Inter Market Perspective

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1 Inter Market Perspective Research Entity Number REP085 Hub Power Co. Ltd Enticing profile but limited upside; initiate at Neutral We initiate coverage on HUBC with a Neutral rating and a Target Price of PkR116/share (10% upside). While the investment in 2x660MW coal power project will drive earnings growth post ; the reduced stake of 26% from previous 49% will limit upside. HUBC s FY16/17F D/Y is only 128/218bp higher than 10yr PIB. Even though expansion into coal energy will ensure longevity of HUBC s lifecycle (base plant s PPA expires in 2027; that of CPHGCL in 2050), the 26% stake in CPHGCL may not adequately compensate for cashflows from base plant post That said, steady uptick in contribution from HUBC s subsidiaries (Laraib and Narowal) will cushion the blow till FY35, where we do not rule out chances of further expansion. HUBC is trading at a 3% premium to its local peers even though its FY16/17F D/Y is about 211bp lower than peers. At current market price the stock is offering a US$ IRR of 8.7%, which does not compare very favorably with Eurobond yield of 7.3%. Investment Thesis We initiate coverage of Hub Power Company (HUBC) which operates three private power plants of total 1,493MW with a Neutral stance and a TP of PkR116/share. Even though HUBC offers a unique proposition of yield & growth, we think the reduced stake in the expansion project, China Power Hub Generation Company Limited (CPHGCL), will limit upside from current market price. We think sponsors have opted for a lower stake to secure payout in the near term and to mitigate the risk of investing large capital in the new plant. It is worth highlighting that the company retains the option of increasing stake to 49% before commissioning of the plant. We have conservatively incorporated 26% stake in our estimates (49% share would add another PkR14/share to our TP; taking it to PkR129/share. The stock is offering an upside of 10%; where the implied US$ IRR of 8.7% does not compare favorably against Eurobond yield of 7.3%. Dividend lifecycle to stretch till FY50 Historically, HUBC has maintained a benign payout policy (payout ratio of over 95% against peer average of 76%), supported by three power plants base plant at Hub (RFO based; 1200MW), Narowal (RFO based; 225MW) and Laraib (hydel; 84MW). HUBC s risk profile and thus sustainability of dividends is secured by completion of boilers overhaul in FY16 and circular debt at a standstill, courtesy low oil prices. In light of 26% stake in the expansion project, we think HUBC should largely maintain payout policy; however, earnings may trim on potential interest costs on debt raised for the equity stake. CPHGCL: The giant extends its arms, albeit with a tiny stake HUBC is en route expansion through CPHGCL (in collaboration with a Chinese power behemoth, China Power Int l Holding Company), which will set up 2x660MW plant; we expect COD in and have thus incorporated the plant in our estimates. Based on HUBC s 26% stake in the project (CPIH 74% stake), the project is expected to add PkR15.5/share to HUBC s existing valuation (PkR101.0/sh) and will lift dividends by PkR /share onwards. The project offers a US$ denominated IRR of 17% (HUBC s IRR: 12%). Being part of CPEC s priority projects, it will likely witness smooth construction and operations. The project will lend a longer life to the company (until 2050), especially as the base plant s power purchase agreement (PPA) expires in 2021 and Laraib (though tiny) will run till Unexciting valuations relative to local peers HUBC is trading at a FY16F P/E of 9.8x and yielding 9.5%, which is at a premium of 3% and 211bps lower relative to peers, respectively. We believe HUBC deserves premium valuations relative to its peers given a track record of growth projects and a more reliable payout history. That said, our Neutral stance is hinged on the fact that the market seems to have partly incorporated the growth project, as it was expecting a higher stake, and thus the upside to current market price is limited. 7 April 2016 Yusra Beg Yusra.beg@imsecurities.com.pk Ext. 306 Hub Power Company Limited Price (PkR/sh) TP (PkR/sh) Stance Neutral Upside 9.8% Fwd D/Y 9.5% Total Return 19.3% Bloomberg / Reuters HUBC PA / HPWR.KA Mkt Cap (US$mn) 1, wk HiLow (PkR/sh) m Avg. Daily Vol ('000 shrs) 688 3m Avg. Traded Val (US$mn) 0.68 HUBC Valuation Snapshot Key Ratios FY15 FY16F F F EPS (PkR) EPS Growth (%) 45.9% 14.6% 16.9% 5.8% PE (x) BVPS (PkR) PBV (x) DPS (PkR) DY (%) 9.0% 9.5% 10.4% 10.4% ROE (%) 29.6% 33.6% 38.2% 34.9% ROA (%) 8.5% 9.7% 12.8% 14.3% Debt to Equity (x) EV/EBITDA (x) EBITDA Margin 13.2% 23.8% 30.2% 28.1% Gross Margin 14.0% 24.8% 31.5% 29.4% Hub Power Company Limited 30% 20% 10% 0% 10% Apr15 Jun15 HUBC Aug15 Nov15 Jan16 KSE100 Index Apr16 To find our Research on Bloomberg, please type - IMKP <GO>

