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Pakistan Strategy|2014 2014 unfolds another chapter of a growth story!


P a k i s t a n S t r a t e g y I 2 0 1 4

ContentPakistan Strategy 2014 – Abstract 4

• KSE Investment Thesis 4• Pakistan at a glance 5

Pakistan Politics 2014 7

• Ground set for sustainable recovery 8

• Performance-off challenges 9

Pakistan Economy 2014 10

• High long-term growth prospects 11• Mid-term challenges & opportunities 13• Inflation: Pressures remain high 14• Policy rate: Too young to die! 15• External account: Sustaining despite challenges 16• Liquidity: Finally improving 17• Remedy to energy crisis 18• Key Macro-factor snapshot 19• Macroeconomic indicators 20

Pakistan Capital Market 2014 21

• The ‘Jewel’ continues to shine apart 22• A ‘top-down’ story from ‘bottom-up’ earlier 23• Earnings growth to outshine historical averages 24• Rising volumes and foreign participation 25• Regional charm sustains despite bull runs 26• KSE100 index to flirt with 31,000pts level 27• Index is deceptive, go cherry-picking! 28• Who is more sensitive to key macros? 29• Alpha-generating triggers in 2014 30• Beta-neutralizing premiums in 2014 31

Pakistan Sectoral Strategies 2014 32

• Banks 33

• Construction & Materials 40

• Personal Goods 53

• Fertilizer 60

• Power 69

• Fixed Line Telecom 78

• Exploration & Production 83

• Oil Marketing 90

Other Sectors in Focus 95

• Consumer Goods (FMCGs) 96

• Pharmaceutical 97

Valuation Guide 99

Disclaimer 101

Annexure 102

• List of Abbreviation 102

• Key Data Source 103

• Contact 104

Closing Prices as of December 31, 2012



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Abstract

KSE Investment Thesis With KSE going all guns blazing while punching in another solid return in 2013 (PKR

49%, USD 38%, cumulative 123%, 90% in USD since Jan’12), Pakistan equities look all set for yet another exciting bull run in 2014, when a set of macro reforms are expected to take place (already started the year on a strong note!), with an expected improvement in country’s overall macroeconomic governance ahead, albeit with a host of challenges on economic and political fronts. As the veterans say: “there are three stages to a bull market. The first stage nobody notices. The second stage the professionals, the smart guys, notice and start accumulating and, in the third stage, the public notices. When the public notices, it goes off the charts and it's time for the smart money to get out.” Pak equities are still not there yet. We think we are nowhere near the end of this bull-run since we are at the beginning of the end of the economic troubles, with a democratic political setup in place that has enough muscle to implement the economic reform agenda. Equities aren’t rising for no reason for sure! And the reasons we will try and explore in this Strategy piece.

KSE’s Investment Thesis is based on:

Solid long-term growth prospects High share of rising middle class in population New gov’t reforms including privatization, foreign fund-raising, fiscal

consolidation as well as improved overall governance Rising breath and depth of equities, expected M&As in key sectors Rising volumes, market liquidity and increased foreign investor’s participation Well-run and shareholder-friendly corporates, despite recent political,

economic and security backdrop Very attractive valuations, high and sustainable earnings growth as well as fat

dividend yield

KSE100 Index Target Estimates 2014Valuation Basis Target Weight Breakup (pts)Target Price Based 29,714 20% 5,943 Earnings Growth 28,701 20% 5,740 Justified PE 30,497 20% 6,099 PE-Growth Ratio 38,441 15% 5,766 Regional DY 24,311 5% 1,216 Regional PBV 27,075 5% 1,354 Regional PE 26,364 5% 1,318 Regional EV/EBITDA 36,016 5% 1,801 Current PE Basis 29,792 5% 1,490 Average 30,101 100% -Weighted Target 30,727 Index Dec-13 end 25,261 Expected Total Return 2014 22%

AHL Research Valuation Snapshot 2009 2010 2011 2012 2013 2014-15F

Earnings Growth 8% 17% 27% 15% 6% 24%PE (x) 8.5 7.6 7.1 6.4 10.4 7.8Dividend Yield 6.8% 7.0% 6.9% 8.2% 5.0% 6.3%Earnings Yield 11.8% 13.2% 14.1% 15.7% 9.6% 13%ROE 23% 23% 25% 25% 23% 26%PBV (x) 1.8 1.6 1.7 1.5 2.2 1.9Payout Ratio 58% 53% 48% 52% 52% 49%

50%

26%

-10%

38% 38%

7%19%

-22%

5%21%

75%

16%

-20%

15%

-5%

-50%

0%

50%

100%

2009 2010 2011 2012 2013

KSE Return (USD)Frontier Market

4



Pakistan at a Glance

Economy EquitiesPopulation (mn) 182.5 Major Stock Exchange Karachi Stock Exchange

Middle Class (of population) 35% Benchmark Index KSE-100

GDP/Capita (USD, FY13) 1,196 Total Market Cap (USD bn, Dec'13) 57.7 (KSE-100: 50.3)

GDP Size (USD bn, FY13) 218.3 Free Float Market Cap (USD bn, Dec'13) 23.1 (KSE-100: 12.4)

GDP Growth (1QFY14) 5.1% Market Cap as %age of GDP 21.3%

Sovereign Rating S&P: -B, Moody‘s: CAA1 Avg. Daily Traded Value (USD mn, CY13) 93.1

FX Reserves (USD bn, Dec’13) 8.1 Avg. Daily Volume (USD mn, 2013) 222.6

Current Account Deficit (5MFY14, of GDP) 1.8% MSCI Category Frontier Markets

Fiscal Deficit (5MFY14, of GDP) 2.2% Number of Stocks in MSCI FM 12

CPI Inflation (Jul-Dec’13) 8.9% Largest Sector Oil & Gas

Policy Rate 10.0% Largest Stock OGDC

Total Debt and Liabilities (Sep’13, of GDP) 71.0% Net Foreign Flows (USD mn, 2013) 398

Total Public Debt (Sep’13, of GDP) 63.4% Foreign Holds (of FF MCap, ex. strategic) 28.0%

5





Pakistan Politics|2014Ground set for sustainable recovery



Moving towards Political Maturity

Ground set for sustainable recovery In 2013, with an unprecedented turnout at the ballot box (55%)

following endless queues, the ‘change’ for a better Pakistan came finally through the vote, the essence of a true democracy taking roots in the country. Pak Politics finally enters a stable mode.

The democratic political transition, from one democratic setup completing terms first time in country's history to another, incredibly boosted investor confidence as the setup has also been built upon ‘simple’ majority, from a divisive ‘coalition’ earlier.

Following smooth political shift, timely transitions of the other two, most powerful positions of the country’s key institutions recently; Military (replacement of the Chief of the Army Staff: from General Ashfaq Pervez Kayani to General Raheel Sharif) as well as Judicial (from Chief Justice iftikhar Muhammad Chaudhryto Justice Tassaduq Hussain Jillan) further set stage for increased confidence and perception change.

Peaceful democratic political transfer, political maturity and judicial activism have started bearing fruits when Pakistan in 2013, amongst 177 countries, improved on the list of global corruption perception index by 13 notches to 127th rank.

PML-N, a veteran political party in its earlier tenors (served twice earlier: Nov'90-Apr'93 and Feb'97-Oct'99) had fine and effective administration and pro-business-pro-privatization attitude, translating into good economics. PML-N chalked out a detailed economic manifesto with needed action plans for a sustainable economic recovery.

PML’N: Historical Performance of earlier Tenors

Indicators PML'N

GDP Growth 4.3%

Inflation 9.1%

As % of GDP

Fiscal Deficit 6.8%

Current Account Deficit 2.8%

Trade Deficit 4.7%

Tax-GDP 13.3%

Savings-GDP 13.7%

Investment-GDP 18.4%

Political Party Position in General Elections 2013

Political PartyNational

%Provincial

%Assembly Assembly

Pakistan Muslim League-Nawaz 188 55% 361 50%

Pakistan Peoples Party 45 13% 104 14%Pakistan Tehreek-e-Insaaf 35 10% 85 12%

Muttahida Qumi Movemen 24 7% 51 7%

Jamiat Ulema-e-Islam Fazlurehman 13 4% 25 3%

Pakistan Muslim League-Functional 5 1% 11 2%

Jamaat-e-Islami 4 1% 9 1%

Others 18 5% 69 10%

Independent 8 2% 9 1%

Total Seats 340 724Source: Election Commission of Pakistan

PML'N formed gov't in the Punjab, Baluchistan & the Centre, PTI in KPK, PPP in Sindh

8



2014: Heading towards Agenda implementation

Performance-off challenges Combing through recent numbers reveals that newly formed

political setup somewhat steered the economy out of deep crises, or at least has put a blockade on bleeding holes through a number of short-term measures, including a balancing budget right after coming into power, one-off resolution of liquidity issues facing power sector, arrangement of the new IMF program and announcement of un-populist measures i.e. power tariff hikes.

The latest report card of the new gov’t on economic performance against targets reveals somewhat rosy picture, where the economic growth seemed to have done well, with GDP at 5.1% in 1QFY14 against last 5yr average of 2.9% (see table alongside).

With 2014’s sunset, though the gov’t looks set to implement its economic agenda and other reforms (power tariff increase/ subsidy reduction, privatization of PSEs, spectrum auction, foreign bond issues and capital market reforms), it is faced with a host of political challenges (uneasy relations with India, unsteady political harmony on peace dialogue with the indigenous militant groups as well as drone attacks and subsequent relations with the US post its withdrawal from Afghanistan ahead).

Gov’t economic agenda consists of the following medium termroadmap for putting the economy back on the growth path: GDP growth to gradually rise to around 7% Investment/GDP to rise to 20% Fiscal Deficit to be brought down to 4% of GDP Forex reserves to be increased to around USD 20bn, and Public debt to be reduced to 57.5% of GDP

Gov’t 5-Year Economic Plan

Indicators Last Full-Yr

5Y Target Indicators 5Y

TargetReal GDP Growth 3.6% 6% Improve Governance YesIndustrial Growth 3.5% 7-8% Tax Reforms YesInflation 7.4% 7-8% Increase in Tax Rate NoBudget Deficit 8.8% 4% Later Tax Cuts YesTax-GDP 9.2% 15% Interest Rate Cuts YesInvestment-GDP 13.4% 20% PSEs Restructuring YesHealth-GDP 0.5% 2% Privatization Programs YesEducation-GDP 3.0% 4% Financial Mkt. Reforms YesT&D Loss of Power sector 25% 10%

KPIs of the new Gov’t in first year in office for far in FY14

Indicators Provisional Target Last year Rating

GDP Growth 5.1% 4.4% 2.9% Positive

Manufacturing 5.2% 4.5% 3.1% Positive

Services 5.7% 4.5% 2.9% Positive

Agriculture 2.5% 3.8% 2.7% Negative

Inflation (5MFY14) 8.9% 10-11% 8.4% Neutral

Policy Rate 10.0% - 9.5% Neutral

As % of GDP

Tax Revenue 3.0% 4.0% 2.9% Neutral

Fiscal Deficit 2.2% 2.6% 2.9% Positive

Current Account Deficit 1.8% 1.1% 0.7% Negative

Public Debt 63.4% 58.0% 58.8% Negative

Circular Debt 0.8% 0.0% 2.1% Positive

9


Pakistan Economy|2014Reforms all the way



Pakistan Economics

High long-term growth prospectsReforms to affect growth in short-term, but good for long-term macro stabilityPakistan economy has been resilient throughout most of its history despite being repeatedly hit by a multitude of shocks that weakened its underlying growth potential - GDP growth has still been in par with the region. The new democratic gov’t is aggressively pursuing fiscal reforms and simultaneously uplifting investment. We expect reforms to pickup pace in 2014 to spur growth on a sustainable basis ahead, albeit with tapered pace in short-to-medium term.

Long-term growth drivers in play Demographics: Strategically placed (between energy hungry

Asia and energy rich Middle-Far East and Central Asia) to become Asia’s premier trade, energy and transport corridor.

Young and growing population: Pakistan, the world’s sixth most populous country (over 180mn population), is experiencing an expanded domestic demand, considering ~55% of the population being under the age of 19. Moreover, country’s middle class (~35% of population) is steadily growing with per capita increase of 9% (10yr CAGR).

Transiting domestic consumption: Pakistan is mainly a consumption-led economy (~89%), and is now experiencing growing share of investment.

Fiscal austerity, without compromising growth: Increasing tax revenues, trimming out excessive non-development expenditure and increasing development projects (~4% of GDP in FY14) will keep investment and growth climate upbeat.

Exhibit:GDP growth averaged 5% for the last 10-yrs. Which is in line with its regional peers (higher than overall average), despite facing both domestic and external challenges

Source: SBP, AHL Research

4.8% 5.2% 3.8% 4.1% 5.1%0%

1%

2%

3%

4%

5%

6%

Pakistan ASEAN -5 CEE Lat. AM MENA

11



Pakistan Economics

Growth storyExhibit: Pakistan Investment/GDP is one of the lowest in the region


Exhibit: Pakistan Saving/GDP is also lowest within the region


Exhibit: Pakistan GDP deteriorated after experiencing +7% growth story


Exhibit: One of the highest young population /total population within the region


504

505

582

663

724

897

980

1,05

3

1,02

6

1,07

2

1,27

5

1,32

3

1,36

8

-

200

400

600

800

1,000

1,200

1,400

1,600

0%1%2%3%4%5%6%7%8%9%

10%

Fy01 Fy02 Fy03 Fy04 Fy05 Fy06 Fy07 Fy08 Fy09 Fy10 Fy11 Fy12 Fy13

Per Capita Income (USD) RHS GDP (%age Growth)

14% 35% 29% 26% 40%0%

10%

20%

30%

40%

50%

Pakistan India Sri Lanka Bangladesh China

14% 32% 22% 27% 53%0%

10%

20%

30%

40%

50%

60%


33% 11% 37% 14% 23%0%

5%

10%

15%

20%

25%

30%

35%

40%


12



Pakistan Economics

Mid-term challenges & opportunitiesInappropriate growth mix keeps macro stability risks aliveThe government's desire to support growth while simultaneously consolidating Pakistan's fiscal budget at a time when private sector investment, as a percentage of GDP, has been on a decline; has to some extent backfired. We believe, efforts to materialise the new growth strategy has started showing up in the form of: 1) elevated inflation; 2) higher reliance on external financing; and 3) increased cost of credit

Effort to change the growth mix still infant Recent monetary tightening by the SBP still to curb

inflation, defend PKR, and the level of pressure on current account balance is increasing downside risks to the growth outlook.

Moreover, rate tightening could impact the willingness of banks to lend, making productive private sector investment growth more difficult to come-by.

Pakistan’s new administration has unveiled some fiscal reforms. We expect these structural reforms (some of them) would speed-up, given the prerequisite disbursement under the new IMF’s EFF arrangement.

This would also allow the government to augment capital inflows albeit in some form of debt.

While such measures could help cushion the pace of currency weakening, we do not expect this to make a major difference in the trend unless structural changes take place and global environment becomes favourable.

Exhibit: Factors such as deteriorating law and order conditions and severe energy conditions are seriously affecting the real productive economic activity. This is constraining the current utilization and future expansion of the economy’ productive capacity. A key indication is the falling investment to GDP ratio.


14.0%

15.0%

16.0%

17.0%

18.0%

19.0%

20.0%

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

Investment %age of GDP

13



Exhibit: Food, &non-food prices trend


Pakistan Economics

Inflation: Pressures remain high Headline CPI inflation has moderated to 8.9% (1HFY14) after a

three year average of 10.7%. However, recent pass-through of administered product prices

– and more to come-by given expected cut-backs in power subsidy – would eventually trigger higher cost of production; allowing in for a higher core price trend, going forward.

With the recent resurgence in food prices – reaching 9.9% 1HFY14 period average, versus 7.3% in 1HFY13 – continuity in trend is expected. Following the spillover effect of rising energy prices and feed-stock prices (reforming in fertilizer subsidy) hints at higher food price index.

In addition, crude oil prices having risen in the last three months (1/3rd of import bill) are also keeping the inflation risk alive. Though commodity outlook stands relatively dim, continuous PKR depreciation (8.5% in 2013, 6% FY14 to date) would also keep inflationary pressures on the higher side (raw material imports in turn leads to higher end product prices).

Although fiscal consolidation is undergoing, we think financing government’s fiscal deficit (8.8% of GDP in FY13 and 6.6% in FY14B) and expansionary government spending (development) all translate well into higher monetary expansion.

Outlook Our base-case period inflation, for FY14E and FY15F, averages

out at around 10.0% and 10.5-11.0%, respectively.

Exhibit: Headline inflation above SBP comfort zone


4%

6%

8%

10%

12%

14%

16%

Jul-0

9

Oct

-09

Jan-

10

Apr-

10

Jul-1

0

Oct

-10

Jan-

11

Apr-

11

Jul-1

1

Oct

-11

Jan-

12

Apr-

12

Jul-1

2

Oct

-12

Jan-

13

Apr-

13

Jul-1

3

Oct

-13

CPI (YoY%) SBP (Comfort Level)

4%

6%

8%

10%

12%

14%

16%

Aug-

11

Oct

-11

Dec

-11

Feb-

12

Apr-

12

Jun-

12

Aug-

12

Oct

-12

Dec

-12

Feb-

13

Apr-

13

Jun-

13

Aug-

13

Oct

-13

Dec

-13

Non-Food Prices (%YoY) Food Prices (%YoY)

14



Exhibit: Real interest rates dipping in the negative territory


Pakistan Economics

Policy rate: Too young to die! Only two years into rate easing, doubts of whether monetary

expansion is sustainable surfaced.

Our interest rate forecast remains contingent on seeing near upside risk to inflation and real interest rate touching the negative territory.

Given the starting point of high inflation and expectations in the medium-term, we believe policy-makers would be certain in pushing policy rate up.

Finally, negative real interests will certainly be a point of consideration for the policy-makers. At present, real interest rate gap stands close to 1.0%. Going forward, inflation touching as high as 11.3% in FY14 (estimated), we would not be surprised to see SBP raising its concerns in monetary policy statements.

Outlook We factor-in a minimum 50bps policy rate hike in 2HFY14 to

10.5%, and subsequent 11% policy rate by FY15.

However, the effect of higher policy rate chasing inflation will be growth front-loaded; with continuation of disappointing credit demand growth in the medium term.

Exhibit: Headline inflation above SBP comfort zone


5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

Jul-0

9

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

Oct

-10

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

CPI (YoY%) SBP Reverese Repo Rate

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Sep

-09

Dec

-09

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Dec

-13

Real rates (based on 3M trailing Inflation rates)

15



Exhibit: Foreign Exchange Reserves and PKR


Pakistan Economics

External account: Sustaining despite challenges Since the commencement of FY14, the current account

balance has moved into a deficit USD 1.9bn (1.8% of GDP) in 5MFY14 versus surplus of USD 0.7mn (0.6% of GDP) – mainly due to marked reduction in services receipts (services deficit at USD 1.1bn, versus USD 563mn, primarily due to decrease in CSF funds from the US this year), alongside rise in import bill and fall in general goods.

Moreover, country’s financial inflows plunged sharply to post a deficit of USD 712mn (0.7% of GDP) versus a surplus of USD 318mn (0.3% of GDP), causing much pressure on country’s balance of payment.

This combined effect of debt repayments and widening current account deficit depleted country’s FX reserves held by SBP that reached USD 3.2bn by Dec-13 versus USD 10.8bn in Jun-12. Henceforth, the SBP’s loss of crucial buffer to shield-off any pressure on PKR resulted in a poor macro environment for PKR. PKR depreciated 6% against USD during the FY14 to date.

Regional currencies faced a similar fate: The phenomenon of weak financial inflows have struck in other emerging and developing economies as well, and these economies have subsequently witnessed sharp depreciation in their respective currencies. While this investment squeeze in Pakistan is not exclusively restricted to weak global demand but also due to deterring domestic fundamentals.

Exhibit: Current account Balance trend (all %age of GDP)


-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

Sep

-13

Dec

-13

Mar

-14

Jun-

14

Sep

-14

Nov

-14

Financial Accounts Net Account Balance (Current + Capital) BoP

-20 40 60 80 100 120 140 160 180 200

2.0 4.0 6.0 8.0

10.0 12.0 14.0 16.0 18.0 20.0

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

Jun-

12

Jun-

13

Dec

-13

Sch Banks SBP Days of Import Cover

16



Exhibit: Banks’ fund utilisation outpaced its deposit growth


Pakistan Economics

Liquidity: Finally improving System liquidity remains tight and cost of credit high: lack

of sufficient external funding has also led to tight interbank liquidity. In 1HFY14, overnight rates traded at their upper limit of 2.5% (reduced from 3% in Feb-13) of SBP Reverse Repo corridor.

Outlook Although liquidity conditions are expected to remain tight in

the short-to-medium term, we expect it to gradually improve in the later of FY14 with gradual materialization of planned flows on account of privatization, Eurodollar/Global Rupee bond issuance, spectrum auction and CSF money.

Moreover, banks deposit growth has outpaced total fund utilisation, which could potentially loosen up some credit availability at banks.

Further, a gradual decline in SBP liquidity injections with the help of aggressive realisation of external funds (lowering burden on domestic sources) and pick-up in government revenue receipts, should bode well for increasing liquidity.

Realization of external funds and privatisation proceeds (this alone has the potential to reduce fiscal deficit by 0.5%-1% of GDP)

Recent steps by SBP to tame down market speculation on PKR alongside aforesaid should stabilise PKR. Overall C/A deficit will remain manageable at 1.2-1.5% of the GDP in FY14E.

Exhibit: O/N rates trading at the upper limit


2%

7%

12%

17%

22%

27%

Dec

-03 Dec

-04 Dec

-05 Dec

-06 Dec

-07 Dec

-08 Dec

-09 Dec

-10 Dec

-11 Dec

-12 Dec

-13

Fund Allocation Growth Deposit Growth

6%7%8%9%

10%11%12%13%14%15%

Feb-

10

May

-10

Aug-

10

Nov

-10

Feb-

11

May

-11

Aug-

11

Nov

-11

Feb-

12

May

-12

Aug-

12

Nov

-12

Feb-

13

May

-13

Aug-

13

Nov

-13

SBP RRR Corridor O/N Rates

17



Pakistan Economics

Remedy to energy crisisOverview Energy availability in Pakistan has been declining over the last few

years, as a result of low investment in the sector. The country faced a record shortfall of both power and natural gas, during FY12-13.

Despite several measures taken by the government, prolonged and frequent power cuts have affected production activities and kept economic growth under stiff grip from reaching its full potential.

At its core, the energy crisis reflects the lack of a coherent policy, tariff structures, under-capacity utilization and huge transmission and distribution losses.

Reforms: Taking a long-view Henceforth, in order to meet up the current and growing energy

demand, the government is aggressively pursuing relatively cheaper and more efficient fuel-based projects to fill-up the supply gap.

This will be achieved through increased indigenous exploration of natural gas and oil, coal conversion, gas imports from neighboring countries, curtailing subsidies to reduce fiscal burden through tariff rationalization and finally inducing energy conservation projects.

The gov’t by start of FY14, plugged in PKR 480bn for the resolution of circular debt. Due to one-off liquidity resolution for the energy chain, the circular debt stands manageable at 0.8% of GDP now v/s 2.1% earlier. Although energy reforms are underway, we suspect energy shortfall to fade away with time due to gradual additions.

