Pakistan Strategy KSE-100 Posted Highest Return in 7 Years Structural Reforms to Set the Market Tone for FY22

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A Fauji Foundation Group Company Equities REP-095

PAKISTAN Pakistan Strategy KSE-100 posted highest return in 7 years Structural Reforms to set the market tone for FY22

Rising commodity prices and slowdown in growth of remittances as travelling opens up amid rising foreign liabilities would put pressure on PKR and proves to be inflationary in nature, in our view. This along with slow progress on structural reforms would make it difficult for government to continue with its accommodative policies and may force it to introduce further revenue measures and cut development expenditure to bring fiscal discipline. However, in order to comply with the IMF program, structural reforms are to be implemented in true spirit, which would helped the heavy weight sectors i.e Banks, Number of COVID cases drop sharply E&Ps and Fertilizer to Outperform. Subsequently, KSE-100 would continue its rally built on 6,000 strong fiscal and monetary support amid easing COVID cases, in our view.

5,000 Market Depth at high of 13 years

4,000 On the back of proactive response of both government and central bank amid declining cases of COVID-19, KSE-100 closes ~37.6% (46% in US$ terms) up in FY21 against muted 3,000 return of last year. Notably, during the fiscal year Rupee appreciated by 6.6%. The current 2,000 fiscal year started by decline in policy rate to 7% and ended with the growth prone budget for FY22 has significantly improved market depth. Average Daily Turnover (ADTO) has 1,000 notably improved by ~164% YoY to ~Rs19.0bn, at a high of 13 along with improvement in 0 volumes by ~168% YoY to ~524mn shares in FY21. However, improved volumes came with

a significant drop in settlement to ~53.2% in FY21, down 689bps YoY.

Jul-20 Jul-20

Jan-21

Jun-21

Oct-20

Apr-21

Sep-20 Feb-21

Dec-20 Dec-20

Aug-20 Besides, companies have raised highest ever amount of Rs17.1bn during FY21 through IPO

Nov-20

Mar-21 May-21 Source: GoP, Foundation Research, June 2021 with total number of new listings of 7 at PSX, which is high of 11 years. Performance witnessed across the board during FY21 Across the board performance, baring E&P and Tobacco, was witnessed at PSX during KSE-100 Index along with KSE-All volume… FY21. Technology and Cyclical sectors outperformed given fiscal and monetary stimulus for revival of economic growth. Technology, Engineering, Cement and Automobile rose Volume (mn) KSE-100 50,000 2,500 the most with return of 162.5%, 138.5%, 71.7% and 51.8% YoY during FY21. Textile, Chemical, Power, OMC, Banks, FMCG and Fertilizer followed with return of 44.6%, 34.6%, 47,500 2,000 28.8%, 24.8%, 22.3%, 16.8% and 5.8% YoY. However, E&P and Tobacco were the worst hit 45,000 sectors with return of -1.0% and -15.7% during FY21. 42,500 1,500 Individuals and Companies provide exit to FIIs and Banks

40,000 1,000 Individuals and Companies provide exit to Foreigners and Banks during FY21. Individuals 37,500 have bought equity stake worth of US$332mn followed by ~US$142mn and ~US$35mn of 500 Companies and Others. However, Foreigners, Banks and Brokers reduced their exposure 35,000 by ~US$395mn, US$101mn and ~US$33mn. Insurance too reduced their exposure by 32,500 - ~US$7mn against buying of US$128mn during FY20.

Foreigner’s to remain on selling spree

Jul-20

Jan-21

Jun-21

Oct-20

Apr-21

Feb-21 Sep-20

Dec-20

Aug-20

Nov-20

Mar-21 May-21 Source: PSX, Foundation Research, June 2021 Continuation of FATF grey list along with looming threat of moving to MSCI FM markets would keep the foreigners at bay, in our view. MSCI starts consultation with market participation on the reclassification of Pakistan to FM market as no Pakistani company Analyst meets EM Size and liquidity criterion. Notably, Foreigners reduced exposure in Pakistani Muhammad Awais Ashraf, CFA +92 21 35612290 equities by ~US$2.2bn during last six year. [email protected] EXT: 338 Prefer defensive and beneficiary of reforms We advise to go long on sectors that are beneficiary of structural reforms, rising commodity prices and gov’t growth policies. We have our liking for E&Ps, Banks, Fertilizers, Foundation Securities (Pvt) Ltd. OMCs and Conglomerates. We prefer OGDC, PPL, MCB, HBL, MEBL, PSO, MARI, LUCK, FFC, Wednesday, June 30, 2021 FFBL, ASTL, ISL and APL.

