Sunday, October 2, 2016

Shanghai Bourse Seeks 40% Stake in Pakistan Stock Exchange

The Shanghai Stock Exchange has submitted a letter of intent to buy up to 40% stake in the Pakistan Stock Exchange, according to  report in The Nikkei Asian Review.  The Shanghai Stock Exchange has the world's fourth largest market cap. The possible Pakistan tie-up could encourage Chinese companies to expand into the South Asian country and perhaps even list on the PSX.

In August this year, Bloomberg News reported Shanghai Electric's US$1.6 billion for 66% stake in K-Electric, Karachi's main electric utility.


Multinational Acquisitions in Pakistan: 

In July 2016, two multinational giants acquired 2 Pakistani companies as part of their growth strategy to establish presence in Pakistan.

Dutch dairy giant FrieslandCampina acquired 51 % of Karachi-based Engro Foods Limited, the second largest dairy producer in Pakistan.

In the same week in July, Turkey's Arcelik announced purchase of Dawlance, Pakistan's market-leading home appliance maker.

Both cited opportunity for double-digit growth in the emerging market as the main reason for their acquisitions.

Shanghai Bourse's Bid: 

If the Shanghai Bourse's bid succeeds, it will represent the first purchase of a stake in a foreign stock exchange by a Chinese bourse.  In June, global index provider MSCI upgraded Pakistan to emerging markets status while keeping Vietnam as a frontier market, because the former has much better market liquidity.

The Shanghai Stock Exchange has the world's fourth largest market cap. The possible Pakistan tie-up could encourage Chinese companies to expand into the South Asian country and perhaps even list on the PSX.

Pakistan Top Performing Market in Asia:

As of Sept 30, 2016, KSE100 index, the PSX's key stock index, has  gained almost 24 percent year to date making Pakistan the best performing market in Asia. Vietnam and Indonesia follow with returns of 18% and 16.8%, respectively, while India’s Sensex Index has gained only 6.7%.

Year-to-date, the Global X MSCI Pakistan ETF (PAK) has gained 21.7%, according to Barron's Asia.

PSX official Ayyaz Afzal told The Nikkei Asian Review that "Shanghai is one of two stock exchanges who submitted us letters of intent (to acquire PSX stakes)".

The other bidder is a bourse in the Middle East. Afzal said the PSX could receive additional letters of intent by December, and "before March 2017, I think there will be some positive news about the strategic investor," he said.

A total of 576 companies are listed on the PSX, with an aggregate market cap of slightly higher than 8 trillion rupees (US$80 billion), according to Nikkei Asian Review. Pakistan, the world's sixth most populous nation, is home to some 190 million people. Its economy in 2015 was the globe's 41st largest, at $270 billion.

ADB Pakistan Forecast: 

The Asian Development Bank (ADB) has recently raised Pakistan's economic growth forecast for fiscal year 2017 (from July 2016 to June 2017) from 4.8% to 5.2%. The Bank also sees brighter outlook for the the entire South Asian region. However, the prospects of even a limited India-Pakistan war could derail the economies of the entire South Asia region. I hope that sanity will prevail in New Delhi to tone down its war rhetoric, abstain from escalation and maintain the current economic momentum.

Summary:

Pakistan's economic recovery is in full swing with double digit growth in multiple industries, including auto, pharma, chemicals, cement, fertilizers, minerals, etc.  It is expected to pick up steam over the next several years with new investments on the back of China-Pakistan Economic Corridor related projects. Prospects of even a limited war in South Asia could derail the economies of the entire region. I hope that sanity will prevail in New Delhi to abstain from escalation and maintain the current economic momentum.

Related Links:

Haq's Musings

ADB Raises Pakistan GDP Growth Forecast

Is Pakistan Ready For War With India?

India's Israel Envy: Surgical Strikes in Pakistan?

Growing Middle Class in Pakistan

Rising Energy Consumption

China-Pakistan Economic Corridor

Pakistan's Thar Desert Sees Development Boom

13 comments:

NBRX said...

2016 2017 UPDATED
Bangladesh 7.1 6.9
India 7.4 7.8
Pakistan 4.7 5.2
Sri Lanka 5.0 5.8

Among the major South Asian countries, Pakistan is still growing the slowest in spite of the rosy Stock Market that you have presented. In terms of global competitiveness in South Asia, Pakistan is the least competitive.