Exhibit: Electricity demand and supply gap


Exhibit: Installed capacities and expansions


80,000

90,000

100,000

110,000

120,000

130,000

140,000

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

Jun-

12

Jun-

13

Jun-

14

Jun-

15

Jun-

16

Jun-

17

Jun-

18

GWh Net Generation (GWh) Demand (GWh)

-5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000

0

50,000

100,000

150,000

200,000

250,000

300,000

Jan-

13

Jan-

14

Jan-

15

Jan-

16

Jan-

17

Jan-

18

Jan-

19

Jan-

20

Jan-

21

Installed Gross Capacity (GWh) Additions (RHS)

18



Exhibit: Pakistan GDP sector-wise percentage point contribution

Source: SBP, AHL ResearchExhibit: PKR trend against USD


Exhibit: Pakistan will be a net borrower in CY14-CY16;with IMF

Source: SBP, AHL ResearchExhibit: Pakistan External Account sustaining its way to better prospects


Exhibit: Pakistan Current Account and falling Investment (%age of GDP)


Pakistan Economics

Key Macro-factor Snapshot

-

500

1,000

1,500

2,000

2,500

CY0

0C

Y01

CY0

2C

Y03

CY0

4C

Y05

CY0

6C

Y07

CY0

8C

Y09

CY1

0C

Y11

CY1

2C

Y13

CY1

4C

Y15

CY1

6C

Y17

CY1

8

Disbursements Repayments+Interest

(3)

(2)

(1)

-

1

2

3

4

80

85

90

95

100

105

110

115

Sep-10 Sep-11 Sep-12 Sep-13

Spread RS OPEN Mkt IBNK Mkt

Exhibit: Pakistan Current Account and falling Investment (%age of GDP)


FY10

FY11

FY12

FY13

0.0% 1.0% 2.0% 3.0% 4.0%

Agri. Industrial Service

10%

15%

20%

25%

30%

35%

40%

10%

15%

20%

25%

FY11 FY12 FY13

Dev. Exp. (%GDP) Cur. Exp. (%GDP)

3%

4%

5%

6%

7%

8%

9%

10%

10%

12%

14%

16%

18%

20%

22%

24%

FY10 FY11 FY12 FY13

Rev. (%GDP)Exp. (%GDP)Fiscal Balance (%GDP) RS

(15,000)

(10,000)

(5,000)

-

5,000

10,000

FY08 FY09 FY10 FY11 FY12 FY13*

Net Balance Fin. Account BoPUSD mn

19



Pakistan Economics

Key Macro-economic indicatorsKey Economic Indicators FY10A FY11A FY12A FY13A FY14E FY15F Real GDP (Real Growth %) 3.1% 3.0% 3.7% 3.6% 4.2% 4.4%Service Sector 4.6% 4.4% 4.0% 3.7% 4.6% 5.0%Industrial Sector 4.9% 0.7% 3.1% 3.5% 3.9% 3.7%Agricultural Sector 2.0% 2.4% 3.4% 3.3% 3.1% 3.3%GDP (MP - PKRbn) 14,824 18,063 20,654 22,909 26,219 30,148 Prices CPI (%age YoY) 10.1% 13.7% 11.0% 7.4% 10.3% 10.6%Policy Rate - Period end 13.9% 13.5% 12.0% 9.0% 10.5% 11.0%

External Sector (USDbn) Exports 19.7 25.4 24.7 24.8 26.7 28.8 Imports 31.2 35.9 40.5 40.2 42.8 45.8 Trade Terms 11.5 10.5 15.8 15.4 16.1 17.0 Remittances 8.9 11.2 13.2 14.1 15.7 17.6 FX Reserves - Period end 16.8 18.2 15.3 11.0 8.7 10.4 Current Account Balance (%age of GDP) -2.2% -0.1% -2.1% -0.4% -1.2% -1.1%Exchange Rate (average) 85 86 89 97 108 113

Fiscal Accounts (%age of GDP) Total Revenue 13.5% 13.0% 12.9% 13.2% 14.5% 14.9%Tax Revenue 10.1% 9.8% 10.3% 9.9% 10.8% 10.9%Total Expenditure 16.6% 18.7% 20.3% 22.0% 21.2% 20.6%Current Expenditure 11.5% 16.0% 16.3% 17.8% 17.0% 16.5%Development Expenditure 5.1% 2.7% 3.9% 4.2% 4.2% 4.1%Fiscal Balance 3.1% 5.7% 7.4% 8.8% 6.6% 5.7%Public Debt 59.9% 57.2% 60.0% 63.5% 66.4% 67.8%Source: SBP, PBS, MoF, AHL Research

20


Pakistan Capital Market|20142014 unfolds another chapter of a growth story!



Pak Equities go all guns blazing 2nd year in row!

The ‘Jewel’ continues to shine apart KSE has been going all guns blazing with simmering returns for

two years back to back (2013: 49.4%, 38.0% in USD, 2012: 49.0%, 37.8% in USD) with cumulative 122.6%, 90.1% in USD till 2013, and looks all set for yet another exciting bull run in 2014 when a set of macro reforms are expected to be in full swing.

While global economy still craves for growth, equity markets around the globe skyrocketed for being bombarded with flush of liquidity amidst undeterred QE. As such, funds flown in at a blazing pace during 2013 (USD27.5bn with average 3% YoYreturn, against USD51.6bn in 2012 with average returns of 25% YoY) across the emerging/frontier regions with some signs of improved economic activity in the west as well proved to be a continuous unpinning force for solid performance of risky assets (equities). However, in the mid of 2013, the emerging Asia region saw massive outflows on fear of ending QE with freefall of equities and currencies. Once fears faded, funds flew back to emerging region, partly due to their better fiscals, growth and solvencies than most of the developed markets still stand with.

KSE has been outpacing EM and FM indices since 2010. With a blistering pace, KSE100 pushed the envelope further and topped Asia Pacific in 2013, from a 3rd position in 2012, while in terms of attracting foreign flows, KSE fetched ~1.5% of total inflows to the region, against below 0.3% earlier. On its relative eco-political scale, KSE performed exceptionally well, given political-eco and law & order shakeups it survived through in last 5 years. The long surge was driven by CGT-related reforms, solid profits, huge foreign flows and policy rate easing.

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World Equity Returns Comparison 2013

Asia Pacific* Market Return Foreign Flows (USD mn)Country 2013A 2012A 2013A 2012APakistan 38% 38% 398 125 Vietnam 20% 19% 263 154 Taiwan 9% 13% 9,188 4,907 S. Korea 2% 19% 4,875 15,069 India -3% 22% 19,942 24,389 Philippines -6% 42% 678 2,548 Thailand -13% 40% (6,211) 2,504 Indonesia -22% 7% (1,806) 1,703 Sri Lanka 2% -17% 164 239 Avg./Total 3% 20% 27,498 51,637

*Ex-Japan

50%

26%

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38% 38%

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2009 2010 2011 2012 2013

KSE Return (USD) Frontier Market Emerging Markets

22



Sustained gains despite Eco-Market dichotomy

A ‘top-down’ story from ‘bottom-up’ earlier KSE continued to show immense resilience despite subdued

economic growth in the last two years (average 2.9% in last 5yrs), power crises, increased inflation, higher interest rates and sharp attrition in the local currency against USD. Despite hurdles, corporate earnings growth was glued to the rising trend.

Ironically, Pak market’s bottom-up story has mostly been driven so far by deteriorating macros in the shape of declining local currency followed by high inflation, which was partly driven by rise in commodity prices (oil, fertilizer, cements and food), which largely benefited bottomlines of the index heavyweights i.e. E&Ps (weight 29%), Food Producers (10.5%), Fertilizer (5.4%), OMCs (2.5%), Textiles (5.6%), Power (3.2%) and Telecom (1.9%). So, 58% of KSE provided currency hedge while Banks (20.5%) were amongst the low-performing ones due to increased macro risks.

As such, Pakistan's corporate earnings growth, ROEs and average payouts rather fared well (better than regional peers’ vis-à-vis macros) while they have yet to reflect the economic reforms expected to be in full swing in 2014, where the outperforming sectors are expected to be the ones more skewed towards growth than the defensive ones earlier.

In 2014, KSE is expected to turn into a top-down story, from a bottom-up story so far, since economic reforms should set ground for sustained growth in corporate profits, owing to ensuing economic expansion and capacity utilizations in consequence of demand growth, while cash-flows are expected to solidify amid better gradual recoveries overall, and thus improved payouts.

Economic Indicators v/s Earnings Growth/Returns

Country RGDP CPI DR EGrow RoE

Indonesia 5.6% 8% 7.5% 16% 21%

India 4.8% 8% 7.8% 20% 18%

Vietnam 6.0% 6% 7.0% 4% 16%

Philippines 7.0% 3% 3.5% 7% 13%

Sri Lanka 7.8% 6% 6.5% 16% 15%

Thailand 2.7% 2% 2.3% 16% 14%

China 7.8% 3% 6.0% 17% 17%

Taiwan 1.7% 1% 1.9% 15% 13%

S.Korea 3.3% 1% 2.5% 28% 10%

Peer Avg 5.2% 4% 5.0% 15% 15%

Pakistan 3.6% 11% 10.0% 14% 25%

Difference -1.6% 7% 5.0% -1% 10%

Relative Value Low Low Low ~Parallel High

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Real GDP (LHS)Real EGrow (LHS)Real Index Growth

23



Sustained gains despite Eco-Market dichotomy

Earnings growth to outshine historical averages Interestingly, during last 5yrs of economic slowdown, corporate

earning growth has rather improved sequentially (kept up momentum at a substantial 14% avg. run rate) while economy could not catch up with its underlying potential amid severe energy issues, stubbornly high inflation and double-digit interest rates over the period.

Entering 2014, we expect earnings growth to be the bastion of KSE. It is expected to turn even better than historical averages (24% in 2014-15 v/s 5Y average at 14%) to be largely triggered by key sectors i.e. E&Ps (+10% above average), Banks (+20% above), Textiles (parallel) and below (due to high-base last year) but still strong for Cements, Chemicals, Telecom, Fertilizer and Power.

Stable oil prices should support Oil & Gas sector (better production from E&Ps, higher cash margins for OMCs) while improving offtake should support Fertilizer earning-payout. Rate hikes should inch-up banking sector’s interest margins (mid-tier) alongside improving NPLs and decline in provisioning/reversals, leading to better payouts (big banks). Cement sector should reap benefits from rising prices, soft/stable coal prices and deleveraging and historic allocation of infrastructure-related funds in budget by the gov’t. Textiles should significantly benefit from improved exports from recently granted GSP+ Status by EU, other PTAs, alongside currency weakness.

Controlled circular debt should translate into better liquidity/cash payout in FY14-15 from PPL, OGDC, PSO, HUBC, KAPCO, NPL, NCPL and few others including NML, NCL, PTC and NBP due to improved sector dynamics. This would attract large portion of the dividend-loving investors to Pakistan equities.

*Fiscal Year (Jul-Jun) for Sectors except for Banks, Fertilizer and Chemicals

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Economic Growth vs Corporate Fundamentals GrowthEarnings Growth KSE100 Return (RHS)GDP Growth (RHS) RoE (RHS)Payout (RHS)

Corporate Sector Earnings Growth: Trend & ForecastYears*

Sector 2009 2010 2011 2012 2013 5-Y Avg. 2014-15FAbove

Average

E&P 19% -3% 18% 41% -4% 14% 24% 10%

Banks 6% 10% 25% 6% -13% 7% 27% 20%

Fertilizer 20% 47% 71% -36% 29% 26% 10% -16%

Cement 103% -30% 23% 170% 54% 64% 16% -48%

Oil Marketing -122% -450% 51% -31% 25% -105% 12% -

Autos -44% 123% -3% 49% -1% 25% 6% -19%Power -11% 13% 45% 19% 21% 17% 8% -9%

Textiles -78% 130% 66% -27% 66% 31% 31% 0%

Chemicals -337% 11% -7% -98% 1313% 176% 98% -78%

Telecom -424% 2% -31% 79% 40% -67% 10% -

AHL Sample 7% 17% 27% 15% 6% 14% 24% 9%

24



Market liquidity on the go!

Rising volumes and foreign participation Since the resolution on the CGT-related issues back in Apr’2012

(simplifying process for investors through NCCPL alongside no-question-ask provision on source of income included in the income tax ordinance 2001 till Jun’2014) has dramatically driven up KSE volumes as well as market liquidity in the last three years.

In this regard, Pak equities’ ATVR (average value traded as % of free float market cap) has also been on the rise, indicating rising market liquidity, though still chasing higher historical averages.

In the last two years of rising streak, Pak equity market volumes went through the roof, up 181%, with average volumes standing at 223mn shares, compared to just 79mn shares in 2011. In the same vein, average market traded value also skyrocketed by 112% to USD93mn by 2013, against only USD44mn recorded during 2011.

Though mixed historically, foreign participation in Pakistan equities has been on the rise, contributing 15% to the total value traded compared to 12% a year earlier, a level last seen in 2010. In this regard, foreign investors’ holdings of Pak equities stood ~USD3.5bn (excluding strategic stakes) or close to 28% of free-float market cap. This gives rise to market sensitivity of foreign trades to KSE100 i.e. 65% of the KSE100 sensitivity is driven by PKR 1.0 delta in OGDC and MCB.

Demutualization of Pak stock exchanges is also expected to underpin further growth in volumes, as observed with other world markets (avg. ~40% rise in overall volumes post-demutualization).

0.00%

0.10%

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2010 2011 2012 2013

KSE Annualized Traded Value Ratio

AVTR

15%

14%

12%

15%

8%

9%

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11%

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13%

14%

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16%

10.0 12.0 14.0 16.0 18.0 20.0 22.0 24.0 26.0 28.0

2010 2011 2012 2013

Foreign PartKSE Val. TradedForeign % of KSE (RHS)

USD bn

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Market Volumes post Demutualization

Traded Vol. Change

Avg. Change

*Free float, ^TMC = Total Mkt. Cap

Stock

Foreign Holding

(USDmn)

Holding (of FF*)

Holding (of

TMC^)

KSE100 Weight

%

KSE100 sensitivity

OGDC 1,152 70% 10% 13.4 9.3PPL 195 28% 6% 6.7 1.9

NESTLE 323 200% 10% 1.3 2.6MCB 827 77% 31% 8.7 6.7

HBL 6 3% 0% 1.7 0

UBL 266 69% 17% 3.1 2.1FFC 26 3% 2% 6 0.2

NBP 30 11% 3% 2.2 0.2POL 26 5% 2% 4.1 0.2

PTC 7 4% 1% 1.3 0.1

LUCK 31 8% 3% 3 0.2ABL 1 1% 0% 0.7 0

PSO 5 1% 1% 2.9 0ENGRO 93 24% 12% 3.1 0.8

HUBC 21 5% 3% 3.8 0.2

KAPCO 1 1% 0% 2.1 0Total 3,010 64.1 24.7

25



Regional appeal through deep discounts

Regional charm sustains despite bull runs KSE’s historical discounts to regional peers’ on PE/DY have been

massive; as high as 52%/61% in 2009 (when market touched historic lows) and as low as 3%/36% in 2005 (when market peaked, then), while the average since 2005 stood at 40%/50%. Comparing averages, KSE still is available at cheaper PE while at a little premium to its regional peers on DY. Since higher risk entails greater return opportunities, KSE100 offers a great deal at these levels more than compensating macro risks that are expected to be reduced with improving macros 2014 onwards.

Since global equities were on a bull run too, KSE100’s deep discount to regional peers remains (43% on PE, 43% on Ev/EBITDA, 52% on PEG, 14% on PBV, and a fat 47% on DY while a sizeable 39% on RoE). We believe, this is a great deal to counterbalance perceived macro risks of i) rising inflation and thus interest rates, ii) one of the lowest eco growth rates, and iii) increased currency volatility, chained with other macro risk-associated premiums.

We expect a 24% YoY earnings growth in 2014-15 (AHL Universe of 29 key stocks). This is in addition to the fact that KSE100 already offers one of the highest RoEs and provides deepest discount at DY (read: pure cash) multiple compared to regional peers’.

Since earnings growth and RoE are the prime factors to look for by investors amongst other key market fundamentals, KSE100’s profit growth is expected to sustain despite high-base, competing most of the peers with better economic growth i.e. China, Sri Lanka, Philippines and Vietnam and India. Thus, we expect KSE100’s re-rating to continue with prevailing market discounts.

Forward EstimatesCountry EGrow DY RoE PE PBV PEG EV/EBITDAIndonesia 16% 2.3% 21% 12.8 2.4 82 8.7

India 20% 1.9% 18% 13.0 2.2 64 8.3

Vietnam 4% 12.0% 16% 10.6 1.8 244 7.9

Philippines 7% 2.5% 13% 16.0 2.3 247 10.6

Sri Lanka 16% 2.8% 15% 10.5 1.8 64 8.5

Thailand 16% 4.0% 14% 11.5 1.8 73 8.3

China 17% 2.8% 17% 8.9 1.3 51 7.8

Taiwan 15% 3.2% 13% 14.8 1.6 101 9.4

S.Korea 28% 1.3% 10% 17.0 1.2 60 7.7

Peer Average 15% 3.6% 15% 12.8 1.8 110 8.6

Pakistan 14% 6.9% 25% 7.2 1.6 52 4.9

Prem/(Disc) 1% -47% -39% -43% -14% -52% -43%

3%

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PE - Regional Disc. Trend

Disc to PeersHistorical Avg. Disc

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47%

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DY - Regional Disc. TrendDisc to PeersHistorical Avg. Disc

26



Index Target 2014

KSE100 index to flirt with 31,000pts level Pakistan equities are set to further re-rate given their grossly

compelling valuations. First re-rating took place following historic resolve on CGT-related issues in 2012, followed by historic change in country’s political canvas in 2013, restoring long-lost investor confidence. Now, in 2014, the 3rd bull run of the series is expected on economic turnaround and its ensuing impacts.

Hence, in 2014, investors need to stay close to where valuations are and should not repeat the same oversight made by those who missed rally in 2013 (KSE100 returned 49% again!), when investors remained focused only, and exclusively, on bad eco-political news and eventually lost sight of the compelling valuations!

Adjusting prevailing regional discounts to historical levels (average discount ranging 14%-52%), chained with justified PE/PEG, Earnings Growth and the Target Price models, gives a weighted average index target of 30,727pts, another solid jump of 5,466pts expected by 2014-end, with a total return of 22% YoY. We reiterate, KSE100 should escalate to the said level in 2014 based on AHL Research Universe performance with a select of risk-adjusted fundamentally-stronger and potentially-outperforming portfolio of stocks (mentioned ahead).

However, any delays in planned inflows and economic reforms implementation, greater-than-expected increase in interest rates amid currency and inflation risks with other economic overhaul risks playing out more than the positives discussed, index could underperform its underlying potential target in 2014.

KSE100 Index Target Estimates 2014

Valuation Basis Target Weight Breakup (pts)

Target Price Based 29,714 20% 5,943

Earnings Growth 28,701 20% 5,740

Justified PE 30,497 20% 6,099

PE-Growth Ratio 38,441 15% 5,766

Regional DY* 24,311 5% 1,216

Regional PBV* 27,075 5% 1,354

Regional PE* 26,364 5% 1,318

Regional EV/EBITDA* 36,016 5% 1,801

Current PE Basis 29,792 5% 1,490

Average 30,101 100% -

Weighted Target 30,727

Index Dec-13 end 25,261 Expected Total Return 2014 22%

*On the basis of adjustments to historical discounts

AHL Research Valuation Snapshot

2009 2010 2011 2012 2013 2014-15F

Earnings Growth 8% 17% 27% 15% 6% 24%PE (x) 8.5 7.6 7.1 6.4 10.4 7.8

Dividend Yield 6.8% 7.0% 6.9% 8.2% 5.0% 6.3%

Earnings Yield 11.8% 13.2% 14.1% 15.7% 9.6% 13%

ROE 23% 23% 25% 25% 23% 26%

PBV (x) 1.8 1.6 1.7 1.5 2.2 1.9

Payout Ratio 58% 53% 48% 52% 52% 49%

27



Key Portfolio Theme

Index is deceptive, go cherry-picking! KSE Investment Thesis is based on:

Solid long-term growth prospects High share of rising middle class in population New gov’t reforms including privatization, foreign fund-raising, fiscal consolidation as well as improved overall

governance Rising breath and depth of equities, expected M&As in key sectors Rising volumes and market liquidity with increased foreign investor’s participation Well-run and shareholder-friendly corporates, despite recent political, economic and security backdrop Very attractive valuations, high and sustainable earnings growth as well as fat dividend yield

We have the following portfolio mix to bank 2014 equity strategy on to outperform market-wide expected average returns:

Symbol Last Closing (PKR) Target (PKR) Upside

PE (x) DY Symbol Last Closing

(PKR) Target (PKR) UpsidePE (x) DY

2013-14 2013-14

KOHC 97.8 166.3 70.1% 5.2 6.1% ACPL 142.6 173.5 21.6% 6.9 9.0%

ENGRO 158.4 255.0 61.0% 4.8 0.0% EPCL 13.4 16.3 21.5% 6.2 0.0%

DGKC 85.7 129.0 50.5% 5.5 3.5% FFC 112.0 134.0 19.7% 7.1 13.3%

NCL 60.2 85.8 42.5% 4.2 6.7% UBL 132.6 157.4 18.7% 8.1 7.4%

PSO 332.2 461.0 38.8% 3.9 3.0% NPL 30.1 35.6 18.6% 3.5 11.8%

NML 127.2 169.4 33.1% 5.4 3.9% OGDC 276.4 327.0 18.3% 8.8 2.7%

PTC 28.4 36.0 26.6% 8.4 6.8% LUCK 299.9 351.0 17.1% 7.5 2.7%

BAFL 27.0 34.2 26.5% 6.8 8.4% PPL 214.0 248.0 15.9% 7.6 6.1%

FFBL 43.8 55.2 26.0% 6.3 14.2% APL 499.7 576.1 15.3% 8.6 10.0%

FCCL 16.0 20.1 26.0% 8.2 8.1%

POL 497.7 609.0 22.4% 7.3 11.1% KSE100 Index 25,261 30,727 21.6% 7.2 6.9%

28



Key Macro-factor sensitivities

Who is more sensitive to key macros? Below is provided companies’ earnings / valuation sensitivity with changes in interest rates and local currency (PKR) depreciation

against the greenback. Please note that, around 60% of the KSE is positively correlated with currency depreciation (due to pricing /margins being in USD) while part deleveraging of the manufacturing sector (during the long monetary easing cycle till Jun’13) isexpected to lessen monetary tightening impact on companies’ bottomlines:

1% PKR Depreciation impact on Earnings

Company Impact (PKR EPS)

2014E- EPS (PKR) Change Company Impact

(PKR EPS)2014E- EPS

(PKR) Change

LUCK 0.11 39.75 0.3% LOTCHEM 0.04 0.56 6.4%

NPL 0.02 8.58 0.2% NML 0.60 23.66 2.4%

NCPL 0.02 7.76 0.2% EPCL 0.05 2.14 2.4%

DGKC (0.03) 15.38 -0.2% KAPCO 0.10 9.05 1.1%

KOHC (0.07) 18.72 -0.4% NCL 0.14 14.30 1.0%

ACPL (0.21) 21.04 -1.4% HUBC 0.08 8.80 0.9%

PSO (1.20) 85.79 -1.4% PTC 0.03 3.49 0.9%

FFBL (0.11) 7.08 -1.5% POL 0.41 68.31 0.6%

FCCL (0.03) 1.87 -1.7% OGDC 0.10 31.40 0.4%

APL 0.17 57.70 0.3%AHL Research Estimates

100bps increase in Policy Rate impact on Valuations

Company Change Company Change

FFC -4.0% ACPL -3.8%

FFBL -4.2% LUCK -4.2%

ENGRO -6.5% KOHC -4.1%

EFERT -8.9% FCCL -5.7%

HUBC -4.0% DGKC -2.9%

KAPCO -2.8% PSO -7.1%

NPL -2.3% APL -3.6%

NCPL -2.5% PPL -1.5%

LOTCHEM -3.9% ODGC -2.0%

EPCL -8.9% POL -2.1%

INDU -3.7% BAFL -4.0%

PSMC -3.9% UBL -7.2%

PTC -3.6% MCB -4.1%

NML -1.3% NBP -5.0%

NCL -3.7%AHL Research Estimates

29



Opportunities to seize in 2014

Alpha-generating triggers Much-awaited and one of the key highlights of 2014, which the

current political setup is prominent for, would be resumption of long-stalled Privatization process. The gov’t is expected to commence the process in 1Q14 with SPOs of the heavyweights (E&Ps: PPL, OGDC, Banks: HBL, UBL, ABL) to offload 5-10% stake (PKR128-213bn, USD1.0-2.0bn) initially. This is expected to not only attract more foreign flows to equities but enhance free-float of the said companies to scale up overall liquidity.

