26.9) 5.8 (0.7)Banks 19.6 18.4 5.7 21.6 11.4 16.0 (2.7)Fertilizer 59.5 (30.9) 50.1 (3.7) 28.3 25.0 6.5 Cement 142.4 111.3 34.0 14.4 16.4 49.8 10.8 Oil & Marketing 1.7 (7.8) 43.7 (14.8) (21.9) 42.0 35.2 Autos 23.6 17.7 13.7 54.0 79.6 35.4 (5.3)Power 33.9 56.2 31.1 40.7 26.9 33.5 7.0 Textiles 7.9 39.2 23.5 (23.7) (11.5) 20.2 11.0 Telecom (19.7) 53.3 37.7 (66.9) 9.3 2.5 10.0 Cable & Electrical (715.3) (109.9) 428.3 269.1 46.3 (18.2) 8.7 AHL Universe - CY Basis 27.9 15.6 19.4 3.3 0.1 14.4 3.4 Ex. E&P 25.8 16.3 24.4 8.6 17.2 20.7 4.4 Ex. Banks 30.6 14.8 23.7 (1.5) (3.5) 14.0 6.2 Ex. E&P & Banks 30.5 14.7 38.0 1.3 21.1 24.9 8.3 Source: Companies Reports, AHL Research

Exhibit: AHL Universe growth story

Source: Company Financials, AHL Research

3.3% 0.1% 3.4%

22.7% 19.5% 18.1%

51.6% 51.1%47.5%

0%

10%

20%

30%

40%

50%

60%

2014 2015 2016

Earning Growth Return on Equity Payout Ratio

29

AHL Research Universe: Earnings growth in CY16 is estimated to remain at3.4%, the nominal growth is attributable to negative earnings growth in bothheavy weight E&P (-0.7%) and Banking Sector (-2.7%), which have acumulative ~50% weightage in our universe profitability. Lower oil prices shalladd to the negative growth in the E&P sector however, production gains andcompelling valuations would make it harder to ignore when deciding onportfolio allocations; whereas banking sector profitability is anticipated todecline amid reinvestment risk attributable to their PIB portfolio, thoughrealization of capital gains could lead to positive earnings surprises andhealthy returns.

Ex-banks and Ex-E&P: On the other hand ex-E&P ex-banks (AHL Universe)reveals profit growth (+8.3%), which is 2.2x the profit growth of the entire AHLUniverse (+3.7%). Ex-E&P growth is expected to be largely triggered by thefollowing key sectors i.e. Cement (+10.8%), Fertilizer (+6.5%), OMCs(+35.2%) and Cable & Electric (+8.7%).

Other key sectors: Our expectations for other key sectors are subject to aspectrum of drivers; for instance cement sector should reap benefits from softcoal prices, low interest rates and better PSDP utilization, while also gainingfrom CPEC related projects. Likewise, steel sector (not in coverage) shouldbenefit from rising economic activity. OMCs should remain in the limelight dueto improving operating cash flows attributable to weaker oil prices, robustofftake and minimal inventory losses. Our preference for the fertilizer sectorremains intact, however urea price decline remains a major risk to ourinvestment thesis. Additionally, insurance sector (not in our coverage) shouldnot be ignored due to improvement in their underwriting businesses and theirinvestment portfolios. While lower interest rates should lead to higherdisposable income and higher spending, thus consumer, auto andpharmaceutical sector could yield positive earning surprises. Last but not theleast, yield play IPPs should also be in focus on the back of record lowinterest rates and better liquidity.


Index Target 2016Index Target 2016KSE100 Index to Make Eyes with 38,044 pts Level KSE100 Index to Make Eyes with 38,044 pts Level

Exhibit: AHL Universe Valuation Snapshot

2011 2012 2013 2014 2015E 5-Y Avg.

2016 F

Earning Growth % 27.9 15.6 19.4 3.3 0.1 13.3 3.4 Earning Growth Ex. E&P % 25.8 16.3 24.4 8.6 17.2 18.5 4.4 E. Growth Ex. Banks % 30.6 14.8 23.7 (1.5) (3.5) 12.8 6.2 E. Growth Ex. Banks & E&P % 30.5 14.7 38.0 1.3 21.1 21.2 8.3 Price to Earning x 8.2 7.6 10.3 9.2 8.3 8.0 8.1 Dividend Yield % 5.1 5.7 4.3 5.6 6.1 5.8 5.9

Payout Ratio % 41.8 43.4 44.8 51.6 51.1 46.5 47.5 Source: Companies Financials, AHL Research

Exhibit: KSE100 Index Target Estimates 2016

Valuation Basis Target Weight BreakupJustified PE 39,049 20% 7,810

Average PE 34,090 10% 3,409 Regional PE 33,777 5% 1,689

Earnings Growth 33,944 30% 10,183

Target Price Based 48,787 20% 9,757 Regional PBV 35,398 5% 1,770

Regional DY 34,262 10% 3,426 Weighted Target 2016 38,044 Index Closing Dec'15 32,816 Source: AHL Research, * On the basis of adjustments to historical discounts

30

Re-rating imminent: In 2016, Pak equities’ re-rating is expected givenimproving macro indicators (lower inflation, better fiscals, improving law &order situation, potential inclusion in MSCI EM Index and completion ofprojects under China Pakistan Economic Corridor). These factors pointtowards a bull run for the economy in general, and equity market in particular.

Focus should be on fundamentals: We advise investors to keep both valuestocks and small caps in their radar. We believe blue chips could perform wellon continued macro improvement, while small caps could also experiencerobust returns on low commodity prices. Although it would be prudent to keepa check on eco-political news, we continue to recommend prioritizingfundamental value and earnings potential over other market related factors

The TARGET: Adjusting prevailing regional discounts to historical levels(average discount ranging 36%), chained with justified PE, Earnings Growthand the Target Price models, gives a weighted average KSE-100 IndexTarget of 38,044pts, another jump of ~5,228pts expected by 2016-end.

Possible risk factors: KSE100 Index may lag its underlying potential in 2016due to continuous slide in oil prices extending into 2016 (putting index-heavyOil sector under pressure), continuous foreign out flows and law & ordersituation. These are important and significant factors however we feel thatdrastic intraday movements will be limited as leveraged positions havedeclined.


Pakistan Stock ExchangePakistan Stock ExchangeAmalgamation of the Local Bourses Amalgamation of the Local Bourses

Exhibit: LSE25 volume & index trend…


4,500

5,000

5,500

6,000

6,500

7,000

-2,000 4,000 6,000 8,000

10,000 12,000 14,000 16,000

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Volume (LHS) LSE25 Index(000 Shrs)

31

With the integration of the Karachi, Lahore and Islamabad stock exchangesinto a single national stock exchange, “Pakistan stock exchange” (PSX) thisyear will mark a new era for the equity market in Pakistan.

Demutualization of the local bourses to integrate core operations is expectedby mid-January 2016. At present the three bourses operate independentlywith ISE and LSE, while the KSE dominates investor interest in capitalmarkets (USD 128mn).

Post integration we view an uptick in investment and trade (locally andinternationally) as the new stock exchange would bring benefits from wide-scale economies, as witnessed in several other countries that operate a lonestock market.

SECP will also find it easier to regulate the market and with the supervisorybody more vigilant, efficiency and transparency will eventually instill greaterinvestor confidence.

In conjunction with the above, we anticipate evaporation of the investment fogthat capitalists usually face when making the decision to invest in equities(choice between three bourses). It shall also promote national interests asvested parties collaborate to improve the sole market rather than focus onindividual ones.

We believe companies to be the biggest beneficiaries with retreating costs(listing fees of one bourse instead of three) tagged with greater investorattention owed to this amalgamation.

Pakistan Sectoral Strategies | 2016


Commercial Banks | 2016Bottoms Up



Exhibit: Sector's Key Statistics CY15

Listed Companies No. 24

Average Daily Turnover mn Shr. 25.4

Market Capitalization PKR mn 1,343,551

Market Capitalization USD mn 12,796

Sector Return % (7.9)

Price to Earnings x 8.2

Price to Book x 1.3

Return on Equity % 17.6

Return on Assets % 1.8

Dividend Yield % 8.4 Source: Bloomberg, AHL Research

Exhibit: Relative Performance


Sector PerformanceSector PerformanceCommercial BanksCommercial Banks

70%

80%

90%

100%

110%

120%

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

KSE100 Banking Sector

-

5.0

10.0

15.0

20.0

25.0

30.0

BA

FL

UB

L

AB

L

HB

L

RH

BC

MK

MC

B

MA

Y M

K

BP

I PM

BP

I PM

KM

B IN

Price to Earning

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

BA

FL

UB

L

AB

L

MC

B

HB

L

MA

Y M

K

RH

BC

MK

BP

I PM

BP

I PM

KM

B IN

Dividend Yield

-

1.00

2.00

3.00

4.00

5.00

6.00

BA

FL

RH

BC

MK

UB

L

AB

L

MA

Y M

K

HB

L

MC

B

BP

I PM

BP

I PM

KM

B IN

Price to Book

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

HB

L

MC

B

UB

L

AB

L

KM

B IN

BP

I PM

BP

I PM

MA

Y M

K

BA

FL

RH

BC

MK

Return on Equity

34


Rising case of deposits: The industry deposits currently stand at PKR~9.1trn as ofNov-15 showing a growth of 9.8% for 11MCY15. Significant here is the utilization offunds, which are predominantly being placed in investments with only a gradualchange in favor of advances. We estimate industry deposits to grow at an average of11.0%-11.6% till CY17, compared to average growth of 14.1% recorded in CY09-14.

Advances hoping for growth: CY15 in itself has not been much better as 11MCY15growth is at 5.1% compared to 8.0% in SPLY. Based on the slow uptick in privatesector growth (0.5% 10MCY15) we have taken a conservative growth assumption of6% for CY16 and 8% for CY17.

Reval gain: In CY16, NIMs will be kept in check on the back of asset re-pricing,where banks (mostly Big 5) with a backlog of capital gains and ample liquidity willbenefit the most.

Little change expected in IDR: The sector IDR as of Nov-15 stands at ~72% and weexpect it to hover around this level in CY16-17. The reason stems from limitedopportunities in advances, therefore; banks are to gain, albeit, at re-adjusted yieldswith bottomed out interest rates which are expected to pick up from 1HCY16.

Near the test depth: Banking spreads have declined by 51bps in 11MCY15 (Nov-15;5.29%), attributable to the substantial decline of 300bps in DR this year. However, webelieve spreads are near their lowest ebb, as a consistent increase in fresh spreads of48bps (Nov-15; 3.29%) since Aug-15 has been witnessed.

Cheap Valuations on offer: The banking sector has historically traded at an averageP/B of 1.6x during CY09-14. With a high of ~1.9x in 2013 and 2014. We are of theview that the decline in interest rates have been overplayed and the current sector P/Bof 1.4x is attractive going forward. Sector P/E similarly has traded at an average of8.7x for CY09-14 offering significant discount to CY15 P/E of 7.9x.

Risks Further stretch in global economic slowdown and political instability (ME) to adversely

effect international operations & loan book quality.

Sector OverviewSector OverviewBottoms UpBottoms Up

Exhibit: Industry dynamics


Exhibit: Spread between SBP OMO Rate, MTB and PIB


0%

10%

20%

30%

40%

50%

60%

70%

80%

01,0002,0003,0004,0005,0006,0007,0008,0009,000

10,000

CY12 CY13 CY14 11MCY15

Investments DepositsAdvances ADR (RHS)IDR (RHS)

8.4%

7.1%

6.4%6.0%

6.5% 6.3%

0

50

100

150

200

250

5.0%5.5%6.0%6.5%7.0%7.5%8.0%8.5%9.0%

1QCY15 2QCY15 3QCY15 4QCY15F 1QCY16F 2QCY16F

SBP OMO PIB Spread (RHS)MTB Spread (RHS)

(bps)

35

Exhibit: UBL P/Bx Band

Source: KSE, Company Financials, AHL Research

Exhibit: HBL P/Bx Band


Exhibit: MCB P/Bx Band


Exhibit: BAFL P/Bx Band


Sector OverviewSector OverviewSector SnapshotSector Snapshot

Exhibit: Financial Snapshot (Consolidated)PKR mn 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015E 2016F 2017FEarnings growth -2% 15% 20% 20% 18% 6% 22% 11% -3% 6%PER 11.3 8.5 8.5 6.8 7.6 10.3 10.5 7.9 8.1 7.6 Dividend Yield 2.2% 2.7% 3.2% 3.2% 4.0% 4.7% 5.2% 7.1% 6.8% 7.2%Earnings Yield 8.9% 11.8% 11.7% 14.7% 13.2% 9.7% 9.6% 12.7% 12.4% 13.2%ROE 19.6% 19.2% 19.5% 20.4% 20.7% 19.2% 20.1% 18.8% 16.4% 16.5%PBV 2.1 1.5 1.6 1.3 1.4 1.9 1.9 1.4 1.3 1.2 Payout Ratio 24% 23% 27% 22% 30% 48% 54% 56% 55% 54%Source: Company Financials, AHL Research

-

50

100

150

200

250

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Price P/B 0.5x P/B 0.9xP/B 1.2x P/B 1.6x P/B 1.9x

-

50

100

150

200

250

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5


-50

100 150 200 250 300 350

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5


-

10

20

30

40

50 Ja

n-10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5


36


Key Investment Theme Accumulating deposits: The bank has managed to increase its Deposit base at a

5yr CAGR (CY09-14) of 13.3% (Big-5 Avg 12.1%) and at 11.2% in 9MCY15 (Big53.6%). Of note is that the bank has not simply focused on CASA but also astutelyenhanced its fixed deposit base, locking in at lowest cost. The drive to have a strongfund base has equipped the bank to be flexible going forward based on CY16 depositgrowth of 10% and 11% in CY17.

Advances to grow on CPEC and macros: Advances growth in CY16-17 is expectedto average at 7% (CY15 5.1%), emanating from projects (CPEC/Power/Energyprojects) as well as growth in Retail segment.

PIBs in focus: UBL holds one of the largest PIB portfolios of PKR 434bn (61% ofInvestments) and MTB portfolio of PKR 150bn (21% of Investments), with an averagematurity/yield of ~3yrs/10.8% (PIBs). Unlike other Big4, UBL is least effected by thereinvestment risk due to delayed maturities and strong support from Non-InterestIncome head. With that said, we expect UBL to maintain asset reclassification towardsT-bills as the PIB yields have bottomed out.

Revaluation gains to support earnings: UBL has a 'Surplus on AFS portfolio' ofPKR 26.3bn (as of Sep'15), of which a certain percentage may be used for realizingCapital Gains and post positive earning surprises.

NII providing additional cushion: Fee commission and brokerage incomecontributed 15% to total income in CY11 gradually rising by a significant 4% to 19% inCY14. Going forward, we feel growth in Bancassurance, remittances, and branchlessbanking will drive the head at a 3yr forward CAGR of 8.1%.