Please Refer to last page for important disclosures and analyst certifications www.jamapunji.pk

Pakistan Strategy July 1, 2021

Fig 1: Majority of the events turned in favor of KSE-100 Index during FY21

ADTO (RHS, Rs bn) KSE100 (LHS) FATF decides to maintain Pakistan in Opposition forms IMF-Pakistan Pakistan issued grey list 50,000 Remittances hit Increased new reaches staff level US$2.5bn Euro 40.00 PDM alliance to IPPs received record high of oust Gov't COVID cases agreement bonds first trance US$2.8bn due to second 35.00 45,000 wave 30.00 Gov't announced 40,000 FY22 budget 25.00 20.00 MSCI proposes Pakistan records 35,000 Global market rally on to reclassify 15.00 5th consective US elections results & Pakistan into current account Inflations falls Pifzer vaccine results FM to 5.7% in MSCI added LUCK/TRG 10.00 30,000 announcement surplus Jan'21 in small/mid cap 5.00

25,000 -

Jul-20

Jan-21

Jun-21

Oct-20

Apr-21

Sep-20 Feb-21

Dec-20

Aug-20

Nov-20

Mar-21 May-21

Source: PSX, Foundation Research, June 2021

Fig 2: Despite negative return of 1.1% in June Fig 3: …market posted return of 37.6% in FY21 Rs Return US$return Rs Return US$return 20% 60%

40% 10% 20%

0% 0%

-20% -10%

-40%

Jul-20

Jan-21

Jun-21

Oct-20

Apr-21

Sep-20 Feb-21

Dec-20

Aug-20

Nov-20

Mar-21

FY12 FY15 FY16 FY20 FY13 FY14 FY17 FY18 FY19 FY21 May-21 Source: PSX, Foundation Research, June 2021 Source: PSX, Foundation Research, June 2021

Fig 4: Historic high monthly volumes of 911.7 witnessed in Jun'21 Fig 5: Taking overall volumes to historic high as well during FY21 1,050 600 950 850 500 750 400 650 10-years average 237mn 550 300 450 350 200 250 150 100 50

Jul-20

Jan-21

Jun-21 Jun-20

Oct-20

Apr-21

FY16 FY18 FY20 FY12 FY13 FY14 FY15 FY17 FY19 FY21

Sep-20 Feb-21

Dec-20

Aug-20

Nov-20

Mar-21 May-21

Source: NCCPL, Foundation Research, June 2021 Source: NCCPL, Foundation Research, June 2021

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Pakistan Strategy July 1, 2021

Fig 6 : ADTO improved by 10% on MoM to Rs23.5 bn Fig 7: taking overall ATDO to 13 years high

US$ (PkR bn) (US$ mn) PkR 160 Rs bn (LHS) US$ mn (RHS) 25.0 190 32 140 170 27 20.0 150 120 130 22 100 15.0 110 17 80 90 10.0 70 12 60 50 40 7 5.0 30 20 10 2

0 -

Jul-20

Jan-21

Jun-21

Oct-20

Apr-21

Sep-20 Feb-21

Dec-20

Aug-20

Nov-20

Mar-21

May-21

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 Source: NCCPL, Foundation Research, June 2021 Source: NCCPL, Foundation Research, June 2021

Fig 8 : FIIs remains on the selling for sixth cosecutive year Fig 9 : Insurance sold the most during Jun'21

400 FY20 FY21 60 May-21 Jun-21 300 40 200

100 20 0 0 (100)

(200) (20) (300) (40) (400)

(500) (60)

Ins.

FIPI

Ins.

Ind.

FIPI

Ind.

Banks

Comp.

Others

Brokers

M. Fund M. Fund

Source: NCCPL, Foundation Research, June 2021 Source: NCCPL, Foundation Research, June 2021

Fig 10 : Goods import rise to FY18 levels (US$ mn) Fig 11 : … as Real Interest Rates already in negative territory RIR CPI Interest Rate 6,000 Imports of Goods FOB 17% 5,500

5,000 12% 4,500 4,000 7% 3,500 3,000 2% 2,500 2,000

-3%

Jun-19 Jun-20 Jun-18

Sep-18 Sep-19 Sep-20

Dec-18 Dec-19 Dec-20

Mar-21 Mar-18 Mar-19 Mar-20

FY06 FY07 FY08 FY13 FY14 FY19 FY20 FY21 FY03 FY04 FY05 FY09 FY10 FY11 FY12 FY15 FY16 FY17 FY18

Source: NCCPL, Foundation Research, June 2021 Source: NCCPL, Foundation Research, June 2021

