Daily Call

REP- 300 January 1, 2019

Market Strategy
KSE-100 Index in 2018: Pak Stocks Slump to end Year in Red
Market Return - Asia Pacfic Region KSE-100 Index in 2018: Consecutive 2nd year of Negative Return
Performance of the KSE-100 index remained disappointing in CY18 posting a negative
Return (USD) Dec-18 CY18 FY19TD
Philippines 1.1% -17.2% 5.3%
return of 8.4% YoY (USD-based 26.8% YoY) to close at 37,067 points in comparison to
Indonesia 0.4% -9.3% 5.1% 15.3% YoY decline in CY17 and an average positive return of 21% in the last 15 years.
India -0.7% -3.1% -0.1% This is the second time local bourse posted consecutive second year negative return since
Taiwan -1.2% -11.3% -10.9% 1996. The market’s dull performance during the year was mostly attributable to 1)
South Korea -2.2% -20.9% -12.3% Deteriorating macroeconomic environment including twin deficits and uncertainty on the
MSCI Emerg -2.9% -16.6% -9.7% PKR-USD front, 2) Political noise prior to General Elections 2018, 3) earnings growth falling
Vietnam -3.1% -11.2% -8.1% below expectations specially in the banking sector, and 4) foreign offloading.
Thailand -3.6% -10.8% -0.5%
Exhibit: Historical KSE100 returns…
China -4.0% -29.3% -17.5%
PKR Based USD Based
MSCI World -7.2% -11.2% -9.8% (%)
MSCI Develop -7.7% -10.4% -9.8% 60 49 49
46 46
Pakistan -8.4% -26.8% -22.6%
38 38
Source: Bloomberg, MSCI Barra 40 33
28 26 27
Net Foreign Flows - Asia Pacific Region
20
USD mn Dec-18 CY18 FY19TD
2
India* 476 (4,414) (3,792)
-
Philippines* (14) (1,080) 139
Taiwan* (2,322) (12,231) (3,264)
CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18
(6) (10) (2) (8)
Indonesia* (355) (3,657) (87) (20) (15)
(20)
S.Korea* 136 (5,676) (1,970) (27)
Vietnam* 31 1,887 319 (40)
Source: Bloomberg, AHL Research
Pakistan (28) (537) (404)
Thailand* (9) (8,913) (3,272) Worst Performing Market in Asia-Pac after China
Total (2,084) (34,621) (12,330) Market returns this year painted a dismal picture; PSX remains worst performing market in
Source: Bloomberg, *Till 28-Dec the Asia Pacific region after China. The KSE-100 index’s underperformance remained
hefty (-12%) as compared to Asia-Pac average return of -14.82% during CY18. On the
Forward Estimates
other hand, India leads the way in Asia-Pac region with a -3.1% return, followed by
Indonesia (-9.3%) and Vietnam (-11.2%).
P/E P/Bv D/Y
China 9.4 1.3 3.3% Massive Underperformance as compared to EM/DM Indices!
India 16.7 2.5 1.7% KSE-100 index underperformed substantially vis-à-vis MSCI Emerging market (-16.6%
Indonesia 14.5 2.2 2.4% return), MSCI Developed markets (-10.4% return) and MSCI World market (-11.2%).
Philippines 15.6 1.8 1.8% Furthermore, the domestic equity bourse now ranks as the 74th worst performing world
S.Korea 8.6 0.8 2.4% market of 2018.
Taiwan 12.5 1.5 5.0%
Exhibit: Historical KSE100 returns…
Thailand 13.5 1.7 3.6%
Vietnam 13.6 2.4 1.7% MSCI Developed MSCI Emerging KSE100
Peers' Avg 13.0 1.8 2.7% 60%
Pakistan 7.3 1.1 8.0%
46%
KSE100 (Disc) -44% -38% -66% 40% 33% 34%
Source: Bloomberg, AHL Research 22%
20%
Analyst 3% 5% 9%
-3% -2%
Samiullah Tariq | Tahir Abbas 0%
sami.tariq@arifhabibltd.com CY14 CY15 CY16 CY17 CY18
tahir.abbas@arifhabibltd.com -20% -5% -10%
-17% -20% -17%
+92 21-32462742
-40% -27%

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Source: Bloomberg, AHL Research