2 EPS/DPS to grow in FY1617; marginal drop in on debt retirement (PkR/Shr) FY13A FY14A FY15A FY16 Source: Company Accounts & IMS Research EPS DPS ROE to grow at a measured pace (20); lift off post FY20 (PkRmn) 2,500 2,000 1,500 1, FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY20 FY22 FY24 FY25 FY26 FY27 Project Company Equity Coal project to provide ample thrust from onwards Dividend contribution set to increase (PkR/Shr) FY27 FY26 FY25 FY24 FY22 FY20 Earnings CPHGCL CPHGCL online in 2021 Total Consolidated Earnings PkR10 /shr In FY16 Base Plant Narowal Energy Laraib Energy Base Plant CPHGCL PkR13 /shr In Narowal Energy Laraib Energy FO prices have dropped significantly lower chances of debt build up with oil prices below US$5060/bbl PkR/Ton 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 Circular debt peak Jan09 May09 Sep09 Jan10 May10 Sep10 Jan11 May11 Sep11 Feb12 Jun12 Sep12 Jan13 May13 Sep13 Jan14 May14 Oct14 Mar15 Jul15 Nov15 Mar16 Source: Pakistan State Oil & IMS Research Liquidity stress coming off gradually as debt cycle stabilizes (PkRmn) 200, ,000 (100,000) (200,000) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Receivables Payables ST debt Source: Company Accounts & IMS Research

3 Shareholding pattern Dawood Hercules Corporation Limited 14.9% Allied Bank Limited 9.7% Committee of Admin. Fauji Foundation 8.5% National Bank of Pakistan 5.0% State Life Corporation of Pakistan 2.2% Financial Institutions 31.1% Individuals 17.9% Joint Stock Companies 4.7% Others 5.9% Source: Company Accounts & IMS Research Company Profile The Hub Power Company Ltd. (HUBC) was incorporated in August 1991 and operates a group of three independent power producers (IPPs). The principal activities of the company are to build, own, operate and maintain power stations. Under its belt is a 1,200MW Furnace Oil (RFO) based power station situated in Baluchistan (Hub Plant; commissioned in 1997), a wholly owned 214MW RFO fired power station in Punjab (Narowal Plant; commissioned in 2011) in addition to 75% controlling interest in 84MW hydel power project (commissioned in 2013): Laraib Energy Limited. The company is now in the process of constructing a 1,320MW coal fired power plant (2x660MW) in collaboration with China Power International Holding Company Limited, having a 26% stake in the project. Dawood Group, which also owns Engro Corporation, is the major sponsor of HUBC. Plant wise contribution in generation as of FY15 HUBC still trades at a discount to the region (X) % Laraib Energy 80% Base Plant % Narowal Energy Base plant Narowal Energy Laraib Energy HUBC P/E EV/EBITDA Regional Utilities Source: Company Reports & IMS Research Source: Bloomberg & IMS Research After its fair share of downs, HUBC is heading towards the upper stump of a rally (PkR) COD Dispute over tariff with WAPDA National Power divests 17.4% holding to Dawood group and ABL Circular debt payment by WAPDA to IPPs Boiler issues HUBC reduces CPHGCL stake to 26% NEPRA approves Gen. License for CPHGCL 1320MW Talks of coal conversion begin WAPDA files suit against HUBC for seeking intl. arbitration ROE/kwh revised down after tariff dispute resolution Xenel Power divests it 12.3% holding Narowal (220MW) COD Laraib Energy (84MW) COD 1320MW coal project rally 20 Lacklustre period 0 Jan97 Jun97 Nov97 Apr98 Sep98 Feb99 Jul99 Dec99 May00 Oct00 Mar01 Aug01 Jan02 Jun02 Nov02 Apr03 Sep03 Feb04 Jul04 Dec04 May05 Oct05 Mar06 Aug06 Jan07 Jun07 Nov07 Apr08 Sep08 Feb09 Jul09 Dec09 May10 Oct10 Mar11 Aug11 Jan12 Jun12 Nov12 Apr13 Sep13 Feb14 Jul14 Dec14 May15 Oct15 Mar16 Source: Bloomberg & IMS Research 3 P age

4 Dividend lifecycle to stretch till FY50 We initiate coverage on Hub Power Company (HUBC), Pakistan s second largest Independent Power Producer, with a Neutral rating and dividend discount model (DDM) based Jun 16 Target Price of PkR 116/share. HUBC s 26% investment in 1320MW coal energy project China Power Hub Generation (CPHGCL), provides an entry into the priority list of CPEC projects. Although dividends may remain flat over FY20, as HUBC retires annual interest payments on debt financing for 26% equity stake; nevertheless, we can expect dividend life to extend further post (CPHGCL achieves commercial operations). Dividends may remain flat in the interim (20) Entry of CPHGCL will spur dividend growth onwards (PkR) FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY20 FY22 DPS EPS 100% debt financing (PkR 16.4bn) for equity portion would result in PkR /sh per annum impact on dividends of the base plant on interest cost payments. Flat Dividends FY16 Expansion may limit upside in near term dividends We expect dividends of the base plant to depict slight attrition in FY20 on interest of loan that HUBC may undertake in order to finance the equity portion (26% stake in the 25% equity of the project) of the coal project (total outlay US$2.4bn, inclusive of jetty cost). HUBC would require equity investment of US$156mn (PkR16.4bn) over four years construction period assuming drawdowns of 34%, 33%, 13% and 20% respectively. We believe out of this portion, HUBC would finance 100% through debt which would result in a PkR /sh per annum impact on the base plant s earnings and thus potentially dividends too. Previously, HUBC had acquired 49% shareholding in the project, which was trimmed to 26%, resultantly clipping the loan size (previously US$294bn) and diluting the impact on base plant s dividends. We assume repayment to commence once plant comes online in, as in the case of Narowal and Laraib. Dividends may trim in the short term on interest cost payments FY % 23% 21% 19% 17% 15% 13% FY16 FY20 FY22 FY24 FY25 FY26 FY27 FY22 FY24 Base plant Narowal Laraib CPHGCL FY25 FY26 FY27 Finance cost (PkR/sh) DPS (PkR/sh) Net Margins (%) Rhs 4 P age

