(41) pakistan market strategy

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

9 February 2017 Asia Pacific/Pakistan

Equity Research Strategy

Pakistan Market Strategy Research Analysts

Farhan Rizvi, CFA

65 6212 3036

[email protected]

Fahd Niaz, CFA

65 6212 3035

[email protected]

STRATEGY

Re-rating done; time to track earnings growth

Figure 1: P/E has risen to a nine-year high fueled by local liquidity

Source: MSCI, NCCPL, Credit Suisse estimates

■ Breather ahead as index flirts with peak levels. Domestic liquidity has

nudged up the index by another 4% YTD (following a 46% rally in 2016).

With a 24% re-rating of P/E multiples (to 10.8x) already in the bag since the

EM upgrade decision and the discount to MSCI EM Asia narrowing to 14%,

we think market returns from here on should track EPS growth (2017E:

+14%), rather than benefiting from multiple expansion. We expect some

correction in the near term; however, with the EM inclusion date around the

corner (estimated passive flows of US$220 mn), we suggest buying on dips.

■ Investment-led growth drivers intact. Infrastructure projects under both

the China-Pakistan Economic Corridor (CPEC) and public sector

development schemes are in full swing. Despite some slippages, we believe

3,500-4,000 MW (18-20% of existing capacity) will likely be connected to the

grid before the 2018 elections. Corporate mood has been upbeat with private

sector credit growth touching 14% YoY and greenfield/M&A activities under

way in consumer, energy, cement and auto sectors. We expect GDP growth

to exceed 5% this year; however, we see risks emerging on the C/A front

(from a deteriorating trade deficit and slowdown in remittances).

■ Maintain selective preference for banks and cement. We set a Dec 2017

index target of ~57,000, implying 19% total return. Market liquidity should

also get a boost from launch of new derivative products in 2H17 with Jan

volumes already touching nine-year highs. Our top picks are HBL, UBL,

DGKC and LUCK, which are pegged to the CPEC-led growth cycle. We

have lowered estimates for HBL, UBL and DGKC by 1-11% but raised TPs

by 5-20%. Key risks include deterioration in political and security

environment, which could curtail investment activity, and higher oil prices.

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

Feb-

15

Apr-1

5

Jun-

15

Aug-

15

Oct-

15

Dec-

15

Feb-

16

Apr-1

6

Jun-

16

Aug-

16

Oct-

16

Dec-

16

Feb-

17

MSCI Pak P/E (x)

MSCI Pak P/E (x) LHS

MSCI announces upgrade

P/E has re-rated 24%

(125)

47 59

(50)

18 9 20 22

(339)

57

303

(119)(88)

3

(41)

226

(400)

(300)

(200)

(100)

0

100

200

300

400

FII's

Reta

il

Fund

s

Bank

s

Com

pani

es

Oth

ers

Brok

erpr

op b

ooks

NBFC

Net buy/(sell) US$mn

2017 YTD 2016

9 February 2017

Pakistan Market Strategy 2

Focus charts and tables Figure 2: P/E at 10.8x is close to a nine-year high Figure 3: Seven stocks make the cut in the MSCI EM

Name of company Weight in MSCI

Pak EM Index Pro-forma weight in MSCI EM Index (bp)

Habib Bank 19.9% 3.56

Lucky Cement 17.7% 3.18

MCB Bank 17.3% 3.11

United Bank 14.8% 2.66

Oil & Gas Development Co. 12.4% 2.23

Engro Corporation 10.5% 1.89

Fauji Fertilizer 7.4% 1.33

Total 100.0% 17.96

Banks will be the heavyweights in MSCI Pak Index.

We expect total passive flows of ~US$220mn in seven stocks post

inclusion.

An additional 20 small cap stocks will be part of the MSCI EM Small

Cap Index.

Source: MSCI, Credit Suisse estimates Source: MSCI, Credit Suisse estimates

Figure 4: Private sector credit has been accelerating Figure 5: Few C/A constituents have raised concern

Source: SBP, Credit Suisse estimates Source: SBP

Figure 6: Top picks

Ticker

(Reuters)

Name of company Price

(PRs)

TP

(PRs)

Rat.

Mkt. cap

(US$ mn)

6M ADTO

(US$ mn)

P/E (x)

P/B (x)

EV/EBITDA (x)

D/Y (%)

ROE (%)

17E 18E 17E 18E 17E 18E 17E 18E 17E

HBL.KA Habib Bank 266.9 305. 0 O 3,740 1.9 9.9 8.3 1.9 1.7 - - 5.3 5.8 19.1

UBL.KA United Bank 241.6 276.0 O 2,826 1.9 9.6 8.5 1.8 1.7 - - 5.8 6.1 19.2

LUKC.KA Lucky Cement 854.4 970.0 O 2,640 2.3 16.1 13.3 3.4 2.8 10.8 9.5 1.5 1.9 20.9

DGKH.KA DG Khan Cement 233.7 290.0 O 978 5.0 10.3 8.6 1.4 1.2 7.7 6.7 2.6 2.6 13.4

Source: Reuters, Credit Suisse estimates

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

Feb-

15

Apr

-15

Jun-

15

Aug

-15

Oct

-15

Dec

-15

Feb-

16

Apr

-16

Jun-

16

Aug

-16

Oct

-16

Dec

-16

Feb-

17

MSCI Pak P/E and discount vs. MSCI EM Asia

MSCI Pak P/E (x) LHS Discount to MSCI EM Asia (RHS)


10%

-2%

7%

2%3%

8% 8%

7%

14%

-6.0%

-3.0%

0.0%

3.0%

6.0%

9.0%

12.0%

15.0%

18.0%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

Private sector credit (PRs bn) Growth (RHS)

-2.3%

6.0%

-2.4%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Exports Imports Remittances

1HFY17 growth YoY

9 February 2017


Re-rating done; time to track earnings growth

Breather ahead as index flirts with peak levels

Pakistan’s stock market has continued to rally in 2017 (+4% YTD), following a 46% USD

return in 2016. The YTD performance has been fueled by continued inflow of domestic

liquidity as FII outflows have persisted (YTD US$125 mn). Post the MSCI EM upgrade

announcement in June 2016, valuations have risen 24%, taking P/E to 10.8x (close to a

nine-year high). As a result, discount to MSCI EM Asia has narrowed to 14%. The re-

rating has also ignored the ~11% EPS decline in 2016. We expect the market to take a

breather in the near term as excitement around corporate results fades, but with EM

inclusion around the corner, 14% EPS growth in 2017E and acceleration in investment

activity, outlook remains positive.

Multiple catalysts still in play

MSCI inclusion is around the corner which we estimate will attract passive flows of

US$220 mn. The investment-led growth theme is also gaining traction with infrastructure

projects in full swing and there is slow but steady progress on power projects, which could

see 3,500-4,000 MW (18-20% of existing capacity) being connected to the national grid

before the 2018 elections. The CPEC price tag has also been raised to ~US$55 bn (from

US$46 bn), as railway upgrades, mass transit and LNG infrastructure projects have been

included. The recent 40% strategic stake purchase in the stock exchange by a consortium

of Chinese investors paves the way for the rollout of new derivative products and should

further enhance liquidity, which touched US$150 mn in January 2017.

Steady macros albeit a few risks present

Macros remain stable, with expected GDP growth in excess of 5% in FY17 (highest level

since FY08), subdued inflation, and growing domestic consumption. Fiscal consolidation

has successfully pulled down the deficit to 4.6% of GDP (from a high of 8.8%). The PKR

has also been very resilient as FX reserves are close to an all-time high (~US$24 bn; ~6

months’ cover). Despite the solid footing, pressures are starting to emerge on the external

account amid a widening trade deficit and weakness in remittances. Fiscal slippages also

remain a possibility in FY18 as the government races against time to complete some of

the infrastructure and power projects prior to the 2018 general elections.

Politics is noisy but government stable

We expect political noise to remain, due to the ongoing Panama hearings by the Supreme

Court. While a disqualification verdict appears highly unlikely, the SC could form an inquiry

commission to investigate into potential money laundering and tax evasion by the first family.

With an eye on next year’s elections, the government is likely to accelerate development

projects, particularly in the infrastructure and energy space. In terms of global relations, we

see an increasing tilt towards China, while relations with the US could stay rocky given a

more hawkish approach of the new US administration.

Prefer structurally driven growth stories

We would stick to sectors and stocks most leveraged to structural themes of CPEC

investments, while the MSCI upgrade could draw passive flows in the seven shortlisted

names. We remain bullish on equities and suggest accumulating on dips. Our preferred

sectors include banks (HBL and UBL) and cement (LUCK and DGKC). We have lowered

estimates for HBL, UBL and DGKC by 1-11% but raised TP by 5-20%. We believe 2017

will track 14% EPS growth with limited scope for further re-rating, and set a Dec-17 index

target of ~57,000—coupled with a D/Y of 5%, potential total return is 19% from here. Key

risks include deterioration in political and security environment—which could curtail

investment activity—and/or increase in international oil prices beyond US$70-75/bbl.

Domestic liquidity has absorbed FII outflow

(YTD US$125 mn)

The market has re-rated 24% to 10.8x P/E

Infrastructure and

energy projects are progressing well with

the CPEC tag up to US$55 bn

Expect growth to exceed 5% this year

Weakness in trade balance and fall in

remittances are concerning

Low probability of Panama Papers

outcome hindering government operations

Pak’s tilt towards China is expected to increase

Top picks: HBL, UBL,

LUCK, and DGKC

Dec17 index target of ~57,000 implies 19%

total return from here

9 February 2017


Breather ahead as index flirts with peak levels The Pakistan market has extended the rally in 2017 (+4% YTD) following a 46% USD

return in 2016. The YTD performance has been fueled by a surge in domestic liquidity

weathering the impact of FII outflows (YTD US$125 mn). Post the MSCI EM upgrade

announcement in June 2016, valuations have risen by 24%, taking P/E to 10.8x. As a

result, discount to MSCI EM Asia has narrowed to 14%. The re-rating drive also ignored

an ~11% EPS decline in 2016. We expect the market to take a breather in the near term

as excitement on corporate results fades, but with EM inclusion around the corner, the

broader outlook is still positive as 14% EPS growth in 2017E is healthy and investment

activity is accelerating.

Valuations have re-rated by 24% since EM upgrade

Post the EM upgrade announcement, MSCI Pakistan P/E has re-rated 24% to 10.8x and

subsequently narrowed the gap MSCI EM Asia to 14%. Valuations have touched a nine-

year high, and we expect some breather in the coming weeks, particularly once the

payout-heavy results season concludes. However, beyond this, we see a pick-up in

market activity as we approach EM inclusion date (passive flows estimated at US$220mn).

Figure 7: P/E of 10.8x is close to a nine-year high and up 24% since MSCI upgrade

Source: MSCI

Domestic liquidity is soaking in FII outflows

2016 bucked the trend as FII selling did not deter the index…

2016 was in some ways a repeat of 2015 with sizeable foreign selling of US$338 mn.

However, unlike previous years when FII flows had dictated market returns (despite FII

participation hovering around 8-9% of total turnover), 2016 bucked the trend as a

significant chunk of domestic liquidity was enough to absorb FII selling. In particular, local

funds (+US$303 mn) and non-bank financial companies (NBFCs) such as insurance

companies (+US$226 mn) emerged as large buyers, while trading books of banks also

took heavy profits (-US$119 mn). For FIIs, the largest chunk of selling occurred in the E&P

sector (-US$120 mn), followed by fertilisers (-US$87 mn) and banks (-US$80 mn). The

only sector to witness a noticeable inflow was oil marketing (+US$70 mn).

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

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

Jan-

16

Feb

-16

Mar

-16

Apr

-16

May

-16

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16

Jul-1

6

Aug

-16

Sep

-16

Oct

-16

Nov

-16

Dec

-16

Jan-

17

Feb

-17

MSCI Pakistan P/E (x)


We see a breather around the corner as

corporate results excitement fades…

…but EM inclusion and

upbeat investment activity should keep

outlook positive

P/E has risen to 10.8x

and shrunk the gap with MSCI EM Asia to

14%

2016 FII outflow was easily soaked in by

local funds and insurance companies

9 February 2017


…and YTD trends indicate its continuation

Despite continued FII outflows (US$125 mn YTD) in 2017, the KSE-100 has managed to

consolidate the gains from last year (+4% YTD), helped once again by strong domestic

liquidity inflows from mutual funds (+US$59 mn) and retail investors (+US$47 mn). Given

low returns on other competing asset classes such as fixed income and increased

regulation on property investments, diversion of funds into equities is likely to continue.

