Daily Call. 2016: Performance Review Equities PSX Rally Strongest in Asia-Pac Region REP December 31, 2016

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1 FY6 FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 REP 3 16: Performance Review Equities PSX Rally Strongest in AsiaPac Region CY16 CY15 Return (PKR) % Return (USD) % 45.6 (2.) Index Level Points 47,87 32,816 Index Change Points 14, High Points 47,87 36,229 Low Points 3,565 28,927 Avg. Volume ms Shr ADTV USD mn Market Cap USD bn (%) Analyst Shahbaz Ashraf, CFA shahbaz.ashraf@arifhabibltd.com Key Market Statistics Mkt Cap to GDP: Long Way to Go Source: SBP, PSX, AHL Research Flush of Liquidity (USD mn) Net FIPI KSE1 Return ((RHS) (%) 6 4 () (4) Source: NCCPL, Bloomberg, AHL Research w w w.arifhabibltd.com KSE1 in 16: Stand and Deliver! Equity Market ended the year at 47,87 level remarkably returning 45.7% in CY16 (USDbased return of 45.6%). The benchmark index displayed a stunning run with several market dynamics coming into play; i) Jun 16 MSCI EM reclassification announcement buoyed market sentiment even though Pakistan will officially graduate to the Emerging Markets category in May 17, ii) PSX divestment, iii) flush of liquidity, iv) steady economic fundamentals including record low interest rates at 6.25%, v) improving law & order situation, vi) positive anticipation of the trickledown effect on economy as CPEC develops and vii) a stable corporate environment. Best Performing Market in Asia! Remarkably, Pakistan dethroned China to reign supreme as Asia s best performing market in CY16; a first for the benchmark. In comparison, it remained a tough year for China with a negative return of 17.%. Pakistan s 45.6% return (USD based) distinctively above the AsiaPacific average of 7.3% and a lot higher than Thailand at.4% and Indonesia at 18.% who scored just below Pakistan. Outperforming EM/FM Indices yet again! Pakistan s equity market also exceeded all MSCI Developed, Emerging and Frontier markets barring Brazil (69.1%), Peru (61.8%), Kazakhstan (61.4%) and Russia (.4%); ranking as the fifthbest performing market in the world in 16 amongst the countries tracked by MSCI. Average returns remained much lower than Pakistan; Developed (5.3% return), Emerging (8.6%) and Frontier (1.3%). Pertinently, Pakistan last achieved the third rank in 14 after which it dropped to spot 23 before recovering to its current position. Better to Follow Domestic Investors Local investors swept the benchmark index to highs as international investors remained net sellers during CY16; net selloff during CY16: USD 339mn vs. CY15: USD 315mn. Vulnerability to startling global events in the second half of the year eroded positive flows the market had attracted in prior months. Portfolio divestment by overseas stockholders was particularly aggravated due to the political shift in Europe amid the Brexit referendum and Trump s surge to victory in the US presidential election; foreigners have sold USD 261mn worth of shares at the PSX in 1HFY17. Foreign selling was particularly evident in i) fertilizers (USD 86mn) given apprehensions over surplus urea inventory, ii) s (USD 1mn) amid volatility in global oil prices, iii) banks (USD 8mn) as the benchmark interest rate was cut in May 16 rate along with the imposition of super tax under the FY17 budget and the maturity of Pakistan investment bonds. Other sectors that remained illfavored were food (USD 21mn), textiles (USD 18mn) and power (USD 11mn). Volumes Driven by Small Caps Trading volumes peaked at 93.2mn shares in Sept 16 (where similar levels of volumes were last seen back in Mar 5). Particularly noticeable was the fact that the year started with slow pace and gradually gained momentum with volumes averaging 281.5mn shares vs mn shares in 15. Top volumetric positions were secured by banks, technology & communication, power, cements and oil marketing companies, drawing on average 38.5, 29.5, 26.7, 24.6 and 1mn shares, respectively. KEL took the top position as volume leader (15.9mn shares), retaining its title from 15, and the scrips that followed were sideboard items like BOP (15.5mn), TRG (12.5mn), DCL (8.9mn) and PACE (8.8mn). 1

