Pakistan Capital Market - Current Challenges (Final)

8/13/2019 Pakistan Capital Market - Current Challenges (Final)

1/43

1

Lahore Stock Exchange (LSELahore Stock Exchange (LSE))

Continuous Professional DevelopmentContinuous Professional Development

December 2011

Pakistans Capital Markets:Pakistans Capital Markets:Current ChallengesCurrent Challenges

Presentation by : Muhammad Farid Alam, FCA

Chief Executive Officer

AKD Securities Limited


2/43

2

Contents

AKD Securities Limited

Economy & Capital Markets

Equity Market of Pakistan

Debt Market of Pakistan

Challenges for Capital Markets

The Way Forward


3/43

3

AKD Securities LimitedAKD Securities Limited


4/43

4

Value Proposition

The leading stock brokerage in Pakistan, accounting for 6% of average daily volumetraded on the Karachi Stock Exchange

Ranked among the top 5 brokerage houses

Key broker for foreign institutional investors with over US$1,300 million turnover in

FY06-07 (25% of the total estimates FII turnover)

Member of the Pakistan Mercantile Exchange Limited (PMEX)

Over 100 domestic institutional and high net worth clients handled by institutional deskcomprising of:

Commercial, Investment & Islamic BanksDevelopment Financial InstitutionsMutual Funds & Investment CompaniesCorporate Provident & Pension FundsPublic & Private Sector Corporations


5/43

5

Recognition

AKD Securities Limited is a proud recipient of The Best Equi t y Brokerage HouseAwardfor the years 2005-06and 200607, awarded by the CFA Association of Pakistan.

The globally recognized business journal Asia Moneyconducted a survey, focused on thequality of brokerage firms, with renowned international portfolio fund managers and rankedAKD Securities Limited as the 2nd Best Local Brokerage, 2nd Best Overall CountryResearch, and 3rd Best Overall Sales Services.


6/43

6

First brokerage firm to launch Online Stock Trading Service in 2002, and now a leadingfranchise in this space

Largest customer base with 7,000 registered clients out of a total market size ofapproximately 19,000 and contribution significantly to overall broking revenues

Marketing joint-venture & co-branding with Standard Chartered Bank for their online PriorityBanking Clientele which allows immediate funds transfer facility to AKDs broking accountwhile enjoying the banking facilities of SCB

Only online trading service provider with fully dedicated customer call-centre support havingtrained staff

Dedicated research portal enabling online customers to be fully informed about market &corporate developments, with access to reports on par with institutional investors

AKD Trade


7/43

7

Investment Banking

Successful track record of completinghuge capital market transactions

Extensive understanding and experienceof structuring and executing complexdebt & equity transactions

Financial strength to commit resources

for large underwriting and participation

In-depth knowledge of investor demand& appetite

Widespread distribution capabilities to adiversified client network throughexperienced distribution team

Close working relationship andcredibility with key regulatory agencies

Experienced senior resources to ensureswift completion of transactions

We believe that with our in-depth understanding ofPakistans capital markets, qualified management, andprior experience, we are best positioned to provideour clients the level of services required for makingevery transaction a resounding success.


8/43

8

Investment Banking

AKDS has assembled a core team of expert professionals with a high level of integrity, financialacumen and industry experience. Driven by young and skilled professionals, the team has initiatedand successfully executed transactions unique in structure and size.

The team has been involved in numerous Initial Public Offerings, Acquisitions, providing riskcapital in underwritings, market-making, various TFC issuances & Asset-back Securitization aswell as leading Privatization deals in the country.

AKDS was selected as advisor for IPO of UBL by the Government of Pakistan. It was the BUYSIDEadvisor for NRL privatization which was acquired by the Attock Oil Group.

AKDS was also mandated as sell-side advisor to Continental Biscuits Limited for the strategic saleof stake to The Danone Group, France.

The consortium of AKDS, Morgan Stanley and Detusche was mandated as the consultants to theGDR of National Bank of Pakistan (on hold)

As Financial Advisors, AKDS has successfully consummated the acquisition of a listed commercialbank by a well known Saudi bank and have acted as Joint Financial Advisors for the 100% RightsIssue of The Bank of Khyber of up to PkR 2,552mn.