Even part materialization of planned flows in 1H14 i.e. Eurobond issue (USD1.0bn), spectrum auction (USD1.0bn), CSF (USD880mn), Etisalat (USD800mn), and other uni/bi/multi-lateral funding should improve system liquidity, which alongside increased investor risk appetite should provide impetus to equities.

Better foreign flows are expected to KSE in 2014 on account of: 1) political uncertainty in Bangladesh and India amid elections followed by deteriorating human rights perception in Sri Lanka, ii) US/EU's plans to continue pumping in liquidity, albeit with gradual taper-off, to stimulate their deficit-ridden economies. This should result in higher inflows for KSE where better valuations reside.

Other triggers like MSCI’s consideration for MSCI EM status in May’14 – KSE is already its sustainability gauge, and KSE’s demutualization expected in 2014, should unwind flows to KSE while historical phenomenon of providing higher returns/increased volumes in 1Q (bigger result season) with foreign-local fresh funds allocation, followed by 2Q and 3Q, respectively, lowest in 4Q, should provide further support to equities from1Q onwards.

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KSE Quarterly* Phenomenon

Avg. Returns Average Volumes

*Since 2006-070

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Foreign Flows vs KSE

Cumulative FIPIKSE100 (RHS)

USD mn '000 pts

Name of Company Gov't Holding

% to be Offered*

Funds to be raised (PKR

mn)

GoP Holding

post sale Financial InstitutionsNational Bank of Pakistan 75.60% 10.00% 12,065 65.60%Allied Bank Ltd. 10.07% 10.00% 9,369 0.07%United Bank Ltd. 23.49% 10.00% 16,406 13.49%Habib Bank Ltd. 41.54% 10.00% 21,629 31.54%Non-Financial InstitutionsPakistan Petroleum Ltd. 71.06% 10.00% 42,654 61.06%Oil & Gas Development Ltd. 74.97% 10.00% 119,411 64.97%Pakistan State Oil 22.45% 10.00% 8,192 12.45%Mari Gas Company Ltd 18.20% 10.00% 2,319 8.20%Kot Addu Power Co. Ltd 46.00% 10.00% 5,437 36.00%Sui Northern Gas Pipeline Ltd. 31.68% 10.00% 1,440 21.68%Sui Sothern Gas Co. 65.21% 10.00% 2,194 55.21%Pak. National Shipping Co. 82.20% 10.00% 1,048 72.20%Pakistan Telecom Co. Ltd. 62.17% 10.00% 11,824 52.17%Pakistan Int'l Airlines 84.64% 10.00% 2,400 74.64%Total 256,389

30



Risk Premiums to account for in 2014

Beta-neutralizing premiums Though possibility of an end to flexibility on CGT (esp. on source

of income till Jun’14) stands remote given no reports of dubious accounts so far and increased investor risk appetite while the gov’t itself would want it continued given privatization-related offloads, this may give birth to investor fears and causal decline in volumes as the deadline draws nearer without any recourse.

Though of low probability (amid IMF-push also), any further delays in the privatization process for any political reasons may turnoff investors’ jubilation mostly on gov’t entities’ stocks, including heavyweights like E&Ps and Banks, which are foreign investor-favorites due to highly compelling valuations, especially E&Ps’.

Delays in planned inflows totaling ~USD3.7bn (Eurobond, spectrum auction, CSF and PTC-related from Etisalat) and any deferral on quarterly tranches from the IMF – if EFF criteria is not fulfilled -may affect PKR, causing high volatility, which may result in shift of funds from equities to USD (though limited impact on equities as ~60% of the KSE provides effective currency hedge).

Gradual thinning of QE (USD10bn of USD85bn/m) may affect flows to Asian markets, which may in turn raise local investor anxiety (narrowed val. discount also). Yet, any downward drift in equities will remain restricted given low level of local leverage financing.

Despite dim commodity outlook (especially fuels), rising CPI due to power/gas tariff pass-ons at home may instigate greater-than-expected monetary tightening, increasing corporate financial cost (though somewhat deleveraged) and scale down equities values, although we have already factored in upcoming rate hikes into our valuations (50bps rate change impact = 646pts!). -55%

68%

33%

0%

49% 49%

0%

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15%

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25%

30%

-80%-60%-40%-20%

0%20%40%60%80%

2008

2009

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2012

2013

Equity Returns vs Currency Depreciation

KSE Returns Average Return (LHS) PKR/USD (RHS)

-58%

60%

28%

-6%

49% 49%

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6%

8%

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2008

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2013

Equity Returns vs Policy RateKSE Returns Policy Rate (RHS)

-32%

35% 27%37% 42%

20%

-55%

68%

33%

0.2%

49% 49%

-28%

-7%-2% -5% -8% -9%

-80%

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60%80%

2008

2009

2010

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2012

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KSE Returns/Earning Growth vs PKREarning Growth KSE Return PKR/USD

31


Pakistan Sectoral Strategies|2014Who will be the Stars in 2014?



Banks

Sector PerformanceExhibit: Banking Sector Performance Relative to KSE100

Source: KSE, AHL Research

Sector's Key Statistics CY13

No of listed companies 25

Average daily turnover (mn) 2.14

Mkt cap (PKR mn) 1,238,051

Mkt cap (USD mn) 11,791

Return 28.45%

PE (x) 12.00

PB (x) 1.38

ROE 15.5%

ROA 0.65%

Dividend Yield 7.67%Source: Bloomberg, AHL Research

80%

90%

100%

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120%

130%

140%

150%

160%

Jan-

13

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13

Mar

-13

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-13

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13

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-13

Nov

-13

Dec

-13

KSE100 Banking Sector

Companies under coverage

Company SYM EPS DPS P/E P/B BVPS RoE Tp Curr. P Upside Recom.

Habib Metro Bank Limited* HMB 5.2 2.8 4.8 0.9 27.5 18.0% 35.3 25.0 41.0% Buy Bank - Alfalah Limited BAFL 4.0 2.3 6.2 1.0 25.6 24.0% 34.2 27.0 26.5% Buy Bank Al-Habib Limited* BAHL 5.2 3.5 8.0 1.6 26.3 20.0% 49.8 41.2 21.0% Buy United Bank Limited UBL 16.8 9.1 8.1 1.5 89.5 20.0% 157.4 132.6 18.7% Buy Allied Bank Limited* ABL 11.9 7.1 7.5 1.5 59 21.0% 98.7 89.4 10.0% Hold National Bank Limited NBP 6.8 5.4 8.7 0.8 73.2 9.0% 57.5 59.3 -3.0% Hold MCB Bank Limited MCB 25.4 15.2 11.2 2.4 121.1 22.0% 261.4 285.0 -8.0% Sell Source: AHL Research, Based on CY14 Estimates, *Under Passive coverage

33



Banks

Spring time!Key drivers Deposit re-structuring to add further value: Most of the banks

under our coverage have, to a certain extent, reshuffled their deposit structure – towards low-cost deposits, which will be imperative in keeping the deposit cost lower. We expect on average 14% YoY growth in sector deposits.

NIMs to expand: With inflation creeping up and foreseeable policy rate tightening, we estimate a 50bps policy rate hike in 1HCY14 to 10.5%, and 11% in subsequent year where we expect banks’ NIMs to expand by 25-30bps.

Asset quality improvement: With NPLs starting to fade off – thanks to a higher coverage ratio 75%+, loan provisioning and lower accretion in NPLs – banks’ overall asset quality has improved modestly. Going forward, we expect banks to book in credit reversal, which should further support asset quality.

Advances to grow, albeit cautiously: We expect banks to increase their credit to private sector, following lower accretion in NPLs while seeking additional yield earnings off the advances shelf. However, high budgetary borrowing should mean fund allocation would remain high in government securities.

Risks Policy rate easing, narrowing corridor of Minimum Deposit Rate

(MDR), faster accretion in non-performing loans (NPLs)

Exhibit: Aggressive fund allocation in investments, with diminishing deposit growth


Exhibit: Bank’s Weighted-Average Lending Rate (WALR) decline sharply post, policy rate hike and MDR limit


0%

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Dec

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IDR ADR Deposit Growth (%YoY) LS

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Banks WALR Spreads (bps)

34



Banks

Bank Al-Falah Ltd.Key investment theme Earnings to grow by 16% to PKR 4.0/share by CY14F: We estimate

bank’s earnings to top PKR 4.0/share in CY14F from PKR 3.5/share in CY13E. In addition, we expect a dividend of PKR 2.0/share and PKR 2.3/share in CY13E and CY14F, respectively.

Bank’s income to expand by 11% YoY: We estimate higher mark-up income expansion – higher NIMs owing to deposit restructuring ( +76% CASA and Islamic deposit portion) – and higher advances growth (+11% in CY14F).

Asset quality: We estimate better loan portfolio with infection ratio falling to 8.5% in CY14F, following improved overall growth overview.

Warid/Wateen proceeds: With Wateen (WTL) buy-back offer at PKR 4.5/share, potential benefit for BAFL’s bottomline is estimated at PKR 0.12/share. While for the 100% sale of Warid – base case USD 750mn – is estimated at PKR 4.9/share, the management can use proceeds from Warid in either enhancing dividend payout, increasing branch network or financing its recent strategic investment in Sapphire Wind Power energy project.

Risks Given the bank’s high leverage ratio (18x) a +/-50bps change in

Policy rate could lead to an EPS impact of +/-PKR 0.4 or +/- PKR 527mn. Higher loan defaults is another key risk for BAFL.

Recommendation BUYTarget Price 34.2 Current Price 27.0 Upside 27%Bloomberg Code BAFL PA Free float 50%Major Shareholders -

Exhibit: NIMs expansion, low OPEX to uplift PPOP

Source: Company Financials, AHL Research

Valuation Parameters 2012A 2013E 2014F

EPS (PKR) 3.3 3.5 4.0

DPS (PKR) 2.0 2.0 2.3

P/E (x) 8.3 7.8 6.7

P/B (x) 1.2 1.1 1.1

Mkt Cap. / PPOP (x) 3.5 4.4 3.9

Div. Yield 7.4% 7.4% 8.5%

ROE 15.7% 14.9% 16.3%

ROA 0.9% 0.8% 0.9%

NIMs 4.8% 3.9% 4.1%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

-1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13E

Dec

-14F

Dec

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PPOP/Share (PKR) NIM (RHS)

35



Banks

Bank Al-Falah Ltd.

PKRmn Dec-12A Dec-13E Dec-14F Dec-12A Dec-13E Dec-14FBalance Sheet Item Key Financial Ratios Interest Earning Assets 481,635 529,971 589,133 Per share Other Assets 54,832 59,455 65,383 EPS (diluted) 3.3 3.5 4.0 Total Assets 536,467 589,426 654,516 DPS 2.0 2.0 2.3 Deposits 457,119 504,551 564,441 P/E (x) 8.3 7.8 6.7 Other Liabilities 49,101 52,670 55,592 Div. Yld (%) 7.4 7.4 8.5 Total Liabilities 506,219 557,220 620,033 P/B (x) 1.2 1.1 1.1 Share capital 13,492 13,492 13,492 Capital Strength (%) Reserves & RE 12,198 14,156 16,434 RWA 281,561 427,721 409,370 Tier I equity 25,690 27,648 29,926 Total Eligible Capital 35,687 57,970 62,070 Toal Equity 30,248 32,205 34,483 CAR (%) 12.7% 13.6% 15.2%Income Statement Item Margins (%) Mark-up Income 18,580 17,337 20,162 Yield on IEA 10.3% 8.7% 9.4%Non Mark-up Income 7,281 7,959 7,929 Yield on IBL 6.0% 5.2% 5.7%Total Income 25,861 25,296 28,092 Spread 4.2% 3.5% 3.7%Operating Exp. 15,519 16,964 18,689 NIM 4.8% 3.9% 4.1%Pre-provisiong Operating Profits 10,342 8,332 9,403 CASA 75.6% 76.4% 76.9%Provisions 3,559 1,528 1,565 RoA 0.9% 0.8% 0.9%Pre-tax Profits 6,783 6,803 7,838 RoE 15.7% 14.9% 16.3%Taxation 2,397 2,142 2,414 Non-financial Information Post-tax Profits 4,386 4,662 5,423 Branches 471 553 561

Current Price 27.0 Relative Perfromance 3M 6M 12MTarget Price 34.2 Abs. Return (%) 29.1% 48.4% 81.6%Upside 27% Avg. Volume (mn) 4.3 4.3 3.7 Mkt. Cap (PKRmn) 36,481 High 28.1 28.1 28.1 Mkt. Cap (USDmn) 346 Low 20.5 18.6 14.4

36



Banks

United Bank Ltd.Key investment theme Bank’s CASA is expected to improve from 72% in CY13 to 75% in

CY14, which should allow for a gradual rise in bank’s cost of deposits (neutralizing impact of MDR). Mark-up income is expected to rise by 29%, a jump to 75% share in total income in CY13, from 69% earlier.

UBL’s int’l operations (18 branches, mostly in ME with 28% of deposits, 30% of advances generating 6% of PAT) provide diversification (hedged against country-specific risks while there was modest impact on UBL of 2008 crisis reflecting good asset quality).

We expect equity market to continue to perform in CY14F albeit in a stable mode after another excellent year of performance. This may allow a relatively lower equity gains, dividends income/ while growth in remittances - CY14E growth projected at 16% - should benefit its branchless banking segment (Omni, for instance).

Given the bank’s relatively lower infection ratio at 14% compared to market average of top banks, we estimate that UBL has a room to grow its loan book, at 12% in CY14F, with high coverage ratio 81%.

Risks

A +/-50bps change in policy rate could lead to an EPS impact of +/-PKR 0.8 or +/-PKR 1.02bn.

Though the bank has high asset quality, any significantly erratic business behaviour in the Middle Eastern markets may impact bank’s books as it has considerable exposure to ME economies.

Recommendation BUYTarget Price 132.6 Current Price 157.4 Upside 19%Bloomberg Code UBL PA Free float 25%Major Shareholders – Best Way Group

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

-

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Dec

-13E

Dec

-14F

Dec

-15F


Exhibit: rebounding NIMs



EPS (PKR) 14.8 14.3 16.8

DPS (PKR) 8.0 8.0 9.1

P/E (x) 9.0 9.3 7.9

P/B (x) 1.8 1.6 1.5

Div. Yield 6.0% 6.0% 6.9%

Mkt Cap. / PPOP (x) 5.2 5.8 4.6

ROE 21.2% 18.4% 19.7%

ROA 2.2% 1.8% 1.9%

NIMs 5.9% 5.1% 5.3%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

-

5.0

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Dec

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-13E

Dec

-14F

Dec

-15F


37



Banks

United Bank Ltd.

PKRmn Dec-12A Dec-13E Dec-14F Dec-12A Dec-13E Dec-14FBalance Sheet Item Key Financial Ratios Interest Earning Assets 803,237 900,229 1,023,010 Per share Other Assets 91,172 101,415 112,332 EPS (diluted) 14.8 14.3 16.8 Total Assets 894,409 1,001,644 1,135,342 DPS 8.0 8.0 9.1 Deposits 699,936 809,052 924,261 P/E (x) 9.0 9.3 7.9 Other Liabilities 103,309 93,765 101,514 Div. Yld (%) 6.0 6.0 6.9 Total Liabilities 803,245 902,817 1,025,775 P/B (x) 1.8 1.6 1.5 Share capital 12,242 12,242 12,242 Capital Strength (%) Reserves & RE 65,385 73,049 83,788 RWA 588,680 529,221 591,471 Tier I equity 77,627 85,290 96,029 Total Eligible Capital 87,174 84,863 95,757 Toal Equity 91,164 98,827 109,566 CAR (%) 14.8% 16.0% 16.2%Income Statement Item Margins (%) Mark-up Income 38,616 37,158 47,301 Yield on IEA 9.8% 8.5% 10.1%Non Mark-up Income 17,131 17,069 16,156 Yield on IBL 4.8% 4.3% 5.4%Total Income 55,748 54,227 63,457 Spread 5.0% 4.2% 4.8%Operating Exp. 24,525 26,482 27,813 NIM 5.9% 5.1% 5.3%Pre-provisiong Operating Profits 31,223 27,745 35,644 CASA 71.8% 73.2% 74.6%Provisions 4,137 1,528 4,426 RoA 2.2% 1.8% 1.9%Pre-tax Profits 27,086 26,217 31,218 RoE 21.2% 18.4% 19.7%Taxation 9,022 8,760 10,685 Non-financial Information Post-tax Profits 18,063 17,457 20,532 Branches 1,296 1,303 1,311

Current Price 132.6 Relative Perfromance 3M 6M 12MTarget Price 157.4 Abs. Return (%) 1.5% 27.1% 74.0%Upside 19% Avg. Volume (mn) 0.8 0.9 0.9 Mkt. Cap (PKRmn) 162,265 High 136.2 151.8 151.8 Mkt. Cap (USDmn) 1,538 Low 117.1 107.6 74.0

38



Banks

Regional Comparison

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5

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K KZ

BAFL

PA

6010

09 C

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UBL

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BBN

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IN

Price to Earning

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BAFL

PA

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UBL

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BBN

I IJ

AMM

MK

MC

B PA

KMB

IN

Price to Book

0%

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HSB

K KZ

MC

B PA

UBL

PA

BBN

I IJ

6010

09 C

H

KMB

IN

BAFL

PA

AMM

MK

NBP

PA

Return on Equity

0%

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6%

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PA

BAFL

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UBL

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MC

B PA

6010

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KMB

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Dividend Yield

Companies Origin Mkt Cap (USD mn)

P/E (x) P/B (x) P/FCF P/Sales NIMs EBITDA Margins

Net Margins Div Yield

D/E ROA ROE

BANK OF NANJING CO LTD -A China 3,919 6.8 1.1 6.3 1.5 3.3% n.a. 43.8% 4.4% 4.0 1.3% 17.3%KOTAK MAHINDRA BANK LTD India 9,183 22.2 3.2 17.2 3.0 4.9% n.a. 22.1% 0.1% 2.4 2.1% 15.5%BANK NEGARA INDONESIA PERSER Indonesia 5,977 9.8 1.6 8.8 2.2 5.6% n.a. 29.5% 3.1% 0.4 2.2% 17.4%HALYK SAVINGS BANK-KAZAKHSTN Kazakhstan 2,700 5.1 1.0 9.3 1.3 4.7% n.a. 40.0% 0.0% 0.9 3.0% 20.6%AMMB HOLDINGS BHD Malaysia 6,679 12.0 1.6 2.8 3.0 2.2% n.a. 37.4% 3.4% 1.4 1.4% 14.1%NATIONAL BANK OF PAKISTAN Pakistan 1,173 8.7 0.8 0.9 1.1 5.1% n.a. 12.5% 9.1% 8.8 1.0% 9.4%UNITED BANK LTD Pakistan 1,541 9.5 1.5 1.3 1.7 5.3% n.a. 21.1% 6.7% 9.0 1.9% 19.7%MCB BANK LTD Pakistan 2,692 7.8 2.5 7.8 3.7 6.4% n.a. 31.0% 5.1% 6.4 3.0% 22.0%BANK AL-FALAH LTD Pakistan 33,621 6.2 1.0 0.3 0.6 4.1% n.a. 10.3% 9.2% 0.9 0.9% 16.3%RIZAL COMMERCIAL BANKING Philippines 1,222 11.8 1.8 7.0 2.3 3.8% n.a. 27.7% 1.5% 1.4 1.8% 16.4%LH FINANCIAL GROUP PCL Thailand 476 23.7 1.1 na 3.1 2.2% n.a. 27.0% 0.0% 1.6 0.7% 5.0%REGIONAL AVERAGE 6,289 11.2 1.6 6.2 2.1 4.3% n.a. 27.5% 3.9% 3.4 1.7% 15.8%Source: Bloomberg, AHL Research

39



Construction & Materials

Sector PerformanceExhibit: Cement Sector Performance Relative to KSE100





Mkt cap (PKR mn) 303,733


Return 85.63%

PE (x) 7.60

PB (x) 1.32

ROE 16.76%

ROA 7.77%


80%

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KSE100 Cement Sector

40



Kohat Cement Company Limited KOHC 19.8 5.5 5 3.5 28.4 43.0% 166.3 97.8 70.10% Buy

D.G. Khan Cement Company Limited DGKC 13.1 3 6.6 3.4 25.6 11.0% 129 85.7 50.50% Buy

Fauji Cement Company Limited FCCL 2.1 1.8 7.6 1.3 12.3 17.0% 20.1 16 26.00% Buy

Attock Cement Pakistan Limited ACPL 20.2 14 7.1 1.2 120.1 28.0% 173.5 142.6 21.60% Buy

Lucky Cement Limited LUCK 39 8 7.7 1.9 158.3 27.0% 351 299.9 17.10% Buy

Source: AHL Research



Key investment theme Cement prices continue to march northwards: Even after a massive

29% (PKR 100/bag) increase during last couple of years, northwards march still goes on as cement price increase by another PKR 25/bag (5%) since July-13. With another spell of price increase expected in 3QFY14, we foresee average price to jump by 12% YoY to PKR 511/bag in FY14. This would enable the companies to pass on the impact of power tariff hike and increase in GST.

Coal price outlook remains sluggish: Coal prices have stabilized around USD 85/ton after crossing USD 90/ton for a brief period in Oct-13. Electricity tariff on the other hand, has already been increased by a hefty ~60%, so probability of any further sharp power tariff hike looks minimal.

Strong PSDP to translate into higher demand: The government announced historic high PSDP figure of PKR 1.1trn for FY14, which is expected to support the cement demand in the country. We foresee 3% YoY growth in cement dispatches in FY14, while exports outlook remains sluggish.

Risks Adverse change in coal or cement prices

Hike in interest rates

Exhibit: Coal & Cement Prices Trend

Source: PBS, Bloomberg, AHL Research

Exhibit: Cement Industry: Exports, Imports & Capacity Utilization



Strong pricing to spur earnings growth

708090100110120130140

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Cement(LHS) CoalPKR/bag USD/ton

68%

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FY11A FY12A FY13E FY14F FY15F

Exports Local Utilisationmn tons

41



Key investment theme Rising cement price to produce windfall gains: KOHC is still

enjoying lower power tariff, unlike its peers, who raised cement prices to pass on the impact of higher power tariff. We expect gross margins to touch 40% in FY14 compared to 38% a year back.

Aggressive deleveraging reducing financial charges; Company has been aggressively pursuing a deleveraging policy with debt now comprising 20% of the equity (vs 47% in FY12), resultantly finance cost is expected to drop by 53% YoY in FY14. In addition, low leveraging will also help the company to raise capital for future capex without compromising dividends payouts.

Bottom line to jump by 16% YoY in FY14: The Company is expected to post a massive 16% YoY earnings growth in FY14 to PKR 19.8/share. On a longer horizon, profitability is expected to jump at 10% CAGR in FY13-16 to PKR 22.9/share.

Risks Increase in power tariff: We have incorporated higher tariff from

FY15 in our models. Delay in the court decision regarding power tariff has upside risk to our valuations.