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 Daily Call
January 1, 2019
Sector Performance Dec-18 Foreign Bears Unleashed Selling
The domestic equity bourse was exposed to excessive foreign offloading in CY18 with
Index Return
Sector Weight
Cont. (MoM) net sell arriving at USD 537mn (CY17: USD 488mn). It was a particularly challenging year
Banks 24.6% (973) -9.8% for global Emerging Markets amid i) rate hikes by the US FED snowballing into an
E&P 14.5% (718) -12.3% attractive yield on 10-yr US Treasury Bills, ii) potential cut down in global growth forecast
Fertilizer 14.4% (383) -7.6% led by China despite governments efforts to support the economy, iii) political turmoil and
Cement 7.0% (372) -12.5% dire economic conditions in economies like Turkey, Argentina and South Africa extending
Power Generation 6.2% (155) -6.3% concerns of contagion in the region, and iv) tariff war initiated by the US with China and
OMCs 5.5% (264) -11.4% other EM partners. This, together with Pakistan’s miniscule weight in the MSCI EM space,
Food & Personal Care 2.5% (13) -1.4% made it hard for global funds to track the economy or give it preference over other larger
Automobile Assembler 2.7% (149) -12.9% economies. With that said, domestic market participants that absorbed foreign selling
Textile Composite 2.0% (121) -13.7% were Insurance Companies (USD 316mn), Individuals (USD 151mn), Companies (USD
110mn) and Other Organizations (USD 56mn).
Tobacco 2.7% 156 18.5%
Pharmaceuticals 2.5% (36) -6.3% Further dissection of FIPI on a sector-wise basis revealed major selling was witnessed in
Insurance 1.9% (68) -8.9% i) Commercial Banks (USD 263mn) owed to index-weighted sell off as well as large banks
Engineering 1.5% (70) -10.9% disappointing on the earnings front due to pension costs, higher admin costs and higher
Chemicals 2.6% 4 -0.3% provisioning, ii) Exploration and Production (USD 148mn) given index-weighted
Miscellaneous 1.8% (0) 0.0% divestment by foreigners, iii) Cements (USD 73mn) in light of changing sector dynamics
Technology 1.5% (100) -15.3% with pricing power waning off and blatant surge in coal prices suppressing margins, iv)
Automobile Parts 1.0% (8) -2.2% Power Generation and Distribution (USD 37mn) since payouts took a tumble this year in
Refinery 1.1% (58) -12.8% lieu of exposure to the circular debt, and v) Textile (USD 28mn).
Paper & Board 0.6% (2) -0.7%
Exhibit: FIPI Sector-wise Activity
Transport 0.8% (22) -6.9%
Cable & Electrical 0.4% (19) -12.6% (USD mn)
Inv. Banks 0.2% (17) -17.4%
Others 42
Real Estate 0.4% (0) -0.2%
Fertilizer 11
Sugar 0.2% (1) -2.0%
(5) Telecom
Glass & Ceramics 0.4% (20) -13.2%
(11) Food Producers
Mutual Fund 0.2% (2) -2.5%
(25) OMC
Leather & Tanneries 0.2% (2) -3.2% (28) Textile
Vanaspati & Allied 0.1% (8) -15.5% (37) Power Gen
Textile Spinning 0.1% (5) -9.1% (73) Cements
Leasing Companies 0.1% (4) -8.4% (148) E&P
Textile Weaving 0.0% 1 15.8% (263) Banks
Synthetic & Rayon 0.0% (2) -12.5%
(300) (250) (200) (150) (100) (50) - 50 100
Modarabas 0.0% 0 1.5%
Woollen 0.0% 0 1.4% Source: NCCPL, AHL Research
Source: PSX, AHL Research
Value Traded Tumbled; Blue Chip Stocks Failed to Impress
This year volumes made an intraday high of 461mn shares in Oct’18 while lowest volumes
were observed in May’18 (60mn shares). Average volumes in CY18 clocked-in at 188mn
shares, deteriorating 21% YoY (average volumes during CY17: 237mn shares). Sectoral
data revealed that volume leaders during the year were Banks, Cements, Power,
Chemicals and Telecom, registering average volumes of 21.2mn, 16.3mn, 14.6mn,
14.2mn and 11.9mn, respectively. Whereas on a scrip-wise basis, volumes were led by
BOP (9.3mn) followed by KEL (8.8mn) and LOTCHEM (8.7mn). Moreover, value traded
also followed suit with average value traded settling at USD 65mn a decline of 45% YoY

