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March 2017

China Pakistan Economic Corridor


Road to the future

Farhan Rizvi, CFA, Pakistan Strategist


Research Analyst, +65 6212 3036, farhan.rizvi@credit-suisse.com

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS,
LEGAL ENTITY DISCLOSURES, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do
business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest
that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
The Background
What is the China Pakistan Economic Corridor ?
The China Pakistan Economic Corridor (CPEC) CPEC investment mix
is a sub branch of Chinese President Xi Electricity
transmission
Jinping’s broader One Belt One Road (OBOR) Gwadar port
2%
7%
vision
Coal IPPs
41%
With a price tag of ~US$55 bn, CPEC is an Rail networks
18%
ambitious venture undertaken to provide
economic uplift to Pakistan and Western China
The corridor is expected to connect Pakistan’s
Gwadar Port with China’s Xinjiang province Road networks
9%
through a network of roads and railways
Wind and solar
It shall provide the necessary infrastructure IPPs Coal mining
6%
4% Hydel projects
transformation to Pakistan and swift access for 13%
China to the Middle East and Central Asia

Source: Ministry of Planning Development and Reform 3


Source: Government of Pakistan, USAID, Wall Street Journal 4
Snapshot of Gwadar Port

Source: Gwadar Port Authority 5


China’s vision behind CPEC
CPEC is one of China’s largest overseas investment in a foreign country, equaling ~18% of
Pakistan’s GDP
It complements China’s broader OBOR vision by offering connectivity to Central Asia and the
Middle East via strategic access to the Gwadar port
More importantly, it provides China the crucial bridge to expand its economic and political
influence towards its western borders
Chinese comfort on CPEC stems from the historic all weather friendship between the two
countries and the strong military commitment on the Pakistani side

6
What is the expected financing structure ?
Financing for CPEC projects will be largely in the form of long-term loans from the Silk Road Fund,
AIIB, ICBC, CDB and Exim Bank some of which are expected to be on soft terms

Estimated financing mix for CPEC projects


Local financing
5% Equity
15%

Chinese
financing
80%

Source: Ministry of Planning Development and Reform, Credit Suisse estimates 7


Investments are skewed towards energy…
PROJECT NAME LOCATION SPONSORS CAPACITY (MW) FUEL TYPE EXPECTED COD CURRENT STATUS

CPEC-PROJECTS
Port Qasim Electric Company Port Qasim (near Karachi) Sinohydro Resources 1,320 Imported coal 1Q2018 Civil and mechanical works underway
and Al-Mirqaab (UAE)
Huaneng Shandong Ruyi Sahiwal (Punjab) Huaneng Shandong Rui Group 1,320 Imported coal 2Q2017 Civil works in progress

Engro Powergen Thar Thar (Sindh) China Machinery Engineering 660 Domestic Thar coal 2018-2019 Financial close achieved
Corporation & Engro Powergen and team mobilized

China Power Hub Generation Hub (Balochistan) China Power International and Hub 1,320 Imported coal 2019-2020 Ground breaking achieved
Company Power Company
Quaid-e-Azam Solar Power Bahawalpur (Punjab) Zonergy China/QA Solar Power 1,000 Solar 2018-2019 COD of first unit (100MW) achieved
Park Company Pakistan
Suki Kinari Hydro Power KPK Province China Gezhouba Group 870 Hydel 2020 Land acquisition in process
Karot Hydro Power Azad Kashmir & Northern China Three Gorges 720 Hydel 2020 Land acquisition in process
Punjab Corporation/Silk Road Fund
Sino-Sindh Resources Thar (Sindh) Sino-Sindh Resources 1,320 Domestic Thar coal 2019-2020 Financial close in 1H2017
Port Qasim Electric Company Port Qasim (near Karachi) Sinohydro Resources 1,320 Imported coal 1Q2018 Civil and mechanical works underway
and Al-Mirqaab (UAE)
TOTAL 8,530