5 that said, Ushaped ROE remains on an upward moving trajectory HUBC s tariff return structure is unlike any other, built in such a way so as to continue at an upward moving trajectory till its touches its peak in FY27 (PPA expiry). Therefore, earnings attrition will somewhat be offset by increase in ROE component of HUBC s tariff, come. Following a dispute over the tariff with WAPDA in 2000, the ROE component of the capacity payments was reduced by US$ 5.25mn/month over a period of approximately 12years. Henceforth, core tariff return on equity is received after deduction of this amount post FY08. Therefore with the upsurge in tariff project company equity in, US$ denominated and CPI linked returns would protect dividends until the commissioning of the expansion project. Ushaped growth and upward moving trajectory Rupee depreciation propelling growth in ROE (PkRmn) 2,500 2,000 1,500 1, % 15% 10% 5% 0% 5% FY11 FY12 FY13 FY14 FY15 FY16 FY20 FY22 FY24 FY25 FY26 FY27 Jan11 Jan12 Jan13 Jan14 Jan15 Jan16 Jan17 Jan18 Jan19 Jan20 Jan21 Jan22 Jan23 Jan24 Jan25 Jan26 Jan27 Project Company Equity Growth (YoY) Rhs USD Indexation ROE (PkR/Kwh) Rhs Base plant s dividends are secure till FY27 HUBC s base plant (1200MW) recently underwent major maintenance, which concluded in 2QFY16 (FY13FY16), thereby ensuring reliability of the plant till FY27 and restoring fuel efficiency to base level of 38%. Prior to boiler refurbishment, the base plant had been incurring fuel losses of ~0.51%. With no major maintenance ahead, its smooth sailing for the base plant from here. This also creates room for the base plant for generation bonus as it can operate at a higher utilization rate (PkR0.10/kwh at 65% and PkR0.05/kwh at 70% for incremental production beyond 65% capacity). Maintenance expenditure to drop significantly FY16 onwards While dispatch is expected to remain above 65% load on avg. (PkRmn) 500 1,000 1,500 2,000 10, % F F FY16F FY15A FY14A FY13A FY12A FY11A FY10A FY09A FY08A FY07A FY06A FY05A Major maintenance 8,000 6,000 4,000 2,000 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 Power Generated (GWh) FY12 FY13 FY14 FY15 FY16F F F Load Factor (%) Rhs 80% 60% 40% 20% 0% Source: NEPRA & IMS Research Dollar indexed returns looking good; 5% depreciation per annum to sustain HUBC s tariff returns (ROE) are denominated in US$ terms, ceteris paribus any depreciation of the PkR vs. the US$ has a net positive impact on the company s indexed returns, and provides a natural hedge for foreign investors. The PkR has shed 2.9%FYTD vs. the US$ and nearterm weakness appears limited given strong Fx reserves buildup and a benign US interest rate outlook. Over the medium to longer term however, we expect PkR to depreciate by 5%pa vs. the US$. 5 P age

6 Demand/supply gap continues to grow 17,000 15,000 13,000 11,000 9,000 FY08 FY09 FY10 Gap of 3,785MW FY11 FY12 FY13 FY14 FY15 Avg. Generation Avg. Peak Demand Source: SBP Annual reports & IMS Research With 3 rd lowest energy consumption/capita (MWh/Year); Pakistan holds immense potential for growth Nigeria Kenya Pakistan India Indonesia Philippines Mexico Thailand Brazil China Argentina Malaysia S.Africa Kazakhastan UK Russia Germany France UAE US Source: SBP Annual reports & IMS Research HSFO bottomed out, liftoff to be gradual (PkR/ton) 100,000 80,000 60,000 40,000 20, (1.0) (2.0) (3.0) (4.0) (5.0) Kinder macros and healthier divisions; a perfect combination Pakistan s total electricity generation during FY15 stood at 98,581GWh with HUBC alone contributing a sizeable 8.9%. Pakistan s power sector is undergoing reforms courtesy IMF program. China Pakistan Economic Corridor (CPEC) will add 10,400MW (US$21.5bn) worth of priority projects in the pipeline. Focus on transmission line upgradation remains key to success with US$3bn earmarked under CPEC and through various other loans from ADB and World Bank. Going forward, privatization of public sector distribution companies (DISCOS), gradual phasing out of tariff differential subsidies and controlled accumulation of circular debt under the IMF program, amid historically low oil prices (HSFO at 8ys low of PkR24000/ton), uphold our stance of easing sector liquidity going forward. Arab Light prices bottomed out in Jan 16 touching US$21.34/bbl (down by 59%YoY), trickling down to local HSFO prices (PkR22,464/ton vs PkR80,000 when crude prices lingered around US$100/bbl) bringing a tide of liquidity across the power sector. Assuming a lower for longer view on oil prices, we anticipate circular debt (CD) to