Figure 8: 2016 defied the regular trend and FII

outflows did not dent the upward march

Figure 9: Aggressive buying from mutual funds,

NBFCs and retail investors has offset FII selling

Source: Bloomberg, NCCPL Source: NCCPL

Figure 10: Sector-wise split of FII flows in 2016 and

YTD 2017

Figure 11: AUMs of local funds have grown 25% and

20% in 2015 and 2016, respectively

Name of sector 2016 (US$ mn) 2017-YTD (US$ mn)

Oil and Gas Marketing Companies 70.4 12.8

Technology and Communication 5.0 0.5

Cement (8.0) (22.7)

Textile Composite (18.2) (9.3)

Power Generation and Distribution (19.7) (27.2)

Food and Personal Care Products (21.4) (0.9)

Commercial Banks (80.0) (25.7)

Fertilizer (86.4) (3.8)

Oil and Gas Exploration Companies (119.9) 3.4

All other sectors (60.6) (52.1)

Total (338.8) (124.9)

Source: NCCPL

Source: NCCPL Source: MUFAP

-10%

0%

10%

20%

30%

40%

50%

60%

(400)

(300)

(200)

(100)

0

100

200

300

400

500

600

2010 2011 2012 2013 2014 2015 2016

Net foreign buy/sell (US$ mn) KSE-100 index returns (RHS)

Despite outflows, market delivered 46% USD return

(125)

47 59

(50)

18 9 20 22

(339)

57

303

(119)(88)

3

(41)

226

(400)

(300)

(200)

(100)

0

100

200

300

400

FII's Retail Funds Banks Companies Others Brokerprop books

NBFC

Net buy/(sell) US$mn

2017 YTD 2016

0

50

100

150

200

250

300

350

400

450

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

AUM's of open-ended funds (PRsbn)

YTD, local funds and retail investors have

been counterweights to foreign outflows

9 February 2017


Volumes rose to a nine-year high in January 2017,

momentum to continue

While the average daily value traded shrank 7% YoY to US$84 mn in 2016, the decline

could be mostly attributed to a slow 1H16 when activity stood at an average of US$72 mn.

This witnessed a sharp climb in 2H16 (to US$98 mn) and has accelerated even further to

US$150 mn in Jan (a nine-year high)

Figure 12: January 2017 turnover stood at a nine-year high

Source: The BLOOMBERG PROFESSIONAL™ service, Credit Suisse estimates

48.439.0

45.2

66.3

77.190.7

71.6

98.0

84.4

149.8

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

2010 2011 2012 2013 2014 2015 1H16 2H16 2016 2017-YTD

KSE-100 ADV's (US$mn)

9 February 2017


Multiple catalysts still in play Notwithstanding some correction in the coming weeks, our positive view on equities is

intact, and we recommend buying on dips. MSCI inclusion, which is around the corner (1

June), is estimated to attractive passive flows of ~US$220 mn. The investment-led growth

theme is also gaining traction, with infrastructure projects in full swing, and there is slow

but steady progress on power projects, which should see 3,500-4,000 MW (18-20% of

existing capacity) being connected to the national grid before the 2018 elections. The

CPEC price tag has also been raised to ~US$55 bn (from US$46 bn), as railway

upgrades, mass transit and LNG infrastructure projects have been included. Recent

conclusion of strategic stake sale of the Pakistan Stock Exchange to Shanghai and

Shenzhen Stock Exchanges has raised optimism for launch of new products, particularly

the much-needed derivatives products, which should boost market liquidity.

MSCI inclusion the next big event

Pakistan will formally become part of the MSCI EM Index on 1 June with seven

constituents (MCB, HBL, LUCK, ENGRO, OGDC, FFC, and UBL) and weightage of ~18

bp. Two companies (PSO and HUBCO), which were initially included in the pro-forma

index at the time of approval in June 2016, have now been dropped. Banks are expected

to lead the pro-forma Pakistan index with HBL, MCB and UBL among the top four names,

accounting for ~52% of the index. One of major pushbacks regarding Pakistan’s inclusion

has been its meagre weightage of 18 bp; however, we downplay concerns about Pakistan

getting lost in the EM space due to a CPEC-driven structural growth story, which fares

better than most EM participants in our view. The increasing liquidity (YTD ADTO up to

US$150 mn)—ahead of the Philippines—and robust EPS growth (14%) are the key

supporting factors, in our view.

Figure 13: MSCI Pakistan EM Index

All figures in (%) Weight in MSCI Pak Index Pro-forma weight in MSCI EM Index (bp)

Habib Bank 19.9% 3.56

Lucky Cement 17.7% 3.18

MCB Bank 17.3% 3.11

United Bank 14.8% 2.66

Oil & Gas Development Company 12.4% 2.23

Engro Corporation 10.5% 1.89

Fauji Fertilizer 7.4% 1.33

Total 100.00% 17.96

Source: MSCI, Credit Suisse estimates

CPEC price tag raised to ~US$55 bn

The China Pakistan Economic Corridor (CPEC) remains the major investment theme over

the medium to long term—it has the capacity to address Pakistan’s crippling energy deficit

and revive the ailing transport infrastructure. Commissioning of the Gwadar Port and

arrival of the first convoy from Kashgar, China, last year was an important milestone,

highlighting the long-term vision of the CPEC. Additional commitments for upgrading

railway tracks, implementing mass transit projects in provincial capitals and investing in

LNG import infrastructure have pushed up the CPEC price tag to US$55bn. While some

priority projects in the power sector have witnessed delays, things are now back on track

with the first loan drawdowns in 4Q16.

MSCI inclusion can

draw passive flows of ~US$220 mn

Stake sale of the

exchange to a consortium of Chinese

investors to expedite new product offerings

Pakistan to have a weight of 18 bp in EM

index with seven constituents (MCB,

HBL, LUCK, ENGRO, OGDC, FFC and UBL)

Railway upgrades, mass transit and LNG import infrastructure

projects have now been included, lifting the

price tag to ~US$55 bn

9 February 2017


Rail-based mass transit projects included

With work on the Orange-Line Metro Train project in Lahore progressing fast, three similar

rail projects have been approved in-principle to be established in the provincial capitals

(Karachi, Quetta, and Peshawar). The government has also approved duty exemptions for

the import of machinery to be used in their construction.

Infrastructure projects progressing at a rapid pace

On the infrastructure front, things are moving swiftly with priority projects such as Karachi–

Lahore Motorway (KLM), Multan-Faisalabad (M-4), Ratodera-Gwadar (M-8) and Sialkot-

Lahore (M-11) motorways progressing well. The PM recently inaugurated the 75-km first

Phase-I of the Karachi-Hyderabad Motorway (M9) with the remaining 60 km section

targeted to be completed by March 2018. Moreover, the first phase of M-8 (200 km

Gwadar-Hoshab section) was completed in February 2016, and subsequent phases are

under construction and expected to be completed by over the next few years. Construction

on other priority infrastructure projects such as the Orange-Line Lahore metro has also

started; although some sections may need to be re-designed given its impact on existing

heritage sites, the government appears committed to completing the projects in the

stipulated time.

Progress on energy projects has been slow…but ploughing along

Despite delays in some projects, work on most priority projects remains on track with the

government confident of adding 3,500-4,000 MW of power before the end of its tenure in

3Q18. Among the ones to achieve full or partial commercial operations before the

elections, we highlight Port Qasim Electric Power Company (1,320 MW), Huaneng

Shandong Ruwi (1,320 MW) and Quaid-e-Azam Thermal Power (LNG) to be the key

projects.

Hubco’s imported coal IPP (1,320 MW) has been the prominent laggard—the project was

originally planned to achieve financial closure in June 2016, but the process was delayed

due to the government’s reported concerns about power capacity surplus. The issue,

however, has been resolved as the government gave the go-ahead for the project last

month. The tariff structure of the US$1.6 bn Matiari-Lahore Transmission Line has recently

been approved, which is vital for providing grid connectivity for the new projects. Recent

news flow suggests that land acquisition is under way.

9 February 2017


Figure 14: Capacity additions planned under CPEC and non-CPEC ventures (list is non-exhaustive)

Project name Location Sponsors Capacity

(MW)

Fuel type Expected COD Current status

CPEC projects

Port Qasim Electric

Company

Port Qasim (near

Karachi)

Sinohydro Resources

and Al-Mirqaab (UAE)

1,320 Imported coal 1Q2018 Civil and mechanical works

underway

Huaneng Shandong Ruyi Sahiwal (Punjab) Huaneng Shandong Rui Group 1,320 Imported coal 2Q2017 Civil works in progress

Engro Powergen Thar Thar (Sindh) China Machinery Engineering

Corporation & Engro Powergen

660 Domestic Thar coal 2018-2019 Financial close achieved

and team mobilized

China Power Hub

Generation Company

Hub (Balochistan) China Power International and

Hub Power Company

660 Imported coal 2019-2020 Financial close

expected in 2Q17

Quaid-e-Azam Solar Power

Park

Bahawalpur

(Punjab)

Zonergy China/QA Solar Power

Company Pakistan

1,000 Solar 2018-2019 COD of first unit (100MW)

achieved

Suki Kinari Hydro Power KPK Province China Gezhouba Group 870 Hydel 2020 Land acquisition in process

Karot Hydro Power Azad Kashmir &

Northern Punjab

China Three Gorges

Corporation/Silk Road Fund

720 Hydel 2020 Land acquisition in process

Sino-Sindh Resources Thar (Sindh) Sino-Sindh Resources 1,320 Domestic Thar coal 2019-2020 Financial close in 1H2017

Total 7,870

Non-CPEC Projects

Datang Pakistan Karachi

Power Generation

Port Qasim China Datang/China Machinery

Engineering

700 Imported coal 2019-2020 Financial close expected in

1H2017

Kolachi Portgen Port Qasim Engro Powergen 450 LNG 2019-2020 Financial close in 1H2017

Lucky Electric Power Port Qasim Lucky Cement 660 Imported coal 2019-2020 Financial close in 1H2017

Quaid-e-Azam Thermal Punjab Government of Punjab 1,200 LNG Partial COD by 4Q17 Construction underway

Thar Energy Thar (Sindh) Hub Power Company 330 Thar coal 2019-2020 Financial close in 1H2017

Total 3,340

GRAND TOTAL 11,210

Source: Ministry of Planning, Development & Reform, NEPRA, Credit Suisse research

Demutualisation and stake divestment of stock market

an important milestone; rollout of new products next

Following the consolidation of three stocks exchanges (Karachi, Lahore, and Islamabad)

into one unified platform (Pakistan Stock Exchange) in January 2016, the government has

conducted a strategic sale with a consortium of three Chinese exchanges coming out as

the winning bidders. This included China Financial Futures Exchange Company Limited

(lead bidder), Shanghai Stock Exchange and Shenzhen Stock Exchange. Together, they

have taken up a 30% stake, while two local financial institutions (Pak-China Investment

Company and Habib Bank) have acquired a 5% stake each. Priced at PRs28/sh, the

transaction fetched ~US$85 mn (on the offer of 320 mn shares), putting a tag of US$213

mn on the total equity value (~2.0x P/B). Besides this 40%, another 20% of the PSX stake

would be offered to the public to bring liquidity into the capital market through brokers.

Expect new product offerings to boost liquidity

With the official Share Purchase Agreement signed a few days ago, we expect the

managers to launch new trading products in 2017, such as options and derivatives trading,

while also developing the bond market. The timing seems ripe as Pakistan is poised to

enter the MSCI EM index in June 2017. We see the market pocketing key milestones in

2017 with Pakistan’s inclusion in MSCI EM being the major one. Additionally, a consortium

of Chinese investors has acquired a 40% stake at the PSX; in our view, the rollout of new

products (such as derivatives) in a largely cash-based market is the need of the hour and

can go a considerable way to improve liquidity and market depth.