Source: Ministry of Planning, Development and Reform 8


…with infrastructure being the other focus area
Est. Cost
Road Length (KM) Latest update Financing
(US$mn)
Work commenced in Sept 2016 – Chinese Govt concessionary
KKH Phase II (KKH Phase II (Thakot -Havelian Section) 118 1,305
Project completion Mar 2020 loan

Work commenced in 1Q16 - Project to be completed by Govt of Pakistan/


Peshawar-Karachi Motorway (Multan-Sukkur Section) 392 2,846
Jun-18 Local bank loan

Khuzdar-Basima Road N-30 (110 km) 110 NA Procedural formalities to be completed

Upgradation of D.I.Khan - Zhob, N-50 Phase-I (210 km) 210 NA Procedural formalities to be completed

KKH Thakot-Raikot N35 remaining portion (136 Km) 136 NA Procedural formalities to be completed

Rail Sector
Feasibility completed/
Expansion and reconstruction of existing Line ML-1 (Karachi to Peshawar) 1,872 8,172 Chinese Govt concession loan
Financing request submitted in Nov -16
Construction in progress
Orange Line Metro - Lahore 26 1,630 Exim Bank/Govt of Pak
- Targeted to be completed by 4Q19
Feasibility completed
Havelian Dry port (450 M. Twenty-Foot Equivalent Units) NA 40 Chinese Govt concession loan
Financing request submitted in Nov -16

Ports and Airport


Chinese government grant and
Development of Gwadar Port, Airport and nearby infrastructure NA 800 Financing arrangement in progress
concessionary loan

Source: Ministry of Planning, Development and Reform 9


CPEC Road network

Source: Ministry of Planning, Development and Reform 10


CPEC Railways network

Source: Ministry of Planning, Development and Reform 11


Multi-year economic dividend
Boost to energy availability
Current electricity supply deficit hovers at 5,000-7,000 MW or 20-30% of peak demand
CPEC is poised to bring online ~10,000 MW of fresh capacity implying a 50% increase to current
base with share of coal rising to 23% from negligible levels currently
China is also looking to construct a 600 mmcfd LNG import terminal in Gwadar along with requisite
pipeline infrastructure. This equates to 10% of Pakistan’s gas requirements
Demand/supply situation (MW) Demand/supply forecasts (MW)
30,000 40,000 Self-sufficiency
Average deficit of 5,000-7,000MW
25,000 35,000
30,000
20,000 25,000
15,000 20,000
10,000 15,000
10,000
5,000 5,000
0 0
FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E FY20E

Peak demand (MW) Supply capability (MW) Peak demand (MW) Supply capability (MW)

Source: NEPRA 13
Improving backdrop for manufacturing
Large-scale manufacturing sector accounts for 11% of Pakistan’s GDP and growth averaged at a
soft 3.4% over FY11-16
We see big room of improvement as better energy supplies lift manufacturing activity
Capacity expansions have been initiated in sectors like cements, autos and consumers
Large-scale manufacturing growth (%)
7.0%
6.0%
6.0% 5.5%
4.6% 5.0%
5.0% 4.5%
4.0% 3.3%
3.0%

2.0% 1.7%
1.1%
1.0%

0.0%
FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E

Source: Economic Survey of Pakistan, Credit Suisse estimates 14


M&A activity and greenfield projects are also picking
up pace
M&A activity has increased across sectors in the past 12 months
Chinese state owned companies are in the hunt for investment opportunities
We expect investment-to-GDP ratio to accelerate to 16.5% in FY17E and 18% in FY18E (from
15.2% currently) propelling GDP growth to 5.3% in FY17E and 5.8-6.0% in FY18E

Recent M&A activities/greenfield projects announced/underway Sector Amount (US$mn)


Royal Friesland Campina (RFC) has concluded purchase of a 51% stake in Engro Foods. Commitment to invest additional US$100mn over 5 years Dairy products 450
Consortium of Chinese investors have taken up 40% stake in PSX Pakistan Stock Exchange 85
State-owned Chinese entity looking to acquire electricity distribution company Electricity utilities 1,800

