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May 31, 2016
MORNING BRIEFING
The underlying theme of the Conference revolved around the recent turnaround in Gw adar Port Related
793
Projects
Pakistan’s macroeconomic indicators, with discussions on the investment
opportunities being offered under the China Pakistan Economic Corridor (CPEC). Other Projects 44
Bulk of CPEC projects are expected to materialize during the next three years as
Total 45,040
part of government’s commitment to free this country from power load-shedding
Source: Ministry of Planning, Development
before the general elections of 2018. Once the energy crisis in the country is
and Reforms
resolved, a turnaround in LSM sector can be expected. We believe, this in turn will
spur the capital markets of the country in the near future with a direct and a positive
impact on sectors like Banks, Cements, Steel and Asphalt manufacturer (28% of
market capitalization). Furthermore, sectors like OMCs and Autos (8% of market
capitalization) would benefit from the snowball impact of expansion witnessed on
account of CPEC projects.
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May 31, 2016
MORNING BRIEFING
banking sector’s advantage of loan growth, on account of project financing, was not
new to investors; however, the key point discussed was the timing of
materialization of those projects. Furthermore, solution of the ongoing energy crisis
also remained a focal point of discussions, where the installed level of circular debt
gave investors some respite, which would lead to lower risks for Pak Banks on the
project financing extended to manufacturing sectors. Investors understood that
apart from direct CPEC projects, banks would witness loan growth from a
magnifying impact on the construction sector as well. Our Top Pick in the Banking
sector is UBL (TP: Rs217).
Cement sector: Investors remained upbeat on the growth of Pakistan’s cement
sector as they agreed with increase in cement demand from CPEC projects
directly, as well as from local infrastructure developments to be executed prior to
CPEC projects. Furthermore, investors’ interest was brought in by the
diversification in investments by cement manufacturers, which balanced their risk
portfolio. DGKC (TP: Rs240) remains our Top Pick in the Cement sector.
Power sector: Pak Power was one of the key interests of investors at the
Conference where investors were keen to know about the new JVs with the
Chinese, coal projects under the CPEC and source of financing for the upcoming
mega projects. However, concerns regarding the ongoing circular debt issue and
materialization of transmission and distribution lines projects were a prominent part
of the discussions. Investors understood the risk profile of Pakistan and remained
positive on the benefit of lower oil prices to the country’s economy in general and
the Power sector, in particular. We favor HUBC in the Power sector with a TP of
Rs121.
Fertilizer sector: Analysing the sector’s maturity stage and least association with
CPEC projects, investors’ remained neutral towards Pak Fertilizers. Potentially
rising unfavorable gap between input-output prices was seen as a key concern
while diversification of some of the Fertilizer manufacturers into the food and power
segments were seen favorably. EFERT remains our Top Pick in Pak Fertilizer with
a TP of Rs105.
Oil & Gas sector: Recent recovery in oil prices rejuvenated investors’ interest in
the Oil and Gas sector. Moreover, promising oil and gas flows that are expected in
the near future, boosted investors’ confidence in Pak E&P space. Key concerns
regarding the sector, circular debt and reserve life, were also addressed, where the
latter may witness upgrade post new oil and gas flows. It was highlighted that
accessibility and significantly improving law & order situation in Baluchistan for the
smooth execution of the CPEC projects has also opened the doors of the said
region for Oil and Gas sector for fresh drilling, which were not easy to operate in
earlier.
Auto sector: Investors remained upbeat on growth in the Auto sector, which would
further be supported by launch of new models by various assemblers, while low oil
prices with considerably soft interest rate environment should encourage higher
consumer financing. Furthermore, increase in demand is also anticipated from
trickle down impact of infrastructure and other CPEC projects. Our top pick in the
Auto sector remains INDU with TP of Rs1,173.
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May 31, 2016
MORNING BRIEFING
Telecom sector: The ongoing price war in the Telecom sector of the country was a Pakistan m arket statistics (May 30, 16)
concern highlighted by investors. It was acknowledged that an optimistic sentiment KSE-100 Index 36,234.69
may be developed if the sector further consolidates as it would result in economies Previous KSE-100 Index 36,694.26
of scale and boost profitability of the sector. Change from last closing -459.57
Change from last closing (%) -1.25%
Pharma sector: The ongoing transition of setting a pricing formula in the Pharma PSX Market Cap. (Rs. bn) 7,391.00
sector was well-known to all investors; however, lack of information with regards to PSX Market Cap. (US$ bn) 70.48
the sector’s products was a concern. Investors were on the same page on the Total Volume (Shares mn) 205.45
bright prospects of overall growth in the Pharma sector. Traded Value (Rs. bn) 9.19
Traded Value (US$ mn) 87.64
What does MSCI review hold for Pakistan? KSE-30 Index 20,913.02
As per the MSCI simulated list, nine companies namely OGDC, HBL, MCB, UBL, Change from last closing -330.25
LUCK, FFC, ENGRO, HUBC and PSO are likely to make part of the MSCI Change from last closing (%) -1.55%
Emerging Market, whereas 19 other companies are expected to be considered for Futures Volume (Shares mn) 39.87
the MSCI Emerging Market Small Cap Index. Even though the MSCI Pakistan Futures Value (Rs. mn) 2,701.89
Index is likely to have a weight of 0.19% in Emerging Markets (vs. ~9% weightage Futures Spread 7.43%
in Frontier Markets), we estimate that incremental inflows can amount to Source: PSX
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May 31, 2016
MORNING BRIEFING
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