Index Rank
Bangladesh 106
India 39
Pakistan 122
Sri Lanka 71

Riaz Haq said...

NBRX: "Among the major South Asian countries, Pakistan is still growing the slowest in spite of the rosy Stock Market"

Using your own numbers, Pakistan's 10.6% jump (from 4.7% to 5.2%) in GDP growth rate is the second highest after Sri Lanka's 16% in South Asia region....that's the slope the stock investors like.


As to the WEF competitiveness index rankings, Ruchir Sharma, the Indian-American head of Morgan Stanley's emerging markets has thoroughly debunked them.

Sharma says the most important predictor of future growth is demographics.

Countries with a young and growing labor force have a much better chance of future economic growth and stability than anything else.

Pakistan is doing very well on this measure.

Pakistan's work force is over 60 million strong, according to the Federal Bureau of Statistics. With increasing female participation, the country's labor pool is rising at a rate of 3.5% a year, according to International Labor Organization.

http://www.riazhaq.com/2015/07/pakistans-growing-population-blessing.html

Sharma addresses the question of Pakistan's low savings rate by saying "it's a chicken-or-egg issue: it's not at all clear which comes first, strong growth or high savings"

https://books.google.com/books?id=CBqZCgAAQBAJ&pg=PT148&lpg=PT148&dq=ruchir+sharma+rise+and+fall+of+nations+savings+rate&source=bl&ots=RFo0J0gSOU&sig=Gid5HW-C7yW91rKcAACDtrKsXEw&hl=en&sa=X&ved=0ahUKEwicy_GSxLXPAhVS2GMKHQv7AkAQ6AEIQDAF#v=onepage&q=savings%20rate&f=false

Majumdar said...

Professor sb,

Sharma addresses the question of Pakistan's low savings rate by saying "it's a chicken-or-egg issue: it's not at all clear which comes first, strong growth or high savings"

Bakkkiland has historically had low savings rate. For most of the post independence era, Bakkkiland has had higher growth rates than India. And yet invariably, its savings rates trailed India's.

Regards

Riaz Haq said...

Majumdar: "Bakkkiland has historically had low savings rate. For most of the post independence era, Bakkkiland has had higher growth rates than India. And yet invariably, its savings rates trailed India's. "

Countries with greater income inequality usually have higher savings rates.

Why?

Because lower equality and greater concentration of income at the high-end promote more savings because high-income earners tend to save more of what they earn. People in low-income groups usually spend almost all of what they earn to sustain a reasonable living standard.

Low savings rate then needs to be made up by foreign inflows in the form of export earnings, investments, worker remittances, debt and aid etc

Riaz Haq said...

#Chinese investor eyeing stake in #Pakistan's Dewan Cement Amid Record Growth of Cement Demand. #CPEC

http://tribune.com.pk/story/1187284/potential-new-player-chinese-investor-eyeing-stake-dewan-cement/

In a development that may raise eyebrows in a highly competitive cement industry, a Chinese investor has expressed interest in due diligence of Dewan Cement Limited in order to acquire a stake in the company.

“We have received a request through email from a potential Chinese strategic investor seeking permission for due diligence of Dewan Cement, which may eventually lead to acquisition of shares in our company,” said a company notice sent to the Pakistan Stock Exchange on Friday.

“We intend to permit due diligence; if any material development takes place, we will communicate the same to the (stock) exchange and the Securities and Exchange Commission of Pakistan.”

The development is expected to create an interesting situation in the cement sector where a number of companies are already vying to increase their market share.

“If this due diligence results in some deal, the new investor will most likely install a new plant which may take up to three years to start operations. So this is not an immediate threat to the cement cartel,” Sherman Securities analyst Sadiq Samin told The Express Tribune.

“The due diligence process will itself take two to three months and then we will have to look how it affects the market.”

This would not cause any jitters because cement demand was growing continuously, he said when asked whether the entry of a foreign player would spark fears.

Dewan Cement has a production capacity of around 2.88 million tons per annum, constituting 6.1% of the total installed capacity of 45.6 million tons of the cement industry. It has two manufacturing units including Pakland Cement and Saadi Cement.

Analysts suggest that the situation would have been different if the company had installed a new plant and the Chinese player could immediately start manufacturing cement after taking it over.