Renault will upgrade Ghandhara Nissan’s existing assembly line and commence manufacturing of Renault vehicles by 2018 Automobile manufacturers 100

Lucky Cement setting in collaboration with Kia will start car assembly Automobile manufacturers NA
Nishat Mills looking to start Hyundai vehicle assembly Automobile manufacturers NA
Cement expansions of 25mn tpa announced by existing players Cements 2,000
Turkish firm, Arcelik has acquired electronics manufacturer Dawlance Consumer electronics 243
Coca-Cola Beverages looking to raise capacity Beverages 200

Source: Credit Suisse research 15


Increasing FDI flows
China is the single largest contributor to FDI with ~40% share. This is largely flowing into the power
sector which has taken up 38%
We expect this trend to continue and increasing FDI should also alleviate recent pressures on the
external account and currency

FDI (US$bn)
2.7 2.5
2.4
2.1
1.7
1.8 1.6
1.5 1.3
1.5
1.2 0.9
0.8
0.9
0.6
0.3
-
FY11 FY12 FY13 FY14 FY15 FY16 FY17E

Source: SBP 16
Better trade connectivity
Pakistan’s trade-to-GDP ratio has been consistently slipping however upgrades to rail/road
infrastructure under the CPEC can boost connectivity and increase exports
The strategic location of Gwadar port also gives Pakistan the opportunity to become a regional trans-
shipment hub providing access to Europe, Central Asia and the Middle East
Pakistan trade to GDP (%) Pakistan exports with trading partners (US$bn)
35% 3.0 2.7
29% 29% 28% 2.5
30% 2.5 2.3
27%
24% 2.0 1.9
25% 22% 2.0 1.7
20% 1.5

15% 1.0

10% 0.5

5% 0.0
FY14 FY15 FY16
0%
FY11 FY12 FY13 FY14 FY15 FY16 China Middle East

Source: SBP 17
Progress update and challenges
Significant progress has been made so far
Infrastructure projects progressing at a rapid pace
 Priority projects such as Karachi–Lahore Motorway (KLM), Multan-Faisalabad (M-4), Ratodera-Gwadar (M-8)
and Sialkot-Lahore (M-11) motorways progressing well

Progress on energy projects has been slow…but ploughing along


 Government confident of adding 3,500-4,000 MW of power before elections even as some priority projects such
as Hubco’s coal IPP have faced delays

Commissioning of the Gwadar port last year was an important milestone


Rail based mass transit projects included
 With work on Orange Line Metro progressing fast, three similar projects in Karachi, Peshawar and Quetta
approved in principal

Source: MSCI 19
Support from military, a powerful signal
Pakistan’s military (largely believed to be the only permanent feature in domestic politics) is
firmly behind CPEC in both words and deeds
The statement of new Army Chief Bajwa in Dec only a few weeks after his
inauguration “The timely completion of CPEC will usher a new area of development in
Balochistan and Pakistan and Pakistan Army is committed to this objective” reflects
the army’s central role in ensuring its success.
The Army has also assigned a Special Security Division (SSD) with 9,000 composite
battalions and 6,000 civil armed forces troops to provide security to CPEC projects.

Source: Ministry of Planning Development and Reform, Express Tribune 20


However, a fair share of risks remain
Internal disputes on project priority amongst provinces
 Provincial governments of KPK and Punjab have contested on the proposed western route to Kashgar, China.

Security conditions
 Army has dedicated a Special Security Division with 15,000 troops to provide security to CPEC projects

Inadequate infrastructure and basic facilities


 Projects in distant locations such as Thar require substantial investment in road network

Legal issues on coal transportation, environmental impact and transparency


 There is a risk of legal challenges with regards to the environmental impact of coal extraction and transportation.