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Pakistan Strategy July 1, 2021

Fig 12: KSE-100 among worst performers… (MTD %) Fig 13: as FII trimmed their stake by US$32 mn

Taiwan India Philippines Indonesia Korea Sri Lanka Vietnam Pakistan Indonesia Philippines India Vietnam Hong Kong Malaysia Singapore Thailand China S. Korea Pakistan Japan Malaysia Taiwan

Thailand

500

(500)

1.0% 2.0% 0.0% 3.0%

1,000 1,500 2,000

-4.0% -3.0% -5.0% -2.0% -1.0%

(1,000) (2,000) (1,500) Source: Bloomberg, Foundation Research, June 2021 Source: Bloomberg, Foundation Research, June 2021

Fig 14: KSE-100 index ranked 4th in FY21 Fig 15: … despite FIIs outflows

Korea India Taiwan Japan India Sri Lanka Pakistan Pakistan China Indonesia Singapore Vietnam Indonesia Philippines Hong Kong Malaysia Thailand Thailand Philippines Taiwan Malaysia S. Korea

Vietnam 0

20,000 40,000 10,000 30,000

(10,000) (20,000)

20% 40% 60% 80%

-40% -20% Source: Bloomberg, Foundation Research, June 2021 Source: Bloomberg, Foundation Research, June 2021

Fig 16: KSE 100 provides impressive growth at low PE Fig 17: … Cheaper on PB as well 21 3.2 3.0 18 2.8 India PER (x) 2021 (x)PER India

Indonesia Philippines 2021 (x)P/BV Taiwan 2.6 Regional Avg. Thailand 15 2.4 Korea 2.2 Indonesia Vietnam Vietnam 2.0 Malaysia Thailand 12 China Singapore 1.8 1.6 9 Hong Kong Regional Avg. Pakistan 1.4 1.2 Philippines China 6 1.0 Hong Kong Pakistan 0.8 Singapore Korea 3 0.6 3 6 9 12 15 18 21 24 27 30 6 8 10 12 14 16 18 EPS Growth (%) 2021 ROE (%) 2021 Source: Bloomberg, Foundation Research, June 2021 Source: Bloomberg, Foundation Research, June 2021

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Pakistan Strategy July 1, 2021

Fig 18: Rupee weakens on MoM along with regional peers Fig 19: …PKR amongst best performing in FY21

Hong Kong China Malaysia South Korea Taiwan Taiwan South Korea Pakistan China India Indonesia Malaysia Singapore Philippines Philippines Singapore India Indonesia Thailand Hong Kong Pakistan Thailand

-3.0% -2.0% -1.0% 0.0% -5% 0% 5% 10% 15% Source: Bloomberg, Foundation Research, June 2021 Source: Bloomberg, Foundation Research, June 2021

Fig 20: Across the board decline during FY20 Fig 21: Across the board increase during FY21 40% 180% 30% 160% 20% 140% 10% 120% 0% 100% -10% 80% -20% 60% -30% 40% -40% 20% -50% 0% -60% -20%

-70% -40%

E&P E&P

Food Food

OMC OMC

Banks Banks

Power Power

Cement Cement

Tobacco Tobacco

Fertilizer Fertilizer

Chemical Chemical

All Others All Others

Technology Technology

Automobile Automobile

Engineering Engineering

Textile Com. Textile Com. Source: PSX, Foundation Research, June 2021 Source: PSX, Foundation Research, June 2021

Fig 22: Textile and Food outperformed during Jun'21 Fig 23: Despite Foreign outflow

12% MoM % Return 40 May-21 Jun-21 10% 30 8% 20 10 6% 0 4% (10) 2% (20) 0% (30) (40) -2% (50)

-4% (60)

E&P

Food

OMC

E&P

Banks

Food

Banks

OMCs

Power

Textile

Others

Cement

Fertilizer

All Others

Technology

Technology Textile Com. Source: PSX, Foundation Research, June 2021 Source: PSX, Foundation Research, June 2021

