Foreign Companies Buying Pakistani Firms to Profit From Growth

[Riaz Haq]

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

[Riaz Haq]

#Pakistan Investors Shrug Off Corruption Allegations Against #NawazSharif #PMLN #PanamaPapers http://blogs.barrons.com/emergingmarketsdaily/2016/07/05/pakistan-s... … via @barronsonline

Allegations of government malfeasance in Pakistan are unlikely to shorten the tenure of Prime Minister Muhammad Nawaz Sharif, according to Eurasia Group.

Despite corruption charges that surfaced in the Panama Papers, with support from the opposition in Pakistan, the small Global X Pakistan Exchange-traded fund (PAK) is up about 15% this year, reflecting MSCI’s recent announcement that it will add the country to the MSCI Emerging Market index. The fund was down 1% in recent trading, while the iShares MSCI Emerging Markets ETF (EEM) was down 2% and the iShares MSCI Frontier 100 ETF (FM) was down 1.3%.

Analyst Christopher Cannell writes:

“Prime Minister Nawaz Sharif of the ruling Pakistan Muslim League – Nawaz party (PML-N) will remain in London until … the end of the month of Ramazan, recovering from heart surgery even as he faces fresh corruption allegations stemming from the Panama Papers. Yet while the mounting allegations will weaken Sharif’s political position at a time when he was not present to defend himself, he will continue to lead the PML-N and early elections are highly unlikely. … The PML-N is likely to win the 2018 election with a reduced mandate …

The contest to replace him will be complicated by corruption allegations against many main contenders within the PML-N, sparking worsening political instability after the election … Sharif’s … approval rating has experienced a non-negligible drop from 75% in October 2015 to 54% in June 2016, the only poll conducted after the leaks. However, Sharif’s political standing is grounded on the PML-N’s strength in parliament, the tacit support of the Army, and the $46 billion China Pakistan Economic Corridor – a set of infrastructure projects critical to Pakistan’s future economic performance—negotiated by Sharif and his PML-N. The PML-N remains the largest party in the lower house, and would not pass a motion of no-confidence in the PM, and it retains control of its Punjab heartland, the most populous area of Pakistan.

… Sharif’s heir apparent is his daughter Maryam Nawaz Sharif, currently the party’s unofficial social media coordinator. She is also reportedly increasingly involved in policy and party meetings while her father convalesces in London, despite having no formal political position. However, she has been directly named in the Panama Papers … “

There are a number of stories on Pakistan opposition leader Syed Khursheed Shah in Pakistan Today. Also see our posts How Do you Define “Emerging”? Pakistan Counts The Ways, MSCI Jazzed On Argentina & Pakistan, Not Nigeria Or China and How Panama Papers Could Play Out In EM.

[Riaz Haq]

#IMF revises up #Pakistan's 2016/2017 growth forecast to 5 percent http://reut.rs/29mzJad via @ReutersIndia
http://in.reuters.com/article/pakistan-imf-idINKCN0ZL1JH

The International Monetary Fund (IMF) on Tuesday increased to 5 percent its forecast for Pakistan's growth in the fiscal year to June 2017, from a previous estimate of 4.7 percent, citing China's plans to invest in road and energy infrastructure.

In September, Pakistan will end a three-year $6.7-billion financial assistance programme from the IMF, after the economy recovered from a series of financial crises, with growth at an eight-year high and increased foreign exchange reserves.

Fund officials say Pakistan has met all performance criteria for the assistance programme but urged Islamabad to keep tackling structural reforms to further increase growth and make it more inclusive.

"Growth is expected to strengthen to 5 percent in FY 2016/17, supported in part by an expected pick-up of investment related to the China Pakistan Economic Corridor (CPEC)," the fund said in a report.

The $46-billion CPEC project will focus on road building and energy infrastructure to end chronic power shortages in Pakistan. A highway is expected to link Western China with the port of Gwadar port on the Arabian Sea.

Fund officials say Pakistan's economy is likely to have grown 4.7 percent in the fiscal year to June 2016, a touch higher than their May estimate of 4.5 percent.

"Inflation is expected to remain contained at 5.2 percent in FY 2016/17, well-anchored by prudent monetary policy," the IMF added.