China Financial Futures Exchange Company,

Shanghai Stock Exchange and

Shenzhen Stock Exchange, along with two local institutions, have acquired a 40%

stake

9 February 2017


Steady macros, albeit a few risks present Pakistan's macros are on a reasonably good footing—GDP growth is expected to cross

the 5% mark in FY17E (the highest level since FY08), inflation is subdued (in low single

digits), and domestic consumption is growing. Fiscal consolidation measures have

successfully pulled down the budget deficit to 4.6% of GDP (from a high of 8.8%). The

PKR has been one of the most resilient currencies relative to regional peers in the past 12-

24 months as FX reserves are close to all-time highs (~US$24 bn; ~6 months’ cover) and

FDI flows from China are picking up pace, under projects from the CPEC. Capacity

expansions in key areas, such as cement, consumer and power, continue to indicate rising

business confidence and has set the stage for fixed capital formation potentially driving the

next wave of economic growth. Despite the strong footing, pressures are starting to

emerge, particularly on the external account from a widening trade deficit (amid falling

textile exports) and weakness in remittances, particularly from the GCC. Fiscal slippages

also remain a possibility in FY18 as the government races against time to complete some

of the infrastructure and power projects prior to the elections.

Rising investment outlay to boost GDP growth

Pakistan is in the midst of a multi-year investment boom, led by higher infra and energy

spending under the US$55 bn CPEC as well as accelerating private sector investments.

After some delays, priority energy projects are starting to achieve financial closure, which

is also reflected by the beginning of drawdowns from local banks in 4Q 2016.

Private sector credit on an upward trend

Private sector credit offtake has also accelerated to 14% in 2016 (the highest since 2007),

led by higher borrowings from the F&B, energy, construction industries and consumer

lending (housing and auto loans). In terms of new investment commitments, the cement

sector alone has announced US$2.1 bn in new investments over the next three years,

while the new auto policy has seen a big jump in new entrants with Renault and Kia

announcing setting up of operations with local JV partners.

Figure 15: 14% growth in private sector credit is a nine-year high

Source: SBP, Credit Suisse estimates

10.2%

-2.4%

6.8%

2.3% 2.7%

8.5% 8.4%

7.0%

13.5%

-6.0%

-3.0%

0.0%

3.0%

6.0%

9.0%

12.0%

15.0%

18.0%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Private sector credit (PRs bn) Growth (RHS)

Macros are steady with GDP growth set to top 5%, CPI curtailed, and fiscal position sound

Some pressure on C/A

is visible from trade deficit and a slowdown

in remittances

9 February 2017


M&A activity and greenfield projects are also picking up pace

M&A activity has also increased with Royal Friesland Campina’s US$446 mn acquisition of

Engro Foods, US$250 mn acquisition of Dawlance Pakistan by Turkish giant Arcilek, and

the US$1.8 bn acquisition announcement by a Chinese energy conglomerate for majority

stake in Karachi's largest utility. Chinese corporates in particular are in the hunt for

acquisition and investment targets, led by Anhui Conch's announcement of due diligence

of Dewan Cement, and Lucky Cement CEO’s recent interview regarding exploring

opportunities for joint-venture investment with Chinese partners. In this backdrop, we

expect the investment-to-GDP ratio to accelerate to 16.5% in FY17E and 18% in FY18E

(from 15.2% currently), propelling GDP growth to a decade high of 5.3% in FY17E and

5.6-5.8% in FY18E.

Figure 16: M&A activity and new capex plans have been unveiled

Recent M&A activities/greenfield projects announced/underway Sector Amount (US$ mn)

Royal Friesland Campina (RFC) has concluded purchase of a 51% stake in

Engro Foods. Commitment to invest additional US$100 mn over 5 years

Dairy products 450

Consortium of Chinese investors have taken up 40% stake in PSX Pakistan Stock Exchange 85

State-owned Chinese entity looking to acquire electricity distribution company Electricity utilities 1,800

Anhui Conch/Lucky Cement doing due diligence for Dewan Cement Cements NA

Renault will upgrade Ghandhara Nissan’s existing assembly line and

commence manufacturing of Renault vehicles by 2018

Autos 100

Lucky Cement setting in collaboration with Kia will start car assembly Autos NA

Nishat Mills looking to start Hyundai vehicle assembly Autos NA

Cement expansions of 25 mn tpa announced by existing players Cements 2,000

Turkish firm, Arcelik has acquired electronics manufacturer Dawlance Consumer electronics 243

Coca-Cola Beverages looking to raise capacity Beverages 200

Source: Credit Suisse research

50-75 bp rate hike expectations in 2H17

Sub-5% CPI readings continue to keep real interest rates in a healthy positive territory (210

bp), alleviating any immediate need of a rate hike. Support from regulatory activities has also

set a favourable backdrop for the CPI as gas tariffs have been lowered across various

consumer categories. The second-round impact of these cuts are yet to manifest firmly.

Second, the government has absorbed the impact of rising oil prices, and post September

2016, the oil price jump of 26% has translated into a retail fuel price increase of only 9%.

However, fiscal constraints would make it difficult for the government to defer the pass-

through for much longer. Recent rainfall throughout the country and the ensuing supply

tightening are also likely to prop up food prices in the coming weeks as the entire impact of

crop damage has yet to be assessed. Note that the food basket constitutes 32% of the CPI.

We expect YoY CPI to rise to ~5.0-5.5% by June 2017 (3.6% currently), thereby propelling

the central bank to raise policy rates by 50-75 bp in 2H17 from 5.75% at present.

Expect CPI to cross the 5% YoY mark in 2H17, prompting the SBP to

hike by 50-75 bp

9 February 2017


Figure 17: Real rates are still comfortable at 210 bp Figure 18: Hike in fuel prices has lagged oil prices

Source: PBS, SBP Source: Bloomberg, Credit Suisse research

Fiscal position can see some slippages in FY18

The process of fiscal consolidation that started with the IMF programme is likely to

continue with fiscal deficit expected to fall to 4.3% in FY17 from 4.6% recorded in FY16

and 8.0% in FY13. While tax revenues only grew 7% YoY in 1H FY17, we expect an

acceleration in 2H FY17, given the government’s increased resolve to target segments

with tax loopholes such as property and continue with higher transaction tax rates for non-

filers. This should help increase the tax-to-GDP ratio to 12.6% in FY17E (FY16: 12.4%).

Moreover, lower interest cost due to falling rates and large maturities of higher-yielding

Pakistan Investment Bonds will lend further support to fiscal balance, in our view. We do

not share the consensus opinion of fiscal slippages in FY17 as the Finance Minister who is

credited with stabilising the economy will be unwilling to allow a roll-back of the gains.

However, we do expect some slippages in FY18 as the government’s priority shifts

towards completion of key infrastructure and power projects prior to elections.

Figure 19: Budget deficit has been well curtailed Figure 20: Tax net has been widened but more to go

Source: MOF, Credit Suisse estimates Source: MOF, Credit Suisse estimates

1.0%

3.0%

5.0%

7.0%

9.0%

11.0%

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep

-14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep

-15

Nov

-15

Jan-

16

Mar

-16

May

-16

Jul-1

6

Sep

-16

Nov

-16

Jan-

17Core CPI Headline CPI Policy rate

9.2%

25.6%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Increase in retail fuel prices Increase in oil prices

Sep-2016 till Feb-2017

7.4

5.2

6.3

5.9

6.6

8.0

5.5

5.3

4.6

4.3

3.5

4.5

5.5

6.5

7.5

8.5

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

E

Fiscal deficit (% of GDP)

9.1%

9.9%

9.3%

10.2%

9.6%

10.1%

11.0%

12.4%12.6%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E

Tax-to-GDP ratio

9 February 2017


Energy and infrastructure are key areas of focus for development spending

Big-ticket energy and infrastructure projects are drawing the major chunk of development

spending in 1H FY17. Combined, these account for 47% of the total development

spending released thus far and have already made up 34-42% of their full-year allocations.

We generally see disbursements pick up in 4Q and reckon that the government would

strive to prioritise these three areas heading into the elections in 2018.

Figure 21: Development spending skewed towards energy and infrastructure

Source: Ministry of Finance

External position stable for now…but risks emerging

Pakistan’s external account position appears stable with FX reserves close to an all-time

high of US$23 bn (~6 months’ import cover), and PKR being one of the most resilient

currencies relative to Asian peers in the past two years. That said, pressures are starting

to emerge with 1H FY17 C/A position deteriorating to US$3.6 bn (1.1% of GDP) vs US$1.9

bn last year. This has been partially driven by a 2% decline in exports (to US$10.5 bn) and

a 6% increase in imports (to US$21.3 bn), widening the trade deficit by 16%. A 6% decline

in textile exports and a 6% increase in machinery imports (mainly for new power plants

and construction) and a 40% increase in automobile imports have been the key

contributors to a widening current account deficit. Other contributing factors include the

absence of Coalition Support Fund receipts, while remittances have also seen a fall of 2%

in 1H and could face additional risk if the current FX distortion in the open market vs the

interbank market persists for longer.

14.0

80.1

47.5

41.0

188.0

130.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

Railways Highways Power

PSDP disbursements in 1HFY17 (PRsbn)

Released amount Budgeted amount

PKR resilience has been concerning,

particularly as C/A is feeling the pressure

from trade deficit and a slowdown in remittances

9 February 2017


Figure 22: FX reserves have been climbing and are

providing ~6 months’ import cover…

Figure 23: …but some pressures on C/A are starting

to become visible

Source: SBP, Credit Suisse estimates Source: SBP, Credit Suisse estimates

Oil prices remain a key risk to medium-term external account outlook

Following the OPEC decision to scale back production, oil prices have rallied in 4Q16 and

could strain the import bill going forward. Oil remains the single most important import

commodity and we estimate that a US$10/bbl hike adds US$1.2 bn (0.4% of GDP) to the

annual import bill. While oil prices have stabilised post the initial surge, the price trend needs

to be closely monitored given its sensitivity to trade deficit and overall external account.

Exchange rate divergence between open market and

interbank market can be detrimental for remittances

Despite visible pressure on the PKR-USD open market rates over the past few months

against the backdrop of rising trade and current account deficit and a resurgent dollar in

the global market, the PKR-USD interbank rate has remained largely flat. As a result, the

differential between interbank and open market rates has widened to 3.3% versus an

average differential of 1% over the past five years. The stability of the official PKR rate is

also in contrast to underperformance regional currencies such as the INR, IDR, CNY, THB

vs the USD. Interestingly, the IMF also views the PKR as 15-20% overvalued on REER.

Remittance flows may suffer from informal channels

We see a risk to official remittances from informal channels such as 'hawala' as a result of a

prolonged differential between official and unofficial rates. Remittances are already down 2%

in 1H FY17, versus 6% growth in 1H FY16, and there remains more downside risk. A closer

look at history suggests that interbank and open market rates generally converge within a

short time span (~1 month) but with the finance ministry strongly advocating a stable

exchange rate policy, the divergence has continued for longer. The stable exchange rate

policy is also impacting export competitiveness with textile exporters in particular advocating

for a sharp PKR devaluation after two consecutive years of decline in exports. The C/A

deficit has also widened to US$3.6 bn in 1H FY17 (+92%YoY/2.2% of GDP) as a result.

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

5,000

7,000

9,000

11,000

13,000

15,000

17,000

19,000

21,000

May

-14

Jul-1

4

Sep

-14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep

-15

Nov

-15

Jan-

16

Mar

-16

May

-16

Jul-1

6

Sep

-16

Nov

-16

Jan-

17

SBP reserves US$mn (LHS) Import cover (months)

-2.3%

6.0%

-2.4%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Exports Imports Remittances

1HFY17 growth YoY

PKR in the open market has moved 3.3% ahead

of interbank rates which can hurt

remittances if this disconnect persists

9 February 2017


3-4% fall in PKR-USD official rate likely in the near term

We expect the official exchange rate to depreciate by 3-4% against the USD in the near

term, and converge towards the open market rate. The steep differential, in our view,

poses structural risks to the economy as it incentivises transactions through unofficial

channels. We also see higher risk to medium-term exchange rate stability from the

government's control on official exchange rate, particularly if oil prices continue their

upward trajectory.