Pakland Cement was established in 1981 at Deh Dhando in Malir district, Karachi. The plant was fully operational by 1985 and producing Ordinary Portland Cement.

Anticipating a further growth in demand, cement companies are aggressively engaged in expansion of their plants.

Cherat Cement, Attock Cement, DG Khan Cement and Lucky Cement have already announced expansion plans and these plants will come online over the next three years. The combined investment by these players is expected to be in the range of $700 million to $1 billion.

The construction sector, a major consumer of cement, posted an excellent 13% growth in fiscal year 2015-16 compared to average growth of 4% in the past four years due to economic recovery and the booming real estate sector, according to the Pakistan Economic Survey 2016.

The government expects construction-related activities to pick up further momentum on the back of increasing public sector development spending coupled with massive infrastructure and power projects under the China-Pakistan Economic Corridor (CPEC).

Majumdar said...

Brofessor sb,

Almost 80% of the China’s oil is currently transported from the Middle East through the Strait of Malacca to Shanghai, (distance is almost 16,000 km and takes 2-3 months). With Gwadar port in Pakistan becoming operational, the distance would reduce to less than 5,000 km.

The CPEC is indeed a fantastic project. What it does not however deserve is a bogus raison d'etre. Even a school boy would know that it takes ten times as much cost to move goods by 1 km overland as it does over water. And we are not talking flatlands but some of the most difficult mountains in the world.

Regards

Riaz Haq said...

Majumdar: " Even a school boy would know that it takes ten times as much cost to move goods by 1 km overland as it does over water. And we are not talking flatlands but some of the most difficult mountains in the world."

There's no way to transport anything by ship to western China.

It's a hot topic these days in the US: transporting oil by tucks, rails, boats or pipeline. Of these pipeline is the cheapest option.

Here's a "schoolboy" guide as published in Wall Street Journal:

PROS: Pipelines are typically the cheapest, and in some cases quickest, way to move crude in the U.S., and they spill less often than other transport methods. In 2014, pipelines delivered 3.4 billion barrels of crude oil to U.S. refineries, according to Energy Information Administration data. The Association of Oil Pipe Lines says it has a 99.999% safe-delivery rate on these shipments. “On an apples-to-apples basis, pipelines have less accidents, cause less environmental damage and cause less harm to human health than do railcars moving comparable masses of oil and gas,” says Mr. Green. (The Energy Information Administration figures are based on U.S. refinery receipts of crude cargo. But crude shipments often combine several modes of transportation, so the numbers don’t give a complete picture.)

The industry seems to be banking on pipelines as the go-to transport of the future. Pipeline projects have added more than 3 million barrels a day of capacity since 2012, although construction has slowed recently.

CONS: Pipelines can corrode over time, leading to spills. And one positive aspect of pipelines—they’re often built underground and out of sight—can also be a problem. Companies have been accused of abandoning underground lines without cleaning them out, meaning they can leak while nobody is watching. In March 2014, a Los Angeles-area pipeline spilled about 1,200 gallons onto a residential street, destroying yards, damaging homes and stinking up the neighborhood. Phillips 66 had bought the pipeline in 2001 as part of an acquisition, but never used it or checked what was inside, until it finally corroded. Phillips 66 says it “cares for the communities where we live and work. We are committed to operating excellence, and we integrate health, occupational safety, process safety and environmental accountability into our organization and all of our operations, including pipeline integrity and maintenance.”

What’s more, even though pipelines don’t spill as often as other forms of transport, when they do spill, they can unleash a huge amount if not caught in time. In 2010, a pipeline owned by Enbridge Inc. ruptured and spilled 843,000 gallons into Michigan’s Kalamazoo River, the largest inland oil spill in U.S. history. Earlier this year, a pipeline owned by Plains All American Pipeline burst in California, spilling as much as 143,000 gallons into the ocean and onto beaches.

http://www.wsj.com/articles/how-to-transport-oil-more-safely-1442197722

Riaz Haq said...

What next 4 #Pakistan, #Asia's best-performing stock market? It's already up 27% year-to-date #Karachi http://bloom.bg/2eJBggc via @markets

Pakistan has plowed an independent trajectory this year, outperforming both its fellow frontier markets and members of the emerging-market grouping that it is slated to join in 2017.