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E&Ps, Cements, Autos and Banks weigh the index down in 2018
Top index negative contributors remained E&Ps (-755pts, 22% of total decline) followed
by Cements (-739pts, 22% of total decline), Auto Assemblers (-546pts, 16% of total
decline), Commercial Banks (-491pts, 12% of total decline) and Engineering (-334pts,
10% of total decline). Meanwhile scrips contributing most to the downside were led by
HBL (-653pts, 19% of total decline) primarily attributable to higher admin cost owing to
business transformation/compliance program and NY branch closure related expenses
and UBL (-544pts, 16% of total decline) on account of heavy provisioning expenses
(mainly on overseas book) and hefty pension liability costs.

Outlook and Recommendation

At present, access to Pakistan’s Equity Market is available at a forward PER of 7.3x as
compared to regional peers including countries such as China (9.4x), India (16.7x) and
Vietnam (13.6x) which are trading at an average of 13.0x PER, implying a ~44% discount.
It is key to mention here that average discount of PSX against regional peers has
remained ~36% for the past 10 years. While on a Dividend Yield basis, KSE-100 index
offers an alluring 8.0% in CY19F compared to a regional average of 2.7%, respectively.
Historically, our equity market’s dividend yield has also fared well compared to the region,
as the last 10 years DY average of 5.9% outperforms the regional average of 2.6%.

For CY19, we expect the market to generate a return 26.8% to 47,000 points. We base
our assumptions on (i) Easing of Balance of Payment concerns (CAD to settle at USD
600-700mn from Jan’18 onwards), ii) clarity on IMF program coupled with expected
foreign inflows/deferred oil payments from China, UAE and Qatar, and (iii) expected
foreign inflows (FIPI and FDI).

Our sectoral preference includes 1) Banks: Betting on high interest rate era, 2) E&Ps:
Stable oil prices and PKR depreciation, 3) Fertilizers: Better margins amid substantial
pricing power. Moreover our favored picks include BOP, BAFL, UBL, OGDC, LUCK,
ENGRO, EFERT, FFC, HUBC, NCL and APL.

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Analyst Certification: The research analyst(s) is (are) principally responsible for preparation of this report. The views expressed in this research report accurately reflect
the personal views of the analyst(s) about the subject security (ies) or sector (or economy), and no part of the compensation of the research analyst(s) was, is, or will be directly
or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. In addition, we currently do not have any interest (financial or
otherwise) in the subject security (ies). Furthermore, compensation of the Analyst(s) is not determined nor based on any other service(s) that AHL is offering. Analyst(s) are
not subject to the supervision or control of any employee of AHL’s non-research departments, and no personal engaged in providing non-research services have any influence
or control over the compensatory evaluation of the Analyst(s).

Equity Research Ratings

Arif Habib Limited (AHL) uses three rating categories, depending upon return form current market price, with Target period as December 2019 for Target Price. In addition,
return excludes all type of taxes. For more details kindly refer the following table;

Rating Description
BUY Upside* of subject security(ies) is more than +10% from last closing of market price(s)
HOLD Upside* of subject security(ies) is between -10% and +10% from last closing of market price(s)
SELL Upside* of subject security(ies) is less than -10% from last closing of market price(s)
* Upside for Power Generation Companies (Ex. KEL) is upside plus dividend yield.

Equity Valuation Methodology

AHL Research uses the following valuation technique(s) to arrive at the period end target prices;
 Discounted Cash Flow (DCF)
 Dividend Discount Model (DDM)
 Sum of the Parts (SoTP)
 Justified Price to Book (JPTB)
 Reserved Base Valuation (RBV)

Risks
The following risks may potentially impact our valuations of subject security (ies);
 Market risk
 Interest Rate Risk
 Exchange Rate (Currency) Risk

Disclaimer: This document has been prepared by Research analysts at Arif Habib Limited (AHL). This document does not constitute an offer or solicitation for the purchase
or sale of any security. This publication is intended only for distribution to the clients of the Company who are assumed to be reasonably sophisticated investors that understand
the risks involved in investing in equity securities. 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
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Disclosure required under Research Analyst Regulations, 2015:

In order to avoid any conflict of interest, we hereby disclosed that;
 Arif Habib Limited (AHL) has shareholding in HBL, NBP, SNGP & BOP.

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