UBL is our top pick amongst banks having a ‘BUY’ rating, offering a significantupside of 32% to our Target Price of PKR 204. With a 3yr forward earning CAGR of5%, the stock is currently trading at a P/B of 1.19x (Sector P/B 1.4x); P/E of 7.0x(Sector P/E 7.8x; offering a dividend yield of 8.4%).

Risks Clean Exposure on Yemen book (only USD 25mn = 0.48% of its total loan book). Possible exposure to UAE slowdown is insignificant, we believe, as most of the loan

book is extended to high worth clientele, with only 1% of UAE book in personal loans.

United Bank LimitedUnited Bank LimitedGunning for the Lead Gunning for the Lead

BUYTarget Price (Dec-2016) PKR 203.8Last Closing PKR 155.0Upside (%) % 31.5KSE Code UBL Bloomberg Code UBL PA

Share InformationMarket Capitalization USD mn 1,807Market Capitalization PKR mn 189,687Outstanding Shares mn 1,224Free Float % 4012M Avg. Daily Turnover mn Shr. 1.212M High | Low PKR 179.5 | 138.7 Major Shareholders Bestway Group

Relative Performance


80%

85%

90%

95%

100%

105%

110%

115%

Jan-

15

Jan-

15

Feb-

15

Mar

-15

Mar

-15

Apr

-15

May

-15

May

-15

Jun-

15

Jul-1

5

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Oct

-15

Nov

-15

Dec

-15

KSE100 UBL

37


Exhibit: Industry growth vs UBL growth

Source: SBP, Company Financials, AHL Research

Exhibit: Investment Mix


United Bank LimitedUnited Bank LimitedFinancial SnapshotFinancial Snapshot

Exhibit: Financial Snapshot (Consolidated)

PKR mn 2015E 2016F 2017FIncome StatementMark-up Income 56,377 54,857 59,235 Non-Mark-up Income 23,967 24,413 25,749 Total Income 81,178 80,101 85,829 OPEX 34,496 37,250 41,333 Post Tax Profit 27,077 26,964 27,932 Balance SheetAdvances 505,646 541,665 593,434 Deposits 1,068,541 1,172,056 1,301,658 Investments 746,218 786,167 831,320 Total Equity TIER - II 158,516 172,351 186,002 Revaluation Surplus 37,099 36,728 34,892

Ratio Analysis Unit 2015E 2016F 2017FPer ShareEarnings PKR 21.7 21.6 22.4 Dividend PKR 13.0 13.0 13.0 Book value PKR 129.5 140.8 151.9 Other Key RatiosPrice to Earning x 7.1 7.1 6.9 Price to Book x 1.2 1.1 1.0 ADR % 47.3 46.2 45.6 IDR % 69.8 67.1 63.9 NIMs % 4.8 4.1 4.1 ROE % 18.3 16.3 15.6 ROA % 2.1 1.8 1.8 Source: Company Financials, AHL Research

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

CY10 CY11 CY12 CY13 CY14 9MCY15

Deposit Growth Industry Deposits

-100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000

-50,000

100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 500,000

CY12 CY13 CY14 CY15 CY16 CY17

PIBs T-Bills Total investment at cost(PKR mn) (PKR mn)

38


Key Investment Theme Dominating deposits: Intensive efforts by the bank have enabled it to outpace the

industry, posting an average increase of 17% for CY11-15 (assuming a year endgrowth of 6% for 2015); HBL’s market share has subsequently increased to ~18%.

The CPEC Initiative: We have projected HBL’s advances to grow at a 5yr CAGR(CY14-19) of 7.4% with a major uptick coming in 2HCY17 emanating from CPECbased opportunities. The bank has further augmented its position in this regard withan agreement with the Industrial and Commercial Bank of China (ICBC) enabling it totake advantage by choosing projects offering the highest IRRs.

Changing investment mix: Major accumulation in PIBs was seen in CY14, rising bymore than 200% to PKR 304bn in total. PIBs further increased to PKR 354bn by9MCY15, accounting for 34% of investments. Simultaneously, 54% of investments arein T-bills making the asset side fairly liquid. The fact can be attributable to themanagement’s foresight to fund projects starting on the CPEC front.

Effective risk mitigation policies: Stringent risk parameters by management havefocused on quality loans, which has resulted in low NPL additions; resultantly, thecoverage ratio has improved from 83.2% Dec-14 to 87.8% Sept-15.

We have a ‘BUY’ call on the scrip offering an upside of 21% to our Target Price ofPKR 243/share. With a 3yr earnings CAGR of 2% the stock is currently trading at P/Bof 1.6x and a P/B of 8.4x.

Risks A major risk remains slower than expected rollout from the CPEC front.

The Federal Reserve (FED) and Habib Bank Limited (HBL) have entered into a ‘ceaseand desist order’. The notice entails a few regulatory and compliance breaches, forwhich the bank needs to submit a written plan to enhance compliance in the span of60 days. With a 0.9% contribution from the NY branch to the bottom-line, our view isthat the worst case scenario of any backlash of such nature would not be significant.

Habib Bank LimitedHabib Bank LimitedPrimed for CPEC or Advances uptickPrimed for CPEC or Advances uptick

BUYTarget Price (Dec-2016) PKR 243.2Last Closing PKR 200.1Upside (%) % 21.5KSE Code HBL Bloomberg Code HBL PA

Share InformationMarket Capitalization USD mn 2,796Market Capitalization PKR mn 293,547Outstanding Shares mn 1,467Free Float % 5012M Avg. Daily Turnover mn Shr. 0.812M High | Low PKR 227.9 | 161.0 Major Shareholders Agha Khan Fund



80%

85%

90%

95%

100%

105%

110%

115%

120%

Jan-

15

Jan-

15

Feb-

15

Mar

-15

Mar

-15

Apr

-15

May

-15

May

-15

Jun-

15

Jul-1

5

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Oct

-15

Nov

-15

Dec

-15

KSE100 HBL

39


Exhibit: Deposit Base vs Peer Banks


Exhibit: IDR standing out


Habib Bank LimitedHabib Bank LimitedFinancial SnapshotFinancial Snapshot

Exhibit: Financial Snapshot (Consolidated)PKR mn 2015E 2016F 2017FIncome StatementMark-up Income 67,445 75,585 78,603 Non-Mark-up Income 35,165 29,577 29,686 Total Income 102,611 105,163 108,290 OPEX 45,989 49,898 54,061 Post Tax Profit 34,995 34,422 33,770 Balance SheetAdvances 598,027 623,712 657,421 Deposits 1,576,235 1,773,265 1,994,923 Investments 1,253,484 1,187,205 1,226,537 Total Equity TIER - II 184,900 198,284 208,446 Revaluation Surplus 23,175 21,207 16,667


-200,000 400,000 600,000 800,000

1,000,000 1,200,000 1,400,000 1,600,000 1,800,000

CY0

7

CY0

8

CY0

9

CY1

0

CY1

1

CY1

2

CY1

3

CY1

4

9MC

Y15

NBP HBL MCB UBL ABL(PKR mn)

72% 76% 67% 62%49% 41% 40% 39% 42%

33% 22% 32% 34%45% 66% 59% 61%

76%

0%

20%

40%

60%

80%

100%

120%

140%

CY0

7

CY0

8

CY0

9

CY1

0

CY1

1

CY1

2

CY1

3

CY1

4

9MC

Y15

IDR ADR

40


Key Investment Theme Best CASA: While peer banks have focused on increasing market share over the

past 2yrs, MCB’s growth in terms of deposits has been limited, however, the quality ofdeposits has improved further based on an ever increasing CASA (5% increase in9MCY15 to 93%).

Advances, the Achilles’ Heel: The bank switched gears to a more risk aversestrategy for its loan book, evident from the flat advances during 9MCY15. The ADR isalso in a declining trend falling from 47% in Dec-14 to 43% in Sep-15. Our assumptionon advances is in line with the ongoing trend for the bank. Additionally, new fundsarising from an increase in deposit base are expected to be channeled intoinvestments, particularly T-Bills.

Highest IDR among peers: An IDR of 86% (9MCY15) further emphasizes the bank’swait-and-see approach as the current strategy seemingly aims at maximizing returnfrom available asset classes (PIBs/T-Bills) till focus on lending resumes. Slight shift ingovernment securities’ portfolio from PIBs to T-bills shows possible intent of themanagement to have a slight liquidity cushion incase lucrative lending opportunitiesarise.

Best asset quality: With the highest CAR of over 20%, coverage ratio of 85% alongwith an infection ratio of just 6.4%, emphasizes the superior asset quality of the bank.

Our Target Price works out at PKR 267/share offering an upside of 23%.Traditionally the stock has traded at a premium (over , however, currently trading atP/B of 1.6x and a P/E of 9.3x offers a . (3yr avg CAGR is 2.5%)

Risks Sluggish response to changing industry dynamics and tentativeness towards lending

outside the group may hurt earnings, as yields on investments are adjusted goingforward.

MCB Bank LimitedMCB Bank LimitedKing of Ratios King of Ratios –– What Next What Next

BUYTarget Price (Dec-2016) PKR 267.0Last Closing PKR 216.9Upside (%) % 23.1KSE Code MCB Bloomberg Code MCB PA

Share InformationMarket Capitalization USD mn 2,299Market Capitalization PKR mn 241,361Outstanding Shares mn 1,113Free Float % 4012M Avg. Daily Turnover mn Shr. 0.4 12M High | Low PKR 318.7 | 205.3 Major Shareholders Nishat Group



60%

70%

80%

90%

100%

110%

120%

Jan-

15

Jan-

15

Feb-

15

Mar

-15

Mar

-15

Apr

-15

May

-15

May

-15

Jun-

15

Jul-1

5

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Oct

-15

Nov

-15

Dec

-15

KSE100 MCB

41


Exhibit: 9MCY15 CASA vs Peers


Exhibit: King of ROA


MCB Bank LimitedMCB Bank LimitedFinancial SnapshotFinancial Snapshot

Exhibit: Financial Snapshot (Consolidated)PKR mn 2015E 2016F 2017FIncome StatementMark-up Income 47,610 46,234 48,842 Non-Mark-up Income 16,715 15,237 16,167 Total Income 64,325 61,471 65,009 OPEX 23,528 25,712 28,099 Post Tax Profit 25,964 23,201 23,828 Balance SheetAdvances 312,657 325,942 343,063 Deposits 714,804 804,155 916,273 Investments 640,312 665,476 709,473 Total Equity TIER - II 145,963 151,312 157,157 Revaluation Surplus 27,715 24,943 22,449


0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

2015 2016 2017

UBL HBL MCB ABL BAFL

40%

50%

60%

70%

80%

90%

100%NBP HBL MCB

42


Key Investment Theme Focused on Advances: The Bank successfully increased its loan book to PKR 304bn

with a CAGR of 8.8% during CY10-14 compared to industry CAGR of 6.7%. In9MCY15, the Bank managed to capture additional 4.0% of its Dec’14 loan book, whilethe industry grew only 2.4%. The Bank is expected to grow its advances in a similarfashion in CY16 at 7%.

Low cost helping NIMs: BAFL is diligently working to reduce its cost of depositsfurther through retirement of its Fixed Deposits, already down by 12% in 9MCY15; toprovide support to Net Interest Income and to maintain NIMs at an expected averageof 3.6% from CY16-17.

Rising IDR: Investments grew at a staggering +27% CAGR during CY09-14, reachingPKR 324bn or ~54% IDR and that too dominated by government securities, with PIBsat 57% and T-Bills at 9% of its total investments. We project the investments to growat an annual average of 9% in CY16-17, with PIB and MTB making up 80% of totalinvestments, at 10.0% and 7.5% average yields respectively.

Warid|Mobilink Transaction: Mobink’s acquisition/merger with Warid, brought BAFLunder limelight due to BAFL’s strategic share in Warid (8.76%). While we await furtherclarity, the transaction is understood to translate into 1.3% stake (8.76% * 15%) in theMergedCo.

Our Target Price of PKR 36.7/share offers a hefty 27% upside potential. The stockcurrently trades at 0.80x book value, which compares well to an average of 1.3x forpeers (BAHL, AKBL) and 1.5x for larger banks (HBL, UBL, MCB). Additionally thebank is also posed to deliver a baffling 3yr CAGR of 13%.

Risks A key concern with regards to Bank Alfalah has been its CAR outlook, considering the

potential loan growth in connection to CPEC, especially CY17 onwards. With thatsaid, we believe the strong support from the parent Abu Dhabi group as well asstrategic relations with IFC should provide the necessary support, if needed.

Bank Alfalah LimitedBank Alfalah LimitedTouching Gloves with the Heavyweights Touching Gloves with the Heavyweights

BUYTarget Price (Dec-2016) PKR 36.7Last Closing PKR 28.8Upside (%) % 27.3KSE Code BAFL Bloomberg Code BAFL PA

Share InformationMarket Capitalization USD mn 436 Market Capitalization PKR mn 45,818 Outstanding Shares mn 1,590 Free Float % 45 12M Avg. Daily Turnover mn Shr. 1.5 12M High | Low PKR 32.5 | 23.9 Major Shareholders Abu Dhabi Group



70%

75%

80%

85%

90%

95%

100%

105%

110%

115%

Jan-

15

Jan-

15

Feb-

15

Mar

-15

Mar

-15

Apr

-15

May

-15

May

-15

Jun-

15

Jul-1

5

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Oct

-15

Nov

-15

Dec

-15

KSE100 BAFL

43


Exhibit: Improved cost to income with freeze in Branch expansion


Exhibit: Historical NIMs and Income earned by investments


Bank Alfalah LimitedBank Alfalah LimitedFinancial SnapshotFinancial Snapshot

Exhibit: Financial Snapshot (Consolidated)PKR mn 2015E 2016F 2017FIncome StatementMark-up Income 28,884 28,074 28,700 Non-Mark-up Income 9,129 9,178 9,460 Total Income 38,013 37,252 38,160 OPEX 22,595 23,437 23,854 Post Tax Profit 8,341 7,711 8,220 Balance SheetAdvances 308,571 327,706 349,254 Deposits 627,745 657,397 699,673 Investments 386,117 415,504 462,283 Total Equity TIER - II 59,380 63,379 69,843 Revaluation Surplus 10,244 7,694 7,200


1,056

969 1,017

1,068 1,121

69%

66%

57%

61%

62%

50%52%54%56%58%60%62%64%66%68%70%

900

950

1,000

1,050

1,100

1,150

1,200

CY13 CY14 CY15E CY16F CY17F

Deposit Per BranchCost to Income (RHS) (%)(PKRbn)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

0%

10%

20%

30%

40%

50%

60%

CY08

CY09

CY10

CY11

CY12

CY13

CY14

CY15

E

CY16

F

CY17

F

CY18

F

CY19

F

NIMs (RHS) Income Earned by Investments (% of total)

44

Fertilizer | 2016Navigating Murky Waters






Market Capitalization PKR mn 748,234


Sector Return % 24.4


Price to Book x 2.7



Dividend Yield % 7.5Source: Bloomberg, AHL Research



Sector PerformanceSector PerformanceFertilizerFertilizer

80%

90%

100%

110%

120%

130%

140%

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

KSE100 Fertilizer Sector

-

5.0

10.0

15.0

20.0

25.0

CH

MB

IN

3983

HK

EFE

RT

EN

GR

O

FFC

CR

IN IN

FFB

L

IPL

AU

297

HK

0024

70 C

H

Price to Earning

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

FFC

EFE

RT

FFB

L

EN

GR

O

3983

HK

IPL

AU

CH

MB

IN

CR

IN IN

297

HK

0024

70 C

H

Dividend Yield

-

1.00

2.00

3.00

4.00

5.00

6.00

297

HK

3983

HK

CH

MB

IN

IPL

AU

EN

GR

O

EFE

RT

CR

IN IN

FFB

L

0024

70 C

H

FFC

Price to Book

2.0%

12.0%

22.0%

32.0%

42.0%

52.0%

62.0%

FFC

EFE

RT

FFB

L

EN

GR

O

CR

IN IN

0024

70 C

H

CH

MB

IN

IPL

AU

297

HK

3983

HK

Return on Equity

46


Key Investment Theme

Agriculture sector: The Agriculture sector is significant to Pakistan’seconomy, contributing ~21% to GDP, simultaneously ensuring food securityand providing employment to 45% of the population. Pakistan is an agrarianeconomy, seen by its exports, dominated by textiles

Guaranteed offtake: Fertilizer sector offtake has an average growth rate of2% for the last 10 years. Furthermore, average demand for urea is around5.6mn tons while average production is around 4.8mn tons, with residualdemand imported by the government.

