Refer to important disclosures on page 3 Page 1

Pakistan Daily Notes

Morning Shout

HUBC: Management meeting notes & 2QFY14 preview

� We met with Hub Power management recently two issue primarily, 1) coal

conversion and implications for Hubco and 2) O&M cost trend.

� Coal conversion will require atleast 3 years after financial close for all four

plants of Hubco to be operational. Management expects a 3 year pay-back

period on the project. To meet financing requirements for the project, dividends

would be curtailed, but not eliminated.

� On O&M cost (repair and maintenance) front, management believes that the

cost will likely remain on the higher side in remaining FY14 as well. This poses a

downside risk to our current FY14E EPS/DPS. However, we do not believe they

will be of the same magnitude as seen in last two quarters.

� We expect Hubco to post 2QFY14 EPS of PRs2.07/sh, down 9%YoY. Along with

the result the company is expected to pay a dividend in the range of PRs3.25-

3.50/sh. With the stock trading at a 13% discount to our target price of

PRs75.0/share, we maintain our Buy recommendation on Hubco.

Geared up for coal conversion Recently, we met with the management of Hub Power Company to discuss recent

developments, specifically related to 1) Hubco’s coal conversion plans and 2) trend in O&M

costs in the coming quarters, and the 3) current state of circular debt in the energy sector.

As per the management, Hubco has done its homework on conversion of its FO based plants to

coal based generation. This includes preliminary discussions with international lenders as well

as legal work pertaining to the conversion process. For Hubco, the coal conversion will require

atleast 3 years after financial close (which includes 2yrs to build boilers and 3 months each to

switch to coal boilers). As per management, payback period for this project is likely to be

around three years.

… but bureaucratic hurdles remain The delay in the coal conversion process is primarily owing to bureaucratic reasons, as ECC has

entrusted Nepra with the responsibility of finalizing the policy and tariff for coal conversion.

Nepra has raised a number of issue in this regard, including 1) rationale for higher than

proposed US$ equity IRR for coal conversion compared to other power projects and 2)

extension in life of existing power plants and associated increase in plant and maintenance

costs. The reason for Hubco’s withdrawal of its proposal for increasing its authorized share

capital in 2013 (which would potentially paved the way for a rights issuance), was due to the

bureaucratic bottle-necks in this process, which are delaying the overall process. Our reading on

this issue is that coal conversion is likely to go through, given that it is a win-win for IPPs and the

government, but the process may take longer than expected.

O&M to remain on high side in FY14 Repair and maintenance expenditure has been on rise since 4QFy13 and we expect it to remain

elevated in the remainder of FY14 as well. In 1QFY14, repair and maintenance costs jumped by

53% to ~PRs300mn, coupled with lower load factor of 64%. We expect utilization to be around

65% in 2QFY14, resulting in lower generation bonus (PRs0.2/sh). Management’s view on higher

O&M is that this necessary to maintain efficiency of the plant, and the company is more than

willing to trade-off the short-term earnings dip for the longer-term benefit of keeping the plant

running efficiently.

2QFY14 earnings outlook- Hubco is expected to post after tax profits of PRS4,214mn (EPS: PRs3.64/share) for 1HFY14,

11% lower as compared to the same period last year. The decline in the profits is primarily due

24 January 2014

Hussain Yasar

Hussain.yasar@kasb.com

KASB Securities Limited

+92 21 111 222 000

Current Price PRs66.54

Price Objective PRs75.00

KATS HUBC

Reuters HPWR.KA

Bloomberg HUBC PA

Shares Outstanding

1157.15mn

Market Cap

PRs76997mn (USD730.38mn)

3 M Average Daily Volumes

1,473,762 shares

12-month High/Low

73.42/47.03

Stock Performance

1M 3M 12M

Absolute% 8.5 3.9 41.5

Rel Index% 2.0 -17.3 -18.6

Abs. (PRs) 5.2 2.5 19.5

HUBC: Valuation Snapshot

FY13A FY14E FY15E

Revenues 165,862 181,178 198,673

% change -5.1% 9.2% 9.7%

PAT 9,388 10,732 13,107

% change 15% 14% 22%

EPS (PRs) 8.11 9.28 11.33

PER (x) 8.13 7.11 5.82

DPS (PRs) 8.00 9.00 10.20

D/Y (%) 12% 14% 15%

ROE (%) 29% 32% 37%

Source: Company accounts, KASB estimates

morning shout

Page 2

to the higher repair and maintenance cost and lower generation during 1HFY14. On an overall

basis, the PRs/US$ exchange rate deteriorated by almost 10% YoY in 1HFY14. We expect the

interim dividend to be in the range of PRs3.25-3.5/share. With the stock trading at a 13%

discount to our target price of PRs75.0/share, we maintain our Buy recommendation on Hubco.

Morning News

� Forex reserves fall by US$149mn (BR)

The country's liquid forex reserves fell by US$149mn during last week. According to SBP, the

country's total liquid reserves declined to US$8.168bn as on January 17, 2014 down from

US$8.317bn. SBP's liquid forex reserves decreased by US$145mn to US$3.322bn from $3.467

billion and reserves held by banks witnessed a decline of US$4mn to US$4.85bn.

Technical View

Ahmed Hanif

ahmed.hanif@kasb.com

Failed to break trend-line resistance; double-top formed The index formed a double top at 27,200-27,220 area and closed on a negative note.

Moreover, the index also failed to break its trend line resistance of 27,300 which also supports

our view of a corrective move from current levels.