The IMF said Pakistan had also sought a four-week extension to the loan programme from Sept 3 to Sept 30 to "allow sufficient time to conduct discussions for the final review". It added Pakistan was in strong position to repay the IMF.

"Pakistan’s financing needs are fully covered for the remainder of the program and the country’s capacity to repay the Fund remains strong owing to supportive macroeconomic policies, resilient remittances inflows, and increasing foreign exchange reserves," the IMF said.

[Riaz Haq]

#China Grants $260m for #Gwadar International Airport in #Pakistan #CPEC http://crss.pk/story/china-grants-260m-for-gwadar-airport/ …

China is granting Pakistan some $260 million for the construction of the Gwadar International Airport on the Arabian Sea, national media reported Tuesday.

Government officials shared this information with the Parliamentary Committee on China-Pakistan Economic Corridor (CPEC) in a recent meeting at Islamabad, the daily Express Tribune said. The entire amount of $ 260 million is a grant from the Chinese government, the parliamentarians were informed. (http://tribune.com.pk/story/1136476/infrastructure-gwadar-airport-c...)

Gwadar, also being developed as a deep-sea port, is the culmination of the CPEC – the first initiative under China’s One Belt One Road (OBOR) trade connectivity plans – that will connect Kashgar in west Chinese province of Xinjiang  through a nearly 3000 km route.

Gwadar is located in the ethnic Baloch part of the southwestern Balochistan province, where a low-intensity Baloch nationalist movement has been stoking unrest.

This airport would be able to handle the largest of passenger planes including the A380 Air Bus and Boeing 747-400.

Additionally, the Chinese government has given another grant of $10 million for the construction of the Pakistan-China Vocational and Technical Training Institute to help locals acquire skills.

These grants are part of  $ 46 billion infrastructure investment and communications’ development plan under the CPEC. It includes construction of highways, industrial zones, and energy projects across Pakistan.

[Riaz Haq]

"#India's Growing At 5-6%, Less Than #Modi Government Claims" "#Pakistan's prospects bright" Morgan Stanley's Sharma

http://www.huffingtonpost.in/prabha-chandran/exclusive-india-will-r... … via @HuffPostIndia

Sharma says: "I think India is growing at a pace between 5 and 6%, or about two points lower than the government claims. That is a huge difference -- but these days a pace better than 5% is actually quite good, even for a relatively lower income country. At a time when slower population growth, high debts, falling growth in global trade and capital flows, and other forces are slowing the global economy, every class of nations needs to lower its expectations. It may be a long time before we see another emerging nation post growth in excess of 7-8% in this new era. The risk for India is that the state will try to push growth faster than is possible or practical, in this slow growth era"


"Sri Lanka, Pakistan and Bangladesh all have bright prospects going forward, with credit growth under control, strong working-age population growth, inflation in check..."

[Riaz Haq]

You can make 3 times more money by betting on stocks in #Pakistan (18% YTD) than in #India (6%) - The Economic Times

http://economictimes.indiatimes.com/markets/stocks/news/you-can-mak...

At a time when the world has turned its focus on India, its neighbour Pakistan is running away with all the honours in financial markets. 

Data compiled by ETMarkets.com shows you could have made three times more money by betting on the Karachi Stock Exchange's KSE30 index than on Bombay Stock Exchange's Sensex. 

The KSE30 has given 18 per cent returns so far this year through July 12, making it the best-performing Asian index. Compared with that, the BSE Sensex has given just 6% .. 


While, IMF has marked India as the brightest spot in the global economy, it has also been raising its forecast for Pakistan. In May, IMF raised Pakistan's GDP forecast for FY2017 to 5 per cent from 4.7 per cent. 

"Growth is expected to strengthen to 5 per cent in FY 2016-17, supported in part by an expected pickup of investment related to CPEC ..


Not only that. The London-based BMI Research, a financial market analysis firm, has rated the country among the next big drivers of global economic growth. Others on the list are Bangladesh, Ethiopia, Egypt, Kenya, Indonesia, Myanmar, Nigeria, Philippines and Vietnam. 

[Riaz Haq]

For retail investors, PAK ETF is pure play. Other index and mutual funds have various weights in Pakistani stocks.