9/43

9

Economy & CapitalEconomy & CapitalMarketsMarkets


10/43

10

Phase Economy Fiscal Policy Short-TermRates

Asset Class

Initial Recovery Inflation still declining Stimulatory Low / Declining

Cyclical shares,commodities and otherriskier assets

Early Upswing Healthy economic growth

Inflation remains low Moving Up Shares and real estate

Late Upswing Inflation gradually rises Restrictive Rising Bonds, interest rate

sensitive shares

Slowdown Inflation continues toaccelerate Peaking Bonds, interest ratesensitive shares

Recession

Inventory correctionbegins Inflation peaks Production declines

DecliningShares (late in cycle),Commodities (late incycle)

Phases of an Economy


11/43

11

Falling Interest Rates Falling Inflation

Expansionary Fiscal Policy Higher Corporate Earnings

Initial Recovery

The Economy of Pakistan


12/43

12

Note: FY12B is GoP estimates. FY12AKD is AKD Research Estimates

FY09A FY10A FY11A FY12B FY12AKD

Real GDP growth (%) 1.7 3.8 2.4 4.2 3.50-3.75

Agri growth (%) 4 0.6 1.2 3.4 2.5

Manufacturing growth (%) -3.6 5.5 3.0 3.7 3.0

Services growth (%) 1.7 2.9 4.1 5.1 4.5Federal budget deficit % of GDP 5.3 6.3 5.7 4.0 5.75

Tax to GDP (%) 9.5 10.1 10 10.3 10.3

Average CPI Inflation Rate (%) 20.8 11.7 14.1 12.0 12.1

Foreign direct investments (US$bn) 3.7 2.2 1.5 2.5 1.5

Exports as % of GDP 11.8 11.1 12.7 12.7 12.5

Imports as % of GDP 19.6 17.6 13.6 17.8 18.0

Current Account as % of GDP -5.7 -1.7 0.5 -0.6 -1.03

Inward Remittances (US$bn) 7.8 8.9 11.2 12.2 12.5

Forex reserves (US$bn) 12.4 16.8 17.5 18.0 16.0

Exchange rate (PkR/US$) 66 84 87 88 91.5

External debt % of GDP 29 28 31 32 30

Actual Budgeted Forecasted

The Economy of Pakistan - Snapshot


13/43

13

15

% FY20106.0%

5.4% Emerging MarketsDeveloped Markets

5.0%

4.0%

3.0%

2.0%1.7%

1.0%

0.0%Emerging Markets Developed Markets

Source: EIU; April 2010

Economic Growth

Growth is expected to come out of the EmergingMarkets because all variables i.e. consumption,savings etc. are at the lower side.

On the other hand the same variables havereached saturation amongst the DevelopedMarkets.


14/43

14

21

Debt % of GDP

90

80

70

60

50

40

29 DEC 2000 31 DEC 2009

30

20'00

Source: Factset; EIU; April 2010

'01 '02 '03 '04 '05 '06 '07 '08 '09

- Developed Markets : G7. Emerging Markets : 87 non-OECD Countries

- Total domestic, external and IMF government debt, as a % of nominal GDP

- Usually but not exclusively central government

Debt % of GDP


15/43

15

Over the past decade total marketcapitalizations input in GDP increasedphenomenally from 8% in FY01 and kepton growing with its peak during thegolden years of 2006 and 2007

GDP Growth

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY1

1F

FY1

2F

Manufacturing Agri Services GDP Growth

Capital Market Performance

KSE 100 Index

1,273 2,701

4,4726,218

9,55710,041

14,076

5,865

9,387

12,022

11,557

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Dec01

Dec02

Dec03

Dec04

Dec05

Dec06

Dec07

Dec08

Dec09

Dec10

01-Dec-11

Index

CAGR CY01-CY11 = 25%

KSE Performance (2001 2011)

8% 10%

16%

25%

32%

37%

46%

37%

17% 18% 18.5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

Market Cap. / GDP


16/43

16

Role of Capital Markets

Mobilization of long-term resources (capital raising avenue forcorporates) & investment avenue of investors including retail

Intermediation Function Distribution of these resources &

investments in various viable projects

Mechanism of entry and exit in a quick and transparent manner


17/43

17

Advantages of Capital Markets

Advantages of capital markets to:

Government -

Sponsors

Society - Investors -

Regulators -


18/43

18

Equity Market ofEquity Market ofPakistanPakistan


19/43

19

KSE-100 Index at a Glance

KSE 100 Index

1,273 2,701

4,4726,218

9,55710,041

14,076

5,865

9,387

12,022

11,557

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Dec0

1

Dec0

2

Dec0

3

Dec0

4

Dec0

5

Dec0

6

Dec0

7

Dec0

8

Dec0

9

Dec1

0

01-Dec-1

1

Index

CAGR CY01-CY11 = 25%

During the 90s marketmovement was sidewaysranging between the levelsof 1,000 to 2,000

The Decade That Was:The first decade of 21st

century was eventful andsaw de-regulation openingup the markets,consolidation, privatization,divestments by GoP worthUSD 6.7bnthat provided forcurrency stabilization (MCB GDR) and later by the curseddomestic and internationalfinancial crisis


20/43

20

KSE Market Dynamics Volatility is an Opportunity

The KSE-100 Index has posted a 10 year return CAGR of 25% however volatility has remained highhistorically. We view this as an opportunity to maximize returns. In view of expected spells ofvolatility following the sell-off in global markets, we believe proactive management can provide forabove average market returns.

KSE 100 Index CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11*

High 1,550 2,701 4,604 6,218 10,303 12,274 14,815 15,676 9,846 12,031 12,682

Low 1,075 1,273 2,359 4,472 6,218 8,767 10,041 5,865 4,815 9,230 10,842

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*

CY % -16% 112% 66% 39% 54% 5% 40% -58% 60% 28% -4%

*CYTD

Difference between KSE-100 High & Low

44%

112%

95%

39%

66%

40%48%

167%

104%

30%17%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*

Market melt down 2005

and 2008


21/43

21

PER vs. EPS Growth (%) ROE (%) vs. PBVS (x)

2012 Dividend Yield (%)

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

6 9 12 15 18 21 24

EPS Growth (%) 2012

PER

(x)2012

Singapore

Hong Kong

Thailand

Malaysia

China

Philippines IndiaIndonesia

Regional Avg.

Pakistan 1.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

2.60

10 12 14 16 18 20 22

ROE (%) 2012

P/BV(x)2012

Singapore Hong Kong

Thailand

Malaysia

China

Philippines

India

Indonesia

Re ional Av .

Pakistan

8.59

4.16 4.14 4.03 3.633.22 3.12

2.56 2.301.85

-

1.0

2.0

3.0

4.05.0

6.0

7.0

8.0

9.0

10.0

Pakistan

Thailand

Hong

Kong

Malaysia

Singapore

Regional

Avg.

Philippines

Indonesia

China

India

Pakistan Market Valuation vs Regional Markets


22/43

22

Features of Equity Markets in Pakistan

Exposure to Corporate Growth

Provides opportunity with some of Pakistans best corporate stories

Inflation Protection

Sale price will increase according to inflation if company will be able to pass through inflation

Liquidity

Ease of entry & exit with market mechanism ensuring availability of buyers and sellers

Higher Returns

The KSE-100 Index has on averaged returned 25% p.a. since Dec01

Ease of Trade

Online trading

Companies become SICKbut Sponsors get HEALTHIER!!!


23/43

23

KSE-100 can reach 13,750points by Jun12 based ontarget price mapping

In absence of any catastrophicevent, downside limited by:

High dividend yield(2012F: 8.6%)

Corporate earningsresilience

Largely cash based market

Market likely to focus on:

Political situation & US relations World economy & stock markets Foreign funding release Central banks monetary policy Macroeconomic Performance

Flags for 2011-12

Key drivers to include:

Corporate results & Earnings outlook Interest rate / liquidity trajectory Release of U.S. / multilateral funding Actual vs. FY12 Budget targets

Equity Market regulations

Check Points

Weather related agriculture sector failureCommodity price shockFiscal indiscipline

Major terrorism event Disruptive political change

KEY MACRO RISKS

Valuation expansion if politicalrisk reduces, economic growthaccelerates while monetaryeasing continues

KSE-100 Index can reach14,250 points by Jun12 if

monetary easing sustains

Is it Bulls or Bears in Pakistans Equity Market?