Cement and Coal price risk: Every PKR 5/bag and USD 5/ton change in cement and coal prices have per share bottom line impact of PKR 0.6/share and PKR 0.7/share, respectively.

Exhibit: Aggressive deleveraging lowering financial burden



EPS (PKR) 20.45 19.75 20.43

DPS (PKR) 5.00 5.50 6.00

P/E (x) 4.81 4.98 4.82

P/B (x) 2.52 1.83 1.42

Div. Yield 5.1% 5.1% 5.1%

ROE 54% 43% 33%

ROA 26% 27% 24%

EBITDA margins 39% 39% 35%

Net margins 23% 23% 22%

Recommendation BUYTarget Price 166.3 Current Price 97.8 Upside 70%Bloomberg Code KOHC PA Free float 25%Major Shareholders - Sheikh Family 58.3%


Kohat Cement Co. Ltd.

0

100

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0

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FY11 FY12 FY13 FY14 FY15 FY16

Short Term LoansLong Term LoansFinance Cost (LHS)

PKR mn

PKR mn

42



Current Price 97.77 Relative Performance 3M 6M 12MTarget Price 166.3 Abs. Return (%) 33.3% 43.7% 74.7%Upside 70% Avg. Volume (mn) 0.6 0.8 0.6 Mkt. Cap (PKRmn) 15,202 High 98.9 98.9 98.9 Mkt. Cap (USDmn) 144 Low 74.8 55.1 52.8

PKRmn Jun-13A Jun-14E Jun-15F Jun-13A Jun-14E Jun-15F Income Statement Key Financial Ratios Sales 11,297 13,107 14,255 Per share Gross profit 4,361 5,102 4,977 Earning / Share 20.4 19.8 20.4 Other income 36 67 145 Dividend /Share 5.0 5.5 6.0 Finance cost 249 116 62 BVPS 39.1 53.9 69.3 Net profit 2,633 3,052 3,157 Price ratio Balance sheet P/E (x) 4.8 5.0 4.8 Total shareholder's equity 6,041 8,320 10,705 P/B (x) 2.5 1.8 1.4 Long term loans 380 240 - Div yield 5% 5% 5%Total non current liabilities 2,294 1,315 1,472 Profitability Trade payables 1,210 2,585 2,792 Gross margins 39% 39% 35%Total current liabilities 2,294 1,315 1,472 EBITDA margins 39% 39% 35%Total equity and liabilities 10,795 11,954 13,954 Net margins 23.3% 23.3% 22.1%Non current assets 6,668 6,388 6,098 Coverage ratio 16.1 40.3 74.9 Current assets 4,126 5,566 7,855 Debt to Equity 0.24 0.06 -Total Assets 10,795 11,954 13,954 Debt to Assets 0.14 0.04 -Cash flow statement CF from operations 3,634 3,086 3,406 Return on Capital CF from investing activities (1,021) (82) (83) ROA 26% 27% 24%CF from financing activities (1,157) (1,757) (1,315) ROE 54% 43% 33%Ending Cash 624 1,871 3,880


Kohat Cement Co. Ltd.

43



Key investment theme Rising cement prices to stabilize margins: DGKC meets around half

of its power requirement through national grid, which has subdued the impact of a hefty 57% rise in power tariff. This coupled with 5% YTD rise in cement prices has set the stage for margins improvement in 2HFY14, where we expect them to cross 38%.

Higher dividend income from associates to support bottom line; We expect other income to grow at 2 year CAGR of 10% to PKR 1.7bn in FY15, mainly on account of higher dividends from Nishat Mills and MCB Bank.

WHRP to generate fuel savings: The company is in final stages to commission its 8.6MW Waste Heat Recovery Plant, which will reduce its reliance on the expensive national grid, having a positive bottom line impact of PKR 1.2/share.

Profitability to jump at 3 year CAGR of 11%: Amid rising cement prices coupled with cost saving measures, falling finance cost and improving dividends, we foresee profitability growth at 3 year CAGR of 11%.

Risks Cement and Coal price risk: Every PKR 5/bag and USD 5/ton change

in cement and coal prices have per share bottom line impact of PKR 0.5/share and PKR 0.6/share, respectively.

Exhibit: Improving Margins and Profitability



EPS (PKR) 12.56 13.08 15.71

DPS (PKR) 3.00 3.00 4.00

P/E (x) 6.85 6.58 5.48

P/B (x) 0.79 0.72 0.65

Div. Yield 3.5% 3.5% 4.6%

ROE 14% 11% 12%

ROA 10% 9% 10%



Recommendation BUYTarget Price 129.0 Current Price 85.7Upside 50%Bloomberg Code DGKC PA Free float 55%Major Shareholders - NML 32%


D.G Khan Cement Co. Ltd.

15%

20%

25%

30%

35%

40%

0

2

4

6

8

10

12

14

16

FY12 FY13 FY14 FY15

EPS DPSGross Margins Net Margins

PKR/share

44




PKRmn Jun-13A Jun-14E Jun-15F Jun-13A Jun-14E Jun-15F Income Statement Key Financial Ratios Sales 24,916 26,963 29,117 Per share Gross profit 9,326 9,473 10,540 Earning / Share 12.6 13.1 15.7 Other income 1,466 1,514 1,773 Dividend /Share 3.0 3.0 4.0 Finance cost 995 708 496 BVPS 109.6 119.6 132.3 Net profit 5,502 5,731 6,884 Price ratio Balance sheet P/E (x) 6.9 6.6 5.5 Total shareholder's equity 47,998 52,415 57,985 P/B (x) 0.8 0.7 0.7 Long term loans 2,899 1,453 649 Div yield 3% 3% 5%Total non current liabilities 9,308 7,693 6,757 Profitability Trade payables 2,286 2,585 2,792 Gross margins 37% 35% 36%Total current liabilities 9,308 7,693 6,757 EBITDA margins 39% 38% 40%Total equity and liabilities 63,527 64,882 68,712 Net margins 22.1% 21.3% 23.6%Non current assets 37,543 36,749 35,940 Coverage ratio 8.1 12.1 20.0 Current assets 25,984 28,133 32,772 Debt to Equity 0.20 0.12 0.08 Total Assets 63,527 64,882 68,712 Debt to Assets 0.15 0.10 0.07Cash flow statement CF from operations 6,520 6,333 6,523 Return on Capital CF from investing activities (3,047) (824) (841) ROA 10% 9% 10%CF from financing activities (2,120) (1,240) (988) ROE 14% 11% 12%Ending Cash (4,951) (683) 4,012


D.G Khan Cement Co. Ltd.

45



Key investment theme Margins improvement: Being depended on the national grid for its

power needs, FCCL was one of the hardest hit company from power tariff increase in Aug-13. However with rising cement prices, coupled with increasing usage of indigenous and Afghan coal, FCCL’s gross margin is expected to improve to 33% in FY14 vs 32% in FY13.

Cross currency swap shielding from exchange losses; FCCL has suffered hefty exchange losses on its USD 58mn loan. To hedge this, FCCL entered into a cross currency swap at the end of FY13. This timely decision, shielded the company from sharp PKR depreciation (6% already in FY14) and expected to bring financial charges down by 33% YoY in FY14.

WHRP to bring cost savings of PKR 0.7/share: FCCL is planning to install a 10MW Waste Heat Recovery Plant, expected to come online in FY16, having annualised bottom line impact of PKR 0.7/share.

Provides strongest earnings growth: FCCL’s is estimated to post a massive 48% YoY profitability growth in FY14, with an expected DPS of PKR 1.75-2, offering a dividend yield of 11%.



Increase in interest rates

Exhibit: Healthy Dispatches Outlook



EPS (PKR) 1.42 2.10 2.37

DPS (PKR) 1.25 1.75 2.00

P/E (x) 11.30 7.64 6.75

P/B (x) 1.34 1.30 1.26

Div. Yield 7.8% 10.9% 12.5%

ROE 13% 17% 19%

ROA 6% 9% 11%



Recommendation BUYTarget Price 20.1 Current Price 16.0 Upside 26%Bloomberg Code FCCL PA Free float 55%Major Shareholders - FF 68%


Fauji Cement Co. Ltd.

60%

65%

70%

75%

80%

85%

90%

95%

100%

105%

0

1

2

3

FY11A FY12A FY13E FY14F FY15F FY16F

Exports Local Capacity Utilisationmn tons

46





Fauji Cement Co. Ltd.

PKRmn Jun-13A Jun-14E Jun-15F Jun-13A Jun-14E Jun-15F Income Statement Key Financial Ratios Sales 15,968 17,383 19,129 Per share Gross profit 5,080 5,693 6,283 Earning / Share 1.4 2.1 2.4 Other income 95 144 151 Dividend /Share 1.3 1.8 2.0 Finance cost 1,512 1,013 709 BVPS 12.0 12.3 12.7 Net profit 2,097 2,977 3,479 Price ratio Balance sheet P/E (x) 11.3 7.8 6.6 Total shareholder's equity 15,936 16,357 16,933 P/B (x) 1.3 1.3 1.3 Long term loans 7,924 5,155 2,783 Div yield 8% 11% 12%Total non current liabilities 4,409 5,296 5,542 Profitability Trade payables 1,483 2,585 2,792 Gross margins 32% 33% 33%Total current liabilities 4,409 5,296 5,542 EBITDA margins 37% 37% 37%Total equity and liabilities 30,305 29,948 29,847 Net margins 13.1% 17.1% 18.2%Non current assets 25,266 24,260 25,092 Coverage ratio 3.0 5.2 8.2 Current assets 5,039 5,688 4,755 Debt to Equity 0.67 0.50 0.34 Total Assets 30,305 29,948 29,847 Debt to Assets 0.35 0.27 0.19Cash flow statement CF from operations 5,994 6,611 6,766 Return on Capital CF from investing activities (54) (236) (2,121) ROA 6% 9% 11%CF from financing activities (4,567) (6,082) (5,947) ROE 13% 17% 19%Ending Cash 1,702 1,995 693

47



Key investment theme Recent price hike in South to benefit the premium Falcon:

Southern region has gone through some strategic changes whereby ACPL’s market share has dropped to 24% from 29%. However this will be compensated by the hike in cement prices (~PKR 20-25/bag), improving gross margins to 32% in FY14 (30% in FY13), despite massive increase in power tariff.

Improving energy efficiency: The company has recently installed an Alternative Fuel Project to replace some of coal with biomass, municipal waste and shredded tyres. In addition the company is planning to install a coal fired captive power plant, which will reduce power cost substantially. We have not incorporated this in our financial model yet due to premature stage of the project.

Bottom line to jump by 9% YoY in FY14: Despite massive increase in power cost, ACPL is expected to post a healthy 9% YoY profitability growth in FY14, which is expected to sustain at 3 year CAGR of 10%.



Exhibit: Sustainable history of more than 100% utilization



EPS (PKR) 18.65 20.24 21.93

DPS (PKR) 13.00 14.00 14.00

P/E (x) 7.76 7.15 6.60

P/B (x) 2.09 1.88 1.70

Div. Yield 9.0% 9.7% 9.7%

ROE 29% 28% 27%

ROA 22% 21% 21%



Recommendation BUYTarget Price 173.5 Current Price 142.6Upside 22%Bloomberg Code ACPL PA Free float 20%Major Shareholders - Pharaon Investments 84.06%


Attock Cement (Pak) Ltd.

100%

102%

104%

106%

108%

110%

112%

-

0.5

1.0

1.5

2.0

FY12

A

FY13

E

FY14

F

FY15

F

FY16

F

FY17

F

mn tons Exports Local Capacity Util

48




PKRmn Jun-13A Jun-14E Jun-15F Jun-13A Jun-14E Jun-15F Income Statement Key Financial Ratios Sales 11,508 13,241 13,427 Per share Gross profit 3,535 4,278 4,350 Earning / Share 18.7 20.2 21.9 Other income 227 242 399 Dividend /Share 13.0 14.0 14.0 Finance cost 15 16 17 BVPS 69.4 76.9 84.9 Net profit 2,136 2,318 2,512 Price ratio Balance sheet P/E (x) 7.8 7.1 6.6 Total shareholder's equity 7,947 8,811 9,720 P/B (x) 2.1 1.9 1.7 Long term loans - - - Div yield 9% 10% 10%Total non current liabilities 1,085 1,078 1,078 Profitability Trade payables 1,614 1,814 1,655 Gross margins 31% 32% 32%Total current liabilities 1,674 1,873 1,714 EBITDA margins 26% 26% 30%Total equity and liabilities 10,706 11,762 12,512 Net margins 19% 18% 19%Non current assets 6,075 5,969 5,860 Coverage ratio 181 122 117Current assets 4,631 5,793 6,652 Debt to Equity - - -Total Assets 10,706 11,762 12,512 Debt to Assets - - -Cash flow statement CF from operations 3,129 2,149 2,733 Return on Capital CF from investing activities (2,141) (299) (307) ROA 22% 21% 21%CF from financing activities (818) (1,462) (1,603) ROE 29% 28% 27%Ending Cash 389 777 1,599


Attock Cement (Pak) Ltd.

49



Key investment theme Highest Gross Margins in the industry: Economies of scale allow

LUCK to be the lowest cost producer (23% lower cost of sales than the sample average) This makes LUCK benefit the most with rising cement prices, making it the highest grosser in the industry. We expect gross margin for FY14 to widen to 47% compared to 44% a year back.

Increased domestic share in the South to boost bottom line: The company has recently refocused its sales mix in the southern market where it currently holds ~45% market share compared to 38% earlier. Due to 36% higher retention price in the domestic market, this strategic move would be a major earnings booster for the company with annualised bottom line impact of PKR 7.1/share.

Strategic investments to be icing on the cake; Strategic investments in ICI Pakistan, DR Congo and Iraq would give further impetus to the bottom line, albeit in the long term.

Earnings to jump at 17% CAGR: We expect LUCK’s bottom line to jump at 3 year CAGR of 17% to PKR 47.8/share in FY16, with 31% YoY growth materializing in FY14 alone.

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

by PKR 0.9/share.

Sharp rise in coal prices; every USD 5/ton increase reduces EPS by PKR 1.1/share.

Exhibit: Booming Share in Southern Domestic Market



EPS (PKR) 30.04 39.12 44.36

DPS (PKR) 8.00 10.00 12.00

P/E (x) 10.02 7.70 6.79

P/B (x) 2.37 1.91 1.56

Div. Yield 2.7% 3.3% 4.0%

ROE 26% 27% 25%

ROA 21% 23% 21%



Recommendation BUYTarget Price 351.0 Current Price 299.9 Upside 17%Bloomberg Code LUCK PA Free float 40%Major Shareholders - Yunus Brothers Group 36%


Lucky Cement Ltd.

34%

36%

38%

40%

42%

44%

46%

FY11A FY12A FY13A Current

50



Current Price 299.9 Relative Performance 3M 6M 12MTarget Price 351.0 Abs. Return (%) 34.2% 48.0% 104.9%Upside 17% Avg. Volume (mn) 0.5 0.6 0.8Mkt. Cap (PKRmn) 97,352 High 301.1 301.1 301.1Mkt. Cap (USDmn) 923 Low 224.2 201.6 141.2

PKRmn Jun-13A Jun-14E Jun-15F Jun-13A Jun-14E Jun-15F Income Statement Key Financial Ratios Sales 37,810 42,162 48,361 Per share Gross profit 16,721 19,690 23,072 Earning / Share 30.0 39.1 44.4 Other income 248 513 948 Dividend /Share 8.0 10.0 12.0 Finance cost 89 46 33 BVPS 126.9 158.0 192.4 Net profit 9,714 12,650 14,345 Price ratio Balance sheet P/E (x) 10.0 7.7 6.8 Total shareholder's equity 41,035 51,099 62,210 P/B (x) 2.4 1.9 1.6 Long term loans 265 219 - Div yield 3% 3% 4%Total non current liabilities 3,846 4,848 5,308 Profitability Trade payables 3,572 2,585 2,792 Gross margins 44% 47% 48%Total current liabilities 3,846 4,848 5,308 EBITDA margins 36% 43% 42%Total equity and liabilities 50,196 61,180 72,705 Net margins 25.7% 30.0% 29.7%Non current assets 37,183 42,166 41,404 Coverage ratio 132.1 352.5 561.4 Current assets 13,013 19,014 31,301 Debt to Equity 0.01 0.01 -Total Assets 50,196 61,180 72,705 Debt to Assets 0.01 0.004 -Cash flow statement CF from operations 12,239 15,603 15,666 Return on Capital CF from investing activities (8,087) (6,745) (1,042) ROA 21% 23% 21%CF from financing activities (2,191) (2,714) (3,499) ROE 26% 27% 25%Ending Cash 1,961 6,144 11,125


Lucky Cement Ltd.

51




Regional Comparison

-

5

10

15

20

25

30

KOH

C P

A

DG

KC P

A

ACPL

PA

BCO

RP IN

LUC

K PA

FCC

L PA

TC M

K

SMG

R IJ

0007

89 C

H

Price to Earning

-

1.0

2.0

3.0

4.0

5.0

6.0

BCO

RP IN

DG

KC P

A

FCC

L PA

TC M

K

ACPL

PA

LUC

K PA

KOH

C P

A

0007

89 C

H

SMG

R IJ

Price to Book

0%

10%

20%

30%

40%

50%

60%

KOH

C P

A

SMG

R IJ

ACPL

PA

LUC

K PA

DG

KC P

A

FCC

L PA

0007

89 C

H

BCO

RP IN

TC M

K

Return on Equity

0%

2%

4%

6%

8%

10%

ACPL

PA

FCC

L PA

KOH

C P

A

0007

89 C

H

TC M

K

DG

KC P

A

LUC

K PA

SMG

R IJ

BCO

RP IN

Dividend Yield

Companies Origin Mkt Cap (USD mn) P/E (x) P/B (x) P/FCF P/Sales Gross

MarginsEBITDA Margins

Net Margins

Div Yield D/E ROA ROE

JIANGXI WANNIANQING CEM-A China 639.5 25.8 3.0 50.7 1.1 19.0% 1791.8% 4.1% 4.2% 112.2% 2.7% 11.8%BIRLA CORP LTD India 321.1 7.0 0.8 306.8 0.7 0.0% 1572.3% 10.4% 2.4% 50.0% 6.3% 11.5%SEMEN INDONESIA PERSERO TBK Indonesia 6,848.9 19.4 5.4 42.8 4.8 47.4% 3482.7% 24.7% 2.7% 21.2% 21.0% 30.5%TASEK CORP BHD Malaysia 540.5 17.1 1.6 16.6 2.8 33.5% 2392.1% 16.3% 4.1% 0.4% 8.4% 9.5%LUCKY CEMENT Pakistan 913.8 7.7 1.9 11.2 2.3 46.7% 42.7% 30.0% 3.3% 0.5% 22.7% 27.5%D.G KHAN CEMENT Pakistan 354.2 6.6 0.7 5.9 1.4 35.1% 37.8% 21.3% 3.5% 12.2% 8.9% 11.4%FAUJI CEMENT Pakistan 202.1 7.6 1.3 4.3 1.2 32.8% 37.8% 17.4% 10.9% 50.0% 9.3% 17.3%ATTOCK CEMENT Pakistan 157.1 7.1 1.9 9.9 1.3 32.3% 26.4% 17.5% 9.7% - 20.6% 27.7%KOHAT CEMENT Pakistan 144.1 5.0 1.8 5.0 1.2 38.9% 38.6% 23.3% 5.1% 6.0% 26.8% 42.5%LAFARGE REPUBLIC INC Philippines 1,154.8 24.3 3.3 27.4 3.4 31.9% 2544.4% 14.1% 5.1% 6.6% 10.0% 13.9%TPI POLENE PUBLIC CO LTD Thailand 663.5 117.5 0.4 70.6 1.1 14.4% 848.2% 0.9% 1.8% 7.0% 0.3% 0.4%REGIONAL AVERAGE 1,085 22.3 2.0 50.1 1.9 30.2% 1165.0% 16.4% 4.8% 0.3 12.5% 18.5%Source: Bloomberg, AHL Research

52



Personal Goods

Sector PerformanceExhibit: Textile Sector Performance Relative to KSE100







Return 72.98%

PE (x) 8.36

PB (x) 1.25

ROE 9.15%

ROA 5.26%


80%

90%

100%

110%

120%

130%

140%

150%

160%

Jan-

13

Feb-

13

Mar

-13

Apr-

13

May

-13

Jun-

13

Jul-

13

Aug-

13

Sep-

13

Oct

-13

Nov

-13

Dec

-13

KSE100 Textile Sector


Company SYM EPS DPS P/E P/B BVPS RoE TP Curr. P Upside Recom.

Nishat Chunian Limited NCL 14.3 4.0 4.3 1.2 51.3 31% 85.8 60.2 42.5% Buy

Nishat Mills Limited NML 23.7 5.0 5.4 0.7 187.1 13% 169.4 127.2 33.1% Buy Source: AHL Research

53



Exhibit: Textile Exports vs PKR/USD Depreciation

Source: PBS, Bloomberg, AHL Research

Exhibit: International vs Local Cotton Prices

Source: PBS, AHL Research

Personal Goods

GSP+ Status ignites sector

4,500 5,000 5,500 6,000 6,500 7,000 7,500 8,000

60 70 80 90

100 110 120 130

Aug-

11

Oct

-11

Dec

-11

Feb-

12

Apr-

12

Jun-

12

Aug-

12

Oct

-12

Dec

-12

Feb-

13

Apr-

13

Jun-

13

Aug-

13

Oct

-13

Dec

-13

COTLOOKA Index Local (RHS)

USD/lb PKR/maund

0%

5%

10%

15%

20%

25%

30%

8.0 9.0

10.0 11.0 12.0 13.0 14.0 15.0

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

Textile Exports

PKR/USD Dep. (RHS)

USD bn

Key investment theme EU’s GSP+ Status: Pakistan’s grant for the GSP+ Status for exports to

the European Union (EU) has come into effect from Jan’14 onwards (valid till further review in 2017). Under the scheme, Pakistan’s textile products (~3,400 items) will have a duty waiver (zero tariff) in 28 European countries. Preliminary estimates suggest additional annual boost of USD 1.0–1.5bn in textile exports alone.

PKR/USD devaluation: Textile sector is exposed to a currency risk as exports (58% of total exports in FY13) are denominated in USD. Depreciation in PKR/USD parity translates into exchange gains for the sector in such a depreciating environment.

Cotton prices: Favorable cotton production and prices will have a positive impact on the sector’s margins and profitability .

Risks

Higher Cotton prices, energy crisis and hike in interest rates

Deterioration in law & order situation and lack of available capacity to meet increased export demand

Bleak Demand Outlook from Export Markets (esp. China)

Threat of blocking textile imports from sizable USA based clients (ex. Walt Disney)

54



Exhibit: NCL’s Revenue Mix


Personal Goods

Nishat Chunian Ltd.Valuation Parameters 2013A 2014E 2015F

EPS (PKR) 11.4 14.3 14.7

DPS (PKR) 2.0 4.0 4.6

P/E (x) 5.3 4.2 4.1

P/B (x) 1.5 1.2 1.0

Div. Yield 3.3% 6.6% 7.6%

ROE 32.3% 31.3% 26.2%

ROA 11.5% 12.7% 12.5%


Net margins 10.7% 12.4% 11.9%

Recommendation BUYTarget Price 85.50 Current Price 60.20 Upside 43%Bloomberg Code NCL PA Free float 45%Major Shareholders - NML 13.6%, ABL 9.6%, NBP 5.4%, DGKC 3.0%

Processing and Home Textiles

31%

Weaving12%

Spinning57%

Key investment theme Advent of GSP+ Status: NCL has the potential to increase its

exposure to the EU markets (currently 11% of the country’s top-line), we foresee a decent bottom-line CAGR growth of 11% in the next 4 years as a result.