The country's benchmark KSE100 Index has rallied 27 percent year-to-date to become Asia’s best-performing equity market in 2016, according to a basket of 26 peers tracked by Bloomberg. The market received a boost in June when MSCI Inc. announced that it would reclassify Pakistan as part of its benchmark emerging-market index from May 2017 — a show of confidence that it declined to extend to China.

It was a long time coming for South Asia's second-largest economy. The Pakistan Stock Exchange, previously known as the Karachi Stock Exchange, was downgraded to frontier-market status in 2009 after it introduced curbs against sell orders to stem an investor exodus in late 2008.
After registering gains over seven of the eight years since, investors are betting it still has further to climb.

"The benchmark index can easily reach 60,000 before the general election in 2018," said Vasseh Ahmed, who's chief investment officer of Karachi-based Faysal Asset Management Ltd., in an interview. That represents almost a 50-percent increase from present levels. "Now that the IMF program is over, the government will be giving incentives that will positively impact the market and business sentiment. The boost from the upgrade and Chinese investment is also there.".

The KSE100 Index reached its all-time peak of 41,464.31 last Friday, and by 2:23 p.m. in Karachi was heading toward a new record. Last month Pakistan completed a three-year $6.6 billion International Monetary Fund loan program. Thanks to the aid, Prime Minister Nawaz Sharif was able to avert a balance-of-payments crisis and boost foreign-exchange reserves to a new high.

"Textile is already seeing the push, and the government may further boost the agriculture sector. The banking sector will also rebound given interest rates have bottomed, while the oil and gas sectors are rallying following a recovery in energy prices and infrastructure development," added Ahmed. The country's central bank has held its benchmark interest rate at 5.75 percent since cutting by 25 basis points in May.
For Federico Parenti, Milan-based fund manager of Base Sicav Emerging and Frontier Markets Equity Fund, Pakistan is on top of his wish-list.
"My fund is currently waiting to get access to such a beautiful and nice market," Parenti said by e-mail. "At the moment Pakistan access is delayed due to fear of political and religious risks, but I think staying just in Europe for investment and thinking other places won't change for the better is a bigger risk."

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For Parenti, the improvements that are predicted by EFG Hermes to lure around $475 million of inflows by the middle of next year do, in themselves, carry risks.
"Because of the MSCI upgrade, the ratio of foreigners holding onto Pakistani stocks is set to increase," the fund manager said. "But they will also add volatility since most of the money is 'disloyal,' meaning that they can easily pull their money out of the country whenever they want."

Still, he said he plans to allocate 10 percent of his funds to Pakistan once regulators give the go-ahead, with these challenges failing to overwhelm to the country's enticing demographics. "The prospect is bright with the growing young population and the rising middle class. I want a piece of your economy — a piece of your frozen food, a piece of your cement, and a piece of your hospitals," he wrote.

Riaz Haq said...

#StandardAndPoors 500 Index Funds Outperform 99% of Actively Managed #US #equity funds. https://www.ft.com/content/e139d940-977d-11e6-a1dc-bdf38d484582 … via @FT

Amin Rajan, chief executive of Create Research, the consultancy, said: “These numbers are scary. Active managers need a root and branch look at their investment processes to retain their relevance in today’s surreal investment landscape.”

According to the analysis, 99 per cent of actively managed US equity funds sold in Europe have failed to beat the S&P 500 over the past 10 years, while only two in every 100 global equity funds have outperformed the S&P Global 1200 since 2006. Almost 97 per cent of emerging market funds have underperformed.

Daniel Ung, director of research at S&P Dow Jones Indices, said: “The figures are startling.”

Asset management experts believe the findings will exacerbate investor concerns about overpriced, underperforming active funds, and will ultimately push investors into cheaper indexed and exchange traded funds.

Stewart Aldcroft, senior adviser on the Asian fund industry at Cititrust, the fund services business of Citigroup, the US bank, said: “The S&P figures have become a massive boon for the ETF industry, which has been able to use them to show the benefit of passive investing.

“The active industry has built a whole range of arguments against [S&P’s statistics], but until they start to consistently achieve better returns, they will continue to be on the back foot.”

Last week politicians and consumer protection groups questioned the integrity of Europe’s €13.3tn asset management industry at an event specifically convened to look at the role of the asset management market.