Long term gas plan: Fertilizer sector is awaiting clarity on the long term gasplan earmarked by the government. The ECC has to reconfirm the gasallocation from Kunnar Pashaki Deep (KPD) field.

Pricing Power: Gauging the sharp plunge (31% YoY in CY15) in internationalurea prices amid lower demand and expected capacity additions in Chinaalong with weaker farm economics, the spread between local andinternational has narrowed down to 3%, leading to fresh doubts about thepricing power of local manufacturers. However, the recent announcement ofthe agriculture package as well as expectations of a rebound in internationalurea prices, we believe that the overall pricing power would sustain in CY16.

Risk

Failure to pass on the impact of gas price hike. Implementation of gas levy over and above GIDC, and failure of passing on of

the same to the farmer/end consumer. Further decline in the int’l urea prices.

Exhibit: Urea offtake and production

Source: NFDC, AHL Research

Exhibit: Fertilizer usage vs Production growth of important crops

Source: PBS, AHL Research,*Production is in thousand bales of 375 lbs. each

Fertilizer SectorFertilizer SectorNavigating Murky WatersNavigating Murky Waters

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

- 20,000 40,000 60,000 80,000

WheatFertilizer usage %age of total

(Production)

Cotton*

SugarcaneRice

Maize

80%

90%

100%

110%

120%

130%

140%

4.0

4.5

5.0

5.5

6.0

6.5

2009

A

2010

A

2011

A

2012

A

2013

A

2014

A

2015

E

ProductionOfftakeOfftake / Production (RHS)

(mn tons)

47


BUYTarget Price (Dec-2016) PKR 451.9Last Closing PKR 279.94Upside (%) % 61.7KSE Code ENGROBloomberg Code ENGRO PA

Share InformationMarket Capitalization USD mn 1,394Market Capitalization PKR mn 146,340Outstanding Shares mn 524Free Float % 5012M Avg. Daily Turnover mn Shr. 4.112M High | Low PKR 331.5 | 210.1Major Shareholders Dawood Group




Earnings to grow at a 5-year CAGR of 26%: We expect the company topost 5-year profitability CAGR of 26%. The expected growth is primarily drivenfrom 1) EFERT, where we assume recurring concessionary gas along withsynergies from DAP trading business, 2) Foods business (EFOODS), which isexpected to be back on track with increasing volumes and stable margins, 3)Power business, which is likely to remain stable amid secure gas supply, and4) Future power projects of ~USD 2bn.

What is in the value pie: The flagship business (EFERT) is expected toprovide major value to ENGRO, contributing 50% to our SoTP based targetprice. We view that even in the case of gas diversion in CY16, the investmentcase is expected to remain intact amid higher utilization of EnVen andconcessionary gas flows. Additionally, the DAP trading business is alsoexpected to contribute in EFERT’s earnings going forward. EFOODS is thesecond major contributor in our ENGRO valuation adding 44% to the totalvalue, we believe higher consumer spending in conjunction with revival ofvolumes and margins would unleash new horizons for the fast growing foodbusiness. Engro Powergen (via Engro Powergen Qadirpur Limited)contributes 3% to our valuations.

Future Coal projects: Future power projects of ~USD 2bn which includeSECMC mining project amounting to USD 800mn and Engro Powergen TharPower Limited (EPTPL) mine-mouth 330MWx2 coal power plant, of value ofUSD 1,200mn. We estimate EPTPL will contribute PKR 46.23/share to ourtarget price of ENGRO assuming 65% stake of Engro Powengen, 30.65%RoE and 75:25 debt to equity ratio, while upside from SECMC mining projectwill be PKR 8.14/share assuming 22% stake of Engro Powergen, 27% RoEand 75:25 debt to equity ratio.

Risks

Unavailability of concessionary gas, any change in the cumulative gas plan,subdued dairy margins and volumes, further loss from rice business.

EngroEngro Corporation LimitedCorporation LimitedDiversification is Key Diversification is Key

80%

90%

100%

110%

120%

130%

140%

150%

160%

Jan-

15

Jan-

15

Feb-

15

Mar

-15

Mar

-15

Apr

-15

May

-15

May

-15

Jun-

15

Jul-1

5

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Oct

-15

Nov

-15

Dec

-15

KSE100 ENGRO

48


Exhibit: PAT & Net Margins


Exhibit: Decreasing interest expense and Debt to Equity…


Exhibit: Financial SnapshotPKR mn 2014A 2015E 2016FIncome StatementSales 175,958 150,700 163,821 Gross Profit 29,949 47,938 53,027 Other Income 3,719 3,119 3,312 Finance Cost 12,344 8,472 7,295 Post Tax Profit 7,007 13,557 17,501 Balance SheetShareholder's Equity 68,025 75,924 88,294 Non-Current Liabilities 62,187 45,837 35,081 Total Liabilities 149,062 116,984 104,333 Current Assets 76,290 63,334 67,531 Non-Current Assets 140,796 129,574 125,096

Ratio Analysis Unit 2014A 2015E 2016FPer ShareEarnings PKR 14.9 25.9 33.4 Dividend PKR 6.0 14.0 16.0 Book value PKR 130.1 145.2 168.8 Other Key RatiosPrice to Earning x 18.8 10.8 8.4 Dividend Yield % 2.1 5.0 5.7 Price to Book x 2.2 1.9 1.7 Net Margins % 4.0 9.0 10.7 Pay out ratio % 40.3 54.1 47.9 ROE % 10.3 17.9 19.8 ROA % 3.2 7.0 9.1 Source: Company Financials, AHL Research

Financial SnapshotFinancial SnapshotEngroEngro Corporation LimitedCorporation Limited

7.8 7.0

13.6

17.5

22.1

-

5.0

10.0

15.0

20.0

5.0

10.0

15.0

20.0

25.0

CY1

3A

CY1

4A

CY1

5E

CY1

6F

CY1

7F

PAT Net Margins (RHS)(PKR bn) (%)

15.6

12.3

8.5

7.3 6.1

-

0.5

1.0

1.5

2.0

2.5

5.0

7.0

9.0

11.0

13.0

15.0

17.0

CY1

3A

CY1

4A

CY1

5E

CY1

6F

CY1

7F

Interest Expense Debt to Equity (RHS)(PKR bn) (x)

49


BUYTarget Price (Dec-2016) PKR 139.3Last Closing PKR 118.0Upside (%) % 18.1KSE Code FFCBloomberg Code FFC PA

Share InformationMarket Capitalization USD mn 1,430Market Capitalization PKR mn 150,099Outstanding Shares mn 1,272Free Float % 5512M Avg. Daily Turnover mn Shr. 1.712M High | Low PKR 153.1 | 107.1Major Shareholders Fauji Foundation




Operational excellency: The 2nd largest urea manufacturer with highestmarket share, stands as the most secure investment in the sector in terms oflower gas curtailment, (the company suffers lowest gas outages, around 8%-12% on annual basis).

Diversification: With the successful transaction of 28% stake in Askari BankLtd (AKBL), Fauji Foundation and Fauji Fertilizer Bin Qasim back in Sept-13,the company has started reaping profit with CY14 dividend income of PKR702mn (EPS impact of PKR 0.55 for FFC). Going forward, we believe thatAKBL will maintain its payout ratio and will distribute PKR 2/share in CY15and PKR 2.5/share in CY16. The dividend income does not stop here asFFC’s venture into wind power business with FFC Energy Limited CoD inMay-13 will start to pay dividend in CY15. The business posted profit after taxof PKR 735mn. Assuming payout ratio of 90%, we believe that the annualcontribution in FFC would be PKR 662mn (pre-tax FFC EPS PKR 0.52/share)in CY16F.

Operational excellency: With the completion of the debottlenecking processfor all three of its plants, the company has an ability to operate at 125%capacity (3-year average) amid secure gas supply from the Mari field.

Lucrative yields: High dividend payout ratio of (3-year average at 90%)translates into attractive dividend yield of 11.0% for CY16 (compare it with 1-year T-bill that is trading at 6.4%).

Risks

Gas tariff hike/inability to pass on the same, for every PKR 10/mmbtuincrease in feed and fuel gas earnings would erode by PKR 0.37/share (PKR17/bag increase in urea price to neutralize the impact).

Reduction in price of urea by PKR 50/bag will hurt FFC’s EPS by PKR 1.1

FaujiFauji Fertilizer Company LimitedFertilizer Company LimitedRevenue Streams Starting to Deliver Revenue Streams Starting to Deliver

80%

90%

100%

110%

120%

130%

140%

150%

Jan-

15

Jan-

15

Feb-

15

Mar

-15

Mar

-15

Apr

-15

May

-15

May

-15

Jun-

15

Jul-1

5

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Oct

-15

Nov

-15

Dec

-15

KSE100 FFC

50


Exhibit: DPS & Payout ratio


Exhibit: Margins Comparison


Exhibit: Financial SnapshotPKR mn 2014A 2015E 2016FIncome StatementSales 81,240 77,415 79,737 Gross Profit 28,783 28,663 29,413 Other Income 4,721 5,420 5,809 Finance Cost 849 1,209 976 Post Tax Profit 18,171 17,317 17,948 Balance SheetShareholder's Equity 25,959 28,013 29,425 Interest Bearing Liabilities 12,806 10,467 9,374 Total Liabilities 45,857 44,353 44,199 Current Assets 30,901 30,550 31,017 Non-Current Assets 40,915 41,815 42,607


FaujiFauji Fertilizer Company LimitedFertilizer Company LimitedFinancial SnapshotFinancial Snapshot

15.4

13.7

12.0

13.0 13.0

85.0

87.0

89.0

91.0

93.0

95.0

97.0

99.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0

CY1

3A

CY1

4A

CY1

5E

CY1

6F

CY1

7F

DPS Payout Ratio (RHS)(PKR) (%)

20.0

25.0

30.0

35.0

40.0

45.0

50.0

CY1

3A

CY1

4A

CY1

5E

CY1

6F

CY1

7F

Gross Margins EBITDA Margins Net Margins(%)

51

Exploration & Production | 2016A New Kind of Flood: ‘Oil’ Flood










Price to Book x 1.6



Dividend Yield % 8.4




Sector PerformanceSector PerformanceExploration & ProductionExploration & Production

50%

60%

70%

80%

90%

100%

110%

120%

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

KSE100 E&P Sector

-

5.0

10.0

15.0

20.0

25.0

OG

DC

OIN

L IN

PP

L

PO

L

883

HK

1662

JP

WP

L A

U

OS

H A

U

Price to Earning

0.0%1.0%

2.0%3.0%

4.0%

5.0%6.0%

7.0%8.0%

9.0%

PO

L

OG

DC

OIN

L IN

PP

L

WP

L A

U

883

HK

OS

H A

U

1662

JP

Dividend Yield

-

0.50

1.00

1.50

2.00

2.50

1662

JP

883

HK

PP

L

OG

DC

WP

L A

U

OIN

L IN

OS

H A

U

PO

L

Price to Book

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

PO

L

OG

DC

WP

L A

U

OIN

L IN

883

HK

PP

L

OS

H A

U

1662

JP

Return on Equity

53


No Signs of Easing Global Supply Glut in near future Crude oil nosedived in CY15: Prices of crude oil plunged during CY15, on the

back of supply glut amid sluggish demand, with Arab Light Crude falling 43%during the year (Brent and WTI down 35% and 29%, respectively).

Gearing for a long-fought battle for market share: OPEC (which accountedfor ~40% of world crude oil production in CY15), repudiated any barriers to itsproduction (4th Dec meeting), while other major producers (US & Russia) alsocontinue to battle for market share.

Demand nowhere near supply: The current downslide is majorly due to anupsurge in oil production. Additionally, factors such as declining demand frommajor consumers (China and emerging markets) may also keep oil pricesdepressed in CY16.

It may get worse: With Iran (planning to pump ~0.5mn bpd initially) and US oilexporters poised to return to global markets, oil glut situation may get worse,we view. Further expected rate hikes by the Fed, resulting in a strongergreenback may put additional pressure on prices during CY16.

Oil prices to stay range-bound in CY16 OPEC’s view: As per OPEC’s recent publication “World Oil Outlook”,

production from OPEC can reduce to 30.9mn bpd in CY16 from current~31.5mn bpd thereby supporting oil prices.

Fiscal breakeven paints a supportive picture: The IMF’s fiscal breakevenprices range between a high of $180/bbl (Libya) to as low as $56.2/bbl (Qatar).We anticipate that with Saudi Arabia facing a fiscal deficit along with othercountries, like Venezuela which are at the brink of bankruptcy, oil prices shouldstart to rebalance next year amidst volatility.

Our assessment: We estimate oil prices to remain sluggish in CY16 with ourassumption at $40/bbl in FY16 and $45/bbl in FY17.