Timely capacity expansion: NCL has increased its spindles capacity by 40% with 22,000 spindles through its own expansion coupled with acquisition of Taj Textile (38,000 spindles). This places the company in a better position to cater rising demand, from domestic and international markets.

NCPL’s healthy payouts supporting the bottom-line: Every PKR 1/share dividend from Nishat Chunian Limited (NCPL), a 51% owned subsidiary, contributes PKR 0.85/share to the bottom line of NCL. For FY14, other income of the company is to improve by 36% YoYmainly on account of special dividend (PKR 2/share) from NCPL.

Risks

Abrupt change in cotton prices and energy costs

With a debt to equity ratio of 1.33x as of FY13, an upward revision in interest rates going forward would swell finance costs of NCL

Uncertainties regarding yarn demand from China pose a threat for NCL as it is major yarn exporter to the country

55



Personal Goods

Nishat Chunian Ltd.Current Price 60.20 Relative Performance 3M 6M 12MTarget Price 85.8 Abs. Return (%) 21.9% 14.8% 95.8%Upside 43% Avg. Volume (mn) 2.5 2.5 2.5 Mkt. Cap (PKRmn) 12,051 High 60.7 60.7 60.7 Mkt. Cap (USDmn) 114 Low 48.8 47.1 28.9

PKRmn Jun-13A Jun-14E Jun-15F Jun-13A Jun-14E Jun-15F Income Statement Key Financial Ratios Sales 21,213 22,997 24,902 Per share Gross profit 3,596 3,831 4,361 Earning / Share 11.4 14.3 14.7 Other income 1,000 1,371 1,120 Dividend /Share 2.0 4.0 4.6 Finance cost 1,243 1,181 1,279 BVPS 40.1 51.3 61.4 Net profit 2,276 2,862 2,953 Price ratio Balance sheet P/E (x) 5.3 4.2 4.1 Total shareholder's equity 8,020 10,264 12,295 P/B (x) 1.5 1.2 1.0 Long term loans 4,201 2,550 884 Div yield 3% 7% 8%Total non current liabilities 4,201 2,550 884 Profitability Trade payables 1,425 1,545 1,673 Gross margins 16.9% 16.7% 17.5%Total current liabilities 9,703 10,416 11,007 EBITDA margins 20% 21% 20%Total equity and liabilities 21,925 23,229 24,187 Net margins 10.7% 12.4% 11.9%Non current assets 9,528 9,556 9,453 Coverage ratio 2.34 2.61 2.77Current assets 12,397 13,673 14,734 Debt to Equity 1.33 0.93 0.68Total Assets 21,925 23,229 24,187 Debt to Assets 0.49 0.41 0.41Cash flow statement CF from operations (454) 3,232 2,596 Return on Capital CF from investing activities (950) (562) (444) ROA 11.5% 12.7% 12.5%CF from financing activities 1,626 (1,693) (2,114) ROE 32.3% 31.3% 26.2%Ending Cash 270 1,247 1,286

56



Exhibit: NML’s Revenue Mix


Personal Goods

Nishat Mills Ltd.

Recommendation BUYTarget Price 169.4 Current Price 127.2 Upside 33%Bloomberg Code NML PA Free float 50%Major Shareholders - Directors 25.2%, DGKC 8.6%, AICL 4.0%

Spinning23%

Processing35%Garments

8%

Power Generation

7%

Weaving27%


EPS (PKR) 16.6 23.7 29.6

DPS (PKR) 4.0 5.0 6.0

P/E (x) 7.7 5.4 4.3

P/B (x) 0.76 0.68 0.6

Div. Yield 3.10% 3.90% 4.70%

ROE 12% 13% 15%

ROA 9% 10% 12%


Net margins 11.2% 14.4% 16.2%

Key investment theme Wide out-reach in EU markets: As NML has a 2.6% market share in

the country’s textile exports to EU markets (especially through value-added segment), EU’s GSP+ status will further unlock NML’s value ahead. We anticipate the bottom-line to increase by a CAGR of 19.6% in the next four years resultantly.

Rising fuel & powers: NML is relatively immune from rising power & gas tariffs due to cost efficiencies through coal (30%) & alternative means (70%) in running its captive power plants.

Dividend incomes: Dividends from investments in subsidiaries & associates accounted for ~42% of NML’s bottom-line in FY13. With stable payouts from group companies going forward, we expect a CAGR growth of 14% in the next four years from other operating income.

Risks

Any unexpected uptick in cotton prices with low level of inventory poses a significant risk to NML’s margins

Other significant risk to our valuation is the portfolio value of NML, to mitigate the risk we have taken a 35% discount to current market values of respective companies, any deep decline in prices can still affect our target value for NML as portfolio contributes approximately 50% to our target price

57



Personal Goods

Nishat Mills Ltd.Current Price 127.2 Relative Performance 3M 6M 12MTarget Price 169.4 Abs. Return (%) 43.5% 41.1% 108.2%Upside 33% Avg. Volume (mn) 3.3 2.6 2.9 Mkt. Cap (PKRmn) 44,738 High 128.8 128.8 128.8 Mkt. Cap (USDmn) 424 Low 82.7 82.7 57.2

PKRmn Jun-13A Jun-14E Jun-15F Jun-13A Jun-14E Jun-15F Income Statement Key Financial Ratios Sales 52,426 57,795 64,228 Per share Gross profit 9,044 12,212 13,762 Earning / Share 16.63 23.66 29.60 Other income 2,739 2,913 3,356 Dividend /Share 4.0 5.0 6.0 Finance cost 1,618 1,360 1,095 BVPS 167.6 187.1 211.0Net profit 5,847 8,319 10,408 Price ratio Balance sheet P/E (x) 7.7 5.4 4.3 Total shareholder's equity 58,917 65,777 74,181 P/B (x) 0.8 0.7 0.6 Long term loans 12,757 7,148 2,543 Div yield 3% 4% 5%Total non current liabilities 3,649 1,654 943 Profitability Trade payables 14,420 17,342 17,518 Gross margins 17% 21% 21%Total current liabilities 18,068 15,963 14,367 EBITDA margins 18% 20% 21%Total equity and liabilities 80,635 83,394 89,491 Net margins 11.2% 14.4% 16.2%Non current assets 53,430 52,809 52,018 Coverage ratio 4.93 7.57 11.09 Current assets 27,205 30,585 37,473 Debt to Equity 0.26 0.16 0.11 Total Assets 80,635 83,394 89,491 Debt to Assets 0.19 0.13 0.09 Cash flow statement CF from operations (735) 8,970 12,184 Return on Capital CF from investing activities (17,924) (777) (670) ROA 9% 10% 12%CF from financing activities 17,697 (6,098) (4,524) ROE 12% 13% 15%Ending Cash 4,744 7,281 25,299

58



Personal Goods

Regional Comparison

-

10

20

30

40

50

60

70

873

HK

NC

L PA

NM

L PA

2228

HK

ARVN

D IN

SUC

TB

1444

TT

0032

00 K

S

RW IN

Price to Earning

-0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8

0032

00 K

S

SUC

TB

NM

L PA

873

HK

ARVN

D IN

1444

TT

RW IN

NC

L PA

2228

HK

Price to Book

0%

5%

10%

15%

20%

25%

30%

35%

NC

L PA

873

HK

2228

HK

NM

L PA

ARVN

D IN

SUC

TB

1444

TT

RW IN

0032

00 K

S

Return on Equity

0%

2%

4%

6%

8%

NC

L PA

NM

L PA

873

HK

2228

HK

ARVN

D IN

RW IN

0032

00 K

S

1444

TT

SUC

TB

Dividend Yield

Companies Origin Mkt Cap (USD) P/E (x) P/B (x) P/FCF P/Sales Gross


Net Margins


JIANGSU LIANFA TEXTILE CO-A China 554 10.9 1.1 103.4 0.9 20.0% 17.5% 8.5% 0.0% 0.5 7.1% 10.6%VICTORY CITY INTL HLDGS LTD Hong Kong 260 7.8 0.4 128.3 0.4 18.4% 13.9% 5.0% 0.0% 0.6 2.6% 4.5%VARDHMAN TEXTILES LTD India 383 4.6 0.7 na 0.3 0.0% 20.1% 7.2% 2.8% 1.1 5.6% 15.1%FUJIBO HOLDINGS INC Japan 233 9.1 1.5 8.7 0.7 36.4% 16.0% 7.7% 2.4% 0.3 7.4% 18.0%NISHAT MILLS LTD Pakistan 414 5.1 1.4 4.1 0.4 21.0% 16.0% 15.0% 4.0% 0.4 11.0% 12.0%NISHAT CHUNIAN LTD Pakistan 99 6.1 0.7 1.7 0.2 17.0% 21.0% 12.0% 7.0% 1.3 12.0% 32.0%ILSHIN SPINNING CO LTD S. Korea 280 16.8 0.3 4.3 0.4 14.7% -1.8% 2.4% 0.0% 0.0 1.4% 1.8%SHINKONG TEXTILE CO LTD Taiwan 394 68.3 2.1 66.5 12.9 28.3% 8.6% 18.8% 0.0% 0.4 2.0% 3.2%SAHA-UNION CORP PCL Thailand 327 9.4 0.7 9.2 1.2 10.2% 9.5% 13.2% 0.0% 0.2 5.4% 7.8%REGIONAL AVERAGE 327 15.3 1.0 40.8 1.9 18.5% 13.4% 10.0% 1.8% 0.5 6.1% 11.7%Source: Bloomberg, AHL Research

59



Fertilizer

Sector PerformanceExhibit: Fertilizer Sector Performance Relative to KSE100







Return 24.08%

PE (x) 20.22

PB (x) 20.12

ROE 23.22%

ROA 7.18%


80%

90%

100%

110%

120%

130%

140%

150%

160%

Jan-

13

Feb-

13

Mar

-13

Apr-

13

May

-13

Jun-

13

Jul-

13

Aug-

13

Sep-

13

Oct

-13

Nov

-13

Dec

-13

KSE100 Fertilizer Sector



Engro Fertilizer Limited na 4.1 - 6.9 1.3 22.2 21.0% 40.4 28.3 43.0% Buy

Fauji Fertilizer Bin Qasim Limited FFBL 6.6 5.9 6.7 2.8 15.4 44.0% 55.2 43.8 26.0% Buy

Fauji Fertilizer Company Limited FFC 15.6 14.8 7.2 5.1 22.1 72.0% 134.0 112.0 20.0% BuySource: AHL Research

60



Fertilizer

The Gloom is HistoryKey investment theme Long term gas plan: Fertilizer sector still waits for the clarity on the

long term gas plan. The ECC has to reconfirm the gas allocation from

Kunnar Pashaki Deep (KPD) field.

Outcome: We believe that the gov’t would reconfirm the

aforementioned plan and it would be completed by 3QCY14.

Lower imports amid higher production: We foresee 2% growth in

production for the upcoming year mainly because of Guddu gas

availability to EFERT for 1Q (or beyond) and long term gas plan

expected to complete by the end of 3Q. This would lead to improved

urea production and lesser imports in CY14.

Risks Failure to implement long-term gas allocation plan.

Implementation of Gas levy over and above GIDC and failure of any passing of the same.

Torrential rains or flooding.

Commitment of gas to EFERT at USc 70/mmbtu would turn negative for the sector excluding EFERT.

Exhibit: Fertilizer Sector Historical Production & Offtake


Exhibit: Long term gas plan


Engro , 79

Agri, 25

Pak Arab, 58

DH Fertilizer, 40

4.0

4.5

5.0

5.5

6.0

6.5

2007

A

2008

A

2009

A

2010

A

2011

A

2012

A

2013

E

mn tons Production Offtake

61



Key investment theme Growth is the story: Engro Fertilizer Limited is the only growth

company (in terms of off-take) in fertilizer sector. The company’s off-take is expected to increase 4% YoY in CY14, and a massive 19% in CY15, due to better production post long-term gas plan. In addition, gas diverted from the Guddu power plant is also expected to keep company’s production lifted till Mar-14.

Margins improvement 1000bps, PAT at 4-year CAGR of 21%: Gas flows from Guddu along with the long-term gas plan bodes well for the company, as gross margins are expected to clock in at a 42% in CY14, an improvement of 1000 bps from CY12. Furthermore, with both plants fully operational from 4QCY14 onwards, the PAT of the company is expected to massively jump at a 4-year CAGR of 21%.

Strong cash flows ahead: We foresee strong cash-flow generation amid higher capacity utilization (85% in CY15) coupled with stable urea prices. Our analysis suggests, in CY15F, the company’s cash position will be strong enough to declare dividend after fulfilling the IFC requirement of retiring 33% of its senior debt.

Risks The key concern remains heavy leveraging of the company - a debt

to equity ratio of 2.8x as of Sep-13 – making it vulnerable in the rising interest rate scenario

Diversion of gas from long-term gas plan to Power sector.

Fertilizer

Engro Fertilizer Ltd.

Exhibit: Efert’s Production, Off-take & Capacity Utilization



EPS (PKR) (2.3) 3.9 4.1

DPS (PKR) - - -

P/E (x) (12.5) 7.3 6.9

P/B (x) 2.3 1.7 1.3

Div. Yield 0% 0% 0%

ROE -19% 27% 21%

ROA -3% 5% 5%


Net margins n.m 10% 11%

Recommendation BUYTarget Price 40.44 Current Price 28.25Upside 43%Bloomberg Code EFERT PA Free float 8%Major Shareholders - Engro Corporation 92%

40%

50%

60%

70%

80%

90%

800950

1,1001,2501,4001,5501,7001,8502,000

CY1

2A

CY1

3E

CY1

4F

CY1

5F

CY1

6F

ProductionOfftakeUtilization (RHS)

k tons

62



Current Price 28.3 Relative Performance 3M 6M 12MTarget Price 40.4 Abs. Return (%) na na naUpside 43% Avg. Volume (mn) na na naMkt. Cap (PKRmn) 36,663 High na na naMkt. Cap (USDmn) 348 Low na na na

PKRmn Dec-12A Dec-13E Dec-14F Dec-12A Dec-13E Dec-14F Income Statement Key Financial Ratios Sales 30,627 48,842 49,373 Per share Gross profit 9,861 21,012 20,816 Earning / Share (2.3) 3.9 4.1 Other income 379 916 1,041 Dividend /Share - - -Finance cost 10,703 9,363 8,772 BVPS 12.2 16.2 22.2 Net profit (2,935) 5,019 5,339 Price ratio Balance sheet P/E (x) n.m 7.3 6.9 Total shareholder's equity 15,798 20,967 28,805 P/B (x) 2.3 1.7 1.3 Long term loans 48,482 53,879 41,879 Div yield 0% 0% 0%Total non current liabilities 55,459 60,857 48,857 Profitability Trade payables 7,960 13,253 8,159 Gross margins 32% 43% 42%Total current liabilities 26,250 22,664 23,927 EBITDA margins 40% 47% 46%Total equity and liabilities 97,508 104,488 101,588 Net margins n.m 10.3% 10.8%Non current assets 83,123 80,198 82,338 Coverage ratio 1.1 2.4 2.6 Current assets 14,385 24,290 19,250 Debt to Equity 4.1 2.8 1.7 Total Assets 97,508 104,488 101,588 Debt to Assets 0.7 0.6 0.5 Cash flow statement CF from operations 6,371 17,014 5,662 Return on Capital CF from investing activities (1,857) (2,139) (7,490) ROA -3% 5% 5%CF from financing activities (4,920) (3,331) (3,145) ROE -19% 27% 21%Ending Cash 2,449 16,442 23,012

Fertilizer

Engro Fertilizer Ltd.

63



Key investment theme Focusing DAP: Primary focus would remain on DAP as it requires

lesser gas than urea. In CY13, the company operated its DAP plant on 113% utilization level (11MCY13 production figures).

DAP Primary margins (PM) on thriving mode: DAP primary margins jumped 19% YoY to USD 243/ton in CY13. We expect PM to grow (+3% YoY) in CY14F as phosphoric acid prices are projecting downward trajectory. Phosphoric acid contract price was settled at USD 610/ton in the 4QCY13 down by 44% YoY.

Gas curtailment: Lesser gas curtailment (40%-45%) on SSGC network in comparison with SNGP network (85%).

Pricing power: DAP (primary product) always sold on premium in comparison with international DAP prices. Current premium with the int’l prices stood at 30%

Risks Extended gas shutdown amid winter gas curtailment.

For every PKR 100/bag reduction in DAP prices, primary margins would shrink by USD 18/ton, translating annual negative impact on bottom line by 0.78/share.

Fertilizer

Fauji Fert Bin Qasim Ltd.Valuation Parameters 2012A 2013E 2014F

EPS (PKR) 4.6 6.2 6.6

DPS (PKR) 4.5 5.0 5.9

P/E (x) 9.4 7.0 6.7

P/B (x) 3.2 3.0 2.8

Div. Yield 10% 11% 13%

ROE 34% 44% 44%

ROA 11% 14% 16%



Recommendation BUYTarget Price 55.21Current Price 43.81Upside 26%Bloomberg Code FFBL PAFree float 35%Major Shareholders – FFC 51%, FF 17.2%


DAP Primary Margins

USD/ton 2012A 2013E 2014FPhos Acid 934 790 628 Conversion 430 371 295 Local DAP 635 614 546 DAP – Primary Margins 205 243 251

64




PKRmn Dec-12A Dec-13E Dec-14F Dec-12A Dec-13E Dec-14F Income Statement Key Financial Ratios Sales 47,911 55,981 48,035 Per share Gross profit 11,461 15,481 13,791 Earning / Share 4.6 6.2 6.6 Other income 1,045 489 491 Dividend /Share 4.5 5.0 5.9 Finance cost 1,821 1,817 1,122 BVPS 13.5 14.7 15.4 Net profit 4,338 5,812 6,147 Price ratio Balance sheet P/E (x) 9.4 7.0 6.7 Total shareholder's equity 12,631 13,772 14,408 P/B (x) 3.2 3.0 2.8 Long term loans 1,232 924 616 Div yield 10% 11% 13%Total non current liabilities 4,905 4,564 4,289 Profitability Trade payables 11,176 11,627 9,831 Gross margins 24% 28% 29%Total current liabilities 23,168 22,057 18,816 EBITDA margins 20% 19% 22%Total equity and liabilities 40,704 40,393 37,512 Net margins 9% 10% 13%Non current assets 17,435 22,617 23,919 Coverage ratio 4.6 5.8 9.3 Current assets 23,268 17,777 13,594 Debt to Equity 1.0 0.8 0.6 Total Assets 40,703 40,393 37,512 Debt to Assets 0.3 0.3 0.2 Cash flow statement CF from operations 1,443 10,052 7,843 Return on Capital CF from investing activities 6,827 (6,492) (2,665) ROA 11% 14% 16%CF from financing activities (9,105) (8,358) (8,386) ROE 34% 44% 44%Ending Cash 4,717 3,991 782

Fertilizer

Fauji Fertilizer Bin Qasim Ltd.

65



Fertilizer

Fauji Fertilizer Co. Ltd.Key investment theme Sure shot: FFC 2nd largest urea manufacturer is most protected

investment in the fertilizer sector, as it has been the major beneficiary of the gas curtailment, since the company suffers lowest gas outage (8-12%) as compared to its peers, while simultaneously benefits on the pricing gains (6% since start of CY13).

Diversified investments: FFC has diversified investment base, with investments in FFBL, S.A (PMP), FCCL. In addition other investments including Wind Power, Al-Hamd foods and lastly Askari bank are going to mature in the future.

Lucrative yields: High dividend payout ratio of 95% (avg. for 3 years) translates into attractive dividend yield of 13% for CY14.

Gas supply: With the continuous gas supply from Mari Gas Company Limited, the company has an ability to operate plant at 120% capacity (avg. 3 years).

Risks Provision of the committed gas sale price (USc 70/mmbtu) to EFERT

could lead to fall in urea prices and thus affect earnings negatively. Reduction in price of urea by PKR 50/bag will hurt EPS by PKR 1.1

Exhibit: FFC’s Market Share



EPS (PKR) 16.4 15.4 15.6

DPS (PKR) 15.5 14.6 14.8

P/E (x) 6.8 7.3 7.2

P/B (x) 5.5 5.3 5.1

Div. Yield 14% 13% 13%

ROE 80% 74% 72%

ROA 34% 31% 29%



Recommendation BUYTarget Price 134.0 Current Price 112.0 Upside 20%Bloomberg Code FFC PA Free float 55%Major Shareholders – FF 47.8%, Individuals 17.8%

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

2007 2008 2009 2010 2011 2012 2013

Industry FFC

66



Fertilizer

Fauji Fertilizer Co. Ltd.Current Price 112.0 Relative Performance 3M 6M 12MTarget Price 134.0 Abs. Return (%) 14.7% 12.1% 10.7%Upside 20% Avg. Volume (mn) 1.1 1.2 1.6Mkt. Cap (PKRmn) 142,413 High 116.8 116.8 116.8Mkt. Cap (USDmn) 1,350 Low 98.14 97.63 96.73

PKRmn Dec-12A Dec-13E Dec-14F Dec-12A Dec-13E Dec-14F Income Statement Key Financial Ratios Sales 74,323 75,199 78,340 Per share Gross profit 35,998 33,218 34,405 Earning / Share 16.4 15.4 15.6 Other income 4,268 4,916 4,862 Dividend /Share 15.5 14.6 14.8 Finance cost 999 1,291 1,641 BVPS 20.5 21.3 22.1 Net profit 20,840 19,588 19,825 Price ratio Balance sheet P/E (x) 6.8 7.3 7.2 Total shareholder's equity 26,096 27,113 28,112 P/B (x) 5.5 5.3 5.1 Long term loans 3,870 2,430 1,125 Div yield 14% 13% 13%Total non current liabilities 7,973 6,246 4,674 Profitability Trade payables 15,837 16,543 17,279 Gross margins 48% 44% 44%Total current liabilities 26,817 33,699 35,220 EBITDA margins 45% 43% 42%Total equity and liabilities 60,887 67,058 68,006 Net margins 28% 26% 25%Non current assets 29,932 37,691 39,075 Coverage ratio 28.0 19.8 16.0 Current assets 30,954 29,367 28,931 Debt to Equity 0.4 0.5 0.5 Total Assets 60,887 67,058 68,006 Debt to Assets 0.2 0.2 0.2 Cash flow statement CF from operations 18,646 18,639 17,129 Return on Capital CF from investing activities 4,719 (4,333) 1,834 ROA 34% 31% 29%CF from financing activities (16,765) (14,123) (19,613) ROE 80% 74% 72%Ending Cash 16,571 22,683 22,033

67



Fertilizer

Regional Comparison

-

2

4

6

8

10

12

14

DPM

VN

FFBL

PA

EFER

T

FFC

PA

TCC

C T

B

CC

M M

K

3983

HK

CRI

N IN

Price to Earning

-

1.0

2.0

3.0

4.0

5.0

6.0

CC

M M

K

EFER

T

3983

HK

DPM

VN

TCC

C T

B

CRI

N IN

FFBL

PA

FFC

PA

Price to Book

0%

20%

40%

60%

80%

FFC

PA

FFBL

PA

DPM

VN

TCC

C T

B

EFER

T

CRI

N IN

3983

HK

CC

M M

K

Return on Equity

0%

4%

8%

12%

16%

FFBL

PA

FFC

PA

3983

HK

CRI

N IN

CC

M M

K

EFER

T

TCC

C T

B

DPM

VN

Dividend Yield



Net Margins


CHINA BLUECHEMICAL LTD - H China 2,978 10.7 1.5 18.6 1.8 30.8% 32.1% 16.9% 3.8% 0.0 10.8% 14.3%COROMANDEL INTERNATIONAL LTD India 1,073 12.1 2.4 8.8 0.9 na 16.3% 7.2% 1.9% 1.3 5.3% 18.8%CHEMICAL CO OF MALAYSIA BHD Malaysia 141 9.6 0.5 90.8 0.2 18.3% 9.5% 2.4% 0.0% 0.9 1.8% 4.7%FAUJI FERTILIZER COMPANY LTD Pakistan 1,373 7.2 5.1 8.2 1.8 43.9% 41.9% 25.3% 13.2% 0.5 29.4% 71.8%FAUJI FERTILIZER BIN QASIM Pakistan 392 6.7 2.8 7.1 0.9 28.7% 21.8% 12.8% 13.5% 0.6 15.8% 43.6%ENGRO FERTILIZER LTD Pakistan 348 6.9 1.3 4.6 0.7 42.2% 45.7% 10.8% 0.0% 1.7 5.2% 21.5%THAI CENTRAL CHEMICAL PUB CO Thailand 538 8.7 2.1 91.4 0.6 11.6% 9.0% 6.6% 0.0% 0.2 15.2% 25.8%PETROVIETNAM FERT & CHEMICAL Vietnam 746 4.5 1.5 3.9 1.0 32.5% 24.2% 22.6% 0.0% 0.0 30.4% 35.1%REGIONAL AVERAGE 949 8.3 2.1 29.2 1.0 29.7% 25.1% 13.1% 4.1% 0.6 14.2% 29.4%Source: Bloomberg, AHL Research

68



Power

Sector PerformanceExhibit: Power Sector Performance Relative to KSE100







Return 40.24%

PE (x) 13.59

PB (x) 2.08

ROE 22.56%

ROA 5.77%


80%

90%

100%

110%

120%

130%

140%

150%

160%

Jan-

13

Feb-

13

Mar

-13

Apr-

13

May

-13

Jun-

13

Jul-

13

Aug-

13

Sep-

13

Oct

-13

Nov

-13

Dec

-13

KSE100 Power Sector

Companies under coverageComapany SYM EPS DPS P/E P/B BVPS RoE Tp Curr. P Upside Recom.