2 CY9 CY1 CY11 CY12 CY13 CY14 CY15 CY16 Sector Wise FIPI Details (USD mn) (USD mn) (119.5) Average Volume & Traded Value Source: NCCPL, Bloomberg, AHL Research 15A 16E 17F P/E x P/B x Earning Grow th % (1.6) (.8) 16.4 Earning Yield % Dividend Yield % Return on Equity % Source: AHL Research Major Index Contributors Textile Weaving Automobile Ass. Textile Composite Pharmaceuticals (8.) (86.4) (18.2) (19.7) Telecom (8.) s Textile (21.4) Food (6.7) Other Sectors Avg. Traded Value Avg. Traded Volume Key Valuation Ratios w w w.arifhabibltd.com ,189 2, (mn Shr.) ,492 Average daily traded value increased to USD 14.1mn visavis USD 127.1mn in CY15, exhibiting a 1.3% YoY increase as scrips in the limelight were from the second & third tiers. Best performing sectors Prompted by economic development, the engineering sector generated a stunning return of 31% aided particularly by steel scrips including ISL. Meanwhile indexheavy banks (~24.3% weight) and s (~1.1% weight) returned a solid 43% and 53% respectively whereby local investors played a key role to unlock value; favorites amongst the sector remained BOP and POL. Other noteworthy performances were displayed by relatively smaller sectors: sugar (.5% weight), automobiles (.5% weight) and glass (.2% weight) providing a return of 89%, 17% and 8%, respectively. Meanwhile fertilizers, another heavyweight (14.5% weight) recorded a nominal increase of 3.3%, majorly underperforming the market because of excess inventory. Lastly, textile spinning companies contracted by 21% YoY. Exhibit: Top & Worst Performing Sectors in CY16 Engineering Textile Weaving Refinery Automobile Parts Sugar Real Estate Modarabas Leasing Companies Textile Spinning Top points for 4% 13% 15% 21% 12% The highest index contributors remained banks (3,492pts), cements (2,134pts), s (2,189pts) and (923pts) while the laggards were textile spinning (1pts), leasing (6pts) and modarabas (5pts). Companies leading the contribution charts include HBL (1,13pts), LUCK (936pts), UBL (92pts) and FML (724pts); on the flipside, FEROZ (74pts) and FFC (65pts) marked down the index. 17 Outlook: ReEmerging Stronger 89% 17% We expect the market to yield a return of 17% to 21% in 17. Our thesis of robust returns is premised on PSX divestment where the positives will be apparent in the long run. Further catalysts include the reclassification into MSCI EM (May 17), double digit earnings growth of 16.4% (higher than regional peers avg. of 15%), strong domestic liquidity, higher economic growth, political maturity and fast progression of Chinese Investment in Pakistan s energy and infrastructure (CPEC). Currently, the only concerns seems to be the foreign selling, however, the equity market upgradation is expected to bring in decent net inflows given that the size of funds which are tracking the EM stands at USD trn (of which ~3% are passive funds) compared to USD 17bn of FM funds. Our preferred sectors include, Oil & Gas and s. 134% 235% 25% 75% 175% 275% 31% 2

3 KEL BOP TRG DCL PACE SNGP JSCL BYCO WTL PIBTL Jan16 Feb16 Mar16 Apr16 May16 Jun16 Jul16 Aug16 Sep16 Oct16 Nov16 Dec16 Jan16 Feb16 Mar16 Apr16 May16 Jun16 Jul16 Aug16 Sep16 Oct16 Nov16 Dec16 Exhibit: PSX Performance During CY16 Exhibit: Dec 16 witnessed highest monthly return after May 13 (1%) 49, 46, 43, 4, 37, 34, 31, 28, Jan16 Feb16 PSX Volume (RHS) KSE1 Index (mn Shr.) Dec16 Nov16 Oct16 Sep16 Aug16 Jul16 Jun16 May16 Apr16 Mar16 16.% 12.% 8.% 4.%.% 4.% 8.% 4.6% 12.2% 6.8% 5.6% 4.8% 4.8% 4.6% 3.9%.2%.7% 1.8% 1.6% Exhibit: LIPI in CY16 (USD mn) Exhibit: Sector Wise FIPI in CY16 (USD mn) /DFIs (119.7) Telecom 7.1 Companies Broker Proprietary (88.4) (41.3) (8.) s (18.2) Textile (19.7) Oher Org. 2.7 (21.4) Food Individuals NBFCs (6.7) Other Sectors (8.) (86.4) Funds 33.1 (119.5) Exhibit: 16 Monthly FIPI (USD mn) Exhibit: Volume Leaders in CY16 (mn Shares) (.) (1.) (1.) (.) 3

4 Pakistan Thailand Indonesia Vietnam Taiwan South Korea India Philippines Sri Lanka China s Food Pharmaceuticals Automobile Insurance Technology & Com. Chemical Inv. Transport Textile Composite SERF TRPOL TSMF TSPL IFSL NCML EMCO DFML SAPL SHCI Exhibit: Sector Wise Average Volume (mn Shares) Exhibit: Top Performing Stocks in CY16 18% 16% 14% 1% 1% 8% 6% 4% % % 157% 899% 768% 573% 538% 444% 47% 45% 329% 326% Exhibit: KSE 1 Top Sector Weights Exhibit: Top Five Performers in the World (%) % 7.% 6% 6.% 5%.% 4% 69.1% 61.8% 61.4%.4% 45.6% 4.% Brazil Peru Kazakhstan Russia Pakistan Exhibit: Asia Pacific Performance Exhibit: Pakistan Historical Returns and Ranking % 46% 4% 3% % 18% % 13% 13% 1% % 1% % 3% 1% 1% 7% 13% 17% Return Rank (RHS) 45.6%.% 38.% 37.8% 4.% 33.3% 3.% 26.1%.% 1.% 2.%.% CY1 CY11 CY12 CY13 CY14 CY15 CY16 1.% 1.1%.%

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