5 Foundation Securities (Pvt) Limited

Pakistan Strategy July 1, 2021

Table 1: Right issue in FY21 S. # Symbol Securities Issue Date Right Issue 1 ALAC Askari Life Ass 26-Aug-20 36% 2 HINO Hinopak Motor 11-Sep-20 100% 3 SPEL Synthetic Prod 18-Sep-20 5% 4 BRR B.R.R.Guardian 2-Oct-20 10% 5 FFBL Fauji Fert Bin 6-Oct-20 38% 6 MFFL MithchellsFruit 26-Oct-20 191% 7 GGL Ghani Glo Hol 27-Oct-20 66% 8 SEARL The Searle Co. 28-Oct-20 13% 9 DKL Drekkar KingsXR 2-Nov-20 150% 10 SHEL Shell Pakistan 9-Dec-20 100% 11 ASC Al-Shaheer Corp 9-Dec-20 50% 12 GLPL Gillette Pak 17-Dec-20 66% 13 GGGL GhaniGlobalGlass 21-Dec-20 140% 14 LOADS Loads Limited 24-Dec-20 66% 15 GHGL Ghani Glass Ltd 7-Jan-21 55% 16 MUGHAL Mughal Iron 19-Feb-21 16% 17 SNAI Sana Ind 24-Feb-21 28% 18 FLYNG Flying Cement 10-Mar-21 114% 19 JSCL Jah.Sidd. Co. 12-Mar-21 20% 20 WAVES Waves Singer 19-Mar-21 50% 21 CRTM Crescent Tex. 29-Apr-21 25% 22 DNCC Dandot CementXR 4-Jun-21 162% 23 MACTER Macter Int. Ltd 22-Jun-21 17% Source: PSX, Foundation Research, Jun 2021

Table 2: Bonus shares in FY21 S. # Symbol Securities Issue Date % of Bonus 1 MEBL Meezan Bank 18-Aug-20 10% 2 COLG Colgate Palm 25-Aug-20 10% 3 CEPB Century Paper 26-Aug-20 20% 4 DOL Descon Oxychem 3-Sep-20 16% 5 NATF National Foods 8-Sep-20 25% 6 SURC Suraj Cotton 15-Sep-20 10% 7 BIFO Biafo Ind. 22-Sep-20 10% 8 FEROZ Ferozsons (Lab) 24-Sep-20 20% 9 SAZEW Sazgar Eng 25-Sep-20 30% 10 OLPL Orix Leasing 29-Sep-20 500% 11 JKSM J.K.Spinning 29-Sep-20 40% 12 FUDLM U.D.L.Modaraba 29-Sep-20 10% 13 PREMA At-Tahur Ltd. 30-Sep-20 10% 14 ASHT Ashfaq Textile 5-Oct-20 10% 15 EWIC East West Ins. 25-Nov-20 15% 16 PAKD Pak Datacom 7-Dec-20 10% 17 GGL Ghani Glo Hol 28-Dec-20 10% 18 MRNS Mehran SugarXD 30-Dec-20 5% 19 NEXT Next Capital 15-Feb-21 10% 20 TGL Tariq Glass Ind. 18-Feb-21 25% 21 MTL Millat Tractors 19-Feb-21 13% 22 BNL Bunnys Limited 26-Feb-21 30% 23 PAKOXY Pak Oxygen Ltd. 1-Mar-21 20% 24 SUTM Sunrays Textile 1-Mar-21 200% 25 IDYM Indus Dyeing 1-Mar-21 200% 26 BOK Bank Of Khyber 2-Mar-21 5% 27 SYS Systems Limited 4-Mar-21 10% 28 HINOON Highnoon (Lab) 25-Mar-21 10% 29 RICL Reliance Ins. 25-Mar-21 8% 30 ASIC Asia Insurance 30-Mar-21 10% 31 SRVI Service Ind.Ltd 31-Mar-21 100% 32 AVN Avanceon Ltd 21-Apr-21 20% 33 GATM Gul AhmedXB 28-Apr-21 20% Source: PSX, Foundation Research, Jun 2021 6 Foundation Securities (Pvt) Limited

Pakistan Strategy July 1, 2021

Table 3:Trading activity summary during the month (US$ mn) Gross Activity FIPI M. Fund Banks Brokers Ind. Ins. Comp. Others Buy 241.60 252.75 104.96 691.31 3,156.98 75.46 209.96 45.39 Sell (273.47) (245.98) (99.29) (702.48) (3,106.53) (122.32) (191.20) (37.14) Net (31.86) 6.76 5.66 (11.17) 50.45 (46.86) 18.77 8.25 Sector wise position Banks (11.65) (6.73) 2.23 (0.65) (1.21) (0.93) 7.76 11.18 E&P (5.06) 5.08 6.10 1.23 10.74 (28.27) 7.41 2.78 Fertilizer 6.20 (3.15) 5.20 (1.78) 8.57 (13.54) 0.77 (2.27) Power (0.03) (2.42) 0.05 0.30 6.33 (1.08) (2.67) (0.47) Cement (3.80) (1.48) (5.23) (1.19) 9.77 0.66 (1.45) 2.71 Food (3.26) 0.39 3.95 (1.57) 5.78 (8.11) 6.03 (3.20) OMCs (1.30) 2.56 (1.72) (0.77) 3.03 0.28 (1.91) (0.16) Textile (3.52) 0.46 2.51 (2.56) 4.31 (1.28) 0.25 (0.17) Technology 0.28 2.95 (0.51) 2.00 4.27 (2.68) (5.77) (0.55) Others (9.72) 9.11 (6.92) (6.16) (1.14) 8.09 8.34 (1.59) Total (31.86) 6.76 5.66 (11.17) 50.45 (46.86) 18.77 8.25 Source: NCCPL, Foundation Research, June 2021