Exhibit: Trend of WTI and Arab Light


Exhibit: Petroleum Demand and Supply

Source: BP, EIA, AHL Research

International Oil PricesInternational Oil PricesThe ‘GLUT’The ‘GLUT’

79,000 81,000 83,000 85,000 87,000 89,000 91,000 93,000 95,000 97,000

CY0

5

CY0

6

CY0

7

CY0

8

CY0

9

CY1

0

CY1

1

CY1

2

CY1

3

CY1

4

CY1

5E

CY1

6F

Global Supply Global Consumption(000 BPD)

-20 40 60 80

100 120 140 160

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11Ju

l-11

Jan-

12Ju

l-12

Jan-

13Ju

l-13

Jan-

14Ju

l-14

Jan-

15Ju

l-15

WTI Arab Light(USD/bbl)

54

Ups and Downs: A Brief History of Arab lightUps and Downs: A Brief History of Arab light

-

20

40

60

80

100

120

140

160 Ja

n-00

Jul-0

0Ja

n-01

Jul-0

1Ja

n-02

Jul-0

2Ja

n-03

Jul-0

3Ja

n-04

Jul-0

4Ja

n-05

Jul-0

5Ja

n-06

Jul-0

6Ja

n-07

Jul-0

7Ja

n-08

Jul-0

8Ja

n-09

Jul-0

9Ja

n-10

Jul-1

0Ja

n-11

Jul-1

1Ja

n-12

Jul-1

2Ja

n-13

Jul-1

3Ja

n-14

Jul-1

4Ja

n-15

Jul-1

5

Chinese Growth takes off

Financial Crisis 2008-09

Arab Spring

Iran Nuclear Tension

Yemen Conflict

Peak of USD 143/bbl

OPEC price war

OPEC Decision

55



Dent in profitability to be compensated with additions Negative sentiments overplayed: In our view, market has overstressed the

impact of falling oil prices (43% dip), thus market capitalization of AHL E&Puniverse contracted by 39% in CY15. Ignoring the contribution from fixed pricegas fields, the sector witnessed an exodus of foreign investors with net outflowof $50mn in CY15 attributable to creeping oil prices.

Conversion to PP-12, a key trigger: Recently, E&P companies haveexecuted agreements for 48 blocks to adopt Petroleum Policy 2012. Theconversion will allow companies to price any new exploratory discovery atfavorable rates under new policy. This option further extends to a minimum of10% additional production from existing wells in opted blocks. Even at $30/bbl,PP12 offers gas at a price of $5.34/mmbtu compared to $4.45/mmbtu and$3.7/mmbtu in PP09 & PP01 (before zonal discounts), respectively.

Additions to support earnings: With significant additions coming online, weexpect earnings of our E&P universe to cushion the blow of lower oil prices inFY16E and FY17F. Our estimates suggest, the production (boe) ofOGDC/PPL/POL will grow at a 2-Yr CAGR of 5%/3%/11% during FY15-FY17F,respectively.

PKR depreciation to cushion revenues: Monetary tightening in US signalsfurther weakening of PKR against the green back, going forward. Concurrently,with revenues inherently linked to USD, we expect this to further stimulateprofitability.

Outlook Forward P/E of the sector warrants an investment case: In our view, E&P

scrips are trading at attractive levels (FY16 PER of 7.9x vs. 5-Yr average of8.2x), we advise investors with a medium-long-term horizon to accumulateE&P stocks.

As per our calculations the market has adjusted for oil prices with averageimplied price of USD 30.8/bbl. For AHL E&P universe.

Exhibit: Implied Oil Prices

Source: Company Reports, AHL Research

Exhibit: Gas prices before zonal discounts under different Petroleum Policies

Source: PPIS, AHL Research

Exploration and ProductionExploration and ProductionLocal E&P’s Fighting BackLocal E&P’s Fighting Back

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

PP97 PP01 PP09 PP12(USD/MMBTU)

(USD /bbl)

31

34

17

12

17

22

27

32

37

OGDC PPL POL

Implied Prices(USD/bbl)

56


Old Lion to Stand TallOld Lion to Stand Tall

Key Investment Theme Global oil prices yanks the scrip downhill: The market capitalization of

OGDC shrank 43% in CY15TD, outpacing the 30% decline exhibited by theAHL E&P universe (ex-OGDC). Importantly, even in a volatile year for oil, thestandard deviation of daily returns of OGDC remained lowest in our universewith OGDC at 1.70% (PPL: 1.76% and POL: 1.75%)

Gas epitomizes larger portion of turnover: As of 1QFY16, gas represented~65% of revenues for OGDC (POL: 34%, PPL: 65%) with ~30% of gasproduction coming from fixed wellhead fields (PPL: ~3%, POL: ~11%).Resultantly, we view the company as less vulnerable to decline in oil prices,compared to its peers.

Additions to corroborate profitability: We anticipate the impendingproduction additions to expand OGDC’s production base from 89mn to 95mnboe in FY16 and 97mn boe in FY17.

Possible acquisition to add impetus to earnings: According to ourcalculations, possible acquisition of Premier Oil Pakistan (POP) can add4.2mn boe to current production, contributing ~PKR 0.6-1.0/share to itsbottom-line.

Potential upside of 42% - BUY: According to our Dec-16 Reserve-basedDCF valuation of PKR 165.83/share, the stock offers an upside of 41%.Moreover, the share is trading at a forward FY16/17 PER of 7.1/6.0x, cheapestamong its peers.

Risks Dwindling oil prices and unexpected PKR appreciation against USD Delay in hydrocarbon production additions One-off expenses i.e. Impairment and Drywells

Oil and Gas Development CompanyOil and Gas Development Company

BUYTarget Price (Dec-2016) PKR 165.8Last Closing PKR 117.3Upside (%) % 41.3KSE Code OGDC Bloomberg Code OGDC PA

Share InformationMarket Capitalization USD mn 4,606Market Capitalization PKR mn 504,671Outstanding Shares mn 4,301Free Float % 1512M Avg. Daily Turnover mn Shr. 0.912M High | Low PKR 213.0| 111.4 Major Shareholders Govt of Pakistan



50%

60%

70%

80%

90%

100%

110%

120%

Jan-

15

Jan-

15

Feb-

15

Mar

-15

Mar

-15

Apr

-15

May

-15

May

-15

Jun-

15

Jul-1

5

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Oct

-15

Nov

-15

Dec

-15

KSE100 OGDC

57


Exhibit: P/E band

Source: Company Financials, Bloomberg, AHL Research

Exhibit: Revenue contribution of oil & gas


Exhibit: Financial SnapshotPKR mn 2015A 2016E 2017FIncome StatementSales 210,625 178,094 206,524 Gross Profit 131,967 103,435 124,170 Other Income 19,186 16,947 18,000 Finance Cost 2,550 2,703 2,865 Post Tax Profit 87,249 71,407 84,700 Balance SheetShareholder's Equity 442,521 484,442 536,291 Total Liabilities 111,270 88,515 96,455 Current Assets 219,779 229,859 277,976 Non-Current Assets 334,013 343,098 354,770

Ratio Analysis Unit 2015A 2016E 2017FPer ShareEarnings PKR 20.3 16.6 19.7 Dividend PKR 7.8 6.6 7.9 Book value PKR 102.9 112.6 124.7 Price RatiosPrice to Earning x 5.8 7.1 6.0 Dividend Yield % 6.6 5.6 6.7Price to Book x 1.1 1.0 0.9 Profitability RatiosGross Margins % 62.7 58.1 60.1EBITDA Margins % 61.5 55.7 57.3Net Margins % 41.4 40.1 41.0Source: Company Financials, AHL Research

Financial SnapshotFinancial SnapshotOil and Gas Development CompanyOil and Gas Development Company

46% 49% 48% 47% 39%

51% 47% 50% 50% 58%

0%

20%

40%

60%

80%

100%

120%

FY11A FY12A FY13A FY14A FY15A

Gas Oil

-50

100 150 200 250 300

Jun-

07D

ec-0

7Ju

n-08

Dec

-08

Jun-

09D

ec-0

9Ju

n-10

Dec

-10

Jun-

11D

ec-1

1Ju

n-12

Dec

-12

Jun-

13D

ec-1

3Ju

n-14

Dec

-14

Jun-

15

Price PE (3.0x) PE (4.8x)PE (6.5x) PE (8.3x) PE (10.0x)

58


BUYTarget Price (Dec-2016) PKR 155.1 Last Closing PKR 121.8 Upside (%) % 27.3 KSE Code PPL Bloomberg Code PPL PA

Share InformationMarket Capitalization USD mn 2,287 Market Capitalization PKR mn 240,175 Outstanding Shares mn 1,972 Free Float % 24 12M Avg. Daily Turnover mn Shr. 1.2 12M High | Low PKR 179.3 | 106.7 Major Shareholders Govt of Pakistan



Aggressive Exploration; Ignoring Oil PriceAggressive Exploration; Ignoring Oil Price

Key Investment Theme Larger exploration costs correlate with earnings: Exploration costs grew at

a 5-Yr CAGR of 30% from PKR 4.5bn in FY11 to PKR 13.1bn FY15.Resultantly, number of exploration wells drilled increased from 1 in FY11 to 8 inFY15 tagged with plans to spud 14 (OGDC:17) exploration wells in FY16despite dwindling oil prices. In our view, increased exploration activities havestarted yielding paybacks, inferred from recent exploratory discoveries in DhokSultan X-1 and Hatim X-1 (cumulative impact of PKR ~1.5/share).

Recent fuel discoveries to back profitability: We anticipate substantialadditions to company’s production from TAL block accompanied by GambatSouth, Kirthar and Hala blocks. Our estimates suggest production to increasefrom 59mn boe in FY15 to 60mn boe in FY16 and 63mn boe FY17.

Upgradation of Sui to PP12: The government authorities allowed Sui Gasfield prices to be revised as per PP12. Based on our estimates, at oil pricesaround USD 35/bbl, PPL will benefit from prices of ~PKR 191/mmbtu (~PKR131/mmbtu under PP97). While any new exploratory well or incrementalproduction (min 10%) from existing wells would be eligible under PP12.

Scrip offers 34% Dec-16 upside: According to our Dec-16 Reserve-basedDCF valuation of PKR 155.06/share, PPL offers a 27.3% upside with the stocktrading at forward FY16/17 PER of 9.6/8.3x.

Risks Non-Extension of Sui mining lease, interim lease extension allowed (expiry in

May’16) Declining oil prices and unexpected PKR appreciation against USD Delay in hydrocarbon additions would hamper expected production growth Oil prices below $35/bbl can impact the bottom-line negatively (~10% of gas

production qualifies under PP01)

Pakistan Petroleum LimitedPakistan Petroleum Limited

60%

70%

80%

90%

100%

110%

120%

Jan-

15

Jan-

15

Feb-

15

Mar

-15

Mar

-15

Apr

-15

May

-15

May

-15

Jun-

15

Jul-1

5

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Oct

-15

Nov

-15

Dec

-15

KSE100 PPL

59


Exhibit: P/E band


Exhibit: Oil & gas Production


Exhibit: Financial SnapshotPKR mn 2015A 2016E 2017FIncome StatementSales 104,377 79,250 88,144 Gross Profit 71,002 45,002 51,912 Other Income 7,569 7,234 7,082 Finance Cost 554 305 285 Post Tax Profit 34,253 25,398 29,562 Balance SheetShareholder's Equity 191,957 204,928 220,026 Total Liabilities 55,719 53,175 55,624 Current Assets 97,689 108,776 128,295 Non-Current Assets 149,987 149,327 147,355


Financial SnapshotFinancial SnapshotPakistan Petroleum LimitedPakistan Petroleum Limited

57.0

58.0

59.0

60.0

61.0

62.0

63.0

64.0

FY14 FY15 FY16 FY17

Oil & Gas Production - boe(BOE)

-

50

100

150

200

250

Jun-

07D

ec-0

7Ju

n-08

Dec

-08

Jun-

09D

ec-0

9Ju

n-10

Dec

-10

Jun-

11D

ec-1

1Ju

n-12

Dec

-12

Jun-

13D

ec-1

3Ju

n-14

Dec

-14

Jun-

15

Price PE (3.0x) PE (4.5x)PE (6.0x) PE (7.5x) PE (9x)

60


BUYTarget Price (Dec-2016) PKR 390.6 Last Closing PKR 268.0 Upside (%) % 45.7 KSE Code POL Bloomberg Code POL PA

Share InformationMarket Capitalization USD mn 604 Market Capitalization PKR mn 63,399 Outstanding Shares mn 237 Free Float % 46 12M Avg. Daily Turnover mn Shr. 0.5 12M High | Low PKR 382.9 | 266.0 Major Shareholders Attock Group



Tal Block Additions Pivotal for POLTal Block Additions Pivotal for POL

Key Investment Theme Limited downside risk with lowest implied price: At current levels, the stock

trades at the lowest implied oil price of $17/bbl in AHL E&P Universe,compared to latest oil price of $31/bbl (45% discount). As per our sensitivityanalysis, for every $5/bbl increase in crude oil prices, the company’s earningsfor FY16 surge by ~6.5% (highest compared to peers). Thus, with any positivemovement in oil prices going forward, POL shall be the biggest beneficiary.

Additions from TAL block to play pivotal role: With additions from MakoriEast-4 already contributing to hydrocarbon production, we expect Maramzai-3and Mardankhel-1 coupled with other additions to supplement the hydrocarbonproduction from 6.9mn boe in FY15 to 7.4mn/8.5mn boe in FY16/FY17,concurrently increasing the bottom-line by 33% in FY17 from FY16.

Alluring yield-play in AHL E&P universe: We anticipate the company torecord a dividend yield (DY) of 8%/11% in FY16/17 respectively, highestamongst peers. Dividend Yield another aspect of the scrip has a spread of1.6% and 4.6% over the current 1-Yr T-Bill rates in FY16 and FY17,respectively.

Trading at attractive valuations: According to our Dec-16 Reserve-basedDCF valuation of PKR 390.6/share, the stock offers a substantial upside of48%. At present, the share is trading at a forward FY16/17 PER of 10.6/7.7x. Inaddition the company has highest earnings growth rate of 37%, among peers,in FY17.