Figure 24: The gap between official and open market rate has widened to 3.3%

Source: Credit Suisse estimates, Thomson Reuters Datastream, Forex.pk

88.0

92.0

96.0

100.0

104.0

108.0

112.0

Feb

-12

May

-12

Aug

-12

Nov

-12

Feb

-13

May

-13

Aug

-13

Nov

-13

Feb

-14

May

-14

Aug

-14

Nov

-14

Feb

-15

May

-15

Aug

-15

Nov

-15

Feb

-16

May

-16

Aug

-16

Nov

-16

Feb

-17

Interbank rate (PKR/USD) Open market rate (PKR/USD)

The gap between interbank and open market rates highest since early 2000s

9 February 2017


Politics is noisy but government stable We expect political noise to remain elevated, given the ongoing Panama investigation and

the approaching General Elections (3Q18). The Supreme Court (SC) hearing of the

Panama petitions against the prime minister and his family has remained the centre of

attention in recent weeks and provided enough ammunition to the opposition to keep the

PM and his party on the back foot. While a disqualification verdict appears highly unlikely,

the SC could form an inquiry commission to investigate potential money laundering and

tax evasion by the members of the first family. With an eye on next year’s general

elections, the government is likely to accelerate development projects, particularly in the

infrastructure and energy space (the cornerstone of the ruling party’s election manifesto in

2013). In terms of global relations, we see an increasing tilt in strategic relations towards

China against the backdrop of acceleration in CPEC-related activities and higher Chinese

business and military engagements. In contrast, relations with the US could stay rocky,

given the new US president’s more hawkish view on the country—although we rule out

complete disengagement as Pakistan continues to play an important role as a power

broker in any peace deal in Afghanistan.

Panama papers hearing to keep the pressure on PM

but a disqualification unlikely

Supreme Court hearing of petitions relating to Panama papers against the prime minister

and his family members has remained the centre of attention over the past few months,

keeping the prime minister and his party slightly on the back foot. While the opposition

failed to provide any concrete evidence against the prime minister regarding allegations of

money laundering and tax evasion, the Supreme Court’s recent directive to Mr Sharif's son

to provide details of the source of income relating to his US$1.9 mn gift to his father has

created some concerns within the ruling party. Looking at the merits of the case, legal

experts remain divided on the likely decision of the honourable court, although there

appears to be a consensus that disqualification of the prime minister is not on the cards.

That said, the SC could form an inquiry commission to investigate into potential money

laundering and tax evasion by members of the first family.

Low probability of a guilty verdict threatening government functioning

We see a low probability of a guilty verdict against the PM's family members, which while

denting his popularity somewhat in the run up to the next years General Elections (GE) will

not impact the PM's authority to govern, in our view. In such a scenario we also see a

more aggressive push to complete infrastructure projects prior to the GE in order to deflect

attention from the court hearings. The opposition continues to remain disjointed and faces

a number of internal issues and challenges with the ruling party still the most popular party

in the country on most surveys.

With elections ahead, focus on development projects

We expect a slowdown in the reform process in 2017 as the focus shifts to 2018 elections

From the government's perspective, there is likely to be a renewed focus on completion of

mega development projects such as infrastructure (both under public sector and the

CPEC) and priority power plants (key themes of its 2013 election manifesto). Recent news

flow also suggests the prime minister personally taking a very keen interest on the

progress of priority projects and making regular visits to construction sites.

Pivot towards China to accelerate

There is likely to be an increasing tilt in strategic relations towards China against the

backdrop of CPEC-related investment activities and rising Chinese military engagement,

particularly around the Gwadar port. The recent build-up of Chinese naval presence in

Panama Papers is

likely to keep the PM and his family slightly

on the back foot

We see a low likelihood of disruption in the

government’s functioning due to a

decision by the court

Expect greater degree of strategic leaning

towards China

9 February 2017


Gwadar for port security highlights the strategic importance of economic corridor to China

beyond the US$55 bn power and infrastructure investments planned as part of the CPEC

over the next 5-7 years. State-owned Chinese enterprises are also taking long-term

investment interests, as reflected by the recent announcement of acquisition of Karachi’s

main utility by a large Chinese SOE as well as Shanghai and Shenzhen Stock Exchanges’

strategic stake in the Pakistan Stock Exchange. Reported interest of Anhui Conch in

acquiring a local cement operator (Dewan Cement), and the Chinese interest in the state-

owned steel manufacturer (Pakistan Steel Mills) further highlights the rising economic

interest of China in Pakistan.

Relations with the US to stay cold

Given Pakistan's increasing leaning towards China, and new US President Donald

Trump’s more hawkish views on the country, relations are likely to remain cold. That said,

the US is unlikely to completely disengage with Pakistan owing to the pending political

settlement in Afghanistan where Pakistan continues to remain an important power broker.

From Pakistan's perspective, dependence on US economic and military assistance has

been on the decline with the US aid now accounting for only 0.3% of GDP as against 2.0%

in 2010. Going forward, we expect a further decline in aid flows with stricter conditions

attached, particularly to military assistance.

Figure 25: Both military and economic aid has been

fizzling out in recent years…

Figure 26: …and now accounts for 0.3% of GDP vs a

high of 2.2% in 2010

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Ties with India likely to improve after hitting last

year’s lows

2016 was a tough year for relations with India which hit a low in September after India

alleged announcement of surgical strikes in Pakistan's border region. While the Pakistani

establishment denied India's assertions, the border situation remained hostile with reports

of daily skirmishes in the aftermath of the strikes. Things have since calmed down with

both sides reiterating the resolve to reduce tensions along the border. The appointment of

the new Army Chief in Pakistan with extensive experience of Kashmir affairs has provided

hope for a restart of dialogue. We expect relations to gradually improve starting in 2Q17

with Mr Sharif making a bigger push post the conclusion of his ongoing Panama hearings.

The Indian prime minister is also expected to avoid making any overtures as his party

deals with key state elections in Punjab and Uttar Pradesh in 1Q17.

-

500

1,000

1,500

2,000

2,500

3,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Historical trends of US aid to Pakistan

Economic aid Military assistance

1.4%

1.1%

1.2%

1.4%

2.2%

1.1%

0.8%

0.5%0.4%

0.3%

0.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

-

1,000

2,000

3,000

4,000

5,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Total aid (US$mn) as % of GDP

Aid from the US has been dwindling and is

now 0.3% of GDP vs 2.2% in 2010.

Relations with the US

to stay cold under President Trump

9 February 2017


Prefer structurally driven growth stories We would stick to sectors and stocks most leveraged to structural themes of CPEC

investments while the MSCI upgrade can draw passive flows in the seven shortlisted

names. We remain bullish and advise accumulating on dips. Our preferred sectors include

banks (HBL and UBL) and cement (LUCK and DGKC). We believe 2017 will track 15%

EPS growth with limited scope for further re-rating and we derive a December 2017 index

target of 57,000. Coupled with a D/Y of 5%, total return is estimated at 19% from current

levels. Key risks include deterioration in the political and security environment, which could

curtail investment activity, and/or a surge in international oil prices beyond US$70-75/bbl.

Autos, oil, and cement outperformed in 2016…

Looking at the 2016 performance, autos delivered strong returns with HCAR and INDU

leading the pack. Recovery in oil prices post the OPEC deal to curtail output allowed oil

stocks to rally, with POL racing ahead of peers due to its higher sensitivity of earnings.

Cement (LUCK and MLCF) also posted above-market returns on strong domestic demand

growth and resilient margins. Within banks, UBL beat peers on stronger earnings growth;

however, other names (HBL, MCB and BAFL) lagged the index. Among the worst-

performing sectors, fertiliser was the most prominent one due to weak industry dynamics.

Figure 27: Notable outperforming sectors for 2016 were autos, oil, and cement

Source: Company data, Credit Suisse estimates

…expect banks and cements to rally in 2017

We expect banks to clock in higher from faster loan demand, and fee income

opportunities. Cements should continue to surf solid domestic demand (+11% in 1H

FY17). Our top picks include HBL, UBL, LUCK, and DGKC. We are selectively positive on

oil (PPL) but remain pessimistic on fertiliser (weak industry dynamics) and autos (subdued

volume growth and increasing competition from new entrants)

-21% -16% -12%-4% -4%

4%9% 11%

19% 21% 22% 26%30% 31%

36% 38% 40% 43%46% 53% 53% 53% 57%

63%

67%

99%

178%

-40%

0%

40%

80%

120%

160%

200%

EF

ER

T

FA

TIM

A

FF

C

KA

PC

O

FF

BL

PT

C

MC

B

EN

GR

O

HU

BC

PA

EL

PS

MC

EF

OO

DS

BA

FL

PS

O

HB

L

NB

P

OG

DC

DG

KC

KS

E-1

00

NM

L

PP

L

UB

L

IND

U

MLC

F

LUC

K

PO

L

HC

AR

2016 performance

We see 14% EPS growth in 2017. Along

with a 5% D/Y, total return is estimated at

19% with an index target of ~57,000

9 February 2017


Figure 28: Top picks

Ticker

(Reuters)


(PRs)

TP

(PRs)

Rat.

Mkt. cap

(US$ mn)

6M ADTO

(US$ mn)

P/E (x)

P/B (x)

EV/EBITDA (x)

D/Y (%)

ROE (%)

17E 18E 17E 18E 17E 18E 17E 18E 17E

HBL.KA Habib Bank 266.9 305. 0 O 3,740 1.9 9.9 8.3 1.9 1.7 - - 5.3 5.8 19.1

UBL.KA United Bank 241.6 276.0 O 2,826 1.9 9.6 8.5 1.8 1.7 - - 5.8 6.1 19.2

LUKC.KA Lucky Cement 854.4 970.0 O 2,640 2.3 16.1 13.3 3.4 2.8 10.8 9.5 1.5 1.9 20.9



Dec-17 index target of 57,000 led by 14% EPS growth

We believe 2017 will track earnings growth and view a repeat of 2016 market re-rating as

unlikely. We expect the market performance to track 14% earnings growth with Dec 2017

index target of 57,000 implying a trailing P/E of 10.8x. Adding ~5% market dividend yield,

the total return is expected to be 19% from current levels. Key risks to our index target

include deterioration in the political and security environment—which could curtail

investment activity—a surge in international oil prices beyond US$70-75/bbl, and

significant FII outflows.

Sectoral analysis shows discounts in financials &

materials; EPS growth good in financials & utilities

We deem it relevant to compare Pakistan's various sector multiples and earnings outlook

with those of its EM peers. Discounts are visible in materials (11%) and utilities and we

keep our preference for cements intact within materials. While Pakistan banks trade close

to peer levels, earnings growth is better (11% vs 8%) and structural factors are supportive,

led by CPEC-driven loan growth.

Our least preferred sector, consumer discretionary (mostly autos) also fares poorly from a

regional context as valuations are 8% higher and earnings growth is unexciting (4%).

Figure 29: Our preferred sectors (financials and

materials) trade at discounts to MSCI EM peers

Figure 30: Financials and utilities offer superior

earnings growth

Source: IBES, MSCI, Credit Suisse estimates Source: IBES, MSCI, Credit Suisse estimates

-4.3%

-11.3%

8.1%

-8.6% +12.9%

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Financials Materials ConsumerDiscretionary

Utilities Energy

Sector-wise valuations relative to MSCI EM - P/E (x)

Pakistan P/E MSCI EM

Pak at premiumPak at discount

11%9%

4%

22%22%

8%

12%

17%

-6%

23%

-10%

-5%

0%

5%

10%

15%

20%

25%

Financials Materials ConsumerDiscretionary

Utilities Energy

Sector-wise EPS growth (2017E)

Pakistan MSCI EM

9 February 2017


Rich valuations could induce volatility near term

Figure 31: P/E of 10.8x is close to a nine year high Figure 32: Discount to EM Asia stands at 14%

Source: MSCI Source: MSCI

Figure 33: D/Y is still healthy at 5.0%, slightly below

historical average of 6.0%

Figure 34: P/B at 2.1x is accompanied by a 17% ROE

relative to 12% for MSCI EM Asia

Source: MSCI Source: MSCI

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Oct

-05

Jun-

06

Feb

-07

Oct

-07

Jun-

08

Feb

-09

Oct

-09

Jun-

10

Feb

-11

Oct

-11

Jun-

12

Feb

-13

Oct

-13

Jun-

14

Feb

-15

Oct

-15

Jun-

16

Feb

-17

MSCI Pakistan P/E (x)

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Oct

-05

Jun-

06

Feb

-07

Oct

-07

Jun-

08

Feb

-09

Oct

-09

Jun-

10

Feb

-11

Oct

-11

Jun-

12

Feb

-13

Oct

-13

Jun-

14

Feb

-15

Oct

-15

Jun-

16

Feb

-17

MSCI Pakistan discount to MSCI EM Asia - P/E (x)

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Jan-

06

Aug

-06

Mar

-07

Oct

-07

May

-08

Dec

-08

Jul-0

9

Feb

-10

Sep

-10

Apr

-11

Nov

-11

Jun-

12

Jan-

13

Aug

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MSCI Pakistan P/B (x)

9 February 2017


Figure 35: CS Pakistan coverage

Ticker

(Reuters)


(PRs)

TP

(PRs)

Rat.