Resettlement and land procurement delays for hydro projects


 Two hydro power projects, Karot (720 MW) and Suki Kinari (870 MW) can face delays if land procurement and
resettlement is not handed properly
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How to gain exposure ?
Habib Bank Limited – Banking giant with a
differentiation
Pakistan’s premier franchise, in our view,
with fastest growth in current accounts and
fee income over the past five years
It is most leveraged to growth opportunities
under CPEC
Fee income remains a key differentiator well
ahead of peers
Margins are likely to stabilise in 2017 led by
uptick in policy rates in 2H17

23
United Bank Limited – On a sound footing
A solid franchise with the history of being one
of the most innovative amongst top tier banks
Acceleration in credit offtake driven by large
syndicate financing for infrastructure and
energy projects led by CPEC a key catalyst
Margins to stabilise in 2017 due to rising rates
in 2H17
Earnings growth to recover in 2017 to 12%
(2016E: 6%) with a three-year CAGR of 12%

24
DG Khan Cement – Well positioned for growth
Domestic demand growth momentum to
support revenue growth
Margins to remain robust despite higher energy
prices due to higher mix of domestic offtake
Expansions in South and North will double
capacity over next three years providing
significant long term growth

25
Lucky Cement – Diversification at its best
Domestic demand momentum is likely to be
driven by rising private construction and
infrastructure spending
Diversification cement expansion both
domestically and overseas should ensure
sustained long-term growth
Coal IPP and autos investment highlight
strategic growth vision with previous successes
such as ICI signifying execution strength

26
Engro Corporation – A diversified conglomerate
One of the most reputable conglomerates with
strong positioning in agri, foods & beverages
and energy businesses
A prime beneficiary of CPEC via its Thar coal
power projects with growth opportunities in
LNG as well
Deployment of excess cash from recent
divestment of stakes in Foods and Fertilizer
business remains the key questions

27
Hub Power Company – securing long-term growth
Hubco is constructing 2 x 660 MW imported
coal IPP with China Power International
Holdings (CPIH) with targeted COD of 4Q19
CPIH holds 51% stake in the venture while
Hubco retains 47%.
Economics of coal IPP’s are attractive with
US$-indexed IRR of 18% over a 25-30 year
project life guaranteed by the government

Source: SBP 28
Disclosures
Companies Mentioned (Price as of 22-Mar-2017) 3-Year Price and Rating History for Hub Power Company (HPWR.KA)
DG Khan Cement Co Ltd (DGKH.KA, PRs237.8, OUTPERFORM, TP PRs290.0)
Engro Corporation Ltd (EGCH.KA, PRs381.67, OUTPERFORM, TP PRs380.0)
Habib Bank Limited (HBL.KA, PRs282.21, OUTPERFORM, TP PRs305.0)
HPWR.KA Closing Price Target Price
Hub Power Company (HPWR.KA, PRs135.82, NEUTRAL, TP PRs122.0) Date (PRs) (PRs) Rating
Industrial & Commercial Bank of China (1398.HK, HK$5.14) 05-May-14 57.01 73.00 O
Lucky Cement Co Ltd (LUKC.KA, PRs893.42, OUTPERFORM, TP PRs970.0)
United Bank Limited (UBL.KA, PRs230.23, OUTPERFORM, TP PRs276.0) 28-Oct-14 67.03 70.00
11-Mar-15 90.37 82.00 N
09-Sep-15 103.19 83.00
Disclosure Appendix 14-Sep-15 106.41 90.00
04-Feb-16 104.03 125.00 O
Analyst Certification 21-Mar-16 104.56 122.00
Farhan Rizvi, CFA, and Fahd Niaz, CFA, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views 18-Apr-16 104.50 118.00
expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her 04-Jul-16 121.00 140.00 O U T PER FO R M

compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. 29-Sep-16 119.96 133.00 N EU T R A L

02-Mar-17 132.03 122.00 N


3-Year Price and Rating History for DG Khan Cement Co Ltd (DGKH.KA) * Asterisk signifies initiation or assumption of coverage.