Risks A plunge in hydrocarbon production from TAL block will drastically impact

revenues (company’s reliance on the block for production Oil: 66%, Gas:75%). Oil prices below $35/bbl will dent profitability since ~75% of gas production

qualifies under PP01. Deteriorating oil prices and unexpected PKR appreciation against USD. Delay in hydrocarbon additions to hurt expected production growth

Pakistan Oilfields LimitedPakistan Oilfields Limited

75%

80%

85%

90%

95%

100%

105%

110%

115%

Jan-

15

Jan-

15

Feb-

15

Mar

-15

Mar

-15

Apr

-15

May

-…

May

-…

Jun-

15

Jul-1

5

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Oct

-15

Nov

-15

Dec

-15

KSE100 POL

61


Exhibit: P/E band


Exhibit: Oil & gas production


Exhibit: Financial SnapshotPKR mn 2015A 2016E 2017FIncome StatementSales 30,881 25,250 29,082 Gross Profit 16,267 10,986 13,446 Other Income 1,563 1,457 1,365 Finance Cost 987 1,086 1,194 Post Tax Profit 8,459 5,937 8,158 Balance SheetShareholder's Equity 32,364 29,983 32,433 Total Liabilities 23,080 20,112 21,776 Current Assets 20,245 12,854 14,150 Non-Current Assets 35,199 37,242 40,059


Financial SnapshotFinancial SnapshotPakistan Oilfields LimitedPakistan Oilfields Limited

6.0

6.5

7.0

7.5

8.0

8.5

9.0

FY14 FY15 FY16 FY17

Oil & Gas Production - boe(BOE)

-

100

200

300

400

500

Jun-

07D

ec-0

7Ju

n-08

Dec

-08

Jun-

09D

ec-0

9Ju

n-10

Dec

-10

Jun-

11D

ec-1

1Ju

n-12

Dec

-12

Jun-

13D

ec-1

3Ju

n-14

Dec

-14

Jun-

15

Price PE (1.5x)PE (3.5x) PE (5.5x)

62

Sector OverviewSector OverviewSector SnapshotSector Snapshot

Exhibit: Oil and Gas Revenue Bifurcation

FY13 FY14 FY15 FY16 FY17Oil and Gas division Oil Gas Oil Gas Oil Gas Oil Gas Oil Gas

OGDC 52% 46% 52% 45% 45% 52% 34% 64% 38% 60%

PPL 34% 65% 42% 56% 38% 59% 29% 68% 33% 64%

POL 53% 28% 60% 25% 53% 25% 39% 30% 41% 30%


Exhibit: Sensitivities of Earnings to crude oil prices

EPS (PKR) USD 25/bbl USD 30/bbl USD 35/bbl USD 40/bbl* USD 45/bbl** USD 50/bbl

FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17 FY16 FY17

OGDC 15.1 13.5 15.6 15.2 16.1 16.9 16.6 18.4 17.1 19.7 17.6 21.3

PPL 11.8 9.9 12.2 11.4 12.5 12.7 12.9 14.0 13.2 15.0 13.6 16.4

POL 20.4 19.7 22.0 23.4 23.5 27.1 25.1 30.9 26.7 34.5 28.2 38.3


*We have assumed an average of USD 40/bbl for 2HFY16, taking our average for FY16 to USD 43/bbl

**We have assumed an average of USD 45/bbl for FY17

63

Cement | 2016Structural Integrity: Strong










Price to Book x 2.3






Sector PerformanceSector PerformanceCementCement

80%

90%

100%

110%

120%

130%

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

KSE100 Cement Sector

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

FEC

TC33

23 H

KA

CP

LD

GK

CM

LCF

FCC

L18

93 H

KK

OH

CLU

CK

GR

AS

I…S

CC

C T

BC

MS

MK

Price to Earning

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

AC

PL

FCC

LFE

CTC

SC

CC

TB

KO

HC

DG

KC

MLC

FC

MS

MK

3323

HK

1893

HK

LUC

KG

RA

SIM

IN

Dividend Yield

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

1893

…

3323

…

DG

KC

FEC

TC

GR

A…

AC

PL

LUC

K

MLC

F

FCC

L

CM

S …

KO

HC

SC

C…

Price to Book

6.0%

11.0%

16.0%

21.0%

26.0%

31.0%

36.0%

MLC

FK

OH

CFC

CL

AC

PL

FEC

TCLU

CK

SC

CC

TB

3323

HK

DG

KC

CM

S M

KG

RA

SIM

IN18

93 H

K

Return on Equity

65


Key Investment Theme Demand to remain buoyant: The government announced historic high

PSDP figure of PKR 1.5tn massively up 27% YoY for FY16. Furthermore, withthe commencement of CPEC related projects, government‘s long termstrategic projects (Diamir basha Dam and Dasu hydro power project) and highend housing schemes (DHA and Bahria), are all set to support the cementdemand in the country. We expect the local demand to jump 7% YoY in FY16.

Stable pricing power intact: Cement prices rose by an YoY average of 10%(PKR 100/bag) since FY12. However, with recent drop in commodity prices,cement prices posted a meager decline to 1% YoY in 1HFY16. We view thatgiven strong demand in local market, prices are expected to remain stablegoing forward.

Sluggish coal price continues: Average coal prices have massivelydropped to USD ~52.9/ton down 22.7% YoY in 1HFY16 after hovering aroundUSD 64.5/ton (down 16.6% YoY) in FY15, which should lead to marginexpansion for cement players. Also, with financial commitment of majorplayers for recent capacity additions (LUCK, DKGC, CHCC, ACPL andKOHC) and investment in coal-based IPPs (Nishat group and LUCK), webelieve that the marketing arrangement would remain intact.

Export front to remain subdued: Downward pressure in int’l cement prices,Anti dumping duty in South Africa and influx of Iranian cement in Afghanistanare the key reasons for declining exports for local sector. We expect thesector to post 16% YoY drop in total exports

Risks Upward volatility in coal or downward pressure on cement, expected hike in

gas tariff (LUCK, DGKC and MLCF to be affected) Any negative development related marketing arrangement. Loss of sales on the export front Electricity tariff hikes

Cement SectorCement SectorStructural Integrity: StrongStructural Integrity: Strong

Exhibit: Upcoming Hydel Projects

Project Capacity (MW)

Diamir Bhasha Dam 4,500 Dasu Dam 4,320 Karot Hydropower Project 720 Suki Kinari Hydropower Project 870 Azad Pattan Hydropower Project 640 Chakothi-Hattian Hydropower Project 500 Kohala Hydropower Project 1,100 Kaigah Hydropower Project 548 Mahl Hydropower Project 590 Source: AHL Research

Exhibit: Housing Scheme Snapshot

DHA Baharia townCurrent Projects Current ProjectsDHA Lahore Baharia Town LahoreDHA EME, Lahore Baharia Town Rawalpindi/ IslamabadDHA Karachi Baharia Town KarachiDHA Islamabad/Rawalpindi Baharia Town Nawabshah

Upcoming Projects Upcoming ProjectsDHA Lahore, Rahbar Sector Baharia Farmhouse KarachiDHA Gujranwala Chapter Karachi Tade and Commodities CentreDHA Multan Chapter Trade and Business Zone KarachiDHA Bahawalpur Chapter Palisades Apartments, IslamabadDHA City, Karachi Baharia Golf City, Islamabad

Baharia Garden City, RawalpindiSource: AHL Research

Exhibit: Other notable CPEC projects27.1 KM Orange Line Metro Lahore486 KM Karakoram Highway Phase-II, upgradation and reconstructionConstruction of Breakwater Gawadar Port 392 KM Peshawar-Karachi MotorwaySource: AHL Research

66


BUYTarget Price (Dec-2016) PKR 689.7Last Closing PKR 495.0Upside (%) % 39.3KSE Code LUCKBloomberg Code LUCK PA

Share InformationMarket Capitalization USD mn 1,525Market Capitalization PKR mn 160,084Outstanding Shares mn 323Free Float % 4012M Avg. Daily Turnover mn Shr. 0.612M High | Low PKR 580.2 | 417.8 Major Shareholders Tabba Group



Key Investment Theme Lowest cost producer: Economies of Scale allow LUCK to be the lowest

cost producer (23% lower cost of sales than industry average). Strategic investments an icing on the cake; Strategic investments in ICI

Pakistan (PKR 78/share or 13% contribution to valuations), Coal-based powerplant of 660MW with commissioning expected by FY18, with our initialestimates suggest that project would add PKR 75.65/share into our targetprice and DR Congo’s operations (to come online by FY17) would furthersupport profitability of company in the longer run.

Increased domestic share in the South to boost bottom-line: Thecompany is setting up new cement plant of ~2.3mn tons in Punjab with theestimated cost of USD 200mn. Given the strong cashflows ahead (EBIDTAgeneration of PKR 63bn in next 3 years), we believe that company will financethe project by internal cash flow generation.

Profitability growth: We expect LUCK’s bottom-line to jump by a 3-yearCAGR of 6%, to PKR 45.14/share in FY18, with 13% YoY growthmaterializing in FY16 alone.

Risks Decline in cement prices; every PKR 5/bag change drags bottom-line by PKR

0.9/share. Rise in coal price; Every USD 5/ton increase reduces EPS by PKR 1.1.

Lucky Cement LimitedLucky Cement LimitedBigger is BetterBigger is Better

80%

85%

90%

95%

100%

105%

110%

115%

120%

Jan-

15

Jan-

15

Feb-

15

Mar

-15

Mar

-15

Apr

-15

May

-15

May

-15

Jun-

15

Jul-1

5

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Oct

-15

Nov

-15

Dec

-15

KSE100 LUCK

67


Exhibit: Sales & Net Margins


Exhibit: EBITDA & Upcoming investments


Exhibit: Financial SnapshotPKR mn 2015A 2016E 2017FIncome StatementSales 44,761 47,322 49,782 Gross Profit 17,741 20,464 21,193 Other Income 1,241 2,104 2,611 Finance Cost 26 27 28 Post Tax Profit 12,432 13,943 14,455 Balance SheetShareholder's Equity 59,259 69,968 81,188 Non-Current Liabilities 6,396 6,396 6,396 Total Liabilities 13,827 12,984 13,272 Current Assets 27,018 42,644 54,952 Non-Current Assets 46,068 40,307 39,508


Financial SnapshotFinancial SnapshotLucky Cement LimitedLucky Cement Limited

24%

25%

26%

27%

28%

29%

30%

38 40 42 44 46 48 50 52 54

FY14

FY15

FY16

E

FY17

F

FY18

F

Sales Net Margins(PKR bn)

7,000 7,000 7,000

-

6,694 6,694 6,694

--

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

FY16E FY17F FY18F FY19F

EBITDA 660MW Coal Plant Capacity Expension

15,069 15,253 15,08014,587

(PKR mn)

68


BUYTarget Price (Dec-2016) PKR 190.9Last Closing PKR 147.6Upside (%) % 29.3KSE Code DGKCBloomberg Code DGKC PA

Share InformationMarket Capitalization USD mn 616Market Capitalization PKR mn 64,662Outstanding Shares mn 438Free Float % 5512M Avg. Daily Turnover mn Shr. 4.112M High | Low PKR 156.7 | 102.9 Major Shareholders Nishat Group



Key Investment Theme Lower power tariff and coal prices along with stable cement prices to

uplift margins: DGKC meets around half of its power requirement throughnational grid, which benefits the company in terms of recent reduction inpower tariffs. This coupled with stable cement prices and sliding coal pricehas set the stage for margins improvement in FY16, expected at 41%, from36% in FY15.

Expansion in south markets; To make its footprint in the southern market,exports via sea route and tap the demand of CPEC western route, thecompany is in process of setting up 2.7mn tons green field cement project inHub, Balochistan. The project is expected to come online in FY18.

Strong investment portfolio; The company has strong portfolio investmentin Nishat Mills Ltd (NML), Nishat Chunian Ltd (NCL), MCB Bank Ltd (MCB)and Adamjee Insurance (AICL), while we value the investment at PKR 26.6bnrupees (portfolio investment value per share PKR 42.6 including 30%discount).

Profitability to jump at 3-year CAGR of 5.3%: Prevalent stable cementpricing power coupled with cost saving measures and falling finance costs, weforesee profitability growth at a 3-year CAGR of 5.3%.

Risks Every PKR 5/bag and USD 5/ton change in cement and coal prices, have

bottom-line impact of PKR 0.5/share and PKR 0.6/share, respectively. Upward volatility in coal or downward pressure on cement prices, hike in gas

tariff as company’s portion of captive power is run on gas.

DG Khan Cement LimitedDG Khan Cement LimitedGame of Margins and Portfolio ValueGame of Margins and Portfolio Value

80%

90%

100%

110%

120%

130%

140%

150%

Jan-

15

Jan-

15

Feb-

15

Mar

-15

Mar

-15

Apr

-15

May

-15

May

-15

Jun-

15

Jul-1

5

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Oct

-15

Nov

-15

Dec

-15

KSE100 DGKC

69


Exhibit: Margins Comparisons


Exhibit: Other income vs PAT


Exhibit: Financial SnapshotPKR mn 2015A 2016E 2017FIncome StatementSales 26,105 28,755 30,049 Gross Profit 11,728 13,986 14,545 Other Income 2,320 2,155 2,178 Finance Cost 282 350 335 Post Tax Profit 7,625 8,085 8,455 Balance SheetShareholder's Equity 62,296 68,628 74,893 Non-Current Liabilities 5,512 4,798 4,798 Total Liabilities 12,095 11,352 10,741 Current Assets 31,426 38,024 44,708 Non-Current Assets 42,965 41,956 40,927

Ratio Analysis Unit 2015A 2016E 2017FPer ShareEarnings PKR 17.4 18.4 19.3 Dividend PKR 4.0 5.0 6.0 Book value PKR 142.2 156.6 170.9 Key RatioPrice to Earning x 8.5 8.0 7.7 Dividend Yield % 2.7 3.4 4.1 Price to Book x 1.0 0.9 0.9 Net Margins % 29.2 28.1 28.1 Pay out ratio % 23.0 24.4 28.5 ROE % 12.3 12.4 11.8 ROA % 10.3 10.5 10.2 Source: Company Financials, AHL Research

Financial SnapshotFinancial SnapshotDG Khan Cement LimitedDG Khan Cement Limited

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

55.0%

FY14 FY15 FY16E FY17F FY18F

Gross Margins EBITDA Margins Net Margins

24%

25%

26%

27%

28%

29%

30%

31%

-1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

10,000

FY14 FY15 FY16E FY17F FY18F

PATOther IncomeOther Income % of PAT (RHS)

(PKR mn)

70

Power Generation & Distribution | 2016The Need to Power Up










Price to Book x 2.4






Sector PerformanceSector PerformancePower Generation & DistributionPower Generation & Distribution

80%

85%

90%

95%

100%

105%

110%

115%

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

KSE100 Power Sector

-

5.0

10.0

15.0

20.0

25.0

NC

PL

KA

PC

O

NP

L

FGE

N P

M

JSW

IN

HU

BC

KE

L

0018

96 C

H

6003

96 C

H

6005

09 C

H

Price to Earning

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

NC

PL

KA

PC

O

NP

L

HU

BC

JSW

IN

FGE

N P

M

KE

L

KE

L

KE

L

KE

L

Dividend Yield

0.50

1.00

1.50

2.00

2.50

3.00

3.50

FGE

N P

M

KE

L

NP

L

JSW

IN

6005

09 C

H

KA

PC

O

NC

PL

6003

96 C

H

0018

96 C

H

HU

BC

Price to Book

2.0%7.0%

12.0%17.0%22.0%

27.0%32.0%

37.0%42.0%

NC

PL

HU

BC

KA

PC

O

0018

96 C

H

NP

L

JSW

IN

KE

L

6005

09 C

H

FGE

N P

M

6003

96 C

H

Return on Equity

72


Key Investment Theme Intensifying demand: Energy availability in Pakistan has been declining over

the last few years, with peak demand still outpacing supply by 7,000MW,IPPs’ share in total power generation is steadily increasing against a decliningtrend witnessed in Hydro-related generation sources Henceforth, in order tomeet up the current and growing energy demand, the government isaggressively pursuing relatively cheaper and more efficient fuel-basedprojects (10,500MW till 2019) to fill-up the supply gap

Oil prices: A steep fall in global oil prices (down 33% YoY in FY15 and 24%YoY in FY16TD) led to decline in notified electricity tariff by PKR 2.9/kWh.The government has so far partially passed (imposition of equalization andNeelum Jhelum surcharges) on impact of declining oil prices to endconsumers.

Circular Debt: Despite heavy liquidity injection couple of years back, circulardebt has again reached ~PKR 220bn in Dec-15. However, the intensity ofincrease in circular debt has considerably slowed (from over PKR 40bn/monthduring till Jun’14, to below PKR 18bn/month currently). Intensity of circulardebt could further be managed by reducing power-related subsidies via raisein electricity tariffs.