remain within the PkR300bn mark over the next 23 years. Although HUBC s base plant remains immune to CD, this would prove beneficial for Narowal Energy s cash flows in the long run. Circular Debt Capping Plan Actual Projected (PkRmn) FY15 FY16 Sector Inefficiencies 179, , , ,722 Discrepancies in tariff regime 64,623 34,602 28,708 21,157 Fiscal requirements & Govt. inefficiencies 69,401 37,322 22,815 9,770 Total Circular Debt Stock 313, , , ,649 Source: Ministry of W&P, IMS Research Shift in fuelmix underway; sector liquidity on the mend Tariff differential subsidies are the difference between tariff determined by NEPRA and the government notified customer tariff. Delayed government subsidy and major dependence on imported fuel and its rising cost have multiplied the effect of CD in the system. The existing government has managed to limit CD stock (outstanding) within PkR300bn over the last two years and is taking tangible measures to curtail additional buildup. Although decline in fuel prices (down 62%FY16TD) has been the principal reason, MeritOrder dispatch of power generation plants has also helped substantially reduce generation cost. Decline in domestic fuel prices has set the tone for sector liquidity, thus allowing GoP to conduct reforms with minimal political backlash. With focus shifting towards cheaper indigenous resources like LNG in the short term and coal generation in the longer term (CPEC 6, 890MW coal priority projects), liquidity crunch is expected to ease. Going forward, gradual increase in power tariffs and scale back of power subsidies (to 0.3% of GDP) will likely limit pace of incremental buildup. Moreover, government s move to align idle IPPs on takeandpay basis in order to avoid costly generation will further ease the propensity of receivable accumulation. Reliance on RFO coming down Gas generation picking pace 30,000 25,000 20,000 15,000 10,000 5,000 May14 Jul14 Sep14 Nov14 Jan15 Mar15 May15 Jul15 Sep15 Nov15 Jan16 Mar16 Avg. HSFO Prices Lhs Fuel Price Adjust (PkR/Kwh) Hydel RFO Gas HSD Nuclear Coal Source: Pakistan State Oil & NEPRA Source: NEPRA & IMS Research 9MFY16 9MFY15 6 P age

7 HUBC boasts a diversified portfolio under its belt Furnace Oil generation Hydel generation Coal generation Guaranteed fuel supply Cheapest energy in the mix at PkR 3/kwh One of the cheapest fuels at PkR 4.5/kwh Dollar denominated returns Decent US$ IRR of 17% Highest ROE in the mix at 27.2% UShaped PCE No fuel cost Private contract with fuel supplier 2.5% positive spread on receivables Immune to circular debt Less susceptible to circular debt No major maintenance ahead Above 90% hydraulic efficiency ROE to increase on local coal generation Hub Power Base Plant Project Details Plant capacity 1,292MW Net Capacity 1,200MW Total Investment Outlay US$ 1.57bn ROE 25.0% IRR 12.5% Benchmark efficiency 38.9% Commercial operations March 31, 1997 PPA expiry 30 years (FY27) Primary Fuel Furnace Oil Fuel Supplier PSO Laraib Energy Limited Project Details Plant capacity 84MW Net Capacity 80MW Total Investment Outlay US$ 0.215bn IRR 17.0% Benchmark hydraulic efficiency 90.0% Commercial operations March 23, 2013 PPA expiry 30 years (FY37) Primary Fuel Hydel Energy Source Mangla Dam HUBC's Investment in LEL 75% Base plant: The safest bet with the best returns Having been operational for 18 years, HUBC s 1200MW base plant accounts for 62% of total consolidated earnings (FY15) and is the only IPP in Pakistan to operate without the confines of a power policy. The company, has a unique tariff structure which ensures ever growing, dollar denominated, sustainable returns over the life of the plant (30 years till FY27). Hedged against most macroeconomic shocks (inflation and exchange rate movement), the company offers limited downside and essentially mimics the nature of a quasibond. HUBC earns a positive net penal income (over 2.5% above KIBOR rate) on its outstanding receivables from WAPDA; therefore, in case circular debt payments dry up, HUBC s earnings benefits. Moreover, HUBC s operations also manage to remain relatively less disrupted due to its guaranteed Fuel Supply Agreement with Pakistan State Oil (PSO) making it a safer bet in times of crisis. Moreover, with the plant having recently undergone major maintenance (FY13FY16) we anticipate HUBC to operate in excess of bonus threshold level of 6791GWh or 60% utilization. Laraib Energy: Immune to circular debt; steady cashflow generation to sustain Laraib Energy earnings have recently picked pace accounting for 33% of HUBC s consolidated earnings (FY15). Generation levels of the hydel plant crossed 78% mark in 1QFY16, where we expect dispatch to continue upwards given likelihood of higher water level flow through the Indus River Basin, courtesy global warming (during monsoon season). This, however, is excluding the possibility of sedimentation works on the dam in the next few years. Laraib recently received an Interim Relief Tariff due to delay in COD tariff determination. The tariff has been assigned for a period of 3years to account for onetime COD adjustment