DGKH.KA Closing Price Target Price 3-Year Price and Rating History for Lucky Cement Co Ltd (LUKC.KA)
Date (PRs) (PRs) Rating
09-Dec-14 102.34 124.00 O LUKC.KA Closing Price Target Price
20-Jan-15 123.82 148.00 Date (PRs) (PRs) Rating
27-Apr-15 137.62 158.00 20-Apr-15 479.75 NR
22-Sep-15 138.77 175.00 04-Feb-16 520.31 685.00 O*
04-Feb-16 158.09 220.00 03-Aug-16 705.45 855.00
03-Aug-16 211.84 275.00 02-Sep-16 661.38 848.00
09-Feb-17 245.37 290.00 26-Jan-17 889.18 970.00
* Asterisk signifies initiation or assumption of coverage.
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM

N O T R A T ED
3-Year Price and Rating History for Engro Corporation Ltd (EGCH.KA) O U T PER FO R M

3-Year Price and Rating History for United Bank Limited (UBL.KA)
EGCH.KA Closing Price Target Price
Date (PRs) (PRs) Rating
02-Jul-14 177.21 197.92 O UBL.KA Closing Price Target Price
29-Dec-14 219.88 258.00 Date (PRs) (PRs) Rating
22-Jan-15 269.22 320.00 06-May-14 171.41 177.00 O
29-Jun-15 293.77 368.00 12-Jun-14 170.02 R
13-Jun-14 170.02 177.00 O
14-Jan-16 272.23 410.00
18-Aug-14 182.39 235.00
06-Jun-16 349.86 R
30-Oct-14 193.42 230.00
08-Jun-16 347.23 410.00 O
29-Apr-15 176.18 220.00
11-Jul-16 339.24 375.00
27-Jul-15 178.93 218.00
13-Jan-17 330.93 380.00 O U T PERFO RM
REST RI C T ED
22-Jul-16 179.53 212.00
* Asterisk signifies initiation or assumption of coverage. 21-Oct-16 203.72 230.00 O U T PER FO R M
R EST R I C T ED
09-Feb-17 241.37 276.00
3-Year Price and Rating History for Habib Bank Limited (HBL.KA) * Asterisk signifies initiation or assumption of coverage.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total
HBL.KA Closing Price Target Price revenues, a portion of which are generated by Credit Suisse's investment banking activities
Date (PRs) (PRs) Rating
18-Aug-14 187.65 260.00 O* As of December 10, 2012 Analysts’ stock rating are defined as follows:
30-Oct-14 214.60 265.00 Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months.
16-Jan-15 215.70 R Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
07-Jul-15 212.91 250.00 O
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
24-Aug-15 208.99 265.00
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which
07-Mar-16 191.37 260.00 consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and
25-Apr-16 172.82 255.00 Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s t otal return
23-Aug-16 218.98 252.00 relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most
attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are
24-Oct-16 226.36 263.00 O U T PERFO RM based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings
REST RI C T ED
09-Feb-17 267.15 305.00 were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s
coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12 -month rolling dividend yield. An Outperform rating is
* Asterisk signifies initiation or assumption of coverage. assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -
5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for
Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications,
including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other
circumstances.

30
Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company
at this time. allocation risks due to estimated proceeds of US$598mn from sell down in stakes in Engro Fertilizer and Engro Foods. Moreover, risk of failure in its
new projects such as Thar coal would have a direct impact on the financial health of the company. Further, Engro's driving force has been its
Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view top management team and any transition issues for the new management could put the entire philosophy behind the company's expansion
on the equity security of the company or related products. strategy in jeopardy.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 Target Price and Rating
months or the analyst expects significant volatility going forward. Valuation Methodology and Risks: (12 months) for Habib Bank Limited (HBL.KA)
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of Method: Our PRs305 target price for Habib Bank is derived using the Gordon growth model. We have used 2017E BVPS and a target P/B multiple of
the sector* relative to the group’s historic fundamentals and/or valuation: 2.15x based on a sustainable ROE of 20.5%, COE of 14.9% and growth internal equity of 9.9%. COE is based on an RFR of 8.5%, market
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. premium of 5.8% and beta of 1.1. We have an OUTPERFORM rating on HBL due to its dominant deposit franchise, best exposure to CPEC
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. and infrastructure projects and superior long term growth profile.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. Risk: Potential risks to our target price of PRs305 and OUTPERFORM rating for Habib Bank include: (1) asset quality deterioration in the bank's
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors. corporate and international loan portfolio which could hurt earnings and negatively impact on the bank's capital base 2) changes in policy rate
impacting margins as ~75% of HBL revenue is denominated from interesting bearing assets and 3) changes in the minimum statutory saving
Credit Suisse's distribution of stock ratings (and banking clients) is: deposit rate and/or imposition of special taxes such as super tax.