Attendees at the meeting, held at the European Parliament and organised by Sven Giegold, a Green MEP, accused investment houses of overcharging their clients and failing to put investors first.

Mr Giegold, who co-organised the event with Sirpa Pietikäinen, an MEP from the European People’s party, said that “high costs” were hurting investment returns.

Assets managed in passive mutual funds, which provide lower-cost exposure to markets by tracking an index, have grown four times faster than traditional active products since 2007, according to Morningstar, the data provider.

Assets held in passive mutual funds have grown 230 per cent globally, to $6tn, since 2007. However, assets held in active funds total $24tn.

Riaz Haq said...

UPDATE 1-Abraaj to sell #Pakistan K-Electric stake to #China's #Shanghai Electric for $1.8 bln #Karachi http://reut.rs/2e12Obd via @Reuters

* SEP to buy 66.4 pct of K-Electric for $1.77 bln

* Abraaj selling after initial investment in 2009

* Part of increased Chinese investment into Pakistan (Adds details, context)

By David French

DUBAI, Oct 30 Abraaj Group has agreed to sell its majority stake in Pakistan's K-Electric to Shanghai Electric Power Co (SEP) for $1.77 billion, the emerging market-focused private equity firm said on Sunday.

The transaction is the largest M&A deal in Pakistan in a decade, and comes at a time of heightened Chinese interest in investing in the South Asian nation as part of its "One Belt, One Road" initiative.

Abraaj-controlled KES Power will divest the 66.4 percent stake subject to regulatory approvals being obtained.

SEP was among a number of Chinese bidders, including China Southern Power Grid, which were lining up to acquire the stake, sources told Reuters in August.

Chinese companies' interest comes after China last year announced energy and infrastructure projects worth $46 billion in Pakistan, with a view to opening a trade corridor linking western China with the Arabian Sea.

K-Electric is Pakistan's biggest electricity company, supplying power to 2.5 million customers in and around Karachi, the country's biggest and wealthiest city.

The private equity firm first acquired its stake in K-Electric in 2009, but said in June 2014 that it had mandated Citigroup to evaluate options for the investment.

"SEP will leverage its own strengths as a strategic investor and further realize K-Electric's potential to provide better services to the people of Pakistan and the government of Pakistan," SEP Chairman Wang Yundan said in the statement. (Editing by Andrew Torchia and Susan Fenton)

Riaz Haq said...

#China's billions are luring other foreign investors to #Pakistan. #CPEC #MergersAndAcquisitions #FDI http://bloom.bg/2fSiinf via @business

Bloomberg

After years of flat direct foreign investment, it has taken China’s pledges of billions to get overseas companies to start looking beyond Pakistan’s negative headlines on security challenges and power outages.

While investment into Pakistan has been little changed in the three years since Prime Minister Nawaz Sharif was elected, companies including Turkey home appliances maker Arcelik AS and Dutch dairy giant Royal FrieslandCampina NV are making acquisitions in Pakistan.

Along with a military crackdown against militants following a 2014 school massacre and the government’s plans to end power shortages by 2018, it is China’s vote of confidence in the country that has boosted investor confidence. It pledged $46 billion in soft loans and investments in a so-called China-Pakistan Economic Corridor, or CPEC, announced last year.
“Pakistan has turned the tide,” said Mattias Martinsson, the Stockholm-based chief investment officer at Tundra Fonder AB, which holds about $160 million in Pakistani stocks. “The CPEC agreement was probably the trigger for many investors to actively start looking. We all know China does not take short term decisions.”


New power plant projects fueled by Chinese investment are expected to help with Pakistan’s chronic outages and pave the way for investment in other industries. Consumer companies are taking the lead to cater to the world’s sixth largest nation by population.
“If you look at demographic and population, it’s just a great place to be,” said Naz Khan, Chief Financial Officer at Engro Corporation Ltd. whose food subsidiary is being bought by Dutch dairy company FrieslandCampina, which is looking to take a 51 percent stake in a deal valued at about $545 million at the Nov. 4 closing.