Mkt. cap

(US$ mn)

6M ADTO

(US$ mn)

P/E (x)

P/B (x)

EV/EBITDA (x)

D/Y (%)

ROE (%)

17E 18E 17E 18E 17E 18E 17E 18E 17E

MCB.KA MCB Bank Limited 231.0 252.0 O 2,457 1.9 10.5 9.5 1.6 1.5 n.a. n.a. 6.9 7.0 17.6

UBL.KA United Bank Limited 241.6 230.0 O 2,826 1.9 10.8 9.6 1.9 1.8 n.a. n.a. 5.4 5.8 19.2

NBPK.KA National Bank 78.6 60.0 U 1,598 1.7 10.2 10.8 1.0 1.0 n.a. n.a. 8.3 7.6 9.1

FAUF.KA Fauji Fertilizer 112.5 110.0 N 1,367 1.8 10.2 9.6 5.0 4.7 14.6 14.6 8.8 9.3 49.1

EGCH.KA Engro Corporation 371.0 380.0 O 1,857 4.5 4.4 13.7 1.8 1.8 6.6 7.6 5.4 4.3 13.2

OGDC.KA Oil and Gas Dev. Co. 157.5 150.0 N 6,473 3.5 11.3 9.9 1.4 1.3 7.3 6.2 3.3 3.8 13.2

PPL.KA Pak Petroleum Ltd 179.6 200.0 O 3,384 1.2 12.5 9.2 1.7 1.5 7.2 5.3 2.8 4.5 16.5

PKOL.KA Pakistan Oilfields 498.1 435.0 O 1,126 2.2 16.3 13.8 3.9 3.9 8.3 6.9 7.0 7.0 28.1

HPWR.KA Hub Power Company 143.0 133.0 O 1,581 1.5 13.9 11.2 5.3 5.3 9.9 9.1 7.7 8.7 46.9

FATF.KA Fatima Fertilizer Co 39.5 37.5 N 793 0.4 8.2 7.8 1.6 1.5 5.7 5.0 5.4 6.3 18.9


PSO.KA Pakistan State Oil 481.1 355.0 U 1,249 3.9 8.7 7.9 1.4 1.3 17.6 9.6 2.6 2.5 15.9

HBL.KA Habib Bank Limited 266.9 263.0 O 3,741 1.9 11.3 9.5 2.0 1.9 n.a. n.a. 5.2 5.4 19.6

BAFL.KA Bank Al-Falah 42.5 37.0 O 645 0.7 8.2 8.0 1.1 1.0 n.a. n.a. 2.4 3.5 13.2

LUCK.KA Lucky Cement 854.4 970.0 O 2,640 2.3 21.3 16.1 4.0 3.4 11.8 10.2 1.2 1.5 20.9

PKEL.KA Pak Elektron 86.4 90.0 O 411 3.3 12.1 10.5 1.7 1.5 8.3 7.0 2.3 2.9 14.2

INDM.KA Indus Motors 1,727.5 1,520.0 U 1,297 0.7 11.9 13.9 4.9 4.5 8.4 10.1 5.8 4.7 32.1

PKSU.KA Pak Suzuki Motors 714.8 450.0 U 562 0.8 22.9 22.8 2.3 2.1 9.9 11.9 0.8 0.8 9.2

HATC.KA Honda Atlas Cars 787.4 700.0 N 1,074 1.6 31.6 20.7 14.2 9.1 19.7 13.1 0.9 1.4 43.9

CS Pakistan universe 11.0 9.0 2.3 2.0 5.6 4.6 4.6 5.9 20.1


9 February 2017


Asia Pacific/Pakistan Regional Banks

Habib Bank Limited (HBL.KA / HBL PA) Rating OUTPERFORM Price (08-Feb-17, PRs) 266.88 Target price (PRs) (from 263.00) 305.00 Upside/downside (%) 14.3 Mkt cap (PRs/US$ mn) 391,473/ 3,740 Number of shares (mn) 1,467 Free float (%) 49.0 52-wk price range 281.69-170.79 ADTO-6M (US$ mn) 1.8 Target price is for 12 months.

Research Analysts

Farhan Rizvi, CFA

65 6212 3036

[email protected]

Banking giant with a differentiation

■ Credit growth to accelerate, led by CPEC projects. After a long hiatus,

credit demand is showing some signs of acceleration with 14% system loan

growth in 2016 (five-year average 9.8%). We expect further acceleration in

credit momentum, led by CPEC, with HBL best positioned among local banks

to lead syndicate financing for power (Engro Thar Coal, Lucky Energy, Hub

Power IPPs) and infrastructure projects over the medium term, which should

drive a 16% credit CAGR over 2016-19E. Moreover, aggressive targets for

commercial, SME and consumer lending also highlight strong intent of the

bank. Consumer, SME and commercial book grew ~15% in 2016, and we

expect it to post a 20% CAGR over the next three years.

■ Fee income continues to remain a key differentiator. HBL’s superior franchise

is reflected by the continued solid fee income performance (~17% growth in

2016E (3% for peers). We expect this momentum to continue going forward with

a solid 16% CAGR over 2016-19E, driven by more aggressive momentum in

syndicating financing and continued focused on consumer and SME businesses.

HBL’s superiority in investment banking and bancassurance will be another

factor ensuring above-average growth in fee and commission income.

■ Margins to gradually rise amid uptick in policy rates. We expect margins to

bottom out in 1Q17 with a gradual uptick from 2H17 led by 50-75 bp increase in

policy rates, and the rising proportion of consumer and SME loans. A stronger

USD and recovery in commodity prices, particularly oil, are likely to drive CPI

higher, leading to a reversal in the monetary policy stance of the central bank.

■ Valuation at multi-year high, but robust growth outlook supportive. HBL

trades at 2017E P/B of 1.8x (10% premium to five-year average P/B) on ROE of

20% and D/Y of 6%. We believe accelerating credit offtake and EPS growth

(19% CAGR over 2016-19E) justify its premium valuation. We tweak estimates

by 3-4%, incorporating slightly higher loan growth and credit cost, and raise TP

by 15% to PRs305 as we roll forward our valuation to 2017E.

Share price performance

The price relative chart measures performance against the

KARACHI SE 100 INDEX which closed at 49,874.96 on

08/02/17. On 08/02/17 the spot exchange rate was

PRs104.67/US$1

Performance 1M 3M 12M Absolute (%) -2.9 8.1 39.0 Relative (%) -5.0 -8.3 -16.2

Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Pre-provision Op profit (PRs mn) 50,580.7 51,240.5 57,247.6 68,538.4 Pre-tax profit (PRs mn) 60,286.2 55,662.0 62,106.4 73,438.0 Net attributable profit (PRs mn) 34,827.1 33,596.5 40,078.5 47,399.4 EPS (CS adj.) (PRs) 23.74 22.90 27.32 32.31 Change from previous EPS (%) n.a. (2.6) (3.2) (3.9) Consensus EPS (PRs) n.a. 23.01 24.51 27.32 EPS growth (%) 10.9 (3.5) 19.3 18.3 P/E (x) 11.2 11.7 9.8 8.3 Dividend yield (%) 5.2 5.1 5.3 5.8 BVPS (CS adj.) (PRs) 123.34 131.49 143.07 159.10 P/B (x) 2.16 2.03 1.87 1.68 ROE (%) 19.8 17.8 19.7 21.2 ROA (%) 1.7 1.5 1.6 1.7 Tier 1 Ratio (%) 13.1 15.7 15.9 16.0

Source: Company data, Thomson Reuters, Credit Suisse estimates

9 February 2017


Habib Bank Limited (HBL.KA / HBL PA)

Price (08 Feb 2017): PRs266.88; Rating: OUTPERFORM; Target Price: (from PRs263.00) PRs305.00; Analyst: Farhan Rizvi

Earnings Drivers 12/15A 12/16E 12/17E 12/18E

Net interest margin (%) 4.58 4.10 4.13 4.30 Provision for non performing loans (PKR mn)

4,854 3,056 2,667 2,365 Fee commission income (PKR mn)

17,089 20,114 23,593 27,678 Loan growth (%) 6.82 11.00 15.00 17.00 - - - -

Income Statement (PRs mn) 12/15A 12/16E 12/17E 12/18E

Interest income 144,232 141,739 156,083 179,394 Interest expense 66,064 60,918 67,636 77,643 Net interest income 78,169 80,820 88,446 101,750 Fee and commission income 17,089 20,114 23,593 27,678 Trading income 2,749 1,938 2,361 2,642 Total non-interest income 22,060 24,161 28,316 32,958 Total income 100,229 104,981 116,762 134,708

Personal expense 23,586 25,873 28,715 31,861 Other expenses 26,127 27,938 30,879 34,401 Total expenses 49,713 53,811 59,594 66,262 Pre-provision profit 50,581 51,240 57,248 68,538 Loan loss provisions 5,136 3,194 2,810 2,515 Operating profit 45,445 48,047 54,438 66,024 Other non-operating inc./(exp.) 11,443 3,888 3,756 3,306 Pre-tax profit 60,286 55,662 62,106 73,438 Taxes 25,185 21,835 21,753 25,713 Net profit before minorities 35,102 33,827 40,354 47,725 Reported net profit 34,827 33,596 40,079 47,399 Net profit (Credit Suisse) 34,827 33,596 40,079 47,399

Balance Sheet (PRs mn) 12/15A 12/16E 12/17E 12/18E

Gross customer loans 706,563 784,285 901,928 1,055,255 Risk provisions 0 0 0 0 Net customer loans 637,384 712,412 827,778 979,146 Interbank loans 58,851 57,744 57,209 65,237 Investment & securities 1,251,761 1,353,520 1,396,157 1,524,907 Cash & cash equivalents 167,251 180,841 205,255 235,017 Fixed assets 28,849 31,336 34,119 37,233 Other assets 76,819 74,338 76,935 81,104 Total assets 2,218,423 2,409,782 2,597,101 2,922,143 Total deposits 1,949,264 2,115,004 2,280,496 2,574,364 Other liabilities 86,539 99,980 104,548 111,878 Total liabilities 2,035,803 2,214,984 2,385,044 2,686,242 Shareholders' equity 180,928 192,875 209,859 233,377 Total liabilities & equity 2,218,423 2,409,782 2,597,101 2,922,143

Asset quality & Capital 12/15A 12/16E 12/17E 12/18E

Asset Quality (%) NPL/ gross loans 10.9 10.1 9.1 8.1 B/S loan loss coverage - - - - Loan/ deposit ratio 39.0 39.1 40.0 41.3 Capital ratios (%) Capital adequacy ratio 17.0 19.9 19.6 19.2 Tier 1 ratio 13.1 15.7 15.9 16.0 Equity Tier 1 ratio 13.1 15.7 15.9 16.0

Per share 12/15A 12/16E 12/17E 12/18E

Shares (wtd avg.) (mn) 1,467 1,467 1,467 1,467 EPS (Credit Suisse) (PRs) 23.74 22.90 27.32 32.31 BVPS (PRs) 123.34 131.49 143.07 159.10 Tangible BVPS (PRs) 121.64 131.21 142.83 158.76 DPS (PRs) 14.00 13.63 14.07 15.38

Earnings 12/15A 12/16E 12/17E 12/18E

Growth (%) Revenue 14.9 4.7 11.2 15.4 Operating expense 17.7 8.2 10.7 11.2 Pre-provision profit 12.3 1.3 11.7 19.7 Net profit 10.9 (3.5) 19.3 18.3 Deposit 7.2 11.5 13.5 14.5

Valuation 12/15A 12/16E 12/17E 12/18E

EPS growth (%) 10.9 (3.5) 19.3 18.3 P/E (x) 11.2 11.7 9.8 8.3 P/B (x) 2.16 2.03 1.87 1.68 P/TB (x) 2.2 2.0 1.9 1.7 Dividend yield (%) 5.2 5.1 5.3 5.8

Profitability & margins (%) 12/15A 12/16E 12/17E 12/18E

ROE stated 19.8 17.8 19.7 21.2 ROE - CS adj. 19.8 17.8 19.7 21.2 ROA - CS adj. 1.7 1.5 1.6 1.7 Gearing (x) 11.6 12.3 12.3 12.3

Company Background

Habib Bank is Pakistan’s largest commercial bank with more than US$19 bn in assets worldwide. The bank is engaged in all major business segments namely, retail, commercial, consumer, investment banking, treasury and Islamic banking.