Attractive dividend yields and a hedge against USD: In the scenario ofcooling down inflation and lower interest rate scenario, IPPs are offering muchhigher dividend yields (9%-10%) vs. government papers (12-M T.Bills at6.4%). Further, tariff for IPPs has built an immunity against PKR depreciationand inflation (both local and US). Therefore, depreciating PKR/USD parityshould increase the ROE component in the medium to long term.

Risk Increasing intensity of circular debt negatively affects IPPs’ liquidity and cash

flows, while appreciation in PKR/USD parity would affect earnings.

Exhibit: Yearly IPPs Capacity addition

Source: PPIB, AHL Research

Exhibit: Expected energy pie in 2024

Source: PPIB, AHL Research* Dasu HPP & Diamir Basha Dam not included

Power SectorPower SectorThe Need to Power UpThe Need to Power Up

-

5,000

10,000

15,000

20,000

25,000

0500

100015002000250030003500

CY-

16

CY-

17

CY-

18

CY-

19

CY-

20

CY-

21

CY-

22

CY-

23

CY-

24

DnS

*

Cumulative Addition (LHS)(MW) (MW)

*Date not Specified

73


BUYTarget Price (Dec-2016) PKR 110.8Last Closing PKR 102.6Total Return (%) % 16.3KSE Code HUBCBloomberg Code HUBC PA

Share InformationMarket Capitalization USD mn 1,131Market Capitalization PKR mn 118,724Outstanding Shares mn 1,157Free Float % 7512M Avg. Daily Turnover mn Shr. 1.012M High | Low PKR 107.5 | 71.0 Major Shareholders Dawood Hercules



Key Investment Theme Expanding investments: Hub Power Holdings Ltd (HPHL) recently entered

into a JVA with China Power International Holdings Ltd (CPIH) fordevelopment of 660x2 MW coal-based power plants at Hub under CPEC. Theplant is expected to provide 27% RoE, with our expectation of PKR 32.4/shareimpact of power plant on HUBC target price. Additionally, the company hascommitted an investment of USD 20mn in Sind Engro Coal Mining Company(SECMC), which is primarily engaged in coal mining of 6.5mt/a in Thar Block-II.

Narowal Demerger: Narowal demerger will reduce debt to equity (currently0.56x FY16E and will be 0.12x FY16E post demerger) and also reduce therisk of dividend curtailment.

One of the best defensive plays: With bond like pre-established dividendstream, secured tariff structure against i)inflation, ii)PKR devaluation andbacked by sovereign guarantees, HUBC is one of the key defensive stocks inPak equities. We expect a cash dividend of PKR 8.5/share in FY16,translating into a dividend yield of 8.4% against the 12M’s T-Bill yield of 6.4%.

Government backing on fuel supplies: HUBC operates under the 1994Power Policy. One of the salient features of the policy is that, the fuel supplyis guaranteed by the government which is not the case for newer powerplants.

Risks Further accumulation of circular debt. Appreciation in PKR against the greenback.

Hub Power Company LimitedHub Power Company LimitedExpansion + Attractive Yield = BUYExpansion + Attractive Yield = BUY

80%

90%

100%

110%

120%

130%

140%

150%

160%

Jan-

15

Jan-

15

Feb-

15

Mar

-15

Mar

-15

Apr

-15

May

-15

May

-15

Jun-

15

Jul-1

5

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Oct

-15

Nov

-15

Dec

-15

KSE100 HUBC

74


Exhibit: Decreasing Debt to Equity…


Exhibit: EPS, DPS & Payout Ratio


Exhibit: Financial SnapshotPKR mn 2015A 2016E 2017FIncome StatementSales 131,484 92,690 92,695 Gross Profit 16,653 15,116 14,618 Other Income 1,532 1,727 1,349 Finance Cost 4,538 2,810 1,832 Post Tax Profit 9,853 11,199 11,301 Balance SheetShareholder's Equity 31,635 38,486 39,663 Non-Current Liabilities 33,498 21,519 13,779 Total Liabilities 94,314 63,620 48,755 Current Assets 82,191 61,053 50,056 Non-Current Assets 43,758 41,053 38,362

Ratio Analysis Unit 2015A 2016E 2017FPer ShareEarnings PKR 8.5 9.7 9.8 Dividend PKR 9.5 8.5 8.5 Book value PKR 27.3 33.3 34.3 Price RatiosPrice to Earning x 12.2 10.7 10.6 Dividend Yield % 9.2 8.2 8.2 Price to Book x 3.8 3.1 3.0 Net Margins % 7.5 12.1 12.2 Pay out ratio x 1.1 0.9 0.9 ROE % 31.9 31.9 28.9 ROA % 7.7 9.8 11.9 Source: Company Financials, AHL Research

Financial SnapshotFinancial SnapshotHub Power Company LimitedHub Power Company Limited

-

0.2

0.4

0.6

0.8

1.0

1.2

FY15

1QFY

16

2QFY

16

3QFY

16

4QFY

16

1QFY

17

2QFY

17

3QFY

17

4QFY

17

Hub only Including Narowal(x)

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

6.00 7.00 8.00 9.00 10.00 11.00 12.00

FY15A

FY16E

FY17F

FY18F

FY19F

DPS EPS Payout Ratio

(PKR)

75

Oil & Gas Marketing | 2016Inventory Losses: Disappearing Act










Price to Book x 1.7



Dividend Yield % 3.9




Sector PerformanceSector PerformanceOil & Gas MarketingOil & Gas Marketing

80%

85%

90%

95%

100%

105%

110%

115%

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

KSE100 OMC Sector

-

5.0

10.0

15.0

20.0

25.0

30.0

PS

O

BC

P T

B

PC

OR

PM

AP

L

857

HK

6003

87 C

H

PTG

TB

Price to Earning

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

AP

L

BC

P T

B

PS

O

857

HK

PTG

TB

PC

OR

PM

6003

87 C

H

Dividend Yield

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

857

HK

PC

OR

PM

PS

O

BC

P T

B

AP

L

PTG

TB

6003

87 C

H

Price to Book

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

AP

L

PS

O

PTG

TB

BC

P T

B

857

HK

6003

87 C

H

PC

OR

PM

Return on Equity

77


Key Investment Theme OMC sector pulled down inline with market : AHL OMC universe Mkt Cap

shed 8% during CY15 despite improving fundamentals and volumetric growth.We expect the sector to perform well in CY16, while our top pick remains PSO.

Falling oil price arrests circular debt : In our view, circular debt situation iseasing off in wake of declining oil prices. Furthermore, government has anadded incentive in alleviating circular debt crisis, being a precondition for IMFassistance. We believe controlled intensity of circular debt should be awelcome relief in terms of cash availability for OMCs, PSO in particular.

Low product prices to kick the volumes upwards: As prices of majorproducts reduced in CY15, total industry offtake for 11MCY15 jumped by 8.5%YoY to 20.96mn tons. We anticipate robust demand in CY16 on the back of lowprices, healthy auto volumes and shortage of CNG.

Inventory losses, the worst is over: The government passed on partialimpact of declining oil prices to consumers in FY15, resulting in massiveinventory losses to OMCs. However, we are of the view that POL prices areunlikely to witness any significant decrease in FY16 from current levels.

CPEC, truly a game changer: Infrastructural developments in CPEC areexpected to provide further impetus to demand for POL products. We view,Attock Petroleum (market leader in asphalt) would be a potential beneficiary ofincreased asphalt demand due to CPEC projects.

Risks PKR depreciation would result in forex losses. Diminishing HSFO demand poses a downside risk to our valuation mainly PSO Accretion in circular debt poses threat to Operating cash flows

Exhibit: Industry sales volumes

Source: OCAC, AHL Research

Exhibit: Energy Product Consumption By Sector

Source: Energy Year Book 2014, AHL Research

1.5 1.4 1.9 2.3 2.8 3.4 3.8 4.7 5.9 6.8 8.2 7.3 7.4 6.9 6.8 6.8 6.8 7.4 7.8 8.1 7.6 8.0 9.2 9.1 8.4 8.5 9.4 9.1

9.1 9.1 1.7 1.5 2.0 1.9 1.2 1.2 0.9 1.0 1.0

1.0

-

5

10

15

20

25

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

Others FO HSD MS(Mn Tons)

7% 8% 7% 6%

47% 50% 51% 49%

43% 41% 40% 43%

3% 2% 2% 2%

0%

20%

40%

60%

80%

100%

120%

FY11 FY12 FY13 FY14

Others Power Transport Industrial

Inventory Losses: Disappearing ActInventory Losses: Disappearing ActOil & Gas MarketingOil & Gas Marketing

78


BUYTarget Price (Dec-2016) PKR 455.1Last Closing PKR 325.8 Upside (%) % 39.7 KSE Code PSO Bloomberg Code PSO PA

Share InformationMarket Capitalization USD mn 843 Market Capitalization PKR mn 88,507 Outstanding Shares mn 272 Free Float % 47 12M Avg. Daily Turnover mn Shr. 0.9 12M High | Low PKR 399.0 | 283.4 Major Shareholders Govt of Pakistan



Absence Absence of Inventory of Inventory Losses Bringing Back Profitability Losses Bringing Back Profitability

Key Investment Theme Alleviating circular debt to generate positive OCFs: PSO recorded

positive operating cash flow of PKR 5bn in 1QFY16, as a consequence ofeasing circular debt crisis. Furthermore, as per management, net circular debtposition for the company stood at PKR 127bn in Oct’15 compared to PKR150bn in Jun’15. In our view, the intensity of accumulation in circular debtposition will relax going forward in midst of low oil prices/IMF incentives.

LNG to support profitability: Net Revenues for FY15 included PKR 14.5bnattributable to LNG. With a margin of 1.82%, we expect the new product toaugment bottom line by PKR 1.6/share and 1.7/share in FY16/17,respectively. As per management briefing, PSO is expected to import a totalof 50-60 cargoes in FY16.

Volumes to remain sturdy: Lack of availability of CNG, growing auto sectorsales and low POL prices among other factors increased offtake by 4.4% YoYin 11MCY15. In our view, volumes for MOGAS and HSD could grow by 25%,5% respectively. Also, in our view declining volumes of deregulated FOshould be partially offset by increasing MOGAS and HSD volumes.

Inventory Losses : We believe, international oil prices have comesubstantially close to their bottom and government is unlikely to decreasePOL prices with the same intensity witnessed in FY15. Moreover, companycould record inventory gains in FY16 and FY17.

An upside of 37% to current levels: We expect earnings to jump by 1.01x inFY16 due to i) low probability of inventory losses, ii) profit contribution fromLNG, and iii) growing volumes despite lower prices. Based on our DCF basedDec-16 valuation PSO merits a buy call with our TP of PKR 456/share.

Risks Forex/inventory losses. Accumulation of circular debt and declining FO volumes. For every 5%

decline in HSFO prices our gross profit in FY16 drops by 1.3%. Formation of “Pakistan LNG Limited” will dilute LNG market share.

Pakistan State OilPakistan State Oil

75%80%85%90%95%

100%105%110%115%120%

Jan-

15

Jan-

15

Feb-

15

Mar

-15

Mar

-15

Apr

-15

May

-15

May

-15

Jun-

15

Jul-1

5

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Oct

-15

Nov

-15

Dec

-15

KSE100 PSO

79


Exhibit: Sales Volumes of POL products

Source: AHL Research, OCAC

Exhibit: Contribution to Gross profit

Source: Company Accounts, OGRA, AHL Research

Exhibit: Financial SnapshotPKR mn 2015A 2016E 2017FIncome StatementSales 913,094 760,404 802,579 Gross Profit 23,579 30,585 33,080 Other Income 14,024 14,016 14,497 Finance Cost 11,017 10,968 11,248 Post Tax Profit 6,936 13,982 15,675 Balance SheetShareholder's Equity 82,310 93,032 105,447 Total Liabilities 258,997 252,678 261,183 Current Assets 275,749 280,267 301,293 Non-Current Assets 65,559 65,443 65,337

Ratio Analysis Unit 2015A 2016E 2017FPer ShareEarnings PKR 25.5 51.5 57.7 Dividend PKR 10.0 12.0 12.0 Book value PKR 303.0 342.4 388.1 Price RatiosPrice to Earning x 13.3 6.6 5.9Dividend Yield % 2.9% 3.5% 3.5%Price to Book x 1.1 1.0 0.9Profitability RatiosGross Margins % 2.6% 4.0% 4.1%EBITDA Margins % 2.6% 4.2% 4.3%Net Margins % 0.8% 1.8% 2.0%Source: Company Financials, AHL Research

Pakistan State OilPakistan State OilFinancial SnapshotFinancial Snapshot

1.9 2.2 2.8 3.2

3.7 3.7 3.9 4.1

6.9 6.1 5.9 5.9

0.6 0.5 0.5 0.6

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

FY14 FY15 FY16 FY17

Others FO HSD MS(Mn Tons)

18.2% 23.7% 29.2%

24.9%34.7%

36.0%

47.7%32.6% 25.8%

9.2% 9.0% 9.0%

0%

20%

40%

60%

80%

100%

120%

FY14 FY15 FY16

Others FO HSD Mogas

80

Automobile Assemblers | 2016Low KIBOR to Rev up sector earnings in CY16










Price to Book x 3.5






Sector PerformanceSector PerformanceAutomobile AssemblersAutomobile Assemblers

80%

90%

100%

110%

120%

130%

140%

150%

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

KSE100 Auto Sector

-

5.0

10.0

15.0

20.0

25.0

30.0

IND

U

PS

MC

6003

35 C

H

SIM

E M

K

0007

01 C

H

Price to Earning

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

IND

U

SIM

E M

K

PS

MC

0007

01 C

H

0007

01 C

H

Dividend Yield

-0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00

SIM

E M

K

PS

MC

6003

35 C

H

IND

U

0007

01 C

H

Price to Book

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

IND

U

PS

MC

6003

35 C

H

0007

01 C

H

SIM

E M

K

Return on Equity

82


Auto Sector: One of the major plays during CY16: We remain buoyant onthe auto sector as a major performer during CY16. Although the key triggersduring CY15 (euphoria of the new generation Corolla and the Punjabgovernment’s taxi scheme) fade out, we believe other factors to come intoplay and replicate the impact of earlier catalysts. These factors include:

Auto Financing to help boost sector volumes and margins: Due to low oilprices, CPI during CY15 has averaged 2.5 YoY (CY14 CPI: 7.2% YoY). Thisallowed the SBP to chop 350bps off the policy rate to a historic 6.0%.Subsequently, the KIBOR rate witnessed a similar dip, thereby providingmuch needed impetus to auto financing growth. Going forward, with our oilprice assumption of USD 43/bbl for CY16, we expect bank financing toemerge as a major factor for auto sector volumes. Consequently, highervolumes will result in lower per unit fixed costs, providing more cushion tosector margins.

Weak Yen to help keep margins upbeat: The Japanese economy continuesto sway perilously close on the edges of recession with a declining andageing population. The Bank of Japan continues to pump in billions of dollarsto stimulate the economy, but so far to a muted response. We expect the JPYto remain under pressure against the PKR during CY16, with our assumptionof 0.85-0.92PKR/JPY. This will aid the auto sector’s margins through lowerraw material procurement costs.