Examples:

the iShares MSCI Frontier Market ETF (FM) and the iShares MSCI Emerging Markets ETF (EEM)

http://www.barrons.com/articles/pakistans-enormous-long-term-growth...

There are also mutual funds like Franklin Templeton Asia Growth Fund

http://www.franklintempletoncareers.com/downloadsServlet?docid=hans...

[Riaz Haq]

Abraaj invested $361 million for 50% KESC (renamed K-Electric) stake in 2008. Shanghai is now buying 66% stake for $1.6 billion.

http://www.abraaj.com/images/uploads/newspdfs/EMPEA_case_study_kesc...

[Riaz Haq]

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

http://www.yenisafak.com/en/world/pakistan-offers-great-potential-f...

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.''

-----


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]

#China's #Shanghai Electric to invest $9 billion in #Pakistan for #KElectric #Karachi upgrades | ET EnergyWorld

http://energy.economictimes.indiatimes.com/news/power/chinas-shangh...

Karachi: China's Shanghai Electric plans to spend $9 billion overhauling electricity infrastructure in Karachi, a minister told AFP, just months after the multinational revealed it was buying a Pakistan power company.
China is ramping up investment in its South Asian neighbour as part of a $46 billion project unveiled last year that will link its far-western Xinjiang region to Pakistan's Gwadar port with a series of infrastructure, power and transport upgrades.

In a presentation made to Pakistani authorities, Shanghai Electric said it would invest an average of $700 million a year until 2030 to increase capacity, improve cabling and target bill defaulters.

"The investment would be utilised in distribution, generation, transmission" and training, Miftah Ismail, minister for state and chairman of Pakistan's Board of Investment told AFP on Wednesday.

The investment would also aim to tackle widespread electricity theft and other losses that cost about $269 million a month in the city, partly by replacing above-ground grid stations with underground ones.

Shanghai Electric announced in August it would buy a majority stake in K-Electric, which is owned by Abraaj Group of Dubai, for $1.7 billion, which would be Pakistan's biggest ever private-sector acquisition.

K-Electric, formerly known as Karachi Electricity Supply Corporation, supplies electricity to more than 2.2 million households and commercial and industrial consumers. 

[Riaz Haq]

#Dubai's #Abraaj Capital takes majority stake in #Pakistan's Jhimpir #wind power co. #renewable http://www.thenational.ae/business/energy/abraaj-takes-majority-sta... … via @TheNationalUAE

Abraaj Group is to acquire a majority stake in a clean energy company in Pakistan, its second investment in the country this year.

The Dubai company is acquiring the stake in Jhimpir Power from Burj Capital.

It is developing a 50 megawatt wind power project in Sindh, south-east Pakistan, which is expected to be completed early next year.

The area, known as the Jhimpir wind corridor, is about 120 kilometres east of Karachi. It already has more than 550MW of wind farms in operation and more than 1 gigawatt is under construction or planned.


Pakistan has been working on establishing investor-friendly policies to attract investment into the renewables sector.

The country is targeting a 6 per cent mix of renewables in its total power mix by 2030. While this may seem small compared with the UAE’s goals of clean energy sources making up 30 per cent of energy generated by 2030, Pakistan needs far more infrastructure expansion before capacity can be added.


"With a shortage of over 6,000MW and rising power consumption in Pakistan today, we are excited by the sheer size of the clean energy infrastructure opportunity, enabling government policies and the potential of the Jhimpir wind corridor," said Sev Vettivetpillai, the managing partner and head of the Abraaj thematic fund.

This is not Abraaj’s first foray into the country’s energy sector. The investment firm sold its stake in power utility K-Electric for US$1.7 billion in October, representing one of the largest private transactions in Pakistan.


"Having invested across the energy value chain in growth markets, including the power sector in Pakistan, we look forward to growing our renewable footprint and consolidating our presence in the sector," Mr Vettivetpillai said.

The Dubai company has invested across the energy value chain to the tune of $1bn in 10 investments in growth markets.

Saad Zaman, an Abraaj partner, said that this was just continuing on the success of the company’s first wind project in Pakistan. "The attractive renewable power policy framework implemented by the government has created a strong impetus for the private sector to invest in clean energy," he said.


Abraaj said this month that it had acquired a stake in Islamabad Diagnostics Centre.