24/43

24

Is it Bulls or Bears in Pakistans Equity Market?


25/43

25

Debt Market of PakistanDebt Market of Pakistan


26/43

26

Features

Largest market size PkR 7trn M2 + NSS (PkR 6.6trn + PkR 1.7trn)

compared to PkR 600bln size of equity marketfree-float which is less than 8% of fixed income

Certain and regular cash flows with lowervolatility in comparison to equities

Two classes of investors: growing segment ofinvestors with Islamic segment & normal fixedincome seekers

Opportunities in Pakistani Fixed Income

Medium to Long term investment: National Saving Certificates Pakistan Investment Bonds

Sukuks Term Finance Certificates

Short term investment: T- Bills Term Deposits in Banks Investor Portfolio Security Account

0

2

4

6

8

1012

14

16

18

Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11

Pakistan Investment Bond Yield

Pakistan InvestmentBond Yield

Fixed Income Market


27/43

27

Source:SBP

0

2

4

6

8

10

12

14

Pakistan

USA

UK

ECB

Japan

Australia

China

India

SouthKorea

Malaysia

Indonesia

Thailand

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Policy Rate (%) LHS YoY Inflation (%)

Country Policy Rate (%) YoY Inflation (%)

Pakistan 12 10.90

USA 0-0.25 3.50

UK 0.5 5.00

ECB 1.25 3.00

Japan 0-0.10 -0.20

Australia 4.50 3.50

China 6.56 5.50

India 8.50 10.10

South Korea 3.25 3.90

Malaysia 3.00 3.40

Indonesia 6.00 4.40

Thailand 3.50 4.20

Fixed Income Market

The classical theory of positive RIR is now a myth!


28/43

28

Outlook of Fixed Income Securities

Declining interest rates provide opportunities for higher returnsWith projection of decreasing interest rate, medium term fixed

income instruments look attractive

Risks in Fixed Income Securities

Interest Rate RiskReinvestment RiskCredit RiskEvent Risk

Inflation Risk

0

2

4

6

8

10

12

14

16

18

8/20/2008 8/20/2009 8/20/2010 8/20/2011



Fixed Income Market


29/43

29

Challenges for CapitalChallenges for CapitalMarketsMarkets


30/43

30

Challenges for Capital Markets in Pakistan

Capi t a l market s move wi t h overa l l economy - rat her mor e sensi t ive Lack of confidence amongst sponsors and investors most wiped off

CGT/documentation and high handedness by tax authorities

Poor law & order conditions

Circular debt and energy crisis deteriorating company profitability, cash flow and balance

sheets Inconsistent policy response and reform implementation

Reluctance by sponsors to take viable companies to the stock market with limited response riskand lack of regulatory incentive

A required concerted effort by members to revive markets lowering mistrust and rebuildingrelationships with regulators and stakeholders

People of accomplishment rarely sat back and let things happen to them.

They went out and happened to things.

- Leonardo Da Vinci


31/43

31

Challenges for Capital Markets in Pakistan

Market participants have been unable to move past the wait and see approach

Higher interest rate higher return for pensioners and other fixed income investors with noor lower risk

Over/Under-regulation has decoupled the joint mandate of regulation and marketdevelopment

Yet to start-off with Over-The-Counter (OTC) Market

Lack of support by Government of Pakistan in providing enabling environment

Shortage of financial products in comparison to developed markets

Keeping the foreign investor engaged in prevailing tougher economic conditions

Political and social instability has massively damaged and overall confidence level in theeconomy

Can T rad i ng and Insi der T rad i ng be separa t ed?

