Initiation Research( Before Emerging Market Upgrade was announced)

Pakistan is a strong frontier market in Asia for investors to consider:

  • The MSCI will review Pakistan’s eligibility to become an emerging market this year
  • Pakistan stands out for its high growth and strong discount to other stock markets in Asia
  • The cement industry, banking industry, and automotive industry are all strong areas for investment
  • Investors should avoid the textile and oil/gas industry in general, although some buy opportunities may emerge from the sell off
  • Regardless of what decision is made this year, Pakistan is still a strong, high growth frontier market


Continued Growth and Strong Performing Stock Market

Economic Growth: Pakistan is on track to continue on its path of strong GDP growth, which has historically averaged at 4.92%.  The IMF projects that Pakistan’s GDP growth will reach a modest rate of 5.2% by 2020, a slight increase from its growth of 4.14% in 2014.

Stock Market Performance: The stock market decline starting from its peak in August is attributed to a decrease in the average trading volume between August and December last year; it decreased from $111.5 million to $87.3 million. Despite this sharp decline, The KSE 100 Index has delivered a 1 year return of 3.4%, and BMA Capital projects 17% upside by December 2016.  A further examination of the discrepancy in performances of various industries shows how a strategic industry approach provides a clear solution to outperform the index.


Pakistan’s inflation has continued to rapidly decline, due to the decrease of global commodity prices, decrease of the transport basket, and the negligent increase of the food basket.  This represents a significant recovery from the high level of inflation experienced in early 2014.

Rising Consumer Confidence and Middle Class

Pakistan’s strong consumer confidence continues to drive the country’s economic growth.  Pakistan has been credited as one of the top five fastest growing middle class countries in the Asia Pacific region, currently representing 55% of the population.

China Pakistan Economic Corridor

The China Pakistan Economic Corridor, a $46 billion FDI pledge from China, will prove to be beneficial to Pakistan’s economy in the long run, particularly for the construction industry.

Future FDI: This deal has already resulted in Russia planning a $2 billion LNG pipeline from Karachi to Lahore, and has resulted in increased geopolitical interest in the region. The UAE is also building a $500 million oil refinery.  Moreover, Pakistan and India are beginning to move towards improving their relations, which will serve as an increased catalyst for economic cooperation between the two countries.

Project Cost( USD Billion)
Lahore Orange Line 1.6
Gwadar International Airport 0.23
1,320 MW Coal Power Plants Port Qasim 1.9
1,000 MW Quaid e Azam Solar Park Bahawalpur 1.3
660 MW Coal Power Plants Thar Block 2 Engro 1.9

These 5 projects have already received closure, and a 6th project, The Karachi-Lahore Motorway, has achieved partial financial closure.  This large inflow of FDI from China, coupled with increased geopolitical interest in Pakistan, will be a strong driver for increased investor confidence in Pakistan.

Pakistan’s Discount

Pakistan’s stock market stands out in terms of valuation, profitability, and dividend yields, when compared to its regional peers.

Country P/E ROE Dividend Yield
Pakistan 8.1 18.3% 7.3%
India 15 15.4% 1.8%
China 13.8 12.9% 2.1%
Malaysia 15.4 11.1% 3.4%
Vietnam 12.7 13.1% 3.1%
Sri Lanka 11.9 14.2% 2.5%
MSCI Frontier Market 100 8.9 9.7% 8.8%

Source: BMA Research

Pakistan trades at a strong discount to other frontier and emerging markets in Asia.  Pakistan has delivered strong gains as a frontier market, yet being prepositioned as it transitions to an emerging market has its merits.

2008: Pakistan’s Reclassification as a Frontier Market

During December 2008, Pakistan lost its MSCI emerging market status.  During this time, only two out of its eight securities in the MSCI Index fulfilled the standard index size and float requirements for the MSCI emerging index; nine qualified for the frontier market index.

2016: Potential for Reclassification as an Emerging Market

During the MSCI 2015 Classification Review, MSCI announced that it would include Pakistan in its 2016 Classification Review for a potential reclassification as an emerging market.  Pakistan currently meets the majority of the requirements, with the exception of potential issues with stability of institutional framework; issues with the stock market’s liquidity and size have receded.  BMA Capital projects that six companies currently meet the MSCI emerging market status.

The P/E for listed equity in Pakistan peaked at 13.8 when the country was last classified as an emerging market, providing a benchmark for the potential higher valuation that could result if Pakistan transitions to an emerging market.

Cement Industry

BMA Capital projects 9% CAGR for local sales for the industry during the next five years, driven highly by the new projects undertaken under the CPEC.  The industry has already displayed a strong benchmark of success, driven by the rising domestic demand, and has been able to cope well despite issues of companies struggling with export duties.

Lucky Cement : Lucky Cement operates two cement plants in Pakistan, a cement grinding facility in Iraq, and is part of a venture that is building a cement plant in the Democratic Republic of the Congo.  The company is in the initial stages of beginning construction for a new cement plant in Central Pakistan, which is expected to be operational by 2018.