of project cost, tariff table and debt repayment schedule. This will result in incremental earnings from FY1618, after which the company will revert back to the original tariff. The hydel subsidiary has a 90% hydraulic efficiency and requires minimal maintenance with no fuel cost expense; therefore, it stays immune to the circular debt cycle. Narowal Energy Limited Project Details Plant capacity 225MW Net Capacity 213MW Total Investment Outlay US$ 0.23bn IRR 15% Benchmark efficiency 45.0% Commercial operations May 16, 2011 PPA expiry 30 years (FY35) Primary Fuel Furnace Oil Bakri Trading Fuel Supplier Company HUBC's Investment in HNL 100% Narowal Energy: Demerger to unburden the base plant Narowal Energy is undergoing a demerger from HUBC s books, which is essentially for the purpose of easing the base plant s liquidity burden. Narowal does not enjoy fuel supply guarantees like the base plant as it falls under the Power Policy 2002, resulting in issues in payable/receivable cycle. This has historically prompted the base plant to burden its own borrowing lines. HUBC s trade receivables have grown from PkR66.7bn in FY10 to PkR151bn in FY12 (2.27x jump) post COD of Narowal. Therefore, unbundling would result in fluid cash flows for the base plant. 7 P age

8 China Power Hub Generation Co. Ltd Project Details Plant capacity 1,320MW Net Capacity 1,216MW Total Investment Outlay US$ 2,408mn CPIH Equity US$ 444mn HUBC Equity US$ 156mn HUBC Debt: Equity 70:30 ROE 27.2% IRR 17.0% Benchmark efficiency 39.0% Primary Fuel Sub Bituminous Coal (imported or local) Ignition Fuel LDO Design Coal Richard Bay (South Africa) Newcastle Australia FOB IndonesiaFOB NAR4700 Transportation of fuel Jetty with 100kDWT bulk carrier Water source Arabian Sea Source: NEPRA & IMS Research CPHGCL is part of the prestigious list of China Pakistan Economic Corridor priority projects (10400MW) Reference Prices Imported coal (subbituminous) US$/M.Ton Richard Bay (South Africa)FOB RB Newcastle AustraliaFOB IndonesiaFOB NAR Weighted average Monthly Prices Marine Freight Marine Insurance 0.09 Other Costs 9.02 Weighted Average CIF Price Cost of common Jetty facility 9.46 Total Imported Coal Price Source: NEPRA & IMS Research CPHGCL: The giant extends its arms but with a tiny stake HUBC not only stands as an ideal yield play but is now venturing into another phase of expansion. The company has entered a JV agreement with China Power International Holding, (a flagship company of China Power Investment Corporation Group) to set up a 1,320MW power plant in Hub Baluchistan, vicinal to the existing base plant (1200MW). China Power Hub Generation Company Limited will be a 26% owned associate of HUBC with total equity of US$600mn (US$156mn HUBC) out of a total project outlay of US$2.4bn. With a 17% dollar denominated IRR (27.2% ROE), this project is expected to add 30% upside to HUBC s core earnings from onwards (given 44 months construction period) and will amp up the valuation by PkR15.5/share. Further, increase in stake from 26% to the previously agreed 49%, remains a key upside risk which could spur swift valuation rerating (additional upside of PkR14/share to existing valuations). Coal project to provide ample thrust from onwards (PkR/Shr) FY27 FY26 FY25 FY24 FY22 FY20 Earnings CPHGCL Total Consolidated Earnings CPHGCL COD The project falls in the list of China Pakistan Economic Corridor priority projects (10400MW), which are lined up for priority financial close. With the addition of CPHGCL, HUBC s net rated capacity would reach a mammoth 2,709MW, to become the largest private IPP holding company in Pakistan. The project is expected to ensure sustainability of earnings and payouts for the investors till FY50 (Expiry of PPA of CPHGCL) post exit of base plant (FY27), Narowal (FY35) and Laraib (CY37). CPEC Investment Breakup Investment US$bn Domestic share Energy % Transport Infrastructure % Gwadar Port % Fibre Optics 0.1% Total CPEC Investment Source: Ministry of Planning Development & Reform Assuming 100% debt financing; leverage for coal project may trim earnings In order to finance the equity portion (26% debt translates into US$ 156mn) of the project, we have assumed that HUBC may be required to take on additional debt to the extent of 100% of the equity portion. This would likely reduce earnings to the tune of PkR1.38/share and PkR1.45/share in / respectively, assuming 26% equity stake of HUBC in the project....but provision remains for equity investment trueup HUBC has maintained the option to increase equity stake at any time, before commercial operations, to 49% from existing 26%. As per management guidance, premise behind reduction of stake is to ensure seamless execution and construction of the project till COD. Another potential reason can be to avert dividend cuts (PkR33.5/sh) or to mitigate risk of committing capital in a project with little experience of working with a Chinese counterpart, in our view. Increase in holding to 49%, would elevate valuations to PkR28.0/share compared with PkR15.5/share on 26% stake. That said, it would also give rise to higher debt financing parallel to rise in equity portion. A 49% stake would have trimmed dividends between 20 by PkR3.03.5/share per annum, in our view. 8 P age