Global Ratings Distribution Target Price and Rating


Valuation Methodology and Risks: (12 months) for Hub Power Company (HPWR.KA)
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 45% (64% banking clients)
Method: We use Dividend Discount Model (DDM) to value HUBCO at PRs122/sh due to the company's policy of semi-annual dividends over a fixed
Neutral/Hold* 39% (61% banking clients) project life which likens the stock to a bond. Key assumptions behind our TP of PRs122 include a cost of equity of 12.2% inclusive of a long
Underperform/Sell* 14% (53% banking clients) term government bond yield (8%) as our risk-free rate. We rate HUBC as NEUTRAL due to high valuations, rising balance sheet stress from
Restricted 2% oil prices and stability in the PKRUSD (which has continued longer than expected). We refrain from turning more negative as medium term
*For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, a nd Underperform most closely correspond growth is secured through coal expansion plans and a D/Y of 8-9% in a low interest rate environment should cushion downside.
to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative bas is. (Please refer to definitions above.)
An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Risk: Potential risks to our NEUTRAL rating and PRs122 TP for HUBCO include dividend cuts from pile up of receivables on the balance sheet
position, PKR appreciation against the US$, efficiency degradation and imposition of Liquidated Damages. Any delays in the timeline of coal
Important Global Disclosures expansions would be negative.
Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products
may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made Target Price and Rating
available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the Valuation Methodology and Risks: (12 months) for Lucky Cement Co Ltd (LUKC.KA)
frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the
Method: Our target price of PRs970 for Lucky Cement is based on a sum-of-total-parts (SOTP) methodology where we value the core domestic
Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner,
cements business using discounted cash flow (DCF) based on a cost of equity (Ke) of 14.2% and terminal growth of 5%. Moreover, we value
please contact your sales representative or go to https://plus.credit-suisse.com .
the investment in the cement plant in Congo using DCF with a ke of 18.6% and terminal growth of 5%, 660 MW Coal IPP using DCF with
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market cost-to-equity of 13% and investment in grinding facility in Iraq using DCF with Ke of 17% and terminal growth rate of 5%. Lucky's investment
that may have a material impact on the research views or opinions stated herein. in ICI Pakistan limited is valued at market price less 20% portfolio discount broadly in line with market implied discount for other
Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to conglomerates. We rate Lucky OUTPERFORM due to robust growth outlook across its core cement business as well as investments in
Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: https://www.credit-suisse.com/sites/disclaimers- Congo, Iraq, ICI and new venture with Kia in the automobile sector.
ib/en/managing-conflicts.html .
Risk: The major risks to our OUTPERFORM rating and target price of PRs970 for Lucky Cement include: (1) a breakdown of the price
Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be arrangement between manufacturers; (2) volatility in international coal prices beyond estimates; (3) operational challenges in running the new
used, by any taxpayer for the purposes of avoiding any penalties. cement plant in Congo and delays with the 660 MW coal IPP; (4) deterioration in the security situaiton in Iraq and Congo; and (5) a
weakening of demand in domestic and export markets
Target Price and Rating
Valuation Methodology and Risks: (12 months) for DG Khan Cement Co Ltd (DGKH.KA) Target Price and Rating
Valuation Methodology and Risks: (12 months) for United Bank Limited (UBL.KA)
Method: Our target price of PRs 290 for DGKC is based on sum-of-the-parts methodology with separate valuations for the firm's core cement
operations and its investment portfolio. We have valued the cement operations using a cost of equity of 15.5%, cost of debt of 7% and WACC Method: Our PRs276 target price for United Bank is derived using the Gordon growth model. We have used 2017E BVPS and a target P/B multiple of
of 14.5% with a target value value of PRs238, while the investment portfolio, which includes mainly strategic investments in group 2.1x based on a sustainable ROE of 19.8%, COE of 14.5% and growth internal equity of 8%. COE is based on an RFR of 8.2%, market
companies, has been valued at market price less portfolio discount of 40% amounting to PRs52/share. We value DGKC as OUTPERFORM premium of 5.8% and beta of 1.05. We rate UBL as OUTPERFORM due to better near term earnings momentum, strong balance sheet and
due to its attractive medium to long term growth profile driven by rising cement demand and planned expansion in the South. attractive valuations.