Nishat Power Limited NPL 7.8 5.5 3.9 1.0 30.3 28.0% 35.6 30.1 18.6% Buy

Hub Power Company Limited HUBC 8.4 8.0 7.3 2.1 28.6 29.0% 69.0 60.7 13.7% Buy

Nishat Chunian Power Limited NCPL 7.6 6.0 4.6 1.6 21.4 37.0% 38.4 34.8 10.5% Buy Source: AHL Research

69



Key investment theme Circular debt: Despite the heavy liquidity injection (PKR 480bn) to

clear the over due receivables in Jun-13, circular debt has again reached around PKR 220bn in Dec-13. However we except liquidity condition to improve in 2HFY14 with trickle down effect of power subsidy removal.

Intensifying demand: With the peak demand still outpacing the supply by 8,600MW the IPPs’ share in the total power generation of the country is steadily increasing amid declining trend witnessed in hydro sources.

Hedging against USD and inflation: The tariff for IPPs has built in immunity against PKR depreciation and inflation (both local and US). Therefore, depreciating PKR/USD parity should increase the ROE component and ultimately the return to equity investors.

Attractive dividend yields: IPP’s are offering much higher dividend yields (13%-18%) as compared to the yields on gov’t securities (10-yr PIB 12.8%).

Risks Increasing intensity of circular debt would negatively affect IPPs’

liquidity and cash flows.

Exhibit: Power Sector Generation Mix


Exhibit: IPPs Power Generation Share


Power

Dividend Ace!

KAPCO, 19%

HUBC, 17%

NCPL, 2%

NPL, 2%Others,

59%

-

20,000

40,000

60,000

80,000

100,000

120,000

FY07 FY08 FY09 FY10 FY11 FY12

Nuclear Thermal PrivateThermal Wapda Hydel

70



Key investment theme Dividends: Despite higher earnings with its comparable peer

NCPL’s, NPL has distributed lower dividend (PKR 3/share vs. NCPL’s PKR 6/share in FY13), which should increase the prospects of dividend increase going forward (FY14E div . yield 18%).

Profitability: PKR depreciation, Indexation adjustments and improved load-factor (74% in FY14) is expected to post an 1% YoY growth to PKR 7.78/share in FY14.

Savings: Likewise its peer, operations and maintenance (O&M) savings and gains from fuel efficiency will also contribute towards the profitability.

Risks Higher finance cost due to increased short terms borrowing on the

back of piled up circular debt.

Higher furnace oil prices would lead to slow recoveries from customers.

Exhibit: NPL’s Trade debts and Short term borrowings



EPS (PKR) 7.7 7.8 8.0

DPS (PKR) 3.0 5.5 6.0

P/E (x) 3.9 3.9 3.7

P/B (x) 1.2 1.0 0.9

Div. Yield 10% 18% 20%

ROE 33% 28% 25%

ROA 10% 10% 10%



Recommendation BUYTarget Price 35.6 Current Price 30.1 Upside 19%Bloomberg Code NPL PA Free float 40%Major Shareholders – NML 51%, ABL 8.4%

Power

Nishat Power Ltd.

0%

5%

10%

15%

20%

25%

-

2

4

6

8

10

12

FY11A FY12A FY13A FY14E FY15F

Trade debtsShort term borrowings (STB)STB as a %age of total assets (RHS)

71



Current Price 30.1 Relative Performance 3M 6M 12MTarget Price 35.6 Abs. Return (%) 7.9% -0.8% 77.6%Upside 19% Avg. Volume (mn) 0.4 0.6 0.6Mkt. Cap (PKRmn) 10,644 High 30.76 33.28 33.28Mkt. Cap (USDmn) 101 Low 27.37 27.37 16.19

PKRmn Jun-13A Jun-14E Jun-15F Jun-13A Jun-14E Jun-15F Income Statement Key Financial Ratios Sales 25,055 26,244 26,477 Per share Gross profit 5,015 4,957 4,898 Earning / Share 7.7 7.8 8.0 Other income 49 58 58 Dividend /Share 3.0 5.5 6.0 Finance cost 2,241 2,133 1,987 BVPS 26.0 30.3 32.8 Net profit 2,739 2,754 2,839 Price ratio Balance sheet P/E (x) 3.9 3.9 3.7 Total shareholder's equity 9,208 10,723 11,615 P/B (x) 1.2 1.0 0.9 Long term loans 10,807 9,425 8,061 Div yield 10% 18% 20%Total non current liabilities 10,807 9,425 8,061 Profitability Trade payables 1,589 1,601 1,615 Gross margins 20% 19% 18%Total current liabilities 5,494 7,243 7,566 EBITDA margins 24% 22% 22%Total equity and liabilities 25,509 27,391 27,241 Net margins 10.9% 10.5% 10.7%Non current assets 13,991 13,109 12,149 Coverage ratio 2.2 2.3 2.4 Current assets 11,518 14,282 15,093 Debt to Equity 1.5 1.4 1.2 Total Assets 25,509 27,391 27,241 Debt to Assets 58.2% 54.5% 50.4%Cash flow statement CF from operations 9,960 2,257 4,401 Return on Capital CF from investing activities (126) (78) - ROA 10% 10% 10%CF from financing activities (5,923) (976) (2,956) ROE 33% 28% 25%Ending Cash 3,947 5,174 6,620

Power

Nishat Power Ltd.

72



Key investment theme PKR depreciation: PKR depreciation of 8% in CY13A and same

expected in CY14E coupled with improved load factor would lead towards earnings growth of 3% YoY in FY14 to PKR 8.37/share.

Dividend story: The dividend in FY14 is expected to remain flat at PKR 8/share. We believe income from Narowal project will be the major contributor to the company dividend.

Gov’t backing: Hub Power Company operates under the 1994 Power Policy. One of the salient features of 1994 power policy is that, the fuel supply is guaranteed by the gov’t unlike the newer power plants.

Coal conversion: The company’s coal conversion project is on cards, however we still await for clarity for the plan, due to unavailability of project details.

Risks Increasing intensity of circular debt.

Higher furnace oil prices.

Right shares issue or curtailment of dividend for the financing of coal project.

Exhibit: HUBC’s Trade Receivables & Payables



EPS (PKR) 8.1 8.4 9.4

DPS (PKR) 8.0 8.0 8.9

P/E (x) 7.5 7.3 6.4

P/B (x) 2.2 2.1 2.1

Div. Yield 13% 13% 15%

ROE 30% 29% 32%

ROA 6% 9% 9%



Recommendation BUYTarget Price 69.04 Current Price 60.72 Upside 14%Bloomberg Code HUBC PA Free float 70%Major Shareholders – DH Fertilizer 10.8%, ABL 9.6%, FF 8.5%

Power

Hub Power Co. Ltd.

86

151

25

60 74

128

35 57

8%11%

-10%

2%

-15%

-10%

-5%

0%

5%

10%

15%

-

20

40

60

80

100

120

140

160

FY11A FY12A FY13A FY14E

Trade receivablesTrade payablesNet receivables as a %age of total assets

73



Current Price 60.7 Relative Performance 3M 6M 12MTarget Price 69.0 Abs. Return (%) -4.7% 5.0% 53.1%Upside 14% Avg. Volume (mn) 1.6 1.8 1.6Mkt. Cap (PKRmn) 70,262 High 65.2 68.9 68.9Mkt. Cap (USDmn) 666 Low 59.0 58.8 38.9

PKRmn Jun-13A Jun-14E Jun-15F Jun-13A Jun-14E Jun-15F Income Statement Key Financial Ratios Sales 165,862 173,102 175,237 Per share Gross profit 16,293 14,749 15,524 Earning / Share 8.1 8.4 9.4 Other income 34 36 32 Dividend /Share 8.0 8.0 8.9 Finance cost 6,548 4,715 4,288 BVPS 28.2 28.6 29.6 Net profit 9,389 9,682 10,931 Price ratio Balance sheet P/E (x) 7.5 7.3 6.4 Total shareholder's equity 32,633 33,058 34,211 P/B (x) 2.2 2.1 2.1 Long term loans 23,551 17,488 14,334 Div yield 13% 13% 15%Total non current liabilities 23,553 17,503 14,349 Profitability Trade payables 34,813 57,343 54,763 Gross margins 10% 9% 9%Total current liabilities 43,127 74,812 72,285 EBITDA margins 10% 10% 11%Total equity and liabilities 99,313 125,374 120,845 Net margins 5.7% 5.6% 6.2%Non current assets 49,834 47,396 44,977 Coverage ratio 0.3 0.6 0.6 Current assets 49,480 77,978 75,868 Debt to Equity 0.9 1.1 0.9 Total Assets 99,313 125,374 120,845 Debt to Assets 30.7% 27.8% 26.3%Cash flow statement CF from operations 26,857 10,907 13,629 Return on Capital CF from investing activities (182) (253) (282) ROA 6% 9% 9%CF from financing activities (10,193) (14,518) (12,932) ROE 30% 29% 32%Ending Cash 17,069 13,205 13,620

Power

Hub Power Co. Ltd.

74



Key investment theme Tempting dividend yield: We expect NCPL to attract investors with

alluring dividend yield (17% in FY14 and 19% in FY15).

Savings: Due to its tariff structure, NCPL is currently saving operations and maintenance (O&M) cost.

Profitability: Improved load-factor (75% in FY14E) and indexation adjustments would translate 2% YoY growth in profitability to PKR 7.59/share in FY14E.

Circular Debt issue: The circular debt issue has been a major problem for the company but no compromise has been made on cash dividends.

Risks Being smaller IPP, slow recovery from NTDC is a problem for NCPL’s

cash flow perspective.

Piling up of Circular receivables lead to heavy short-term borrowings (subsequently higher finance cost).

Exhibit: NCPL’s Trade debts and Short term borrowings



EPS (PKR) 7.5 7.6 8.1

DPS (PKR) 6.0 6.0 6.5

P/E (x) 4.7 4.6 4.3

P/B (x) 1.8 1.6 1.5

Div. Yield 17% 17% 19%

ROE 41% 37% 36%

ROA 11% 12% 12%



Recommendation BUYTarget Price 38.4 Current Price 34.8 Upside 11%Bloomberg Code NCPL PA Free float 41%Major Shareholders – NCL 51%, UBL 7.3%, ABL 8.17%

Power

Nishat Chunian Power Ltd.

6.9

11.7

5.8

8.5 8.0

3.6

5.8

0.0

3.1 2.8

15%

20%

0%

12% 12%

0%

5%

10%

15%

20%

25%

-

2

4

6

8

10

12

14

FY11A FY12A FY13A FY14F FY15F

Trade debtsShort term borrowings (STB)STB as a %age of total assets (RHS)

75




PKRmn Jun-13A Jun-14E Jun-15F Jun-13A Jun-14E Jun-15F Income Statement Key Financial Ratios Sales 25,166 25,910 26,097 Per share Gross profit 5,064 5,141 5,109 Earning / Share 7.5 7.6 8.1 Other income 156 75 75 Dividend /Share 6.0 6.0 6.5 Finance cost 2,424 2,287 2,077 BVPS 19.8 21.4 23.4 Net profit 2,737 2,788 2,962 Price ratio Balance sheet P/E (x) 4.7 4.6 4.3 Total shareholder's equity 7,270 7,854 8,612 P/B (x) 1.8 1.6 1.5 Long term loans 11,837 10,268 8,780 Div yield 17% 17% 19%Total non current liabilities 11,837 10,268 8,780 Profitability Trade payables 1,939 1,751 1,767 Gross margins 20% 20% 20%Total current liabilities 3,524 6,738 6,672 EBITDA margins 24% 23% 23%Total equity and liabilities 22,631 24,860 24,064 Net margins 10.9% 10.8% 11.4%Non current assets 14,773 13,910 12,930 Coverage ratio 0.5 0.6 0.5 Current assets 7,858 10,951 11,135 Debt to Equity 1.8 1.9 1.5 Total Assets 22,631 24,860 24,064 Debt to Assets 8.6% 19.4% 19.1%Cash flow statement CF from operations 9,642 1,409 4,156 Return on Capital CF from investing activities (58) (117) - ROA 11% 12% 12%CF from financing activities (9,157) (488) (3,715) ROE 41% 37% 36%Ending Cash 270 1,074 1,515

Power

Nishat Chunian Power Ltd.

76



Power

Regional Comparison

-

2

4

6

8

10

12

14

NPL

PA

NC

PL P

A

PPC

VN

KAPC

O P

A

HU

BC P

A

JSW

IN

TA P

M

6000

21 C

H

GLO

W T

B

Price to Earning

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

TA P

M

PPC

VN

NPL

PA

6000

21 C

H

JSW

IN

NC

PL P

A

KAPC

O P

A

HU

BC P

A

GLO

W T

BPrice to Book

0%

10%

20%

30%

40%

50%

NC

PL P

A

NPL

PA

KAPC

O P

A

HU

BC P

A

GLO

W T

B

JSW

IN

PPC

VN

6000

21 C

H

TA P

M

Return on Equity

0%

2%

4%

6%

8%

10%

12%

14%

NC

PL P

A

HU

BC P

A

KAPC

O P

A

NPL

PA

PPC

VN

6000

21 C

H

GLO

W T

B

JSW

IN

TA P

M

Dividend Yield



Net Margins


SHANGHAI ELECTRIC POWER CO-A China 1,748 10.7 1.4 7.8 0.7 17.0% 20.5% 5.9% 4.5% 1.7 2.8% 13.7%JSW ENERGY LTD India 1,450 8.2 1.4 - 1.0 51.9% 31.3% 10.1% 3.4% 1.7 4.6% 15.2%HUB POWER COMPANY Pakistan 666 7.3 2.1 6.4 0.4 8.5% 10.4% 5.6% 13.2% 1.1 8.6% 29.5%NISHAT POWER LTD Pakistan 101 3.9 1.0 4.4 0.4 18.9% 22.2% 10.5% 18.3% 1.4 10.4% 27.6%NISHAT CHUNIAN POWER LTD Pakistan 121 4.6 1.6 4.2 0.5 19.8% 23.2% 10.8% 17.3% 1.9 11.7% 36.9%TRANS-ASIA OIL & ENERGY DVLP Philippines 153 10.4 0.8 25.5 4.2 86.5% 55.4% 57.3% 1.8% - 7.3% 8.2%GLOW ENERGY PCL Thailand 3,152 13.0 3.1 19.6 2.0 15.6% 22.8% 9.7% 4.0% 1.7 4.5% 15.7%PHA LAI THERMAL POWER JSC Vietnam 371 4.8 0.9 11.5 0.9 11.2% 25.7% 12.2% 8.1% 1.7 4.2% 14.2%REGIONAL AVERAGE 919 7.8 1.6 9.9 1.3 28.7% 26.4% 15.3% 8.8% 1.4 6.8% 20.1%Source: Bloomberg, AHL Research

77



Fixed Line Telecom

Sector PerformanceExhibit: Telecom sector performance relative to KSE100







Return 58.11%

PE (x) 18.08

PB (x) 0.99

ROE 5.04%

ROA 3.05%


80%

90%

100%

110%

120%

130%

140%

150%

160%

Jan-

13

Feb-

13

Mar

-13

Apr-

13

May

-13

Jun-

13

Jul-

13

Aug-

13

Sep-

13

Oct

-13

Nov

-13

Dec

-13

KSE100 Telecom Sector


Company SYM EPS DPS P/E P/B BVPS RoE TP Curr. Pe Upside Recom.

Pak Telecommunication Co. PTC 3.1 2.0 1.2 0.1 9.1 6% 36.0 28.4 26.6% BuySource: AHL Research

78



Fixed Line Telecom

Gearing up for 3G!Exhibit: Broadband market share technology wise


Exhibit: LDI monthly minutes (mn) since ICH


1,001

836

741

653

582 614 593

505501 505

611

495

586

493 477

400

500

600

700

800

900

1,000

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb-

13

Mar

-13

Apr-

13

May

-13

Jun-

13

Jul-

13

Aug-

13

Sep-

13

Oct

-13

Nov

-13

Dec

-13

63% 53% 44% 40% 38%

21%29%

28%25% 20%

5% 12% 26% 33% 41%

10% 6% 3% 2% 2%

0%

20%

40%

60%

80%

100%

FY09 FY10 CY11 CY12 Aug'13

DSL WiMax EvDO OthersKey investment theme 3rd Generation (3G) auction: With 3G auction to take place in

Feb’14, Pakistan’s Telecos, brace themselves for Avg. Revenue per Users (APRUs) attrition as higher speeds spectrum will increase usage (in particular data usage) of cellular services and wireless broadband.

LDI operators’ ICH arrangement: Increase of incoming int’l call rates from aboard by 400% since Oct’12 has remained unchanged. Documented traffic from aboard could pick up with the success of law enforcement agencies in stemming of grey traffic.

Broadband subscribers segment: This segment will continue to show its impressive growth trend in CY14 as witnessed in CY13 (from Jan’13-Aug’13, +15% increase in particular EvDO segment posting a +37% growth in subscribers).

Risks

Constant decline in documented LDI traffic could continue to dent revenues for LDI operators, reports of the ICH policy might also come under review by PTA going forward as well.

Further delays in 3G auction spectrum and non-resolution of 130+ properties dispute pending with Etisalat and Gov’t since privatization pose a sentimental dent on the sector

Zong (China Mobile, Pakistan) has been finally granted an LDI license, which will further dilute the 14 existing LDI operators market share

79



Exhibit: PTCL’s Revenue Mix


Fixed Line Telecom

Pakistan Telecom Co.

Recommendation BUYTarget Price 36.0 Current Price 28.4 Upside 27%Bloomberg Code PTC PA Free float 16%Major Shareholders - Govt. of Pakistan 62.2%, Etisalat 26%


EPS (PKR) 2.24 3.13 3.50

DPS (PKR) - 2.00 2.00

P/E (x) 12.68 9.08 8.13

P/B (x) 1.27 1.15 1.09

Div. Yield 0.0% 7.0% 7.0%

ROE 9.61% 12.67% 13.36%

ROA 5.25% 6.40% 6.73%

EBITDA margins

Net margins

Key investment theme Warid Telecom acquisition: The deal is set to materialize in CY14,

PTCL’s Ufone (100% owned subsidiary) could increase its existing subscriber base of currently 24.8mn by a further 12.8mn (with an existing loyal post-paid subscriber base from Warid an added attraction) through the acquisition

Broadband revenues: This segment continues its upward trend (+23% YoY) as subscribers in particular EvDO segment (+68% YoY) would continue to grow with the addition of the 3G spectrum which will act as an impetus for increasing ARPUs of broadband and Cellular Mobile Subscribers (est. to increase bottom-line by an avg. 5.5% from CY14)

Clam down on grey-traffic: This would augment LDI revenues (est. to increase bottom-line by 2.2% for every +100mn minutes increase) which also benefit from PKR to USD dep. (8% forecast for CY14) as call rates are collected in USD

Risks Highly leveraged book given that PTC goes for heavy external

borrowing to fund both Warid deal and 3G-Auction

Dilution in LDI market share of PTC (currently 50%) with the entrance of Zong (China Mobile, Pakistan), increasing grey traffic would also continue to hurt LDI revenues

FLL&WLL34%

UFONE40%

DSL&EVO12%

LDI & OTHERS

14%

80



Fixed Line Telecom

Pakistan Telecom Co.

PKRmn Dec-12A Dec-13E Dec-14F Dec-12A Dec-13E Dec-14F Income Statement Key Financial Ratios Sales 118,415 133,542 136,050 Per share Gross profit 43,815 47,613 47,923 Earning / Share 2.2 3.1 3.5 Other income 5,549 5,571 8,196 Dividend /Share - 2.0 2.0 Finance cost 3,813 2,520 1,221 BVPS 22.4 24.7 26.2 Net profit 6,553 15,969 17,851 Price ratio Balance sheet P/E (x) 12.7 9.1 8.1 Total shareholder's equity 114,364 125,998 133,649 P/B (x) 1.3 1.2 1.1 Long term loans 18,750 18,625 12,625 Div yield 0% 7% 7%Total non current liabilities 72,944 81,685 88,118 Profitability Trade payables 37,849 41,138 41,982 Gross margins 35% 36% 35%Total current liabilities 54,889 49,156 49,156 EBITDA margins 37% 39% 40%Total equity and liabilities 242,197 256,838 270,922 Net margins 10.3% 12.0% 13.1%Non current assets 159,786 154,375 150,576 Coverage ratio 4.72 8.53 16.44 Current assets 82,411 102,464 127,422 Debt to Equity 0.17 0.15 0.09 Total Assets 242,197 256,838 277,999 Debt to Assets 0.09 0.07 0.05 Cash flow statement CF from operations 16,395 28,465 36,631 Return on Capital CF from investing activities (2,218) (4,950) (209) ROA 5.2% 6.4% 6.7%CF from financing activities (183) (10,109) (12,056) ROE 9.6% 12.7% 13.4%Ending Cash 43,987 57,393 81,759

Current Price 28.4 Relative Performance 3M 6M 12MTarget Price 36.0 Abs. Return (%) 8.7% 33.1% 70.3%Upside 27% Avg. Volume (mn) 8.7 9.3 10.9 Mkt. Cap (PKRmn) 145,044 High 31.7 31.7 31.7 Mkt. Cap (USDmn) 1,375 Low 25.4 21.3 14.9

81



Fixed Line Telecom

Regional Comparison

-5

10 15 20 25 30 35 40

PTC

PA

KZTK

KZ

GRA

M B

D

TELE

IJ

GO

LD M

K

728

HK

SLTL

SL

IDEA

IN

Price to Earning

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

KZTK

KZ

GO

LD M

K

728

HK

PTC

PA

SLTL

SL

TELE

IJ

IDEA

IN

GRA

M B

DPrice to Book

0%10%20%30%40%50%60%70%80%90%

KZTK

KZ

GRA

M B

D

TELE

IJ

PTC

PA

SLTL

SL

IDEA

IN

GO

LD M

K

728

HK

Return on Equity

0%

1%

2%

3%

4%

5%

6%

7%

8%

PTC

PA

GRA

M B

D

728

HK

TELE

IJ

IDEA

IN

KZTK

KZ

GO

LD M

K

SLTL

SL

Dividend Yield



Net Margins


GRAMEENPHONE LTD Bangladesh 3,447 13.5 6.7 14.6 2.6 57.0% 54.3% 19.0% 7.0% 0.4 15.5% 47.1%CHINA TELECOM CORP LTD-H China 40,702 19.3 1.1 13.7 1.0 0.0% 25.0% 5.3% 2.2% 0.4 3.1% 5.7%IDEA CELLULAR LTD India 8,985 37.3 2.6 20.2 1.7 99.0% 26.6% 4.5% 0.2% 1.0 2.9% 7.4%TIPHONE MOBILE INDONESIA TBK Indonesia 279 14.1 2.6 27.5 0.4 5.5% 3.4% 2.5% 1.5% 0.2 16.0% 25.5%KAZAKHTELECOM Kazakhstan 1,056 12.1 0.5 na 0.9 29.3% 39.3% 126.4% 0.0% 0.3 52.8% 76.9%GOLDIS BHD Malaysia 365 17.2 0.8 27.8 13.0 42.2% 22.4% 100.1% 0.0% 0.1 5.4% 6.7%PAKISTAN TELECOM CO LTD Pakistan 1,375 8.1 1.1 7.1 1.1 35.2% 39.6% 13.1% 7.0% 0.1 6.7% 13.4%GLOBE TELECOM INC Philippines 4,899 21.2 3.1 72.1 1.7 91.1% 42.3% 7.9% 0.0% 1.3 4.9% 14.6%SRI LANKA TELECOM PLC Sri Lanka 507 19.9 1.5 na 1.4 31.6% 31.9% 7.1% 0.0% 0.3 4.1% 7.6%JASMINE INTL PUBLIC CO LTD Thailand 1,455 17.8 4.5 13.2 3.7 54.8% 44.8% 20.6% 0.0% 0.4 11.0% 27.0%REGIONAL AVERAGE 6,307 18.0 2.5 24.5 2.7 44.6% 33.0% 30.7% 1.8% 0.5 12.2% 23.2%Source: Bloomberg, AHL Research

82



Exploration & Production

Sector PerformanceExhibit: E&P Sector Performance Relative to KSE100





Mkt cap (PKR mn) 1,730,584


Return 47.9%

PE (x) 12.06

PB (x) 3.42

ROE 28.3%

ROA 12.3%


Companies under coverageCompany SYM EPS DPS P/E P/B BVPS RoE Tp Curr. P Upside Recom.