OverallEffect=LowestEverVolumes


32/43

32

South Asia Others3%Trading

2%

Equities

Broking

95%

Need for Re-defining Business Model

UK

Treasury

25%

Interest

Rate

Derivative

20%

Fixed

Income

33%

Others

11%Informatio

n Sales

3%

EquitiesBroking

8%

Comparison of Products ( South Asia vs UK)


33/43

33

Pathway to Glory Phases Towards Listing

It is vital for local companies to get listed in the equitymarkets of our country not only for the enhancementand growth of the markets but also to gain access to amore convenient & robust form of capital raising

Year KSE No. of IPOs

Amount Raised

(USD mn)

2007 14,076 10 85

2008 6,037 9 66

2009 9,387 3 17

2010 12,022 6 62

2011 11,762 4 35

32 USD 265mn

Realization andefforts by allstakeholders to givedepth to the market


34/43

34

KSE Value & Volume

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

-

100.00

200.00

300.00

400.00

500.00

600.00

Mar-07

Jun-07

Sep-07

Dec-07

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Feb-10

May-10

Aug-10

Nov-10

Feb-11

May-11

Aug-11

Dec-11

Volume (mn LHS) KSE-100 Index (RHS)

KSE-100 Index + Volume


35/43

35

If Volumes Dont Improve


36/43

36

Corporate Profitability Is it intact?

ACCOUNTING PROFITS REAL PROFITS

Numerous profit generating corporateentities in Pakistan are facing liquiditydry-outs recently, mainly due to theenergy crisis and mounting circular debt

Growth in Earnings is essential but Dividendsmust increase in the same proportion as well


37/43

37

Can Capital Markets Perform Independent of the Economy?

Punjab

Governorassassinat

MENA crisis

escalates

RaymondDavis

issueaffects

Pak-USties

PML-Nparts ways

with PPPin Punjab

MTSlaunched

Additio nal

revenuemeasures

announcedafter IMF

talks

Securities

Lendingand

BorrowingProductlaunched

US says Pakistan notdoing enough tocombat militancy

US forces kill

Osama BinLaden in

Abbottabad

Moodys

givesassurance

on

Pakistanssovereigndebt

FY12 Budget

announced

MQM parts

ways fromcoalition

Selloff inline

with globalequities

DRreduced

by 50bps

Deterioratinglaw & order

in Khi

CPI tumblesdue torebasing

Globalrecession

concerns +US pressureon Pakistan

10,500

11,000

11,500

12,000

12,500

13,000

Jan-11 e -11 pr-11 May-11 Jun-11 u -11 S p-11 Nov-11

US announcesOperation Twist

on globalrecession fears

DR cut by

150bps to12%

FSV benefit

enhanced

Circular debtexposure

converted toGoP se curities

Pak-IMF

Article IVtalks

FBR to examine

source ofinvestment incapital mkts

NATOattacks and

memoscandle


38/43

38

Friendly Opposition

Political parties lackfinancial and economic

expertise

PTI talks about revolution;Reality or Over-confidence?

Challenging Political Environment

I feel that the failure of Common-Wealth Games and success of ChinaOlympics shows that Democracy may not be the solution to all the ills!


39/43

39

Lessons Learned

Imposition of floor was a disastrous decision

Failure of regulator to save the Non-Banking Financial Institutions (NBFIs)

Monopolistic scenario in the banking sector Capital hoarding Big 5 only protecting their RoE

Enjoying highest banking spreads A few industries were over-leveraged due to which they had to face the music

Success stories like Engro and Nishat need to be respected rather than envied

Over-regulated equity market creates no value

Interfering with market mechanism BACKFIRES!!!

The brokerage community in Pakistan was content withplain-vanilla trading services dealing primarily in theReady Market which led to overdependence on marketvolumes and vulnerability in the earnings stream.


40/43

40

The Way Forward???The Way Forward???


41/43

41

It has been a tough period for all financial markets since the economic meltdownbegan in 2008, but there is always a new beginning

Integration

Demutualization

IPOs to keep the primary markets alive

De-regulation

New products

Tax structure

Investor awareness

The Way Forward!!!


42/43

42

Brokerage House (Member of LSE) Yearly Profit & Loss A/c

NEW OLDNo. of Employees 4 to 5 10 to 13

PKR PKR

Brokerage revenue 1,320,000 4,000,000

Operating Expenses:

Payroll 1,800,000 4,500,000Depreciation 49,500 148,500

Electricity 48,000 150,000

Rent 120,000 240,000

Other Expenses 240,000 480,000Audit & Certification Fee 50,000 150,000

2,307,500 5,668,500

Net Loss Per Annum* (987,500) (1,668,500)

*Excluding certain possible expenses


43/43

43

Thank You!!!Thank You!!!

Documents

Pakistan Capital Market - Current Challenges (Final)