Risk: The major risks for our OUTPERFORM rating and target price of PRs290 for DGKC include: (1) breakdown of the price arrangement Risk: Potential risks to our OUTPERFORM rating and target price of PRs276 for United Bank include: (1) asset quality deterioration in the bank's
between manufacturers; (2) increase/decrease in international coal prices beyond estimates; (3) delays in commissioning of new plant in the corporate and international loan portfolio which would impact earnings and potentially the bank's capital base and (2) political turmoil in the
South(4) decline in PSDP spending by the government and/or private sector real estate investment which could result in weakening of Middle East which could severely impact the international operations of the bank. Industry risks include changes in policy rate and/or the
domestic demand minimum statutory saving deposit rate than currently estimated.

Target Price and Rating Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically
Valuation Methodology and Risks: (12 months) for Engro Corporation Ltd (EGCH.KA) used in the target price method and risk sections.
Method: Our target price of PRs380 for Engro Corporation Limited is based on a sum-of-the-parts valuation of the company's subsidiaries and joint See the Companies Mentioned section for full company names
ventures, namely Engro Fertilizer, Engro Foods, Engro Polymer, Engro Energy, Engro Thar Coal and Engro Vopak using a 20% holding
company discount. We have valued the core fertiliser business by using a discounted cash flow (DCF) valuation with projected cash flows for The subject company (EGCH.KA, LUKC.KA, UBL.KA, 1398.HK) currently is, or was during the 12-month period preceding the date of distribution of this
11 years and a weighted average cost of capital of 9.4%. The valuation of Engro Foods is based on 15x EV/EBITDA multiple, whiile Engro report, a client of Credit Suisse.
Polymers is based on DCF using a cost of equity of 14.5 and Engro Thar Coal using prescribed IPP agreement and guaranteed US$IRR of Credit Suisse provided investment banking services to the subject company (EGCH.KA, 1398.HK) within the past 12 months.
20%. Moreover, the valuation of Engro Vopak and Engro Energy is on DDM with a cost of equity of 15%, 14.5% and 14.0%, respectively.
Credit Suisse provided non-investment banking services to the subject company (UBL.KA, 1398.HK) within the past 12 months
Terminal growth is between 2% and 5% across various businesses. We have an OUTPERFORM rating on the company due to its strong
balance sheet and long term growth potential due to exposure to the energy, consumer and agriculture industry. Credit Suisse has managed or co-managed a public offering of securities for the subject company (EGCH.KA, 1398.HK) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (EGCH.KA, 1398.HK) within the past 12 months
Risk: The major risks to our PRs380 target price and OUTPERFORM rating for Engro Corp include gas availability for the urea business, increase
in gas prices, interest rates, capital allocation and operational issues with different businesses. Engro is also exposed to exchange rate risks Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (EGCH.KA, HPWR.KA,
via foreign currency loans, overseas investments and imports of raw material and finished goods for various business. There are also LUKC.KA, 1398.HK) within the next 3 months.

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