D.G. Khan Cement : This company currently operates three cement plants in Pakistan, and plans to complete another cement plant by late 2018.  D.G Khan also supplies paper products and packing material, and produces and sells raw milk.

Attock Cement Pakistan Ltd : Attock Cement operates a single cement plant, and has plans for expansion by  investing an additional $120 million in this cement plant.  This new plant is expected to be in production in early 2019.

All three companies have prepositioned themselves for the industry growth that is ahead, and are embarking on new projects that will result in further growth in 2018 and 2019.  The cement industry is one of the clearest ways to benefit from the CPEC.  My previous insight Pakistan’s Cement Industry Poised for Further Growth outlines the opportunity presented for three companies in this industry.

Banking Industry

Pakistan’s banking industry presents a strong opportunity for investment, while having the issue of NPLs:

  • Approximately 80% of its population is unbanked
  • The industry is a high growth industry, and has been delivering 13-15% growth in assets and deposits
  • Valuation for a large number of listed equity options is below average
  • Pakistan’s banking industry does have some areas of concern, as the average NPLs for Pakistan’s banking industry is currently around 12.8%

Bank Alfalah Ltd  stands out in the industry for its relatively lower NPLs and its strength in targeting SMEs, the major economic driver of Pakistan’s economy.

  • Bank Alfalah’s NPLs are currently 5.8% lower than the industry’s average
  • Bank Alfalah has partnered with USAID to provide services to SMEs, and has also received loans from the IFC, to assist the bank in expanding its services to SMEs

My previous insight Bank Alfalah: Profit From Pakistan’s Banking Industry fully outlines this opportunity.

Automotive Industry

I previously covered this industry in the insight Pakistan’s Automotive Industry , due to the strong level of growth this industry has been experiencing:

  • Pakistan’s Automotive Manufacturers Association reported 62% YoY growth in November last year
  • There are currently only around 14 cars per 1,000 people in Pakistan, providing the opportunity for strong growth in the future
  • The continued growth of Pakistan’s middle class, which currently accounts for 55% of Pakistan’s population, will continue to be a catalyst for this industry.

Avoid Textile and Oil Companies

Textile: My previous insight Avoid Pakistan’s Textile Industry: Look to Vietnam Instead  mentioned the current challenges faced by Pakistan’s textile industry:

  • Vietnam’s textile industry will benefit from the TPP and its comparatively lower wages, consequently presenting a threat to Pakistan’s industry
  • The industry also struggles from high oil and electricity costs, presenting a challenge for companies operating in this industry
  • Consequently, stocks in this industry have performed poorly, while the KSE 100 Index has risen substantially.

Oil and Gas Companies: Oil and Gas companies have experienced a 57.6% decline in the past year, while the KSE 100 Index has returned 3.4%.

  • The majority of components have experienced a sharp decline in revenue and net income in the past year
  • Several companies in this industry, including Oil & Gas Development Co Ltd , stand out for having below average valuation

Overall both industries currently compose the “weak link” of Pakistan’s stock market, which is thriving in other industries. Filtering based on industry strengths and weaknesses provides the opportunity to beat the index, which has low valuation despite delivering large gains in the past.

Key Statistics for Select Companies

P/E P/B ROE ROA Profit Margin Dividend Yield
Lucky Cement 11.62 2.54 23.94% 14.85% 18.64% 1.77%
D.G Khan Cement 7.1 1.09 13.26% 10.35% 28% 3.26%
Attock Cement 9.07 2.45 27.73% 17.67% 17.35% 8.54%
Bank Alfalah 6.1 0.91 18% 1.06% 20.67% 6.83%
Honda Atlas Car 9.61 5.81 79.97% 29.6% 9.53% 1.98%
Pak Suzuki Motor Co. 9.11 1.79 21.67% 14.53% 6.17% 0.99%
Indu Motor Company Ltd. 7.74 3.13 45.48% 23.27% 10.49% 8.37%

The following companies represent some of the most strategic means to access Pakistan’s growth, while avoiding the “problem child” industries.  Pak Suzuki Motor Co., Bank Alfalah, and D.G Khan Cement stand out as the three strongest value investing picks.


Pakistan is an excellent frontier market destination, that has often being overlooked or avoided by investors. With the potential to be classified as an emerging market in the future, Pakistan offers strong upside potential from the future higher valuation of its stock market.  Each industry requires investors to take a long term horizon, but has also delivered a strong benchmark of success:

  • Banking Industry: The issue of NPLs does not offset investment, as there is inevitable high growth of Pakistan’s industry, driven by its increasing middle class and existing large unbanked population.  Bank Alfalah effectively targets SMEs, the most strategic portion of businesses in Pakistan, and stands out for relatively lower NPLs
  • Cement Industry: The industry has been delivering strong growth, and is poised for even greater growth through 2019, as the CPEC will result in increased domestic demand
  • Automotive Industry: There is still room for this industry, driven by the further growth of Pakistan’s middle class, and the substantial portion of Pakistan’s population that does not own an automobile

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