9 Definitive earnings boost through CPHGCL FY25 FY27 FY29 FY31 FY33 FY35 FY37 FY39 FY41 FY43 FY45 FY47 FY49 HUBC share in CPHGC Profits CPHGCL Total Earnings (PkR/sh) We expect HUBC s equity financing loan to retire in FY24PkR/sh (PkRmn) 2, , , FY20 FY22 FY24 Interest Payment Outstanding balance (Rhs) Coal SubOptimal Efficiency Benchmarks Net Capacity (MW) Efficiency (%) % % % Source: NEPRA & IMS Research Trafigura (Dutch commodity trading company) may be one of the coal suppliers. Above benchmark efficiency easily achievable HUBC has a coal requirement of 4.185mnT/annum, which will initially be met through imported subbituminous variety with design coal for the project set at South African RB3, Indonesian NAR4700 and Newcastle Australia FOB. We believe plant will be easily able to achieve the benchmark 39% efficiency factor depending on the BTU/kwh of the coal procured. Imported coal to be primary fuel; Thar reserves may take some time Given lack of exploration of local reserves of the country, HUBC will initially rely on imported coal for generation. Pakistan currently has 185.2bn tones of exploitable coal reserves, with Thar coal field in Sindh having the largest share. Work is underway through Sindh Engro Coal Mining Company (SECMC), which has been awarded 95.5 square km of Thar BlockII, to explore coal deposits. However, the project is expected to come online by 2018 leaving no room for local coal generation in the interim. HUBC has consequently made use of its convenient location at Hub for the construction of standalone Jetty Terminal for berthing of 100kDWT bulk carrier for transportation of imported coal. Having utilized a mere 70 acres for PlantI so far HUBC has 1430 acres remaining under its wing which it intends to utilize for the construction of the 1320MW plant and 4x660MW projects in the long run. Similar coal projects on the way CPHGCL will likely be the third IPP after Port Qasim and Engro Thar Coal Power Project to achieve financial close tentatively by 2Q with several IPPs expected to follow suit. Currently SinoSindh Resources Limited (SSRL) Thar coal power plant has the highest ROE/kwh in the coal energy space owing to their first mover advantage. Coal Power Projects waiting in line Gross Capacity (MW) Levelized Tariff (PkR/kwh) ROE/kwh Benchmark Efficiency China Power Hub Generation 1, % 39.0% Port Qasim Imported Coal Power Projects 1, % 39.0% SSRL Thar Coal Fired Power Project 1, % % Jamshoro Coal Power Project Petition 1, N/A 43.4% Engro Thar Coal Power Project % 37.0% Lucky Imported Coal Power Project % 39.0% Siddique Sons Imported Coal Power Project % 39.0% Source: NEPRA & IMS Research 9 P age

10 Target Price sensitivity to Risk Free Rate % 9% 9% 10% 10% 12% Unexciting valuations relative to peers We have valued HUBC with Sum of Parts and individual companies within HUBC valued with Dividend Discount Model (DDM) methodology to arrive at our indicative Target Price of PkR116/share, offering limited 10% upside. Valuation details are given below: Risk Free Rate 8.50% Beta 0.65 Risk Premium 6.00% Cost of Equity 12.40% Target Price Sum of Parts Valuation HUBC's Stake Total Plant Value Stake wise Plant (%) (100%) Value (PkR/sh) Base Plant 100% Narowal Energy 100% Laraib Energy 75% CPHGCL 26% HUBC Target Price Incl. CPHGCL Plant wise valuation matrix BASE PLANT Jun16 Jun17 Jun18 Jun19 Jun20 Jun21 Jun22 Jun27 Earnings (PkR/sh) Dividends (PkR/sh) Cost of Equity 12.4% 12.4% 12.4% 12.4% 12.4% 12.4% 12.4% 12.4% NPV of Dividends (PkR/share) Target Price NAROWAL ENERGY Jun16 Jun17 Jun18 Jun19 Jun20 Jun21 Jun22 Jun35 Earnings (PkR/sh) Payout 100% 100% 100% 100% 100% 100% 100% 100% Dividends (PkR/sh) Cost of Equity 12.4% 12.4% 12.4% 12.4% 12.4% 12.4% 12.4% 12.4% NPV of Dividends (PkR/share) Target Price LARAIB ENERGY Jun16 Jun17 Jun18 Jun19 Jun20 Jun21 Jun22 Jun37 Earnings (PkR/sh) Dividends (PkR/sh) Cost of Equity 12.4% 12.4% 12.4% 12.4% 12.4% 12.4% 12.4% 12.4% NPV of Dividends (PkR/share) Target Price CPHGCL Jun16 Jun17 Jun18 Jun19 Jun20 Jun21 Jun22 Jun50 Earnings (PkR/sh) (10.18) (16.35) (22.12) Cost of Equity 12.4% 12.4% 12.4% 12.4% 12.4% 12.4% NPV of Dividends (PkR/share) (8.05) (11.51) (13.85) Target Price P age