Blue/Grey Sky Scenario

Our Blue Sky Scenario (PRs) (from 500.00) 510.00

Historical peak P/B of 3.5x and 50 bp higher policy rates

Our Grey Sky Scenario (PRs) (from 72.00) 80.00

Historical trough P/B of 0.5x and 50 bp lower policy rates


The price relative chart measures performance against the KARACHI SE 100

INDEX which closed at 49,874.96 on 08-Feb-2017

On 08-Feb-2017 the spot exchange rate was PRs104.67/US$1


9 February 2017


Asia Pacific/Pakistan Regional Banks

United Bank Limited (UBL.KA / UBL PA) Rating OUTPERFORM Price (08-Feb-17, PRs) 241.59 Target price (PRs) (from 230.00) 276.00 Upside/downside (%) 14.2 Mkt cap (PRs/US$ mn) 295,750/ 2,826 Number of shares (mn) 1,224 Free float (%) 39.0 52-wk price range 256.35-149.08 ADTO-6M (US$ mn) 1.9 Target price is for 12 months.

Research Analysts

Farhan Rizvi, CFA

65 6212 3036

[email protected]

On a sound footing

■ Credit offtake on the rise. UBL has also demonstrated a willingness to participate in the large syndicated infrastructure and energy financing, reflected by its commitments to motorways and IPP projects. Given acceleration in drawdowns on existing commitments starting 4Q16 and financial closure on some prior commitment projects, the outlook for credit growth remains positive. Moreover, after a long hiatus, UBL is looking to re-focus on SMEs, given increasing opportunities amid more attractive financing rates. These initiatives should help drive a 14% credit CAGR over 2017-19.

■ Margins to rise from 2H17 on higher rates. UBL’s active treasury management (high proportion of long-duration PIB bonds in the investment portfolio) has ensured superior domestic margins than peer banks. While this benefit will likely be diluted in 2017 against the backdrop of continued maturities in the PIB portfolio, margins could see an uptick in 2H17 driven by higher interest rates and better spreads on infra and energy loans. Higher loan growth domestically will also ensure better margins on a blended basis.

■ Risks from GCC largely contained. UBL international operations performed admirably in 2016 despite the challenging environment in the GCC region due to higher exposure in less oil-sensitive UAE and better risk management. The bank plans to maintain its focus on higher-quality credit and fixed income exposure with the Financial Institution Group also playing an important role in enhancing trade flows and revenues. UBL has significantly reduced its exposure to Yemen and remains comfortable on its asset quality outlook for the broader GCC.

■ Earnings growth to recover in 2017E. We expect EPS growth to recover sharply in 2017 to 12% (2016: 6%) with a three-year CAGR of 12%, led by improving margins from 2H17 and a recovery in fee income growth amid rising trade flows and syndicate financing. We tweak estimates by 2% and raise TP by 20% to PRs276 as we roll-forward our valuation to 2017E. Despite outperforming by 7% in 2016, UBL still trades at an attractive 2017E P/B of 1.85x (10% discount to historical average).





PRs104.67/US$1

Performance 1M 3M 12M Absolute (%) -2.5 9.3 56.3 Relative (%) -4.6 -7.1 1.1


Year 12/15A 12/16E 12/17E 12/18E Pre-provision Op profit (PRs mn) 42,647.5 40,206.1 45,080.0 52,088.0 Pre-tax profit (PRs mn) 42,174.7 44,922.8 47,153.3 53,158.5 Net attributable profit (PRs mn) 25,727.1 27,299.8 30,709.5 34,730.7 EPS (CS adj.) (PRs) 21.02 22.30 25.09 28.37 Change from previous EPS (%) n.a. (0.4) (0.1) (2.2) Consensus EPS (PRs) n.a. 22.76 23.38 26.53 EPS growth (%) 17.3 6.1 12.5 13.1 P/E (x) 11.5 10.8 9.6 8.5 Dividend yield (%) 5.4 5.4 5.8 6.1 BVPS (CS adj.) (PRs) 116.11 125.32 130.82 142.48 P/B (x) 2.08 1.93 1.85 1.70 ROE (%) 19.2 18.5 19.6 20.8 ROA (%) 2.0 1.8 1.8 1.8 Tier 1 Ratio (%) 10.4 10.7 10.8 10.8


9 February 2017


United Bank Limited (UBL.KA / UBL PA)


Earnings Drivers 12/15A 12/16E 12/17E 12/18E

Net interest margin (%) 5.29 4.33 4.20 4.17 Fee income (PKR mn) 12,203 12,953 14,244 16,375 Provision for non performing loans (PKR mn)

3,299 1,324 2,156 2,175 - - - - - - - -


Interest income 94,353 96,580 108,110 120,483 Interest expense 38,511 41,443 47,638 53,269 Net interest income 55,842 55,137 60,473 67,213 Fee and commission income 12,203 12,953 14,244 16,375 Trading income 2,271 2,151 2,510 2,963 Total non-interest income 18,566 18,752 20,647 23,530 Total income 74,407 73,889 81,120 90,743

Personal expense 12,013 12,763 13,437 14,106 Other expenses 19,930 21,121 22,832 24,817 Total expenses 31,944 33,883 36,269 38,922 Pre-provision profit 42,647 40,206 45,080 52,088 Loan loss provisions 3,299 1,324 2,156 2,175 Operating profit 39,348 38,882 42,924 49,913 Other non-operating inc./(exp.) 2,826 6,040 4,229 3,246 Pre-tax profit 42,175 44,923 47,153 53,159 Taxes 16,448 17,623 16,444 18,428 Net profit before minorities 25,727 27,300 30,710 34,731 Reported net profit 25,727 27,300 30,710 34,731 Net profit (Credit Suisse) 25,727 27,300 30,710 34,731


Gross customer loans 497,032 551,705 634,461 739,147 Risk provisions 41,618 42,030 43,489 44,920 Net customer loans 455,414 509,675 590,972 694,227 Interbank loans 40,954 52,782 61,090 70,919 Investment & securities 707,707 850,454 888,298 993,614 Cash & cash equivalents 112,011 129,373 149,426 173,633 Fixed assets 26,581 27,921 29,376 30,956 Other assets 63,033 64,545 67,656 70,904 Total assets 1,400,651 1,629,623 1,781,592 2,028,906 Total deposits 1,214,367 1,434,411 1,574,367 1,801,259 Other liabilities 44,148 41,794 47,082 53,221 Total liabilities 1,258,515 1,476,204 1,621,449 1,854,479 Shareholders' equity 142,135 153,419 160,143 174,426 Total liabilities & equity 1,400,651 1,629,623 1,781,592 2,028,906

Asset quality & Capital 12/15A 12/16E 12/17E 12/18E

Asset Quality (%) NPL/ gross loans 9.4 8.3 7.7 6.8 B/S loan loss coverage 88.9 91.4 89.4 88.7 Loan/ deposit ratio 43.3 42.0 42.1 42.6 Capital ratios (%) Capital adequacy ratio 14.6 13.7 13.6 13.3 Tier 1 ratio 10.4 10.7 10.8 10.8 Equity Tier 1 ratio 10.4 10.7 10.8 10.8

Per share 12/15A 12/16E 12/17E 12/18E

Shares (wtd avg.) (mn) 1,224 1,224 1,224 1,224 EPS (Credit Suisse) (PRs) 21.02 22.30 25.09 28.37 BVPS (PRs) 116.11 125.32 130.82 142.48 Tangible BVPS (PRs) 111.98 121.14 126.55 138.12 DPS (PRs) 13.00 12.97 14.00 14.70

Earnings 12/15A 12/16E 12/17E 12/18E

Growth (%) Revenue 19.4 (0.7) 9.8 11.9 Operating expense 7.5 6.1 7.0 7.3 Pre-provision profit 30.2 (5.7) 12.1 15.5 Net profit 17.3 6.1 12.5 13.1 Deposit 17.4 15.5 15.5 16.2

Valuation 12/15A 12/16E 12/17E 12/18E

EPS growth (%) 17.3 6.1 12.5 13.1 P/E (x) 11.5 10.8 9.6 8.5 P/B (x) 2.08 1.93 1.85 1.70 P/TB (x) 2.2 2.0 1.9 1.7 Dividend yield (%) 5.4 5.4 5.8 6.1

Profitability & margins (%) 12/15A 12/16E 12/17E 12/18E

ROE stated 19.2 18.5 19.6 20.8 ROE - CS adj. 19.2 18.5 19.6 20.8 ROA - CS adj. 2.0 1.8 1.8 1.8 Gearing (x) 9.4 10.3 10.9 11.4

Company Background

United Bank Limited is a Pakistan-based company. The company is a banking company engaged in commercial banking and related services. It has 1,123 branches, including six Islamic banking branches, one branch in Karachi Export Processing Zone.



100 bp higher policy rates and peak P/B multiple of 3.8x

Our Grey Sky Scenario (PRs) 78.00

100 bp lower policy rates and trough P/B multiple of 0.6x






9 February 2017


Asia Pacific/Pakistan Building Materials & Construction

DG Khan Cement Co Ltd (DGKH.KA / DGKC PA) Rating OUTPERFORM Price (08-Feb-17, PRs) 233.69 Target price (PRs) (from 275.00) 290.00 Upside/downside (%) 24.1 Mkt cap (PRs/US$ mn) 102,384 / 978.16 Enterprise value (PRs mn) 86,172 Number of shares (mn) 438.12 Free float (%) 40.0 52-wk price range (PRs) 245-149 ADTO-6M (US$ mn) 5.1 Target price is for 12 months.

Research Analysts

Farhan Rizvi, CFA

65 6212 3036

[email protected]

Well positioned for growth

■ Domestic demand momentum to continue. Domestic demand continues to remain robust, led by rising private sector construction activity in major cities and higher government infra spending. We expect domestic demand to continue to grow at a three-year (FY17-19E) CAGR of 13% helping capacity utilisation to rise to 95% by FY18, which should make it comfortable to absorb 28% of capacity additions by FY19 and keep price arrangement intact in the longer term. DGKC could also benefit from the sizeable capacity addition (~60%), which should ensure FY16-19 domestic demand CAGR of 14%.

■ Margins to remain upbeat despite rising coal prices. Despite the rise in international coal prices (+42% since July 2016), margins for DGKC are expected to remain upbeat (45% in FY17E), led by a shift towards higher-margin domestic offtake and an efficient energy mix. Robust domestic demand and recent price hikes also provide confidence on the continuity of the price arrangement.

■ Expansions to provide longer-term growth. The 2.7 mtpa (US$200 mn) South expansion is progressing well and management remains confident of a 4Q FY18 target Commercial Operations Date (COD), in time to avail the five-year tax holiday. Moreover, DGKC is working on the 2.2 mtpa brownfield expansion in the North, which is expected to achieve COD in FY20. These expansions should ensure sustained medium- to long-term growth.

■ Attractive valuation. Despite the recent run-up (+27% over 3M), DGKC trades at an undemanding adjusted FY17E EV/EBITDA of 6.0x (28% regional discount). Given the favourable dynamics, we expect margins and profits to remain upbeat with a 15% earnings CAGR over FY17-19E. We have cut FY17-19E EPS by 7-11% to incorporate higher coal price and distribution cost. We, however, increase our SOTP-based TP to PRs290 (from PRs275) as we roll forward our cement-business DCF value to FY18E and account for a sharp increase in its listed portfolio value. Breakdown in the price arrangement, volatility in coal prices, delays with South expansion, and a slowdown in infra spending remain the key risks.