Low Commodity prices: Besides oil prices, lower demand frompowerhouses such as China has resulted in falling commodity prices. Ofparticular importance to the auto sector, steel, plastics, aluminum and rubberprices have shrank during CY14-15, adding more meat to auto margins.

Exhibit: Sector margins rise as the JPY goes in freefall


Automobile AssemblerAutomobile AssemblerLow KIBOR to Rev up Sector Earnings in CY16Low KIBOR to Rev up Sector Earnings in CY16

Exhibit: Lower KIBOR rates lead to jump in auto financing


10.0 8.4

6.7 8.0

11.5 10.6 11.1

14.1 15.6 16.0

0.8

0.9

1.0

1.1

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Jun-

13

Sep

-13

Dec

-13

Mar

-15

Jun-

14

Sep

-14

Dec

-14

Mar

-15

Jun-

15

Sep

-15

GM (LHS) JPY/PKR (RHS)(%)

68 69

71 72 74 76

79 81

84 85

87 90

6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0 10.5 11.0

65

70

75

80

85

90

95

Oct

…

No…

De…

Jan…

Feb…

Mar

…

Apr

…

Ma…

Jun…

Jul-1

5 Au…

Se…

Auto Financing 1Year KIBOR(PKR bn) (%)

83


Key Investment Theme Car Financing to enhance company’s earnings: Pak Suzuki (PSMC)

stands to gain most from Car financing due to its target market of middleincome consumers, who typically are seekers of financing. Due to currentlyprevailing low financing costs, we expect ‘ex-government scheme’ PSMCvolumes to grow by 3% YoY in CY16, with growth to be seen in particular insales of Mehran, Cultus and Wagon-R variants.

Government Scheme to add to volumes: The ongoing Punjab governmentscheme of 50,000 cars (25,000 Ravi and 25,000 Bolan) commenced in Feb-15 and expires in Feb-16. With roughly 40,000 cars sold by Dec-15, there arestill around 10,000 cars to be sold under the scheme, which will add to thecompany’s sales and earnings in CY16.

Huge cash position to fuel expansion and/or payouts: The company hadCash & Equivalents of PKR 185/share by 30-Sep-15, compared to PKR22/share by end of CY14. We believe this opens up room for expansion,seeing the company has already offered to replace the Mehran and Cultusand bring in 4 new models, if offered the same incentives under the upcomingAuto Policy as being provided to new entrants.

Risks Any fluctuation in the JPY/PKR can potentially impact our valuations Any subsequent schemes launched by the government could pose an upside

risk to our valuations.

Pak Suzuki Motor CompanyPak Suzuki Motor CompanyFinancing Replacing Government Schemes as Top Buy ReasonFinancing Replacing Government Schemes as Top Buy Reason

BUYTarget Price (Dec-2016) PKR 606.2Last Closing PKR 495.3Upside (%) % 22.4KSE Code PSMCBloomberg Code PSMC PA

Share InformationMarket Capitalization USD mn 388Market Capitalization PKR mn 40,763Outstanding Shares mn 82Free Float % 2612M Avg. Daily Turnover mn Shr. 0.112M High | Low PKR 497.0 | 325.9 Major Shareholders Suzuki Motor Corporation



80%

90%

100%

110%

120%

130%

140%

150%

Jan-

15

Jan-

15

Feb-

15

Mar

-15

Mar

-15

Apr

-15

May

-15

May

-15

Jun-

15

Jul-1

5

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Oct

-15

Nov

-15

Dec

-15

KSE100 PSMC

84


Exhibit: Volumes to depict stable growth

Source: Company Financials

Pak Suzuki Motor CompanyPak Suzuki Motor CompanyFinancial SnapshotFinancial Snapshot

Exhibit: Gross margins surge on JPY depreciation


78

91 93 95 96 97 98

0%2%4%6%8%10%12%14%16%18%

65 70 75 80 85 90 95

100 105

CY14

A

CY15

E

CY16

F

CY17

F

CY18

F

CY19

F

CY20

F

Sales Volumes (Ex-Govt Schemes) YoY (RHS)(000 Units)

1.1

1.2

1.0 1.0

0.9

0.7 0.8 0.8 0.9 0.9 1.0 1.0 1.1 1.1 1.2 1.2

-2.0 4.0 6.0 8.0

10.0 12.0 14.0 16.0

CY11

A

CY12

A

CY13

A

CY14

A

CY15

E

JPY/PKR (RHS) Gross Margins(%)

Exhibit: Financial SnapshotPKR mn 2014A 2015E 2016FIncome StatementSales 53,665 80,788 69,067 Gross Profit 3,454 9,171 7,181 Other Income 510 1,208 1,647 Finance Cost 27 27 35 Post Tax Profit 1,922 5,709 4,877 Balance SheetShareholder's Equity 19,237 23,464 27,107

Total Liabilities 9,117 13,937 12,663 Current Assets 23,108 32,518 34,618 Non-Current Assets 5,247 4,884 5,152

Ratio Analysis Unit 2014A 2015E 2016FPer ShareEarnings PKR 23.4 69.4 59.3 Dividend PKR 5.0 18.0 15.0 Book value PKR 233.7 285.1 329.4 Price RatiosPrice to Earning x 20.9 7.0 8.2 Dividend Yield % 1.0 3.7 3.1 Price to Book x 2.1 1.7 1.5 Profitability RatiosGross Margins % 7.8 14.2 13.6EBITDA Margins % 6.4 11.4 10.4Net Margins % 3.6 7.1 7.1 Source: Company Financials, AHL Research

85

Textile Composite | 2016Bearish Outlook Despite Numerous Incentives








Sector Return % 7.8


Price to Book x 2.9






Sector PerformanceSector PerformanceTextile CompositeTextile Composite

60%

70%

80%

90%

100%

110%

120%

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

KSE100 Textile Sector

-

5.0

10.0

15.0

20.0

25.0

30.0

NM

L

2007

26 C

H

6009

87 C

H

0023

94 C

H

0022

06 C

H

Price to Earning

4.5%

4.6%

4.7%

4.8%

4.9%

5.0%

5.1%

2007

26 C

H

NM

L

6009

87 C

H

6009

87 C

H

6009

87 C

H

Dividend Yield

-0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00

NM

L

2007

26 C

H

0023

94 C

H

6009

87 C

H

0022

06 C

H

Price to Book

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

6009

87 C

H

2007

26 C

H

0023

94 C

H

0022

06 C

H

NM

L

Return on Equity

87


TextilesTextilesDull Outlook Despite Numerous IncentivesDull Outlook Despite Numerous Incentives

Exhibit: Local & International cotton prices trend

Source: Bloomberg, BR, AHL Research

Exhibit: Textile exports on a declining trend


88

-20%

-15%

-10%

-5%

0%

5%

10%

15%

950

1,000

1,050

1,100

1,150

1,200

1,250

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Exports YoY(USD mn)

60 65 70 75 80 85 90 95 100 105

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

Dec

-13

Feb-

14

Apr

-14

Jun-

14

Aug

-14

Oct

-14

Dec

-14

Feb-

15

Apr

-15

Jun-

15

Aug

-15

Oct

-15

Dec

-15

Local International (RHS)PKR/maund USd/lb

Textiles underperformed the benchmark index by 31% during CY15. Majorreasons for the dismal performance of the sector included (i) fallinginternational cotton prices (COTLOOK A index down 15.2% YoY on averagein CY15) resulting from sluggish global demand, and (ii) electricity and gasshortages hampering productivity and competitiveness.

During 5MFY16, textile exports reached USD 5.2bn, down 8.4% YoY fromUSD 5.7bn in 5MFY15. Although price decline contributed to falling exports,the dip in quantities was more drastic, with Cotton Yarn down massively25.9% YoY, while quantities of Bed-wear, Readymade Garments and CottonCloth exported fell by 6.1%, 4.5% and 3.4% YoY, respectively.

Outlook The textile sector is undergoing a rough patch (Cotlook A index down 15.2%

YoY in CY15), due to the reasons mentioned above. However, a number ofpositives still exist, such as the recent decision of the government to impose10% RD on imported yarn, grey and processed fabrics (+ve for spinningsegment), lower financing costs in low interest rate scenario, continuedbenefit from GSP plus status and increase in value added segment of overallexports.

Although our view remains neutral to negative on the sector, particularly onspinning and weaving segments, we have a clear preference towards valueadded segment, based on increasing importance in overall textile portfolio,along with government’s incentives to increase value added segment’scomponent in overall production and exports (also mentioned in Textile Policywith LTFF granted to value added segment for technology upgrades).

Risks A key downside risk remains any reversal (appreciation) in the PKR/USD

parity, which would negatively affect exports and sales Any further increases in power/gas tariffs would negatively affect the sector,

as would any gas shortages (through low production and higher per unit fixedcosts)


NishatNishat Mills Limited Mills Limited Trading Cheap Given Strong Equity PortfolioTrading Cheap Given Strong Equity Portfolio

BUYTarget Price (Dec-2016) PKR 134.4Last Closing PKR 94.9Total Return (%) % 41.7KSE Code NMLBloomberg Code NML PA

Share InformationMarket Capitalization USD mn 318Market Capitalization PKR mn 33,386Outstanding Shares mn 352Free Float % 5012M Avg. Daily Turnover mn Shr. 1.112M High | Low PKR 130.0 | 93.0 Major Shareholders Mansha Family



70%75%80%85%90%95%

100%105%110%115%

Jan-

15

Jan-

15

Feb-

15

Mar

-15

Mar

-15

Apr

-15

May

-15

May

-15

Jun-

15

Jul-1

5

Jul-1

5

Aug

-15

Sep

-15

Oct

-15

Oct

-15

Nov

-15

Dec

-15

KSE100 NML

89

Trading at sizeable discount to its potential: We remain positive on NML,despite a bearish outlook on textiles. Our conviction stems from (i) equityportfolio, with a market value of PKR 109.6/share, after 40% portfoliodiscount, (ii) ~two-fifths of sales due to value-added segment, (iii) expansionthrough doubling its garments (jeans/pants) capacity, expected in 2HFY16,(iv) potential benefit from GSP plus (once EU recovers) as ~27% of its salesin FY15 were EU bound, and (v) economic revival in US to help further boostsales. Our SoTP based Dec-16 TP for NML works out to PKR 134.1/share,with an upside potential of 43% from current levels.

Strong equity portfolio to beef up dividend income: NML’s equity portfoliois dominated by DGKC, MCB and NPL, contributing 68% to earnings in FY15.We expect dividend income to contribute significantly to the company’sbottom-line going forward.

Core operations strong due to value added segment: NML has diversetextile operations, including spinning, weaving and value added segment,including processing and home textile. Due to roughly two-fifths of its salesbeing attributable to value added segment, the company has managed toescape from the brunt of the global cotton prices slump. Moreover, withCotton prices having bottomed out in our view, we expect company’s GM’s toremain stable during FY16-18.

Stands to gain from GSP plus status: Of the company’s total sales duringFY15, roughly 27% were to the European Union, with the EU remaining amajor region for the company. Besides, the true impact of the GSP plus statushas been muted due to energy bottlenecks. Once the energy crisis isresolved, we expect that NML stands to become a major gainer among textilecompanies of increased exports to EU.

Risks Any change in the PKR/USD can ultimately affect our valuation Any drastic decline in yarn/other products prices will affect our valuation


NishatNishat Mills Limited Mills Limited Financial SnapshotFinancial Snapshot

Exhibit: Financial SnapshotPKR mn 2015A 2016E 2017FIncome StatementSales 51,178 46,677 58,265 Gross Profit 4,622 4,955 5,740 Other Income 4,005 4,126 4,457 Finance Cost 1,745 1,328 1,590 Post Tax Profit 3,912 4,215 4,977 Balance SheetShareholder's Equity 76,143 76,078 78,945Non-Current Liabilities 18,890 21,172 23,372Total Liabilities 24,997 26,163 29,331Current Assets 24,190 27,135 35,591Non-Current Assets 76,950 75,106 72,685

Ratio Analysis Unit 2015A 2016E 2017FPer ShareEarnings PKR 11.1 12.0 14.2 Dividend PKR 4.0 4.5 5.0 Book value PKR 216.6 216.4 224.5 Price RatiosPrice to Earning x 8.4 7.8 6.6 Dividend Yield % 4.3 4.8 5.3 Price to Book x 0.4 0.4 0.4 Profitability RatiosGross Margins % 11.8 11.6 12.1EBITDA Margins % 9.0 10.6 9.9Net Margins % 7.6 9.0 8.5 Source: Company Financials, AHL Research

Exhibit: NML portfolio as at 30-Jun-2015Shares

(mn)Market Price

(PKR)Market Value

(PKR mn)

Nishat Power 180.6 53.9 9,733 DGKC 137.6 147.1 20,233 LPL 109.4 28.6 3,131 PKGP 102.5 29.1 2,978 MCB 83.0 215.7 17,913 AICL 102.8 56.7 5,832 NCL 27.2 33.6 916 Others 3,510 Total portfolio value 64,247 After 40% Discount 38,548 Per share value for NML @ 351.6mn shares 109.64 Source: Company Financials, KSE, AHL Research

Exhibit: Non Core EPS contributing heavily to company earnings


2.0

4.0

6.0

8.0

10.0

FY14

FY15

FY16

FY17

FY18

EPS Core EPS Non Core

90

Other Companies in FocusOther Companies in Focus

Code Company Mkt Cap (USDmn)

1Yr Avg. Volume

(000)

Last Price (PKR)

Freefloat (%)

52-Weeks Trailing

High Low PE PBV

MUGHAL Mughal iron and steel 83.5 1,252.0 69.7 20.7 86.0 29.4 12.2 2.4 ASTL Amreli Steel 169.9 2,741.6 60.1 25.0 63.2 53.6 17.6 3.0 SEARL The Searle Company 388.2 698.2 395.7 45.0 427.0 160.6 29.0 8.4 FEROZ Ferozsons Lab 318.2 43.1 1,106.9 35.0 1,133.8 466.1 44.6 10.9 DAWH Dawood Hercules 546.1 263.4 119.1 70.0 133.1 75.7 19.3 1.8 CPPL Cherat Packaging Ltd. 79.5 63.3 303.1 70.0 314.8 153.0 12.8 3.8 SRVI Service industries Ltd. 97.4 2.3 850.0 50.0 969.1 658.1 13.2 3.4 IGIIL IGI Insurance 276.4 94.1 236.6 33.5 271.6 187.3 35.3 2.5 ATLH Atlas Honda Ltd 384.1 6.9 390.0 10.0 407.1 314.2 20.1 5.1 PKGS Packages Limited 490.0 40.9 582.1 35.0 731.3 508.1 20.3 1.0 THALL Thal Ltd. 195.5 30.6 253.3 42.7 316.0 236.1 9.6 1.9

Code Key RatiosGross

Margins (%)

Net Margins

(%)RoA (%) RoE (%) Book

Value -PKR DY (%)Revenue

Growth (%)