Pakistan Oilfields Limited POL 68.0 55.0 7.3 3.2 157.3 46% 609.0 497.7 22.4% Buy

Oil & Gas Development Company OGDC 33.6 13.0 8.2 2.8 97.8 39% 327.0 276.4 18.3% Buy

Pakistan Petroleum Limited PPL 29.7 12.0 7.2 2.2 95.4 35% 248.4 214.6 15.9% BuySource: AHL Research

80%90%

100%110%120%130%140%150%160%170%

Jan-

13

Feb-

13

Mar

-13

Apr-

13

May

-13

Jun-

13

Jul-

13

Aug-

13

Sep-

13

Oct

-13

Nov

-13

Dec

-13

KSE100 E&P Sector

83



Key investment theme Production additions to shape up the growth story: As key

development projects will start bearing fruits in a couple of years, AHL E&P universe appears all set to post a massive FY13-15 CAGR 14% and 10% for oil and gas, respectively. POL leads the pack with 17% CAGR in oil while OGDC dominates the gas production with at 18% CAGR.

Regulatory framework encouraging aggressive exploration: To encourage the exploration activities, the government in its recent Petroleum Policy 2012, has increased gas pricing by 36% to USD 6/mmbtu. In addition, government is giving 40% higher price for tight gas, while a policy for shale gas pricing is also under consideration.

Circular debt resolution generating interest income stream: To tackle the issue of piling up receivables of E&Ps, the government issued PIBs worth PKR 51bn and PKR 21bn to OGDC and PPL, respectively converting their receivables into earning assets. Improving liquidity will also provide funds for aggressive exploration activities.

Strong earnings growth ahead: Amid strong production growth and improving other income, OGDC, POL and PPL are expected to post a massive 3Y CAGR earnings growth of 23%, 19% and 18%, respectively.

Risks Sharp decline in crude oil price Delay in development project

Exhibit: E&P Sector Oil Production


Exhibit: E&P Sector Gas Production



Production paving the way for strong earnings

0

5

10

15

20

25

FY12 FY13 FY14 FY15

POL PPL OGDC

0

500

1,000

1,500

2,000

2,500

FY12 FY13 FY14 FY15

POL PPL OGDC

84



Key investment theme Production growth to propel earnings: POL’s oil and gas production

is expected to grow at 17% and 10% CAGR (FY13-15), respectively, mainly from TAL where discovery of Makori East 3 and Gas Processing Facility will be the major contributors towards this massive production growth.

Reserves downgrade not as scary as thought earlier; Despite a ~70% reserves downgrade of Manzalai, POL’s oil reserves managed to post a modest 1% growth in FY13 as reserves upgrades from Adhi and Makori East compensate the fall. Though, gas reserves have dropped by 18%, however lower gas contribution towards the top line is expected to prevent any sizeable damage going forward.

Earnings growing at 3 year CAGR of 19%: We expect POL’s bottom line to jump at 3 year CAGR of 19% to PKR 76/share in FY16. For FY14, profitability is expected to clock in at PKR 68/share, up 49% YoY, mainly due to strong production growth.

Attractive multiples: The stock is currently trading at FY14E PER of 7.3x, while offering an eye catching dividend yield of 12%.

Risks Declining oil price and PKR appreciation against USD.

Delay in development projects may cause lower than expected production growth.

Exhibit: Oil and Gas Production



EPS (PKR) 45.8 68.0 73.4

DPS (PKR) 45.0 55.0 60.0

P/E (x) 5.2 3.5 3.2

P/B (x) 3.6 3.2 2.9

Div. Yield 9.0% 11.1% 12.1%

ROE 31.8% 45.9% 44.8%

ROA 20.5% 28.6% 28.4%

EBITDA margins 64.8% 68.7% 69.1%

Net margins 37.5% 42.1% 43.0%

Recommendation BUYTarget Price 609.0Current Price 497.7Upside 22%Bloomberg Code POL PAFree float 46%Major Shareholders – Attock Oil Co. 52.9%, Banks 11.4%


Pakistan Oilfields Ltd.

1.60

1.70

1.80

1.90

2.00

2.10

2.20

2.30

2.40

2.50

50556065707580859095

100

FY12 FY13 FY14 FY15 FY16

Gas (LHS) Oil (RHS)mmcfd mn bbls

85



Current Price 497.7 Relative Performance 3M 6M 12MTarget Price 609.0 Abs. Return (%) 16.1% 5.3% 25.0%Upside 22% Avg. Volume (mn) 0.2 0.2 0.3 Mkt. Cap (PKRmn) 645,928 High 509.4 509.4 509.4 Mkt. Cap (USDmn) 6,123 Low 435.4 428.7 386.8

PKRmn Jun-13A Jun-14E Jun-15F Jun-13A Jun-14E Jun-15F Income Statement Key Financial Ratios Sales 28,878 38,236 40,429 Per share Gross profit 16,262 23,581 24,835 Earning / Share 45.8 68.0 73.4 Other income 1,954 2,156 2,341 Dividend /Share 45.0 55.0 60.0 Finance cost 830 1,495 1,345 BVPS 139.3 157.3 170.7 Net profit 10,828 16,089 17,371 Price ratio Balance sheet P/E (x) 5.2 3.5 3.2 Total shareholder's equity 32,948 37,210 40,389 P/B (x) 3.6 3.2 2.9 Long term loans - - - Div yield 9% 11% 12%Total non current liabilities 12,752 13,364 14,006 Profitability Trade payables 6,292 6,061 6,409 Gross margins 56% 62% 61%Total current liabilities 7,938 8,475 9,015 EBITDA margins 65% 69% 69%Total equity and liabilities 53,639 59,049 63,410 Net margins 37% 42% 43%Non current assets 37,026 39,422 42,292 Coverage ratio 18.5 15.3 17.9 Current assets 16,613 19,627 21,117 Debt to Equity - - -Total Assets 53,639 59,049 63,410 Debt to Assets - - -Cash flow statement CF from operations 12,559 17,583 19,279 Return on Capital CF from investing activities (5,202) (3,611) (4,185) ROA 20% 29% 28%CF from financing activities (12,995) (11,827) (14,193) ROE 32% 46% 45%Ending Cash (5,637) 2,145 901


Pakistan Oilfields Ltd.

86



Key investment theme Leading the gas production growth: OGDC is expected to lead the

gas production growth amongst its peers with a jump of 18% CAGR in next couple of years, mainly from KPD-TAY, Sinjhoro, Uch and JhalMagsi fields.

Oil not far behind; Strong production flows from Nashpa, MakoriEast, KPD and Sinjhoro are anticipated to improve oil production at 13% CAGR in two years time.

Other income to jump by 50% YoY: Other income is expected to jump by a hefty 50% YoY to PKR 23bn in FY14, mainly on account of higher interest realised from investments in PIBs (PKR 52bn) and TFCs (PKR 82bn).

Profitability growth: Fuelled from higher production coupled with strong interest income, OGDC’s profitability is expected to jump at 3 year CAGR of 23% to PKR 39.34/share in FY16.

Attractive multiples: The stock is currently trading at FY14E PER of 8.2x, while offering a dividend yield of 4%.

Risks Declining oil price and PKR appreciation against USD.

Delay in development projects may cause lower than expected production growth.

Exhibit: Oil and Gas Production



EPS (PKR) 21.1 33.6 37.2

DPS (PKR) 8.3 13.0 15.0

P/E (x) 13.1 8.2 7.4

P/B (x) 3.7 2.8 2.2

Div. Yield 3.0% 3.6% 3.6%

ROE 30.7% 38.9% 33.4%

ROA 24.1% 30.8% 27.01%

EBITDA margins 72.4% 78.0% 79.0%

Net margins 40.6% 49.9% 50.4%

Recommendation BUYTarget Price 327.0Current Price 276.4Upside 18%Bloomberg Code OGDC PAFree float 15%Major Shareholders – GoP 74.97%, OGDCL EET 10.05%


Oil & Gas Dev. Co. Ltd.

10.0 11.0 12.0 13.0 14.0 15.0 16.0 17.0 18.0 19.0 20.0

1,000 1,050 1,100 1,150 1,200 1,250 1,300 1,350 1,400 1,450 1,500

FY12 FY13 FY14 FY15 FY16

Gas (LHS) Oil (RHS)mmcfd mn bbls

87



Current Price 276.4 Relative Performance 3M 6M 12MTarget Price 327.0 Abs. Return (%) 18.4% 23.0% 48.6%Upside 18% Avg. Volume (mn) 0.5 0.6 0.7 Mkt. Cap (PKRmn) 1,188,605 High 280.5 280.5 280.5 Mkt. Cap (USDmn) 11,266 Low 233.1 225.4 177.6

PKRmn Jun-13A Jun-14E Jun-15F Jun-13A Jun-14E Jun-15F Income Statement Key Financial Ratios Sales 223,365 289,687 317,640 Per share Gross profit 157,666 211,977 232,253 Earning / Share 21.1 33.6 37.1 Other income 15,694 23,501 28,298 Dividend /Share 8.3 13.0 15.0 Finance cost 2,315 2,501 2,676 BVPS 75.3 95.7 118.4 Net profit 90,765 144,671 159,486 Price ratio Balance sheet P/E (x) 13.1 8.2 7.5 Total shareholder's equity 323,659 411,488 509,040 P/B (x) 3.7 2.9 2.3 Long term loans - - - Div yield 3% 5% 5%Total non current liabilities 51,611 57,398 64,128 Profitability Trade payables 36,503 46,350 50,822 Gross margins 71% 73% 73%Total current liabilities 38,741 48,588 53,061 EBITDA margins 72% 78% 79%Total equity and liabilities 414,011 517,474 626,229 Net margins 41% 50% 50%Non current assets 279,682 297,260 306,228 Coverage ratio 60.2 83.9 86.6 Current assets 134,329 220,214 320,000 Debt to Equity - - -Total Assets 414,011 517,474 626,229 Debt to Assets - - -Cash flow statement CF from operations 278,113 151,460 175,493 Return on Capital CF from investing activities (164,799) (29,696) (17,987) ROA 24% 31% 28%CF from financing activities (33,922) (51,068) (61,933) ROE 31% 39% 35%Ending Cash 79,392 70,696 95,572


Oil & Gas Dev. Co. Ltd.

88




Regional Comparison

6

7

8

9

10

11

12

RDG

Z KZ

POL

PA

GAS

VN

PPL

PA

OG

DC

PA

883

HK

PTTE

P TB

ON

GC

IN

Price to Earning

-0.5

1.0 1.5

2.0 2.5 3.0

3.5 4.0

RDG

Z KZ

ON

GC

IN

883

HK

PTTE

P TB

PPL

PA

GAS

VN

OG

DC

PA

POL

PA

Price to Book

0%5%

10%15%20%25%30%35%40%45%

GAS

VN

POL

PA

OG

DC

PA

PPL

PA

883

HK

PTTE

P TB

ON

GC

IN

RDG

Z KZ

Return on Equity

0%

2%

4%

6%

8%

10%

12%

POL

PA

PPL

PA

PTTE

P TB

883

HK

ON

GC

IN

GAS

VN

OG

DC

PA

RDG

Z KZ

Dividend Yield



Net Margins


CNOOC LTD China 82,448 9.4 1.9 18.4 9.4 na 47.5% 25.7% 3.6% 0.2 15.2% 22.2%OIL & NATURAL GAS CORP LTD India 40,311 11.0 1.7 8.9 11.0 na 27.5% 14.9% 3.5% 0.1 10.0% 16.8%KAZMUNAIGAS EXPLORATION PROD Kazakhstan 6,357 6.9 0.8 6.0 6.9 na 35.6% 20.2% 0.0% 0.0 10.4% 12.2%PAKISTAN PETROLEUM LTD Pakistan 4,026 7.2 2.2 6.5 3.2 72.4% 75.7% 44.2% 5.6% - 22.3% 31.1%OIL & GAS DEVELOPMENT CO LTD Pakistan 11,257 8.2 2.8 9.5 4.1 73.2% 78.0% 49.9% 3.6% - 30.8% 38.9%PAKISTAN OILFIELDS LTD Pakistan 1,118 3.5 3.2 47.6 3.1 61.7% 68.7% 42.1% 11.1% - 28.6% 45.9%PHILEX PETROLEUM CORP Philippines 298 na 74.2 na na 44.2% -5.2% na 0.0% 1.2 -24.8% -72.7%PTT EXPLOR & PROD PUBLIC CO Thailand 20,113 9.6 2.0 39.1 9.6 78.2% 72.0% 27.0% 3.7% 0.4 10.9% 21.9%PETROVIETNAM GAS JOINT STOCK Vietnam 6,020 7.5 2.7 7.1 7.5 21.8% 21.7% 14.4% 3.0% 0.3 21.6% 38.7%REGIONAL AVERAGE 19,105 7.9 10.2 17.9 6.8 58.6% 46.8% 29.8% 3.8% 0.4 13.9% 17.2%Source: Bloomberg, AHL Research

89



Oil Marketing

Sector PerformanceExhibit: OMC Sector Performance Relative to KSE100







Return 53.6%

PE (x) 8.36

PB (x) 1.71

ROE 20.4%

ROA 4.7%


80%

90%

100%

110%

120%

130%

140%

150%

160%

Jan-

13

Feb-

13

Mar

-13

Apr-

13

May

-13

Jun-

13

Jul-

13

Aug-

13

Sep-

13

Oct

-13

Nov

-13

Dec

-13

KSE100 OMC Sector

Companies under coverageBank SYM EPS DPS P/E P/B BVPS RoE Tp Curr. P Upside Recom.

Pakistan State Oil PSO 86.2 10.0 3.9 1.0 326.2 30% 461.0 332.2 38.8% Buy

Attock Petroleum Limited APL 63.7 50.0 7.9 2.7 184.6 36% 576.1 499.7 15.3% Buy


90



Key investment theme Power sector reforms to benefit OMCs: Power tariff increase will

pave the way for liquidity improvement in the energy chain as power subsidy was one of the major reasons for resurrection of circular debt. We believe that improving liquidity would be a major trigger for the re-rating of OMCs stocks going forward, particularly for PSO, which is currently trading at FY14E and FY15F PER of 3.9 and 4.7, vs market PER of 7.2x.

Scarcity of CNG fuels the demand of transportation fuels: With CNG getting dearer every year, demand of MS and HSD has been on the rise, evident from 18% YoY and 8% YoY growth already achieved in FY14TD. We foresee this trend to strengthen further as the government continues to discourage the usage of CNG.

Improving liquidity spurs FO demand: Improving liquidity coupled with government’s persistence of less load shedding, demand of FO has increased by 15% YTD in FY14.

Margins improvement on the cards: As Petroleum ministry is in final stage to recommend increase in OMC margins for retail segment.

Risks Drop in oil price would decrease margins on deregulated products

and inventory loss

Government’s failure to curb circular debt problem.

Exhibit: OMCs Sector Oil Sales


Oil Marketing

Circular Debt improvement to lead the way

-

5

10

15

20

25

FY11 FY12 FY13 FY14

Other JP FO HSD MSmn tons


Earnings Sensitivity on Crude Oil Price and Margins Amount in PKR/share

Crude Oil Margin increase by PKR 0.25/ltr

On USD +5/bbl HSD MS

PSO 5.72 3.38 1.71

APL 1.1 1.9 0.8

91



Key investment theme Resolution of circular debt: Rationalization of power tariff and

substantial reduction in subsidy are the major steps forward towards the eradication of circular debt. With 76% share in FO market, PSO will be the major beneficiary of circular debt resolution.

Volumetric growth: With highest market share, PSO will be the major beneficiary of 18%, 6% and 9% YoY growth in MS, HSD and FO, respectively mainly on account of CNG shortage and improving load factor of power sector.

Strong other income; Under the circular debt resolution mechanism, PSO subscribed to PIBs worth PKR 44bn, carrying mark up rate of 11.5%. These PIBs, provide healthy interest income on one hand, while become a pledge of short term borrowing for PSO.

Earnings growing at 3 year CAGR of 14%: We expect PSO’s bottom line to jump at 3 year CAGR of 14% to PKR 75.6/share in FY16. For FY14, profitability is expected to clock in at PKR 86.17/share, up 69% YoY, mainly due to penal interest received from power sector.

Risks Resurrection of circular debt

Decline in oil prices leads to drop in margins of deregulated products and cause inventory losses.

Exhibit: PSO’s Finance Cost & Other Income



EPS (PKR) 50.84 86.17 71.09

DPS (PKR) 5.00 10.00 15.00

P/E (x) 6.53 3.86 4.67

P/B (x) 0.75 0.98 1.16

Div. Yield 1.5% 3.0% 4.5%

ROE 22% 30% 20%

ROA 4% 7% 5%



Recommendation BUYTarget Price 461.0Current Price 332.2Upside 39%Bloomberg Code PSO PAFree float 46%Major Shareholders – GoP 22.5%, NBP 15.0%, Modarbas 34.0%

Oil Marketing

Pakistan State Oil

5

7

9

11

13

15

17

FY12A FY13A FY14E FY15F

Finance Cost Other IncomePKR bn

92




Oil Marketing

Pakistan State Oil

PKRmn Jun-13A Jun-14E Jun-15F Jun-13A Jun-14E Jun-15F Income Statement Key Financial Ratios Sales 1,100,122 1,549,912 1,620,213 Per share Gross profit 36,509 43,456 42,673 Earning / Share 50.8 86.2 71.1 Other income 5,939 16,272 8,348 Dividend /Share 5.0 10.0 15.0 Finance cost 7,591 7,103 7,539 BVPS 250.6 326.2 384.8 Net profit 12,558 21,284 17,559 Price ratio Balance sheet P/E (x) 6.5 3.9 4.7 Total shareholder's equity 61,888 80,578 95,050 P/B (x) 0.8 1.0 1.2 Long term loans - - - Div yield 2% 3% 5%Total non current liabilities 3,728 3,728 3,728 Profitability Trade payables 197,303 210,491 220,423 Gross margins 3.3% 2.8% 2.6%Total current liabilities 215,693 277,005 291,458 EBITDA margins 2.5% 2.6% 2.1%Total equity and liabilities 281,308 361,311 390,235 Net margins 1.1% 1.4% 1.1%Non current assets 56,952 56,618 56,371 Coverage ratio 0.3 0.2 0.2 Current assets 224,356 304,693 333,864 Debt to Equity 0.3 0.8 0.7 Total Assets 281,308 361,311 390,235 Debt to Assets 0.1 0.2 0.2 Cash flow statement

CF from operations 79,444 (38,808) (3,718) Return on Capital

CF from investing activities (46,107) (855) (902) ROA 4% 7% 5%

CF from financing activities (11,698) 45,530 1,432 ROE 22% 30% 20%Ending Cash 21,639 5,867 (3,188)

93



Oil Marketing

Regional Comparison

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20

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PSO

PA

APL

PA

RIL

IN

GM

B M

K

MJL

BD

ESSA

IJ

0000

96 C

H

Price to Earning

-

1.0

2.0

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7.0

0000

96 C

H

RIL

IN

PSO

PA

MJL

BD

APL

PA

GM

B M

K

ESSA

IJ

Price to Book

0%

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15%

20%

25%

30%

35%

APL

PA

ESSA

IJ

PSO

PA

GM

B M

K

RIL

IN

MJL

BD

0000

96 C

H

Return on Equity

0%

2%

4%

6%

8%

10%

12%

APL

PA

MJL

BD

PSO

PA

RIL

IN

0000

96 C

H

ESSA

IJ

GM

B M

K

Dividend Yield



Net Margins


MJL BANGLADESH LTD Bangladesh 231 29.2 2.6 1,008.7 2.7 19.0% 17.4% 9.3% 3.4% 0.4 5.7% 9.2%SHENZHEN GUANGJU ENERGY CO-A China 459 96.0 1.1 34.4 2.1 6.6% 1.6% 2.1% 0.0% - 1.0% 1.1%RELIANCE INDUSTRIES LTD India 45,815 10.9 1.2 29.1 0.6 0.0% 8.4% 5.3% 1.0% 0.6 6.1% 11.9%SURYA ESA PERKASA TBK PT Indonesia 221 41.8 6.6 579.4 8.0 63.3% 29.1% 18.9% 0.0% 0.4 9.7% 23.2%GAS MALAYSIA BHD Malaysia 1,485 19.8 3.3 18.1 1.6 11.2% 11.5% 7.7% 0.0% - 10.9% 16.1%PAKISTAN STATE OIL CO LTD Pakistan 778 3.9 1.0 3.7 0.1 2.8% 2.6% 1.4% 3.0% 0.8 6.6% 29.9%ATTOCK PETROLEUM LTD Pakistan 9,339 7.9 2.7 174.9 4.1 3.0% 3.3% 2.2% 10.0% - 14.9% 36.0%PETRON CORP Philippines 2,949 80.5 1.7 - 0.2 4.4% 3.4% 0.5% 0.0% 1.5 1.0% 2.1%CHEVRON LUBRICANTS LANKA PLC Sri Lanka 249 10.7 5.9 8.4 2.1 32.4% 25.6% 19.2% 0.0% - 43.8% 62.0%REGIONAL AVERAGE 6,836 33.4 2.9 206.3 2.4 15.8% 11.4% 7.4% 1.9% 0.5 11.1% 21.3%Source: Bloomberg, AHL Research