PRs104.67/US$1

Performance 1M 3M 12M Absolute (%) 8.7 29.2 58.0 Relative (%) 6.6 12.8 2.9


Year 6/16A 6/17E 6/18E 6/19E Revenue (PRs mn) 29,703.8 32,970.7 37,848.1 42,988.5 EBITDA (PRs mn) 13,036.1 14,134.5 17,050.2 21,130.0 EBIT (PRs mn) 11,145.8 12,047.2 14,858.0 17,206.8 Net profit (PRs mn) 8,789.7 9,912.8 11,914.7 13,227.8 EPS (CS adj.) (PRs) 20.06 22.63 27.20 30.19 Change from previous EPS (%) n.a. (10.9) (6.5) (7.8) Consensus EPS (PRs) n.a. 20.55 22.09 25.09 EPS growth (%) 15.3 12.8 20.2 11.0 P/E (x) 11.6 10.3 8.6 7.7 Dividend yield (%) 2.6 2.6 2.6 2.6 EV/EBITDA (x) 6.3 6.3 5.5 4.4 P/B (x) 1.56 1.38 1.21 1.06 ROE (%) 13.7 14.2 15.0 14.6 Net debt/equity (%) Net Cash 9.3 14.8 11.0


9 February 2017


DG Khan Cement Co Ltd (DGKH.KA / DGKC PA)



Sales revenue 29,704 32,971 37,848 42,988 Cost of goods sold 17,036 19,275 21,234 23,819 EBITDA 13,036 14,134 17,050 21,130 EBIT 11,146 12,047 14,858 17,207 Net interest expense/(inc.) 130 170 324 1,776 Recurring PBT 12,481 13,579 16,101 17,180 Profit after tax 8,790 9,913 11,915 13,228 Reported net profit 8,790 9,913 11,915 13,228 Net profit (Credit Suisse) 8,790 9,913 11,915 13,228


Cash & cash equivalents 7,010 6,646 4,966 10,862 Current receivables 202 208 214 220 Inventories 767 790 813 838 Other current assets 22,857 24,589 26,302 28,267 Current assets 30,836 32,233 32,295 40,187 Property, plant & equip. 39,577 53,650 68,384 77,082 Investments 12,948 12,948 12,948 12,948 Intangibles 0 0 1 2 Other non-current assets 0 0 0 0 Total assets 83,360 98,831 113,628 130,220 Current liabilities 10,057 9,538 9,951 10,740 Total liabilities 17,635 24,752 29,130 33,918 Shareholders' equity 65,783 74,137 84,555 96,357 Minority interests 0 0 0 0 Total liabilities & equity 83,418 98,889 113,685 130,275

Cash Flow (PRs mn) 06/16A 06/17E 06/18E 06/19E

EBIT 11,146 12,047 14,858 17,207 Net interest (130) (170) (324) (1,776) Tax paid 0 0 0 0 Working capital 1,650 (139) (116) (7) Other cash & non-cash items 75 123 (427) 1,721 Operating cash flow 12,741 11,861 13,991 17,144 Capex (11,508) (16,160) (16,926) (12,622) Free cash flow to the firm 1,232 (4,299) (2,935) 4,522 Investing cash flow (4,501) (17,230) (18,059) (13,823) Equity raised (3,112) 1,069 1,133 1,201 Dividends paid (2,191) (2,629) (2,629) (2,629) Financing cash flow (1,487) 5,005 2,389 2,573 Total cash flow 6,752 (363) (1,679) 5,894 Adjustments 0 0 0 0 Net change in cash 6,752 (363) (1,679) 5,894

Per share 06/16A 06/17E 06/18E 06/19E

Shares (wtd avg.) (mn) 438 438 438 438 EPS (Credit Suisse) (PRs) 20.06 22.63 27.20 30.19 DPS (PRs) 6.00 6.00 6.00 6.00 Operating CFPS (PRs) 29.08 27.07 31.93 39.13

Earnings 06/16A 06/17E 06/18E 06/19E

Growth (%) Sales revenue 13.8 11.0 14.8 13.6 EBIT 35.3 8.1 23.3 15.8 EPS 15.3 12.8 20.2 11.0 Margins (%) EBITDA 43.9 42.9 45.0 49.2 EBIT 37.5 36.5 39.3 40.0

Valuation (x) 06/16A 06/17E 06/18E 06/19E

P/E 11.6 10.3 8.6 7.7 P/B 1.56 1.38 1.21 1.06 Dividend yield (%) 2.6 2.6 2.6 2.6 EV/sales 2.8 2.7 2.5 2.2 EV/EBITDA 6.3 6.3 5.5 4.4 EV/EBIT 7.3 7.4 6.4 5.4

ROE analysis (%) 06/16A 06/17E 06/18E 06/19E

ROE 13.7 14.2 15.0 14.6 ROIC 12.0 12.0 12.3 13.0

Credit ratios 06/16A 06/17E 06/18E 06/19E

Net debt/equity (%) (0.0) 9.3 14.8 11.0 Net debt/EBITDA (x) (0.00) 0.49 0.73 0.50

Company Background

DG Khan Cement is a leading cement producer in Pakistan with an installed capacity of 4.4 mn tpa. The company has two plants located in Deri Ghazi Khan and Chakwal and also holds a strategic 9% stake in MCB Bank being part of the Mansha Group.



Peak EV/EBITDA multiple of 9.0x

Our Grey Sky Scenario (PRs) (from 130.00) 145.00

Trough EV/EBITDA multiple of 3.0x






9 February 2017


Asia Pacific/Pakistan Cement

Lucky Cement Co Ltd (LUKC.KA / LUCK PA) Rating OUTPERFORM Price (08-Feb-17, PRs) 854.44 Target price (PRs) 970.00 Upside/downside (%) 13.5 Mkt cap (PRs/US$ mn) 276,305 / 2,638 Enterprise value (PRs mn) 258,181 Number of shares (mn) 323.38 Free float (%) 45.0 52-wk price range (PRs) 889-449 ADTO-6M (US$ mn) 2.2 Target price is for 12 months.

Research Analysts

Farhan Rizvi, CFA

65 6212 3036

[email protected]

Diversification at its best

■ Positive demand momentum to continue. Domestic demand has continued to remain strong (+11% in 6M FY17), led by rising private sector construction activity and higher government infra spending. Given likely acceleration in CPEC projects and more aggressive government spending in the run up to the 2018 general elections, demand momentum is likely to continue. We expect domestic demand to continue to post a three-year (FY17-19E) CAGR of 13%, helping capacity utilisation to rise to 95% by FY18, and comfortably absorb 28% of capacity additions by FY19.

■ Diversified cement expansions to provide sustained growth. Diversified

cement expansions should ensure sustained long-term growth. The 1.2 mtpa Congo plant started commercial production in December, while Lucky is also doubling capacity at its Iraq grinding facility. Moreover, 1.3 mtpa Karachi expansion is on track to achieve commercial operations in 1Q18. Lucky has not given up on the 2.3 mtpa greenfield expansion in Punjab and is seeking government approvals with a revised financial closure target of June 2017.

■ Coal IPP and auto diversification highlight growth vision. Lucky’s unique

strength has been its successful diversification, such as cement ventures in Iraq and Congo or the ICI acquisition locally. The company plans to continue its diversified growth strategy, led by a 660 MW Coal IPP (targeted financial closure May 2017) and the recent agreement with Kia Motors to set up a US$200 mn auto manufacturing and distribution facility in the next two years.

■ Valuation still at a discount despite superior growth pedigree. Despite rallying strongly (+21% over three months) and outperforming the market by 5%, Lucky remains attractively valued, trading at an FY18E adjusted EV/EBITDA of 7.3x (a 14% discount to the region) despite EBITDA margins nearly twice the regional average. We also see potential value from a US$115 mn automobile investment in Kia (not incorporated in our numbers). Breakdown in price arrangement, volatility in coal prices and pullback in development spending and private sector real estate activity are key risks.





PRs104.75/US$1

Performance 1M 3M 12M Absolute (%) -1.1 21.4 64.3 Relative (%) -2.8 4.6 10.6


Year 6/16A 6/17E 6/18E 6/19E Revenue (PRs mn) 45,222.1 52,173.1 60,500.7 68,355.6 EBITDA (PRs mn) 21,201.0 24,452.4 28,382.6 33,444.1 EBIT (PRs mn) 18,631.9 21,748.5 24,953.6 29,662.6 Net profit (PRs mn) 12,944.2 17,189.2 20,788.8 24,451.1 EPS (CS adj.) (PRs) 40.03 53.16 64.29 75.61 Change from previous EPS (%) n.a. 0.0 0.0 0.0 Consensus EPS (PRs) n.a. 54.90 68.15 76.74 EPS growth (%) 4.1 32.8 20.9 17.6 P/E (x) 21.3 16.1 13.3 11.3 Dividend yield (%) 1.2 1.5 1.9 2.2 EV/EBITDA (x) 11.8 10.8 9.5 7.8 P/B (x) 3.99 3.36 2.82 2.38 ROE (%) 20.1 22.7 23.1 22.8 Net debt/equity (%) Net Cash Net Cash Net Cash Net Cash


9 February 2017


Lucky Cement Co Ltd (LUKC.KA / LUCK PA)

Price (08 Feb 2017): PRs854.44; Rating: OUTPERFORM; Target Price: PRs970.00; Analyst: Farhan Rizvi


Sales revenue 45,222 52,173 60,501 68,356 Cost of goods sold 23,422 27,205 32,003 34,806 EBITDA 21,201 24,452 28,383 33,444 EBIT 18,632 21,749 24,954 29,663 Net interest expense/(inc.) 24 29 989 1,045 Recurring PBT 18,400 22,942 26,952 31,831 Profit after tax 12,944 17,189 20,789 24,451 Reported net profit 12,944 17,189 20,789 24,451 Net profit (Credit Suisse) 12,944 17,189 20,789 24,451


Cash & cash equivalents 26,806 18,594 18,922 26,989 Current receivables 2,182 3,130 3,630 4,101 Inventories 1,588 2,870 3,328 3,760 Other current assets 8,832 9,652 11,193 12,646 Current assets 39,408 34,246 37,072 47,495 Property, plant & equip. 34,014 44,419 56,015 56,651 Investments 12,422 18,696 27,061 35,426 Intangibles 0 0 0 0 Other non-current assets 79 79 79 79 Total assets 85,922 97,439 120,227 139,651 Current liabilities 9,631 13,849 20,932 21,953 Total liabilities 16,600 15,131 22,304 23,421 Shareholders' equity 69,323 82,308 97,923 116,230 Minority interests 0 0 0 0 Total liabilities & equity 85,922 97,439 120,227 139,651

Cash Flow (PRs mn) 06/16A 06/17E 06/18E 06/19E

EBIT 18,632 21,749 24,954 29,663 Net interest 0 0 0 0 Tax paid 0 0 0 0 Working capital 747 (10,518) (1,326) (1,239) Other cash & non-cash items (3,119) (1,855) (736) (1,430) Operating cash flow 16,260 9,375 22,892 26,993 Capex (1,522) (13,109) (15,025) (4,418) Free cash flow to the firm 14,738 (3,734) 7,867 22,576 Investing cash flow (3,019) (19,382) (23,390) (12,783) Equity raised 0 0 0 0 Dividends paid (2,880) (4,204) (5,174) (6,144) Financing cash flow (2,897) 1,775 99 (6,912) Total cash flow 10,344 (8,232) (399) 7,298 Adjustments 0 0 0 0 Net change in cash 10,344 (8,232) (399) 7,298

Per share 06/16A 06/17E 06/18E 06/19E

Shares (wtd avg.) (mn) 323 323 323 323 EPS (Credit Suisse) (PRs) 40.03 53.16 64.29 75.61 DPS (PRs) 10.00 13.00 16.00 19.00 Operating CFPS (PRs) 50.28 28.99 70.79 83.47

Earnings 06/16A 06/17E 06/18E 06/19E

Growth (%) Sales revenue 1.0 15.4 16.0 13.0 EBIT 15.5 16.7 14.7 18.9 EPS 4.1 32.8 20.9 17.6 Margins (%) EBITDA 46.9 46.9 46.9 48.9 EBIT 41.2 41.7 41.2 43.4

Valuation (x) 06/16A 06/17E 06/18E 06/19E

P/E 21.3 16.1 13.3 11.3 P/B 3.99 3.36 2.82 2.38 Dividend yield (%) 1.2 1.5 1.9 2.2 EV/sales 5.5 5.1 4.5 3.8 EV/EBITDA 11.8 10.8 9.5 7.8 EV/EBIT 13.4 12.1 10.8 8.8

ROE analysis (%) 06/16A 06/17E 06/18E 06/19E

ROE 20.1 22.7 23.1 22.8 ROIC 30.7 29.0 24.0 23.7

Credit ratios 06/16A 06/17E 06/18E 06/19E

Net debt/equity (%) (38.7) (15.3) (7.1) (12.9) Net debt/EBITDA (x) (1.26) (0.52) (0.24) (0.45)

Company Background

Lucky is the second largest cement producer in Pakistan with an installed capacity of 7.6 mtpa with two plants located at Pezu and Karachi. It also has a JV for 0.9 mtpa grinding facility in Iraq and a 1 mtpa plant under construction in Congo.