Consumer Spending
Consumer spending in Pakistan has increased 83.4 percent in the past five years compared with 48.7 percent in the Asia-Pacific region, according to data by Euromonitor International, a consumer research firm. Its forecasts show Pakistan’s disposable income has more than doubled in six years.
“Its young population, increasingly growing economy, makes it an enticing prospect as a market in the region,” Polat Sen, chief financial officer at Arcelik, said by e-mail. “Pakistan is on the verge of an investment-led growth cycle.”
Arcelik is scheduled to complete its purchase of Pakistan’s home appliance maker Dawlance for $243.2 million this month. It plans to focus on the local market and closely evaluate opportunities in the current export markets of Dawlance, according to Sen.
Pakistan’s government expects the economy to grow at the fastest pace in a decade after completing an International Monetary Fund loan program that averted a balance of payment crisis and boosted foreign exchange reserves to a record level. The economy is expected to grow around five percent annually for the next three years and Arcelik plans to keep its sales growth above that, according to Sen.

----

Pakistan’s automobile sector has also attracted interest with Renault entering exclusive negotiations with Ghandhara and Al Futtaim to develop a brand in Pakistan, a spokeswoman said by phone on Nov. 3. Meanwhile, investments are expected to jump to $5 billion in the year starting July from $1.28 billion in the last fiscal year as power plants come on line, Miftah Ismail, chairman of the nation’s Board of Investment, said in an August interview.
“I think you will also see Pakistan moving more toward merchant markets, you know people coming in and start taking risks," Khan said. “ I think this is just the beginning."

Riaz Haq said...

#Pakistan offers great-potential for #Turkish firms investments. #Dawlance #Cocacola #Erdogan #Turkey

http://www.yenisafak.com/en/world/pakistan-offers-great-potential-for-turkish-firms-investments-2566850

Atilla Yerlikaya, the president of Turkey-Pakistan Business Council of External Economic Relations Committee, emphasized Pakistan's economic potential for Turkey, showing a brief glance into the country's economic opportunities.
According to Yerlikaya, during Erdogan's last visit to Pakistan, Erdogan and Pakistani PM Nawaz Sharif came together with businessmen from both countries and called for a closer cooperation to increase bilateral trade volume and investments to a great degree.
He said, ''President Erdogan praised the Koç Group for investing in Pakistan by buying Dawlance co, a prominent white goods producer of Pakistan for $243 million and Anadolu Group for Coca-Cola investment which exceeds $500 million. He cited them as examples of successful economic cooperation between two countries.''

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Highlighting Pakistan's great potential for business, he said, ''Within the context of the Project of China-Pakistan Economic Corridor, Pakistan's energy and logistic infrastructures will be renewed. Considering Pakistan's $270-billon national income, one can easily grasp how a $50-billion investment makes sense. These investments will unlock agricultural and industrial sectors of the country for Turkey."

Riaz Haq said...

World's top performing #Pakistan bourse to sell 40% stake for $225m. 17 prospective buyers include #Brits #Chinese http://bit.ly/2hd55Wp

Karachi: Pakistan’s main bourse is to sell a 40 per cent stake next week, a company official said on Friday, citing Chinese and British consortia as among the prospective buyers.
At least 17 entities have expressed an interest in the Pakistan Stock Exchange (PSX), whose benchmark stock index was one of the best performing indices worldwide in 2016, gaining 38 per cent so far.
The PSX is currently owned by more than 300 Pakistani brokers.
“We are opening bidding for the 40 per cent share of the PSX on December 15,” Shahzad Chamdia, chief of a PSX divestment committee, told AFP.
Analysts estimate the deal will be worth around $225 million (Dh826.2 million), but the committee declined to comment.

“We have the reference share price being evaluated by a third party and will reveal it only on the bidding day,” Chamdia said.
Sources at the PSX said a consortium consisting of the Shanghai Stock Exchange, the Shenzen Stock Exchange and a Chinese fund is bidding, as well as another consortium of UK financial institutions led by Nasdaq Technology.
Chamdia did not reveal the names of either consortia but confirmed that Chinese and British stock companies were in the running.
Other bidders include Pakistani banks and financial institutions, but their chances of winning are thought to be unlikely.
Following the sale, the company plans to offer 20 per cent of its shares to the public, Chamdia said.
Under its stock exchange reforms, Pakistan merged its three stock exchanges — the Karachi Stock Exchange, the Lahore Stock Exchange and the Islamabad Stock Exchange — to form the PSX in January this year.
The benchmark KSE index of 100 shares was at its highest ever level of 45319 points on Friday, compared with 32816 points on January 1.