Table 4:Trading activity summary during FY21 (US$ mn) Gross Activity FIPI M. Fund Banks Brokers Ind. Ins. Comp. Others Buy 2,720.71 1,939.51 942.77 6,878.37 29,906.57 774.55 1,935.35 343.96 Sell (3,115.95) (1,911.69) (1,043.77) (6,911.61) (29,574.51) (781.28) (1,793.83) (309.15) Net (395.24) 27.82 (101.00) (33.24) 332.06 (6.73) 141.52 34.82 Sector wise position Banks (117.00) 3.58 8.94 (6.97) 71.91 (59.71) 48.16 51.10 E&P (91.54) (3.38) 5.18 7.02 58.97 1.19 19.03 3.54 Fertilizer (1.71) 28.49 (10.05) (1.62) 10.27 (7.86) 5.51 (23.03) Power (21.12) (29.19) (6.78) (6.37) 93.98 (11.71) (21.26) 2.46 Cement (10.55) (9.17) (41.49) 2.69 44.38 4.64 2.88 6.61 Food (14.59) (5.17) (4.13) 2.48 31.28 9.98 (9.88) (9.98) OMCs (8.80) (2.57) (6.13) 6.19 20.43 2.67 (11.31) (0.49) Textile 6.39 (10.41) (8.76) (13.98) 3.52 14.60 6.34 2.29 Technology 0.66 12.73 (10.50) 0.10 8.19 (16.19) 6.70 (1.70) Others (136.99) 42.93 (27.28) (22.78) (10.88) 55.64 95.34 4.03 Total (395.24) 27.82 (101.00) (33.24) 332.06 (6.73) 141.52 34.82 Source: NCCPL, Foundation Research, June 2021

Fig 24: KSE-100 best and worst performer stocks during FY21

505%

, ,

TRG

388%

331%

, ,

NRL

UNITY

238%

, ,

187%

, ,

132%

163%

, ,

120%

SYS

, ,

134%

, ,

125%

, ,

ATRL

IBFL

INIL

KAPCO

PSX

PSMC

11%

, ,

34%

, ,

PSEL

PAKT

SHFA

SNGP

OGDC

DAWH

GLAXO

JDWS

NESTLE HASCOL

Source: PSX, Foundation Research, June 2021

7 Foundation Securities (Pvt) Limited

Pakistan Strategy July 1, 2021

Abbreviations

ADTO Avg. Daily Turnover volume Bn Billion CY Calendar Year EU European Union FIIs Foreign Institutional Investors FED US Federal Reserves

GDPg Gross domestic product growth ITFC International Islamic Trade Finance Corporation MoM Month on Month Mn million

KSE100 Karachi Stock Exchange 100

PSX Pakistan Stock Exchange PE Price to Earnings PBV Price to Book

ROE Return on Equity

DY Dividend Yield NT Near Term YoY Year on Year

YTD Year to Date

UW Under weight OW Over weight MW Market weight

8 Foundation Securities (Pvt) Limited

Pakistan Strategy July 1, 2021

Important disclosures:

Disclaimer: This report has been prepared by FSL. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments. FSL may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis before such material is disseminated to its customers. Not all customers will receive the material at the same time. FSL, their respective directors, officers, representatives, employees, related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise, either as principal or agent. FSL may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. FSL may have recently underwritten the securities of an issuer mentioned herein. This document may not be reproduced, distributed or published for any purposes.

Research Dissemination Policy: Foundation Securities (Pvt.) Ltd. endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely manner through either physical or electronic distribution such as mail, fax and/or email. Nevertheless, not all clients may receive the material at the same time.

Target price risk disclosures: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures.

Analyst certification: The views expressed in this research accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Foundation Securities and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.

Recommendations definitions

If Expected return >+10% Outperform. Expected return from -10% to +10% Neutral. Expected return <-10% Underperform.

9 Foundation Securities (Pvt) Limited