94


Other Sectors in Focus|2014The new bulls lined up



Consumer Goods (FMCGs)

Key Company IndicatorsCompany Mkt Cap

(USDmn) 1Yr Avg. Volume

Last Price (PKR) Freefloat

52-Weeks Trailing Revenue Growth

(YoY) High Low PE PBV Clover Pakistan Ltd. 6.17 3,355 69.0 5.0% 73.2 50.2 10.9 0.8 27.3%Engro Foods Ltd. 759.95 2,994,983 104.6 15.0% 162.2 80.4 30.9 8.0 34.5%Ismail Industries Ltd. 99.51 303 207.8 5.0% 208.6 137.2 29.3 4.4 8.9%Mitchell's Fruit Farms Ltd. 37.89 1,798 634.5 35.9% 734.5 272.9 36.9 9.2 5.0%Murree Brewery Co. Ltd. 84.67 18,787 387.5 44.0% 400.0 115.0 12.4 3.8 19.5%National Foods Ltd. 199.20 15,628 405.7 28.0% 458.4 205.2 31.2 15.0 19.2%Nestle Pakistan Ltd. 3,395.85 284 7,900.0 5.0% 9,300.0 4,421.5 61.1 31.0 22.0%Noon Pakistan Ltd. 2.20 1,250 44.5 25.0% 55.7 36.5 (1.8) 0.8 -11.2%Quice Food Ltd. 3.75 890,689 7.6 75.0% 10.2 5.5 nm 3.5 11.2%Rafhan Maize Products Ltd. 700.39 233 8,000.0 4.5% 8,208.9 3,376.1 36.2 10.8 6.9%Shezan International Ltd. 45.91 2,473 667.2 43.4% 772.3 347.3 19.4 4.3 12.1%Unilever Pakistan Foods Ltd. 554.48 58 9,500.0 1.4% 11,400.0 3,671.1 81.8 99.0 18.6%

Key Ratios Gross Margins Net Margins RoA RoE Book Value Dividend

Yield, % Debt to Equity

Debt to Assets

Profit Growth

(YoY) Clover Pakistan Ltd. 33.5% 210.9% 5.9% 6.8% 90.73 8.7% 0.0% 0.0% -88.7%Engro Foods Ltd. 25.7% 6.5% 13.4% 30.0% 13.12 0.0% 77.5% 35.1% 191.3%Ismail Industries Ltd. 17.2% 3.5% 4.2% 16.5% 47.68 1.0% 55.9% 14.8% -2.5%Mitchell's Fruit Farms Ltd. 24.6% 5.7% 13.7% 27.4% 68.66 1.2% 88.0% 46.8% 47.6%Murree Brewery Co. Ltd. 31.2% 14.5% 9.6% 24.7% 102.09 1.3% 0.3% 0.1% 36.8%National Foods Ltd. 32.5% 8.1% 19.4% 50.2% 27.07 1.5% 36.2% 16.1% 15.4%Nestle Pakistan Ltd. 27.2% 7.4% 13.6% 61.2% 254.91 0.9% 218.4% 49.6% 25.6%Noon Pakistan Ltd. 12.2% 1.1% 2.7% 12.6% 58.07 0.0% 112.0% 25.7% -455.4%Quice Food Ltd. 34.5% 18.8% 21.2% 66.7% 2.17 0.0% 59.7% 30.5% -99.1%Rafhan Maize Products Ltd. 20.3% 10.4% 21.9% 32.0% 743.13 1.6% 0.0% 0.0% 0.3%Shezan International Ltd. 28.8% 4.1% 10.0% 20.1% 153.64 1.3% 0.0% 0.0% 20.2%Unilever Pakistan Foods Ltd. 38.0% 12.2% 37.9% 132.1% 95.97 1.2% 11.0% 3.2% 16.0%Source: Company Financials, AHL Research

96



Pharmaceuticals

Key Company Indicators

97

Company Mkt Cap (USDmn)

1Yr Avg. Volume

Last Price (PKR) Freefloat

52-Weeks Trailing Revenue Growth

(YoY) High Low PE PBV Abbot Laboatories (Pak) Ltd. 365.2 18,153 393.5 19.9% 448.4 193.3 18.4 5.2 17.5%Ferozsons Laboratories Ltd. 45.4 20,613 158.6 30.0% 158.6 69.5 11.7 2.3 10.3%Glaxosmithkline (Pak) Ltd. 373.8 304,971 136.2 15.5% 145.6 59.5 29.9 3.6 6.4%Highnoon Laboratories Litd. 20.4 25,571 118.5 35.0% 181.2 42.7 20.8 3.4 -16.3%IBL HealthCare Ltd. 15.8 38,762 72.5 20.0% 74.8 20.2 16.6 5.3 19.4%Otsuka Pakistan Ltd. 4.9 11,592 47.4 12.9% 52.3 30.0 na 1.0 -18.9%Sanofi-Aventis Pakistan Ltd. 70.1 407 767.3 15.0% 767.3 304.5 15.2 3.7 13.2%The Searle Company Litd. 71.8 151,527 123.6 45.0% 128.8 30.4 14.5 2.9 16.4%Wyeth Pak Ltd. 60.6 1,257 4,500.0 26.6% 5,200.0 823.4 33.4 4.9 8.5%

Key Ratios Gross Margins Net Margins RoA RoE Book Value Dividend

Yield, %

Pharma % age in

Topline

Pharma Market Share

Profit Growth

(YoY) Abbot Laboatories (Pak) Ltd. 36.3% 13.7% 25.0% 35.1% 76.3 1.8% 74.8% 5.9% 27.1%Ferozsons Laboratories Ltd. 38.9% 20.9% 16.8% 23.4% 67.9 2.8% 68.0% na 0.0%Glaxosmithkline (Pak) Ltd. 21.7% 5.7% 8.7% 12.1% 38.2 2.9% 89.1% 11.6% 15.7%Highnoon Laboratories Litd. 10.1% 4.2% 6.3% 55.6% 34.9 3.0% na na 11.9%IBL HealthCare Ltd. 42.9% 11.6% 17.4% 32.7% 13.8 3.4% 23.0% na 28.4%Otsuka Pakistan Ltd. -1.0% -0.2% -0.3% -0.7% 46.8 2.6% 100.0% 4.1% nmSanofi-Aventis Pakistan Ltd. 18.5% 5.6% 9.9% 26.9% 207.3 1.6% 97.1% na 112.2%The Searle Company Litd. 24.6% 10.6% 11.3% 25.9% 42.1 0.8% 95.0% na 39.2%Wyeth Pak Ltd. 26.2% 6.1% 11.2% 15.5% 919.4 1.8% 100.0% na 9.4%Source: Company Financials, AHL Research




98



AHL Research Valuation Guide

Sr. No Company Symbol Price* Target

Price Upside/

Downside StanceShares

(mn)Free

Float (%)M.Cap ($

mn)EPS DPS P/E Div. Yield P/B ROE

11-12 12-13 13-14 11-12 12-13 13-14 12-13 13-14 12-13 13-14 12-13 13-14 12-13 13-14E&Ps

Pakistan Petroleum Ltd. PPL 214.0 248.0 15.9% Buy 1,972 21% 4,018 20.8 21.3 28.2 9.58 10.5 13.0 10.1 7.6 4.9% 6.1% 2.8 2.2 37.1% 30.4%Pakistan Oilfields Ltd. POL 497.7 609.0 22.4% Buy 237 46% 1,121 50.1 45.8 68.3 52.50 45.0 55.0 10.9 7.3 9.0% 11.1% 3.6 3.3 34.5% 31.7%Oil and Gas Dev Co. OGDC 276.4 327.0 18.3% Buy 4,301 15% 11,320 22.5 21.1 31.4 7.25 7.5 7.5 13.1 8.8 2.7% 2.7% 3.7 2.7 41.2% 30.7%

BanksNational Bank of Pakistan NBP 58.1 57.5 -1.0% Sell 2,128 24% 1,176 7.6 4.3 6.5 7.00 3.5 5.2 13.5 8.9 6.0% 8.9% 0.8 0.8 11.3% 5.9%MCB Bank Ltd. MCB 281.2 261.4 -7.0% Sell 1,012 40% 2,710 20.7 21.8 25.6 13.00 14.0 15.4 12.9 11.0 5.0% 5.5% 2.5 2.3 22.0% 20.5%United Bank Ltd. UBL 132.6 157.4 18.7% Buy 1,224 25% 1,545 14.7 14.3 16.3 8.50 8.6 9.8 9.3 8.1 6.5% 7.4% 1.7 1.5 21.5% 18.9%Bank Alfalah BAFL 27.0 34.2 26.5% Buy 1,349 50% 347 3.4 3.5 4.0 2.00 2.0 2.3 7.9 6.8 7.3% 8.4% 1.1 1.1 16.3% 15.0%Meezan Bank MEBL 39.4 37.5 -4.8% Sell 1,003 10% 376 3.5 3.6 3.5 1.50 2.0 2.0 10.8 11.1 5.2% 5.2% 1.9 1.7 22.2% 18.6%

Fertilizer Engro Corporation ENGRO 158.4 255.0 61.0% Buy 511 50% 771 2.4 16.4 33.5 - - - 9.8 4.8 0.0% 0.0% 1.6 1.3 2.9% 17.9%Fauji Fertilizer Co. FFC 112.0 134.0 19.7% Buy 1,272 55% 1,357 16.4 15.4 16.0 20.00 14.6 15.2 7.4 7.1 12.8% 13.3% 5.3 5.2 84.8% 73.5%Fauji Fert. Bin Qasim FFBL 43.8 55.2 26.0% Buy 934 35% 390 4.6 6.7 7.1 4.50 5.3 6.3 6.6 6.3 12.0% 14.2% 2.9 2.9 33.0% 46.9%

Cement Attock Cement Ltd. ACPL 142.6 173.5 21.6% Buy 115 20% 156 12.5 18.7 21.0 8.50 13.0 13.0 7.7 6.9 9.0% 9.0% 2.1 1.7 23.1% 29.3%D.G. Khan Cement Co. DGKC 85.7 129.0 50.5% Buy 438 55% 358 9.4 12.4 15.4 1.50 3.0 3.0 6.9 5.5 3.5% 3.5% 0.8 0.9 13.0% 13.5%Fauji Cement Company FCCL 16.0 20.1 26.0% Buy 1,331 55% 202 0.3 1.4 1.9 - 1.3 1.3 10.8 8.2 8.1% 8.1% 1.3 1.1 3.0% 12.7%Kohat Cement Company KOHC 97.8 166.3 70.1% Buy 155 25% 144 10.7 17.0 18.7 3.00 5.0 6.0 5.7 5.2 5.1% 6.1% 2.5 1.9 52.9% 53.7%Lucky Cement Ltd. LUCK 299.9 351.0 17.1% Buy 323 40% 924 21.0 30.0 39.8 6.00 6.0 8.0 9.9 7.5 2.0% 2.7% 2.4 1.9 22.2% 26.1%

Oil MarketingPakistan State Oil PSO 332.2 461.0 38.8% Buy 247 46% 781 36.7 50.8 85.8 5.50 5.0 10.0 6.5 3.9 1.5% 3.0% 1.4 1.1 18.1% 22.7%Attock Petroleum Ltd. APL 499.7 576.1 15.3% Buy 83 20% 395 49.7 47.1 57.7 50.00 45.0 50.0 10.6 8.6 9.0% 10.0% 3.0 2.7 31.4% 29.6%

Autos Indus Motor Company INDU 333.0 360.7 8.3% Hold 79 25% 249 54.7 42.7 43.5 32.00 25.0 25.0 7.8 7.7 7.5% 7.5% 1.5 1.3 27.6% 19.4%Pak Suzuki Motor Co. PSMC 153.9 169.7 10.3% Hold 82 26% 121 11.9 15.9 13.3 2.50 2.5 2.5 9.2 11.0 1.7% 1.7% 0.7 0.6 6.0% 7.4%

PowerHub Power Company HUBC 60.7 69.0 13.7% Hold 1,157 70% 669 7.1 8.1 8.8 6.00 8.0 7.5 7.5 6.9 13.1% 12.3% 2.2 2.1 27.2% 29.6%Kot Addu Power Co. KAPCO 61.8 66.4 7.5% Hold 880 52% 518 6.9 8.4 9.1 6.90 7.5 7.5 7.3 6.8 12.2% 12.2% 2.1 2.1 25.5% 29.9%Nishat Chunian Power Ltd. NCPL 34.8 38.4 10.5% Hold 367 41% 122 5.5 7.5 7.8 3.50 6.0 4.5 4.6 4.4 17.5% 13.1% 1.8 1.5 36.8% 41.3%Nishat Power Limited NPL 30.1 35.6 18.6% Buy 354 40% 101 5.8 8.1 8.6 2.00 3.5 3.5 3.6 3.5 11.8% 11.8% 1.2 1.0 32.1% 35.1%

TextilesNishat Mills Ltd. NML 127.2 169.4 33.1% Buy 352 50% 426 10.0 16.6 23.7 3.50 4.0 5.0 7.7 5.4 3.1% 3.9% 0.8 0.7 9.6% 12.1%Nishat (Chunian) Ltd. NCL 60.2 85.8 42.5% Buy 200 45% 115 3.5 11.4 14.3 2.00 2.0 4.0 5.3 4.2 3.3% 6.7% 1.5 1.2 11.9% 32.3%

ChemicalLotte Chemical Pak Ltd. LOTCHEM 7.3 8.3 13.4% Hold 1,514 25% 106 0.0 0.0 0.6 - - - 216.5 - 0.0% 0.0% 0.9 0.8 0.0% 0.4%Engro Polymer & Chem. EPCL 13.4 16.3 21.5% Buy 663 17% 85 0.1 1.3 2.1 - - - - 6.2 0.0% 0.0% 1.4 1.1 1.2% 13.8%

Fixed Line TelecomPak Telecom Co. Ltd** PTC 28.4 36.0 26.6% Buy 5,100 12% 1,381 2.2 3.0 3.5 - 2.0 2.0 9.8 8.4 6.8% 6.8% 1.2 1.1 10.1% 12.5%

* Closing price as of Dec 31, 2013, **On consolidated basis

99



Notes

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Disclaimer

Analyst certification: The analysts for this report certify that all of the views expressed in this report accurately reflect their personal views about the subject companies and their securities, and no part of the analysts’ compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.

Disclosures and disclaimer : This document has been prepared by investment analysts at Arif Habib Limited (AHL). AHL investment analysts occasionally provide research input to the company’s Corporate Finance and Advisory Department.

This document does not constitute an offer or solicitation for the purchase or sale of any security. This publication is intended only for distribution to current and potential clients of the Company who are assumed to be reasonably sophisticated investors that understand the risks involved in investing in equity securities. The information contained herein is based upon publicly available data and sources believed to be reliable. While every care was taken to ensure accuracy and objectivity, AHL does not represent that it is accurate or complete and it should not be relied on as such. In particular, the report takes no account of the investment objectives, financial situation and particular needs of investors. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. AHL reserves the right to make modifications and alterations to this statement as may be required from time to time. However, AHL is under no obligation to update or keep the information current. AHL is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Past performance is not necessarily a guide to future performance. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for any investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his or her own advisors to determine the merits and risks of such investment. AHL or any of its affiliates shall not be in any way responsible for any loss or damage that may be arise to any person from any inadvertent error in the information contained in this report. We and our affiliates, officers, directors, and employees may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, company (is) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as advisor to such company (is) or have other potential conflict or interest with respect to any recommendation and related information and opinions. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. AHL generally prohibits it analysis, persons reporting to analysts and their family members from maintaining a financial interest in the securities that the analyst covers.

Arif Habib Research’s coverage excludes Fatima Fertilizer Company Limited (FATIMA), an Arif Habib Group company, while Pakistan Petroleum Limited’s (PPL) coverage has been put on the restricted list due to Corporate Financial Advisory Mandate.

© 2014 Arif Habib Limited: Corporate Member of the Karachi, Lahore and Islamabad Stock Exchanges and Pakistan Mercantile Exchange Limited. No part of this publication may be copied, reproduced, stored or disseminated in any form or by any means without the prior written consent of Arif Habib Limited.

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Annexure

List of Abbreviations3G 3rd Generation FO Furnace Oil MN Million PPP Pakistan People Party

4G 4th Generation FOB Freight on Board MOGAS Motor Gasoline PPS Percentage Points

A/C Account FSV Forced Sale Value MoU Memorandum of Understanding PSDP Public Sector Development Program

ADB Asian Development Bank FX/Forex Foreign Exchange MP Market Price PSE Public Sector Enterprise

ADR Advance to Deposit Ratio FY Fiscal Year MPS Monetary Policy Statement PSF Polyester Staple Fibre

AL Arab Light G2P Government to Person MQM Muttahida Quami Movement PTA Purified Terephtalic Acid

ANP Awami National Party GDC Gas Distribution Companies MS Motor Spirit PTI Pakistan Tehreek-e-Insaf

APMDA All Pakistan Motors Dealer Association GDP Gross Domestic Product MSCI Morgan Stanley Composite Index QoQ Quarter on Quarter

BN Billion GDS Gas Development Surcharge MT Metric Ton RDF Refused Derive Fuel

BOP Balance of Payments GENCO Generation Companies MTS Margin Trading System RGST Reformed General Sales Tax

BPD Barrel per day GM Gross Margin MW Mega Watt ROA Return on Assets

BPS Basis Points GoP Government of Pakistan NDA Net Domestic Assets ROE Return on Equity

BTU British Thermal Unit Gov't Government NFA Net Foreign Assets RPPs Rental Power Projects

BV Book Value GRM Gross Refinery Margin NFC National Finance Commission SBA Standby Agreement

CAD Current Account Deficit HOBC High Octane Blended Component NFDC National Fertilizer Development Centre SBP State Bank of Pakistan

CAGR Compound Average Growth Rate HoH Half on Half NFML National Fertilizer Marketing Limited SCRA Special Convertible Rupee Account

CAR Capital Adequacy Ratio HSD High Speed Diesel NII Net Interest Income SECP Securities Exchange Commission of Pakistan

CFY Cashflow Yield IDR Investment to Deposit Ratio NIMs Net Interest Margins SLR Statuary Liquidity Requirement

CNG Compressed Natural Gas IFEM Inland Freight Equalization Margin NPL Non Performing Loan SME Small Medium Enterprises

CPI Consumer Price Index IFI International Financial Institutions NSS National Saving Scheme SR Sharpe Ratio

CRR Cash Reserve Requirement IMF International Monetary Fund NTB Non-Tariff Barriers STA Single Treasury Account

CSF Collation Support Fund Int'l International NTDC National Transmission and Dispatch Company TBILL Treasury Bill

CY Calendar Year IPI Iran-Pakistan-India OCAC Oil Companies Advisory Committee TDF Tyre Derived Fuel

CYTD Calendar Year to date IPO Initial Public Offering OGRA Oil and Gas Regulatory Authority TI Transparency International

DAP Di-ammonium Phosphate IPP Independent Power Producer OMC Oil Marketing Company TRN Trillion

DEP Depreciation IPS Investor Portfolio Securities PAAPAM Pakistan Association of Automotive Parts Accessories Manufacturers USD United States Dollar

DHDS Diesel Hydro Desulphurization JUI Jamiat Ulema Islam PAMA Pakistan Automotive Manufacturers Association WAPDA Water and Power Development Authority

DPS Dividend per share Kero Kerosene Oil PAT Profit After Tax WHR Waste Heat Recovery

DR Discount rate KIBOR Karachi Interbank Offered Rate PB Price to Book WTI West Texas Intermediaries

DSC Defence Savings Certificates KPD Kunnar Pasaki Deep PCF Price to Cash Flow YoY Year on Year

DY Dividend Yield KSE Karachi Stock Exchange PEG Price-Earnings to Growth YR Year

E&P Exploration & Production LDI Long Distance International PEPCO Pakistan Electric Power Company YTD Year to date

EBIT Earning before interests & taxes LDO Light Diesel Oil PER Price to Earning Ratio

EBITDA Earning before interest, taxes, depreciation & amortization LIBOR London Interbank Offered Rate PIB Pakistan Investment Bond

EGrow Earnings Growth LIPI Local Investor Portfolio Investment PKR Pakistan Rupees

EM Emerging Market LPG Liquified Petroleum Gas PL Petroleum Levy

EPS Earning per share LSM Large Scale Manufacturing PLS Profit and Loss Sharing

EV Enterpise Value LTE Long Term Evolution PML Pakistan Muslim League

EY Earning Yield M&A Merger & Acquisition PML-N Pakistan Muslim League (Nawaz)

FC Factor cost MCR Minimum Capital Requirement POL Petroleum Oil Lubricants

FIPI Foreign Investor Portfolio Investment MEG Ethylene Glycole PP Petroleum Policy

FM Frontier Market MFN Most Favoured Nation PPIB Private Power Infrastructure Board

FMCG Fast Moving Consumer Goods MMCFD Millions of cubic feet per day PPIS Pakistan Petroleum Information Service

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Annexure

Key Data SourceAPCMA All Pakistan Cement Manufacturing AssociationAPTMA All Pakistan Textile Manufacturers Association

Annual planADB Asian Development Bank Report

BloombergBudget DocumentsEconomic SurveyGallup PakistanGovernment of Punjab Agricultural DepartmentGovernment of Sindh Agricultural Department

IMF International Monetary FundIFS International Financial StatisticsKCA Karachi Cotton AssociationNEPRA National Eletric Regulatory AuthorityNFDC National Fertilizer Development CentreOECD Organization of Economic Committee Development ReportOGRA Oil and Gas Regulatory AuthorityOCAC Oil Companies Advisory Committee

PAAPAMPakistan Association of Automotive Parts Accessories Manufacturers

PAMA Pakistan Automotive Manufacturers AssociationPBS Pakistan Beareu of StatisticsPTA Pakistan Telecommunication AuthoritySBP State Bank of Pakistan

World Bank DatabaseWDI World Development Indicators

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Contact

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

Research Team

Khurram Schehzad VP - Head of Research [email protected] +92-21-3246-0742Syed Abid Ali AVP - Senior Investment Analyst [email protected] +92-21-3246-2589Saad Khan AVP - Investment Analyst [email protected] +92-21-3246-1106Tahir Abbas SR Officer- Investment Analyst [email protected] +92-21-3246-2589Numair Ahmed SR Officer- Investment Analyst [email protected] +92-21-3246-1106Rao Aamir Ali SR Officer- Manager Database [email protected] +92-21-3246-2589Ovais Shakir SR Officer- Database [email protected] +92-21-3246-1106

Equities Sales Team

Shahid Ali CEO - Head of Equity Sales [email protected] +92-21-3240-1930Anshuman Ray Head of Foreign Sales [email protected] +92-21-3246-6074Syed Farhan Karim VP - Equity Sales [email protected] +92-21-3244-6255M. Yousuf Ahmed SVP - Equity Sales [email protected] +92-21-3242-7050Farhan Mansoori VP - Equity Sales [email protected] +92-21-3242-9644Afshan Aamir VP - Equity Sales [email protected] +92-21-3244-6256Atif Raza VP - Equity Sales [email protected] +92-21-3246-2596Faraz Naqvi AVP - Equity Sales [email protected] +92-21-3244-6254Azhar Javaid AVP – Foreign Equity Sales [email protected] +92-21-3246-8312Dave Sommerhaug Foreign Sales [email protected] +1-415-2267-757Furqan Aslam AVP - Equity Sales [email protected] +92-21-3240-1932

Corporate Finance & Treasury

M. Rafique Bhundi SVP - Head of Corporate Finance [email protected] +92-21-3246-0741

Zilley Askari VP - Head of Inter-Bank Brokerage [email protected] +92-21-3240-0223

Faisal Khan VP - Head of Business Development [email protected] +92-21-3246-6076

Atif Raza VP - Head of Marketing [email protected] +92-21-3246-2596

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