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

Gwadar vs Chabahar Ports

Multinationals Snapping Up Pakistani Companies For Growth

Two multinational giants acquired 2 Pakistani companies in just the last week alone 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, 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.

Pakistan's Emerging Market Upgrade:

Earlier in June, Morgan Stanley announced its decision that Pakistan's MSCI shares index will be upgraded from frontier to emerging market status. Pakistan's Karachi Stock Exchange KSE100 Index has rallied 14% in 2016, making it Asia's best performing market so far this year in anticipation of the MSCI announcement.

Pakistan Dairy Market:

Pakistan is the third largest milk-manufacturing country in the world, with 38 billion liters on an annual basis, according to Retail Detail of Europe.  FrieslandCampina wants to take advantage of the shift to packaged dairy products in Pakistan: not even 10 % of milk consumption comes from processed and packaged milk in Pakistan, but FrieslandCampina expects that to change in the near future.

“Thanks to this well-organized and very successful company, we have obtained a strong position in the Pakistani dairy market. A growing middle class is switching to processed and packaged milk in Pakistan and Engro Foods provides a platform to build on. This acquisition will contribute to the value proposition we want to give our member dairy manufacturers. We will also help develop the agricultural industry in Pakistan with our extensive knowledge on the dairy manufacturing process and thanks to our Dairy Development Programme", CEO Roelof Joosten said.

To tap into the Pakistani market, FrieslandCampina is buying 51% of Engro Foods at an estimated price of $448 million, a securities filing said on Monday. Topline Securities said Engro Corporation will generate cash of around Rs. 47 billion, part of which will most likely be invested in energy-related projects with a higher rate of return, according to a report in  Pakistan's Express Tribune newspaper.

Home Appliance Demand in Pakistan:

Pakistan's $3 billion home appliance market is experiencing double digit annual growth. It has attracted the attention of China's Haier, a multinational giant that recently acquired American General Electric's home appliance business.

Haier has 8 industrial complexes, two of which are foreign--one in the United States, and one in Pakistan,  according to  Xiaofei Li, the author of "China's Outward Foreign Investment: A Political Perspective". In these Special Economic Zones, Haier does localization to suit the needs of the consumers.  For Pakistani market, Haier especially designed a washer that can hold 15 long gowns at one time. There are many more such Special Economic Zones envisaged as part of the CPEC (China-Pakistan Economic Corridor).  It will be essentially an industrial corridor spanning almost the entire length of the country from the Arabia sea coast to the Karakorams where it enters China via the Karakoram Highway (KKH), the word's highest paved road.

Pakistan's privately-held Dawlance is also a major player in Pakistan's home appliance market. It is Pakistan's leading refrigerator and microwave brand, No. 2 air conditioners and No. 3 in the laundry category. In  2015, it reported $221 million in revenue and $45 million in EBITDA (earnings before interest, taxes, depreciation and amortization), according to Nikkei Asian Review.

“Pakistan is the sixth most populous country in the world with a population of 200 million people. In particular its young population and increasingly growing economy make it an enticing prospect as a market in the region. With the acquisition of Dawlance in Pakistan, Arçelik will employ a total workforce of 30,000 worldwide and will have a global production base of 18 manufacturing facilities including Turkey, Romania, Russia, China, South Africa and Thailand. Our acquisition is also a powerful example of south-south cooperation, representing a technology and know-how transfer between developing countries,” said Fatih Ebiçlioğlu, the head of the Consumer Durables Group of Koç Holding that controls Arcelik, according to Turkey's Hurriyet Daily News.

Summary:

Smart money is starting to flow into Pakistan again as the world recognizes the country's tremendous economic potential as a growing emerging market.  Investors and businesses are looking to profit from expanding Pakistani economy backed by growing middle class consumption and rising Chinese investments in energy and infrastructure.

Related Links:

Haq's Musings

China's Haier Expands Manufacturing in Pakistan

Japanese Multinationals Rank Pakistan Among Top Growth Markets

Chinese FDI in Pakistan For CPEC Projects

Pakistan Included in MSCI Emerging Market Index

Pakistan's Middle Class Grows to 55% of Population

China-Pakistan Industrial Corridor (CPEC)

Pakistan Launches $8.2 Billion Rail Upgrade Project