Our Blue Sky Scenario (PRs) 1,080

Peak target EV/EBITDA multiple of 7.7x for FY18E and 2% higher domestic demand growth

Our Grey Sky Scenario (PRs) 580.00

Trough EV/EBITDA multiple of 2.4x and 40% discount on portfolio value






9 February 2017


Companies Mentioned (Price as of 08-Feb-2017) Anhui Conch Cement Co. Ltd. (0914.HK, HK$25.8) Arcelik (ARCLK.IS, TL21.96) Bank Alfalah (BAFL.KA, PRs42.49) DG Khan Cement Co Ltd (DGKH.KA, PRs233.69, OUTPERFORM, TP PRs290.0) Dewan Cement (DECE.KA, PRs34.14) Engro Corporation Ltd (EGCH.KA, PRs371.03) Engro Fertilizer (ENGR.KA, PRs69.68) Engro Foods (ENFL.KA, PRs203.76) Fatima Fertilizer Co Ltd (FATF.KA, PRs39.51) Fauji Fert Bin Qasim Ltd. (JORD.KA, PRs52.21) Fauji Fertilizer Company Limited (FAUF.KA, PRs112.46) Ghandhara Nissan (GHLT.KA, PRs351.85) Habib Bank Limited (HBL.KA, PRs266.88, OUTPERFORM, TP PRs305.0) Honda Atlas Cars (HATC.KA, PRs787.41) Hub Power Company (HPWR.KA, PRs142.96) Hyundai Motor Company (005380.KS, W139,000) Indus Motor Company (INDM.KA, PRs1727.45) KAPCO (KAPCO.KA, PRs80.93) Kia Motors (000270.KS, W36,800) Lucky Cement Co Ltd (LUKC.KA, PRs854.44, OUTPERFORM, TP PRs970.0) MCB Bank Limited (MCB.KA, PRs230.98) Maple Leaf Cmt (MPLF.KA, PRs134.06) National Bank of Pakistan (NBPK.KA, PRs78.58) Nishat Mills (NISM.KA, PRs181.37) Oil & Gas Development Company (OGDC.KA, PRs157.51) Pak Elektron (PKEL.KA, PRs86.42) Pak Suzuki Motors (PKSU.KA, PRs714.82) Pakistan Oilfields Ltd (PKOL.KA, PRs498.08) Pakistan Petroleum Limited (PPL.KA, PRs179.63) Pakistan State Oil (PSO.KA, PRs481.14) Pakistan Telecommunication Co Ltd (PTCA.KA, PRs18.41) Renault (RENA.PA, €83.6) The Coca-Cola Company (KO.N, $42.02) United Bank Limited (UBL.KA, PRs241.59, OUTPERFORM, TP PRs276.0)

Disclosure Appendix

Analyst Certification Farhan Rizvi, CFA, and Fahd Niaz, CFA, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for DG Khan Cement Co Ltd (DGKH.KA)

DGKH.KA Closing Price Target Price

Date (PRs) (PRs) Rating

09-Dec-14 102.34 124.00 O

20-Jan-15 123.82 148.00

27-Apr-15 137.62 158.00

22-Sep-15 138.77 175.00

04-Feb-16 158.09 220.00

03-Aug-16 211.84 275.00

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

9 February 2017


3-Year Price and Rating History for Habib Bank Limited (HBL.KA)

HBL.KA Closing Price Target Price


18-Aug-14 187.65 260.00 O *

30-Oct-14 214.60 265.00

16-Jan-15 215.70 R

07-Jul-15 212.91 250.00 O

24-Aug-15 208.99 265.00

07-Mar-16 191.37 260.00

25-Apr-16 172.82 255.00

23-Aug-16 218.98 252.00

24-Oct-16 226.36 263.00


O U T PERFO RM

REST RICT ED

3-Year Price and Rating History for Hyundai Motor Company (005380.KS)

005380.KS Closing Price Target Price

Date (W) (W) Rating

24-Apr-14 242,000 294,000 O

24-Jul-14 229,000 287,000

23-Oct-14 171,000 252,000

03-Mar-15 166,500 NR

21-Apr-15 171,000 170,000 N *

10-Jun-15 134,500 150,000

14-Jul-15 125,500 137,000

08-Sep-15 156,500 150,000

27-Jan-16 137,000 145,000

29-Feb-16 147,500 190,000 O

18-Jul-16 132,000 175,000

05-Oct-16 140,000 168,000

25-Jan-17 142,000 163,000


O U T PERFO RM

N O T RA T ED

N EU T RA L

3-Year Price and Rating History for Kia Motors (000270.KS)

000270.KS Closing Price Target Price

Date (W) (W) Rating

25-Apr-14 57,300 60,000 N

22-May-14 60,100 72,000 O

18-Sep-14 54,400 88,500

24-Oct-14 54,400 98,900

26-Jan-15 46,450 70,400

03-Mar-15 46,700 NR

21-Apr-15 47,900 42,000 U *

10-Jun-15 44,250 48,000 N

08-Sep-15 50,600 61,000 O

27-Jan-16 48,600 57,000

23-Mar-16 49,800 61,000

06-Jul-16 41,400 50,000

24-Nov-16 36,950 40,000 N


N EU T RA L

O U T PERFO RM

N O T RA T ED

U N D ERPERFO RM

9 February 2017


3-Year Price and Rating History for Lucky Cement Co Ltd (LUKC.KA)

LUKC.KA Closing Price Target Price


20-Apr-15 479.75 NR

04-Feb-16 520.31 685.00 O *

03-Aug-16 705.45 855.00

02-Sep-16 661.38 848.00

26-Jan-17 889.18 970.00


N O T RA T ED

O U T PERFO RM

3-Year Price and Rating History for United Bank Limited (UBL.KA)

UBL.KA Closing Price Target Price


06-May-14 171.41 177.00 O

12-Jun-14 170.02 R

13-Jun-14 170.02 177.00 O

18-Aug-14 182.39 235.00

30-Oct-14 193.42 230.00

29-Apr-15 176.18 220.00

27-Jul-15 178.93 218.00

22-Jul-16 179.53 212.00

21-Oct-16 203.72 230.00


O U T PERFO RM

REST RICT ED

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equa l to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

9 February 2017


*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

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Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 45% (64% banking clients) Neutral/Hold* 38% (59% banking clients) Underperform/Sell* 15% (54% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

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Target Price and Rating Valuation Methodology and Risks: (12 months) for DG Khan Cement Co Ltd (DGKH.KA)

Method: Our target price of PRs 290 for DGKC is based on sum-of-the-parts methodology with separate valuations for the firm's core cement operations and its investment portfolio. We have valued the cement operations using a cost of equity of 15.5%, cost of debt of 7% and WACC of 14.5% with a target value value of PRs238, while the investment portfolio, which includes mainly strategic investments in group companies, has been valued at market price less portfolio discount of 40% amounting to PRs52/share. We value DGKC as OUTPERFORM due to its attractive medium to long term growth profile driven by rising cement demand and planned expansion in the South.

Risk: The major risks for our OUTPERFORM rating and target price of PRs290 for DGKC include: (1) breakdown of the price arrangement between manufacturers; (2) increase/decrease in international coal prices beyond estimates; (3) delays in commissioning of new plant in the South(4) decline in PSDP spending by the government and/or private sector real estate investment which could result in weakening of domestic demand

Target Price and Rating Valuation Methodology and Risks: (12 months) for Habib Bank Limited (HBL.KA)

Method: Our PRs305 target price for Habib Bank is derived using the Gordon growth model. We have used 2017E BVPS and a target P/B multiple of 2.15x based on a sustainable ROE of 20.5%, COE of 14.9% and growth internal equity of 9.9%. COE is based on an RFR of 8.5%, market premium of 5.8% and beta of 1.1. We have an OUTPERFORM rating on HBL due to its dominant deposit franchise, best exposure to CPEC and infrastructure projects and superior long term growth profile.

Risk: Potential risks to our target price of PRs305 and OUTPERFORM rating for Habib Bank include: (1) asset quality deterioration in the bank's corporate and international loan portfolio which could hurt earnings and negatively impact on the bank's capital base 2) changes in policy rate impacting margins as ~75% of HBL revenue is denominated from interesting bearing assets and 3) changes in the minimum statutory saving deposit rate and/or imposition of special taxes such as super tax.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Lucky Cement Co Ltd (LUKC.KA)

Method: Our target price of PRs970 for Lucky Cement is based on a sum-of-total-parts (SOTP) methodology where we value the core domestic cements business using discounted cash flow (DCF) based on a cost of equity (Ke) of 14.2% and terminal growth of 5%. Moreover, we value the investment in the cement plant in Congo using DCF with a ke of 18.6% and terminal growth of 5%, 660 MW Coal IPP using DCF with cost-to-equity of 13% and investment in grinding facility in Iraq using DCF with Ke of 17% and terminal growth rate of 5%. Lucky's investment in ICI Pakistan limited is valued at market price less 20% portfolio discount broadly in line with market implied discount for other conglomerates. We rate Lucky OUTPERFORM due to robust growth outlook across its core cement business as well as investments in Congo, Iraq, ICI and new venture with Kia in the automobile sector.

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9 February 2017


Risk: The major risks to our OUTPERFORM rating and target price of PRs970 for Lucky Cement include: (1) a breakdown of the price arrangement between manufacturers; (2) volatility in international coal prices beyond estimates; (3) operational challenges in running the new cement plant in Congo and delays with the 660 MW coal IPP; (4) deterioration in the security situaiton in Iraq and Congo; and (5) a weakening of demand in domestic and export markets

Target Price and Rating Valuation Methodology and Risks: (12 months) for United Bank Limited (UBL.KA)

Method: Our PRs276 target price for United Bank is derived using the Gordon growth model. We have used 2017E BVPS and a target P/B multiple of 2.1x based on a sustainable ROE of 19.8%, COE of 14.5% and growth internal equity of 8%. COE is based on an RFR of 8.2%, market premium of 5.8% and beta of 1.05. We rate UBL as OUTPERFORM due to better near term earnings momentum, strong balance sheet and attractive valuations.

Risk: Potential risks to our OUTPERFORM rating and target price of PRs276 for United Bank include: (1) asset quality deterioration in the bank's corporate and international loan portfolio which would impact earnings and potentially the bank's capital base and (2) political turmoil in the Middle East which could severely impact the international operations of the bank. Industry risks include changes in policy rate and/or the minimum statutory saving deposit rate than currently estimated.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names The subject company (UBL.KA, LUKC.KA, OGDC.KA, EGCH.KA, PKOL.KA, PPL.KA, NBPK.KA, 000270.KS, 005380.KS, ARCLK.IS, KO.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (OGDC.KA, EGCH.KA, PKOL.KA, PPL.KA, NBPK.KA, 000270.KS, 005380.KS, KO.N) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (UBL.KA, KO.N) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (EGCH.KA, KO.N) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (OGDC.KA, EGCH.KA, PKOL.KA, PPL.KA, NBPK.KA, 000270.KS, 005380.KS, KO.N) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (LUKC.KA, OGDC.KA, EGCH.KA, PKOL.KA, PPL.KA, MCB.KA, NBPK.KA, FATF.KA, HPWR.KA, 0914.HK, 000270.KS, 005380.KS, ARCLK.IS, KO.N) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (UBL.KA, KO.N) within the past 12 months Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (000270.KS, 005380.KS).

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683. For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=283395&v=-4uo124qlm6adn9gnfsg9aj281 .

Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (HBL.KA, UBL.KA, EGCH.KA, 005380.KS, KO.N) within the past 3 years. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse AG, Singapore Branch .............................................................................................................. Farhan Rizvi, CFA ; Fahd Niaz, CFA To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse AG, Singapore Branch .............................................................................................................. Farhan Rizvi, CFA ; Fahd Niaz, CFA

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9 February 2017


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9 February 2017


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