Profit Growth

(%) Mughal Mughal iron and steel 10.5 5.9 7.8 26.5 28.9 0.7 105.0 84.6 ASTL Amreli Steel 17.4 7.0 8.6 18.9 19.8 - 20.5 300.6 SEARL The Searle Company 43.9 18.5 19.7 34.5 47.0 5.1 24.9 86.6 FEROZ Ferozsons Lab 45.5 16.9 19.9 25.9 101.8 1.4 74.9 79.3 DAWH Dawood Hercules 7.5 81.0 7.6 9.9 64.9 0.8 (24.2) (13.8)CPPL Cherat Packaging Ltd. 21.0 10.5 16.8 36.3 79.8 2.3 16.2 159.0 SRVI Service industries Ltd. 16.4 4.7 14.8 28.6 246.4 2.9 12.3 24.9 IGIIL IGI Insurance 19.9 78.7 5.9 7.3 94.4 1.3 (2.0) 71.0 ALTH Atlas Honda Ltd 9.5 4.5 15.2 27.7 76.5 2.6 5.1 24.4 PKGS Packages Limited 14.7 16.8 4.5 5.5 565.8 1.5 1.3 41.2 THALL Thal Ltd. 18.9 13.8 18.7 21.3 132.9 9.9 33.7 57.8 Source: Companies Financials, AHL Research

Emerging StarsEmerging Stars

91

Code Company Mkt Cap (USDmn)

1Yr Avg. Volume

(000)

Last Price (PKR)

Freefloat (%)

52-Weeks Trailing

High Low PE PBV

GTYR General tyre 97.7 28.4 171.6 25.0 450.0 140.6 14.0 4.3 ICI ICI Pakistan 425.7 0.7 484.0 15.0 3,813.2 2,615.0 21.0 3.4 BAHL Bank al Habib Ltd. 440.3 12.5 41.6 60.0 102.0 56.1 7.2 1.4 HMB Habib Metropolitan Bank 304.1 75.8 30.5 45.0 597.6 248.5 2.7 0.9 ISL International Steel Ltd. 101.1 679.8 24.4 43.6 31.6 22.9 52.6 1.9 SPEL Synthetic Products Enterprises 39.4 1,127.0 53.5 25.0 14.2 10.3 18.0 2.7

Code Key RatiosGross

Margins (%)

Net Margins

(%)RoA (%) RoE (%) Book

Value -PKR DY (%)Revenue

Growth (%)

Profit Growth

(%) GTYR General tyre 20.4 7.7 18.4 33.4 39.5 4.1 10.3 42.7 ICI ICI Pakistan 88.1 5.0 8.6 16.9 143.9 2.4 (0.2) 24.9 BAHL Bank al Habib Ltd. 117.8 33.7 1.2 22.0 29.7 7.2 33.7 23.8 HMB Habib Metropolitan Bank 151.4 103.8 3.3 37.1 33.2 6.6 23.6 21.7 ISL International Steel Ltd. 8.3 1.1 1.1 3.6 12.7 4.1 (15.7) (70.7)SPEL Synthetic Products Enterprises 22.8 10.6 11.8 19.3 20.1 1.9 26.0 88.4 Source: Companies Financials, AHL Research

Other Companies in FocusOther Companies in FocusEmerging Stars… cont’dEmerging Stars… cont’d

92

Recommendation SummaryRecommendation Summary

93

Code Company Price TP Upside (%) Stance EPS DPS P/E (x) DY (%) P/B (x) ROE (%)Dec-15 Dec-16 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017

Exploration & Production

PPL Pakistan Petroleum Ltd. 121.8 155.1 27.3 Buy 12.9 15.0 6.3 7.3 9.5 8.1 5.2 6.0 1.2 1.1 12.8 13.9

OGDC Oil and Gas Dev Co. 117.3 165.8 41.3 Buy 16.6 19.7 6.6 7.9 7.1 6.0 5.7 6.7 1.0 0.9 15.4 16.6

POL Pakistan Oilfields Ltd. 268.0 390.6 45.7 Buy 25.1 34.5 20.0 28.0 10.7 7.8 7.5 10.4 2.1 2.0 19.0 26.1 Commercial BanksUBL United Bank Ltd. 155.0 203.8 31.5 Buy 21.6 22.4 13.0 13.0 7.2 6.9 8.4 8.4 1.1 1.0 15.8 15.1

BAFL Bank Alfalah 28.8 36.7 27.3 Buy 4.9 5.2 3.0 3.0 5.9 5.6 10.4 10.4 0.7 0.7 12.6 12.3 ABL Allied Bank Ltd. 94.3 104.8 11.1 Buy 12.8 14.4 7.0 8.0 7.4 6.5 7.4 8.5 1.2 1.1 16.0 17.5 MCB MCB Bank Ltd. 216.9 267.0 23.1 Buy 20.8 21.4 13.5 13.9 10.4 10.1 6.2 6.4 1.6 1.5 15.6 15.4 HBL Habib Bank Ltd. 200.1 243.2 21.5 Buy 23.5 23.0 13.0 13.0 8.5 8.7 6.5 6.5 1.5 1.4 18.0 16.6 FertilizerENGRO Engro Corporation 279.4 451.9 61.7 Buy 33.4 42.2 16.0 21.0 8.4 6.6 5.7 7.5 1.7 1.4 21.3 22.8

EFERT Engro Fertilizer 84.1 108.7 29.1 Buy 10.3 12.8 7.0 7.0 8.2 6.6 8.3 8.3 2.5 2.1 31.9 34.9

FFC Fauji Fertilizer Co. 118.0 139.3 18.1 Buy 14.1 14.5 13.0 13.0 8.4 8.1 11.0 11.0 5.1 4.8 62.2 60.8

FFBL Fauji Fert. Bin Qasim 52.7 67.4 27.9 Buy 4.9 5.7 4.0 5.0 10.8 9.3 7.6 9.5 3.3 3.2 31.9 35.2 CementKOHC Kohat Cement Company 240.9 287.5 19.4 Buy 23.5 27.0 11.0 12.0 10.2 8.9 4.6 5.0 2.9 2.5 30.9 30.0 ACPL Attock Cement Ltd. 167.8 218.1 30.0 Buy 21.5 21.8 17.0 17.0 7.8 7.7 10.1 10.1 2.0 1.9 26.7 25.7 LUCK Lucky Cement Ltd. 495.0 689.7 39.3 Buy 43.1 44.7 10.0 11.0 11.5 11.1 2.0 2.2 2.3 2.0 21.6 19.1 DGKC D.G. Khan Cement Co. 147.6 190.9 29.3 Buy 18.4 19.3 5.0 6.0 8.0 7.7 3.4 4.1 0.9 0.9 12.3 11.8 FCCL Fauji Cement Company 36.8 48.6 31.9 Buy 3.9 4.4 3.0 3.5 9.4 8.4 8.1 9.5 2.8 2.5 30.7 31.6 MLCF Maple Leaf Cement 74.6 92.0 23.4 Buy 8.8 10.2 2.0 3.0 8.5 7.3 2.7 4.0 2.4 1.9 31.6 29.3 Oil & Gas MarketingPSO Pakistan State Oil 325.8 455.1 39.7 Buy 51.5 57.6 12.0 12.0 6.3 5.7 3.7 3.7 1.0 0.8 15.9 15.8 APL Attock Petroleum Ltd. 505.1 683.3 35.3 Buy 50.8 55.0 40.6 44.0 9.9 9.2 8.0 8.7 2.9 2.7 30.1 30.7 Automobile AssemblerINDU Indus Motor Company 1,011.7 1,260.1 24.6 Buy 123.4 116.7 86.0 70.0 8.2 8.7 8.5 6.9 2.9 2.6 38.0 31.8 PSMC Pak Suzuki Motor Co. 495.3 606.2 22.4 Buy 59.3 50.8 15.0 13.0 8.4 9.7 3.0 2.6 1.5 1.3 19.3 14.6 Power Generation & DistributionKEL K-Electric Ltd. 7.4 10.8 45.2 Buy 0.6 1.1 - - 12.1 6.7 - - 1.4 1.2 12.5 19.2 KAPCO Kot Addu Power Co. 81.0 75.6 (6.7) Hold 11.0 11.2 9.0 9.0 7.4 7.2 11.1 11.1 2.2 2.2 31.2 30.4

HUBC Hub Power Company 102.6 110.8 8.0 Buy 9.7 9.8 8.5 8.5 10.6 10.5 8.3 8.3 3.1 3.0 32.0 28.9

NCPL Nishat Chu. Power Ltd. 55.1 56.6 2.8 Buy 9.7 8.8 8.0 7.5 5.7 6.2 14.5 13.6 2.4 2.2 45.2 36.9

NPL Nishat Power Limited 53.7 51.1 (4.8) Hold 9.6 11.9 7.0 8.0 5.6 4.5 13.0 14.9 1.4 1.3 27.3 29.9 Textile CompositeNML Nishat Mills Ltd. 94.9 134.4 41.7 Buy 12.0 14.2 4.5 5.0 7.9 6.7 4.7 5.3 0.4 0.4 5.5 6.4 ChemicalsLOTCHEM Lotte Chemical Pak Ltd. 6.5 7.6 17.5 Buy (0.1) 0.05 - - nm nm - - 0.9 1.0 (2.0) 0.7 Cable & Electrical GoodsPAEL Pak Elektron Ltd. 62.5 91.8 46.8 Buy 9.0 9.6 3.0 5.0 7.0 6.5 4.8 8.0 1.6 1.4 24.3 22.7 Source: Bloomberg, AHL Research

DisclaimerDisclaimer

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 viewsexpressed 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 notdetermined 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 AHL’s non-research departments, and no personal engaged inproviding non-research services have any influence or control over the compensatory evaluation of the Analyst(s).

Equity Research RatingsArif Habib Limited (AHL) uses three rating categories, depending upon return form current market price, with Target period as June 2016 for Target Price. In addition, return excludes all type of taxes. For moredetails kindly refer the following table;

Equity Valuation MethodologyFollowing valuation technique(s) are used to arrive at the target price of subject security (ies); Free Cash Flow to Firm (FCFF) Free Cash Flow to Equity (FCFE) Reserve Base Valuation (RBV) Discounted Cash Flow (DFC) Justified Price to Book (JPB) Justified Price to Earnings (JPE) Relative Valuation (RV) Sum of Parts (SoTP)

RisksThe 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. Thispublication 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. Theinformation 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 orcomplete 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 thisdocument 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. AHLreserves 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 iscommitted 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 aguide 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 anyuse 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 companiesreferred 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 inany 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.

Rating DescriptionBUY Total return of subject security(ies) is more than +10% from last closing of market price(s)HOLD Total return of subject security(ies) is between -10% and +10% from last closing of market price(s)SELL Total return of subject security(ies) is less than -10% from last closing of market price(s)

94

List of AbbreviationList of Abbreviation

95

1H First Half EU European Union NIM Net Interest MarginsADB Asian Development Bank EV Enterprise Value NIR Net International ReserveADIP Auto Industry Development Policy Ex Excluding NPL Non Performaning LoansADR Advances Deposit Ratio FIPI Foreign Investor Portfolio Investment O&M Operations & MaintanceAHL Arif Habib Limited FM Frontier Markets OMCs Oil Marketing Companiesbbl Barrel FMCGs Fast Moving Consumer Goods OMO Open Market OperationBEER Bond Equity Equivalent Ratio FO Furnace Oil OPEC Oil Producing and Exporting CountriesBoE Barrels of Oil Equivalent FX Foreign Exchange Reserves PAT Prof it After Taxbpd barrels per day FY Fiscal Year PBS Pakistan Bureau of StatisticCAC Cotton Crop Assesment Committee GBP Great Britian Pound PBV Price to Book ValueCAGR Compounded Annual Grow th Rate GDP Gross Domestic Product PER Price Earning RatioCAR Capital Adequacy Ratio GENCOs Pow er Generation Companies PIB Pakistan Investment BondsCASA Current Account Saving Account GSP Generalised Scheme of Preferences PKR Pakistan RupeeCG Central Government ICH International Clearing House POL Petroleum Products PricesCKD Complete Knock Dow n ICT Information & Communications TechnologyPP Petroleum PolicyCNG Compressed Natural Gas IDR Investment Deposit Ratio PR Policy RateCNY Chinese Yuan IFC International Finance Corporation PSX Pakistan Stock ExchangeCPEC China Pakistan Economic Corridor IMF International Monetary Fund RDs Regulatory DutiesCPI Consumer Price Index IPPs Independent Pow er Producers REER Real Effective Exchange RateCSF Coalition Support Fund JPY Japanese Yen RGDP Real Gross Domestic ProductCY Calendar Year KO Kerosene Oil ROA Return on AssetsDAP Di-ammonium Phosphate KSE Karachi Stock Exchange ROE Return on EquityDPS Dividend Per Share LNG Liquif ied Natural Gas SBP State Bank of PakistanDR Discount rate LSM Large Scale Manufacturing SME Small Medium EnterprisesDY Dividend Yield LTFF Long Term Financing Facility T&D Transmission & DistributionE&P Exploration & Production ME Middle East USD US DollarEBITDA Earning Before Interest, Taxes & Amortization MMBTU Metric Million British Thermal Unit VSS Voluntary Separation SchemeECC Economic Coordination Committee MPC Monetary Policy Committee WAPDA Water & Pow er Development AuthorityEFF Extended Fund Facility MS Motor SpiritEGrow Earning Grow th MSCI Morgan Stanley Composite IndexEM Emerging Markets MW Mega WattsEPS Earrings Per Share NFA Net Domestic Assets

Contact ListContact List

Shahid Ali Habib Chief Executive Officer [email protected] +92 -21-3240-1930

Shahbaz Ashraf, CFA Head of Research [email protected] +92-21-3246-0742

Tahir Abbas AVP- Senior Investment Analyst [email protected] +92-21-3246-2589

Syed Faw ad Basir AVP- Investment Analyst faw [email protected] +92-21-3246-2589

Ahmed Lakhani Investment Analyst [email protected] +92-21-3246-1106

Rao Aamir Ali Investment Analyst [email protected] +92-21-3246-0742

Syed Shiraz Zaidi Investment Analyst [email protected] +92-21-3246-1106

Waleed Rehmani Investment Analyst [email protected] +92-21-3246-1106

Misha Zahid Investment Analyst [email protected] +92-21-3246-1106

Muhammad Husnain Madni Off icer- Database [email protected] +92-21-3246-1106

Azhar Javaid VP- International Sales [email protected] +92-21-3246-8312

Usman Tauf iq Ahmed AVP- International Sales [email protected] +92-21-3246-8285

M. Yousuf Ahmed SVP- Equity Sales [email protected] +92-21-3242-7050

Syed Farhan Karim VP- Equity Sales [email protected] +92-21-3244-6255

Farhan Mansoori VP- Equity Sales [email protected] +92-21-3242-9644

Afshan Aamir VP- Equity Sales [email protected] +92-21-3244-6256

Atif Raza VP- Equity Sales [email protected] +92-21-3246-2596

Furqan Aslam AVP- Equity Sales [email protected] +92-21-3240-1932

Research Team

Equities Sales Team

96

pakistan strategy 2016 · operation zarb-e-azb led to improving security situation crackdown by...

Documents