11 Listed Power Space 2015 Last Close Stocks Symbol (PkR/sh) Premium valuations reinforce our Neutral rating HUBC s valuations seem unexciting compared to local peers. It is currently trading at an FY16F premium of 3.4x (P/E: 9.8x) to the listed IPP space (6.4x) where limited room remains for price appreciation, in our view. Although we believe market has not completely incorporated the impact of the 1,320MW project, the move to reduce stake to 26% has significantly limited upside (on previous 49% stake). That said, earnings upside may arise from CPHGCL s 2.3ppt jump in ROE on local coal generation (27.2% ROE on imported) once Thar reserves come online. Market Cap (PkRmn) Market Cap (US$mn) P/E (x) D/Y (%) ROE/Kwh (%) Net Capacity (MW) Load Factor (%) HUBC ,300 1, % 25% 1,200 66% KAPCO , % 23% 1,600 59% NCPL , % 36% % NPL , % 34% % KEL , n.a n.a 2,247 81% ALTN , n.a n.a % SPWL , % 38% % PKGP , n.m. 7.7% n.a 350 8% EPQL , % 44% % LPL , % n.a % KOHE , % 24% % Source: Bloomberg & IMS Research even though HUBC remains cheap vs. regional players Still HUBC is however cheap when compared to IPPs in the region (9.8x vs regional average P/E of 10.6x). Equated against regional peers the company offers superior yield and an excellent track record of sustained payouts (5year average Payout: over 95%) and definitive earnings progression (5YR Earnings CAGR: 15%). HUBC s risk profile has significantly improved with circular debt at a standstill and the completion of the boilers issue in FY16. Regional Valuation Snapshot Companies Country Div Yields P/E (x) P/B (x) EV/EBITDA FY16F FY16F FY16F FY16F (x) HUBC Pakistan 9.4% KAPCO Pakistan 11.2% ZHEJIANG ZHENEA China 4.7% GD POWER China 5.3% n.a MANILA ELECTRIC Philippines 4.4% EDC Philippines 3.0% HUADIAN POWERA China 4.9% RATCH Thailand 4.7% ROJANA INDUS PAR Thailand 9.2% GLOW Thailand 5.5% EGCO Thailand 3.7% RELIANCE POWER India 0.93% PTC INDIA LTD India 3.6% Source: Bloomberg & IMS Research Interest rate uptick to be gradual HUBC essentially mimics the nature of a fixed income (30yr tenure) security; therefore it is suitably compared with yields on GoP securities where 3yr PIB is at 6.3% and Defense Saving Certificate is 7.8%. While we believe interest rates have bottomed, soft CPI (FY16F: 2.8%; F: 5.5%) implies any rate uptick is some time away and is likely to occur at a sedate pace, particularly if oil prices remain subdued. As a result, HUBC s 9.5%/10.4% FY16F/F dividend yield appears significantly attractive, and this should continue to be the case over the next few years. 11 P age

12 Risks to thesis Risk factors include (i) delay in financial close of the coal project; (ii) build up in circular debt stock; (iii) lower efficiency on inferior quality coal procurement for CPHGCL; (iv) appreciation of the Rupee vs. US$; and (v) uncertainty associated with EPC contract with Chinese counterparts. Delay in financial close of the coal project China Power Hub Generation Company is expected to achieve financial close by Dec 16; however, any delays could potentially push forward the commercial operations and thereby the impact the expected dividends from. This can arise due to further legal bottlenecks or issues raised by the regulator NEPRA before the financial close. As per initial target, the financial close has already been delayed by over six months. Circular debt buildup Despite transition from high levels of RFO prices to their 8year historical low (PkR 22,464k/MT), we expect HSFO prices to remain lower for longer. That said, structural weaknesses and inefficiencies in the system remain: (i) weak transmission distribution recoveries; (ii) higher system losses; and (iii) sharp increase in oil prices which could kick start circular debt accumulation. Fluctuation of coal quality on efficiency CPHGCL has a benchmark efficiency of 39%; however, the plant is more than capable of generating at up till 42% depending on quality of the coal. Drop in the quality of the coal procured (heating value) may affect the efficiency of the overall plant which could hamper fuel savings. Appreciation of the Rupee vs. US$ With HUBC s ROE denominated in dollar terms, any appreciation of the rupee would prove detrimental to investor return. This seems unlikely in the near term, however, as trade deficit may remain negative given Pakistan s dwindling oil import is offset by falling exports. Also, with interest rates expected to rise from 2HFY16, in our view, the currency may continue to weaken against the US dollar. Uncertainty of project execution through Chinese EPC contractor Historically, Pakistan IPPs have utilized European and Japanese expertise for execution of engineering, procurement and construction of power plants. Seeing as CPHGCL falls under CPEC, Chinese contractors have been hired for EPC of the plant. Given lack of track record in Pakistan, risk of uncertainty remains on smooth execution of the plant. 12 P age

13 Hub Power Company Limited Financial Snapshot Profit & Loss Account (PkRmn) FY14 FY15 FY16F F F Net Revenue 165, ,836 90,606 76,423 78,708 Cost of sales 151, ,588 68,103 52,372 55,547 Gross profit 14,318 19,248 22,503 24,051 23,161 Admin & Selling Exp , ,029 EBITDA 13,529 18,171 21,537 23,053 22,132 Dep & Amortization 3,607 3,683 4,557 4,563 4,571 EBIT 13,529 18,171 21,537 23,053 22,132 Financial Charges 5,828 5,690 3,556 2,775 2,771 Other income Other charges 451 Profit before Tax (Owners) 7,490 11,078 12,514 14,629 13,775 Taxation Net Profit after Tax. 7,485 10,918 12,514 14,629 13,775 Key Ratios FY14 FY15 FY16F F F EPS (PkR) EPS Growth (%) 25.8% 45.9% 14.6% 16.9% 5.8% PE (x) BVPS (PkR) PBV (x) DPS (PkR) DY (%) 6.2% 9.0% 9.5% 10.4% 10.4% ROE (%) 21.6% 29.6% 33.6% 38.2% 34.9% ROA (%) 6.14% 8.51% 9.67% 12.82% 14.29% Debt to Equity (x) EV/EBITDA (x) EBITDA Margin 8.2% 13.2% 23.8% 30.2% 28.1% Gross Margin 8.6% 14.0% 24.8% 31.5% 29.4% Balance Sheet (PkRmn) FY14 FY15 FY16F F F NonCurrent Assets 62,327 59,730 56,793 53,879 50,941 Total Current Assets 92,878 86,387 77,463 59,073 45,004 Total Assets 155, , , ,953 95,945 Share capital 11,572 11,572 11,572 11,572 11,572 Reserves Surplus on revaluation Total Equity 34,602 36,840 37,192 38,339 39,468 Long Term Debt 33,978 31,231 25,197 20,145 15,287 Total Noncurrent Liabilities 33,978 31,231 25,197 20,145 15,287 Short term Debt 16,878 10,963 9,403 8,462 6,770 Total Current Liabilities 86,625 78,046 71,867 54,468 41,189 Total Liabilities 155, , , ,953 95,945 HUBC P/E Band (FY16F) (PkR) Jul03 May04 Apr05 Mar06 Feb07 Jan08 Dec08 Nov09 Oct10 Sep11 Aug12 HUBC DY Trend (%) Jul13 Jun14 May15 Apr16 (x) % Cash Flow Statement (PkRmn) FY14 FY15 FY16F F F CF from Operating Activities (13,906) 16,207 27,530 24,209 21,768 CF from investing Activities (17,675) (1,085) (1,620) (1,650) (1,632) CF from Financing Activities 17,887 (18,778) (21,996) (20,933) (20,538) Net decrease/increase in cash (13,694) (3,656) 3,914 1,626 (402) cash at beginning 13,557 5,016 2,347 6,261 7,887 Cash at end of year 5,016 1,360 6,261 7,887 7, % 16.0% 14.0% 12.0% 10.0% 8.0% Jul10 Nov10 Apr11 Aug11 Jan12 May12 Oct12 Mar13 Jul13 Dec13 HUBC Dividend Yield (%) May14 Sep14 Feb15 Jun15 Nov15 Mar16 13 P age

14 I, Yusra Beg, certify that the views expressed in the report reflect my personal views about the subject securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations made in this report. I further certify that I do not have any beneficial holding of the specific securities that I have recommendations on in this report. Ratings Guide* Buy Upside more than 20% Accumulate Upside more than 10% but less than or equal to 20% Neutral Upside from 0% to 10%; Downside from 0% to 10% Reduce Downside more than 10% but less than or equal to 20% Sell Downside more than 20% *Based on 12 month horizon unless stated otherwise in the report. Upside/Downside is defined as the percentage difference between the Target Price (TP) and the Market Price (last close). Valuation Methodology: Please refer to page 10. Risks: Please refer to page 12. Disclaimer: Intermarket Securities Limited has produced this report for private circulation only. The information, opinions and estimates herein are not direct at, or intended for distribution to or use by, any person or entity in any jurisdiction where doing so would be contrary to law or regulation or which would subject Intermarket Securities Limited to any additional registration or licensing requirement within such jurisdiction. The information and statistical data herein have been obtained from sources we believe to be reliable where such information has not been i ndependently verified and we make no representation or warranty as to its accuracy, completeness and correctness. This report makes use of forward looking statements that are based on assumptions made and information currently available to us and those are subject to certain risks and uncertainties that could cause the actual results to differ materially. No part of the compensation of the author(s) of this report is related to the specific recommendations or views contained in this report. This report is not a solicitation or any offer to buy or sell any of the securities mentioned herein. It is meant for information purposes only and does not take into account the particular investment objectives, financial situation or needs of individual recipients. Before acting on any information in this report, you should consider whether it is suitable for your particular circumstances and, if appropriate, seek professional advice. Neither Intermarket Securities Limited nor any of its affiliates or any other person associated with the company directly or indirectly accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. Subject to any applicable law and regulations, Intermarket Securities Limited, its affiliates or group companies or individuals connected with Intermarket Securities Limited directly or indirectly may have used the information contained herein before publication and may have positions in, or may from time to time purchase or sell or have a material interest in any of the securities mentioned or may currently or in future have or have had a relationship with, or may provide investment banking, capital markets and/or other services to, the entities mentioned herein, their advisors and/or any other connected parties. This document is being distributed in the United States solely to major institutional investors as defined in Rule 15a6 of the US Securities Exchange Act of 1934, and may not be furnished to any other person in the United States. Each US person that receives this report by its acceptance thereof represents and agrees that it: is a major institutional investor as so defined, and understands the whole document. Investors should contact their Intermarket Securities representative if they have questions concerning this report. 14 P age