The possibility of the index targeting 25,800-26,000 which is its 23% retracement level of the

rise from 21,497-27,213 increases as some key stocks like PSO, OGDC, MCB, LUCK and DGKC are

showing some downside from current levels.

It is recommended to stay cautious at the current levels

KSE-100 Intra-day Movement

26,990

27,025

27,060

27,095

27,130

27,165

27,200

9:30 AM 10:55

AM

12:20

PM

1:45 PM 3:10 PM

High 27,204

Low 26,998

Source: KSE

Index Data & Volume Leaders

Close % Chg

Vol.

US$ mn

KSE30 19,671.00 0.1% 68.47

KSE100 27,064.34 0.2% 98.40

KSE All

Share 20,283.05 0.5% 120.08

DGKC 95.63 2.5% 13.84

ARL 224.49 1.3% 7.87

ENGRO 184.78 -0.8% 7.35

FCCL 16.37 1.2% 5.76

LPCL 11.09 6.6% 3.90 Source: KSE

KSE-100: Top Gainers & Losers

-6% -4% -2% 0% 2% 4% 6% 8%

TRIPF

NETSOL

SHFA

SNBL

IGIIL

CHCC

MUREB

PICT

PCAL

LPCL

Source: KSE

morning shout

Page 3

World Markets and Commodity Prices

International Equity Markets

Asian Markets (Closing Rates) European Markets (Last Trading Session’s Rates)

Price Abs. Chg. % Chg. Price Abs. Chg. % Chg.

All Ordinaries 5,275.50 -55.8 -1.05 ATX 2,684.00 -23.2 -0.86

Shanghai Composite 2,042.18 -9.6 -0.47 BEL-20 2,944.70 -7.7 -0.26

Hang Seng 22,733.90 -348.3 -1.51 CAC 40 4,280.96 -44.0 -1.02

BSE 30 21,373.66 36.0 0.17 DAX 9,631.04 -89.1 -0.92

Jakarta Composite 4,496.04 18.6 0.41 AEX General 403.89 -3.6 -0.87

KLSE Composite 1,808.31 -5.8 -0.32 Swiss Market 8,404.98 -61.7 -0.73

Nikkei 225 15,695.89 -125.1 -0.79 FTSE 100 6,773.28 -53.0 -0.78

NZSE 50 4,911.08 -39.3 -0.79 American Markets

Straits Times 3,100.24 -33.5 -1.07 Dow Jones Ind. Average 16,197.35 -217.1 -1.32

Seoul Composite 1,947.59 -22.8 -1.16 NASDAQ Composite 4,218.87 -24.1 -0.57

Taiwan Weighted 8,595.10 -30.2 -0.35 NASDAQ -100 3,613.76 -14.0 -0.38

KSE-100 Index 27,064.34 49.2 0.18 S&P 500 Index, RTH 1,828.46 -16.4 -0.89 Source: Bloomberg

Foreign Portfolio Investment in Equities

Country Day (US$mn) WTD (US$mn) MTD (US$mn) YTD (US$mn) YoY - YTD (chg) Date

Pakistan 7.3 17.1 22.4 22.4 242.5% 23-01

India 46.6 114.1 443.4 443.4 -85.3% 22-01

Indonesia 48.7 89.8 349.2 349.2 -24.9% 22-01

Japan N.A 681.6 (771.1) (771.1) -111.3% 17-01

Philippines 16.8 24.1 (13.1) (13.1) -102.4% 23-01

South Korea (40.8) (33.3) (319.3) (319.3) 57.9% 23-01

Taiwan 36.9 262.7 1,322.0 1,322.0 1114.3% 23-01

Thailand 56.5 (45.5) (18.6) (18.6) -104.0% 23-01

Vietnam 5.8 18.0 68.9 68.9 -13.6% 23-01 Source: Bloomberg, NCCPL

Forex and Money Market snapshot

Current Previous Chg.

6-Month KIBOR (Offer) 10.13 10.14 -0.01

12-M T-Bill (Average) 9.98 10.00 -0.02

10- year PIB (Average) 12.53 12.51 0.02

PkR/ US$ 105.44 105.54 -0.10 Source: KASB Money Market

Commodity Prices

Price Abs. Chg. % Chg.

WTI (Crude Oil) 97.37 0.6 0.6

Gold 1,264.14 27.1 2.2

CRB Index 281.29 0.76 0.3 Source: Bloomberg

KASB Securities Limited, 5th Floor, Trade Centre, I.I. Chundrigar Road, Karachi

This report has been prepared by KASB Securities Ltd. and is provided for information purposes only. Under no circumstances is to be used or considered as an offer to sell or solicitation of

any offer to buy. While all reasonable care has been taken to ensure that the information contained therein is not untrue or misleading at the time of publication, we make no

representation as to its accuracy or completeness and it should not be relied upon as such. From time to time KASB Securities Ltd. and any of its officers or directors may, to the extent

permitted by law, have a position, or otherwise be interested in any transaction, in any securities directly or indirectly subject of this report. This report is provided solely for the

information of professional advisers who are expected to make their own investment decisions without undue reliance on this report and the company accepts no responsibility

whatsoever for any direct or indirect consequential loss arising from any use of this report or its contents. In particular, the report takes no accounts of the investment objectives, financial

situation and particular need of individuals, who should seek further advice before making any investment. This report may not be reproduced, distributed or published by any recipient for

any purpose. The views expressed in this document are those of the KASB Securities & Economic Research Department and do not necessarily reflect those of KASB or its directors. KASB,

as a full-service firm, has or may have business relationships, including investment-banking relationships, with the companies in this report.