Pakistan Cement Industry

Cement Sector
Pakistan Cement Industry Rabia Asif AC

Multiple risks to undermine industry performance rabia.asif@abaalihabib.com
+92 021-242-9664 Ext. 106
Aba Ali Habib Securities | 09th Oct 2018

REP-055
Pakistan Industry Report
Preface
In this cement industry report, we highlight short term & long-term risks which, we believe, could affect cement stocks performance in near
term. We believe the effects of prevailing expansionary cycle would last longer due to excessive supply compared to demand. Since demand
is positively correlated with economic growth, which is expected to drop in FY19, hence local cement demand is likely to trim after recording
a significant growth of 15% in FY18.
Higher coal, gas & oil prices would further exaggerate the prevailing situation where cement companies, particularly north players, are
already feeling the heat of softer cement prices. Given the coal price outlook in backwardation, we see higher coal prices is one of the key
short-term risks. Additionally, escalating oil prices is expected to lift power cost of local cement companies during FY19, which we believe is
another short-term risk.
Since the cement industry has not fully absorbed the capacity additions of third expansionary cycle, price softness is likely to persist despite
the rising fuel & power costs. Cement companies have added 2.11mtpa to overall industry capacity during FY18 which is expected to touch
7.34mtpa at the end of FY19 and 18.42mtpa at the end of FY21. As a result of this, south capacity would clock in at 16.84mtpa, representing
22% of industry capacity, while north capacity would cross 53.83mtpa, indicating 78% of industry capacity. We believe north based cement
companies would face a stiff price competition post commencement of planned expansions thus leading to further price softness. We have
assumed cement price of PKR 550/bag for south & PKR 540/bag for north players for FY19 and thereafter 2% growth going forward.
The cement stocks has substantially underperformed by 30% since the start of FY18 mainly due to capacity additions by north & south
players. We believe the cement stock performance for the period ahead would be influenced by (i) new capacity additions (ii) prospects for
local demand as a result of cut in PSDP, slowdown in construction activities for real estate projects and CPEC related projects.
AAH Cement Universe is trading at a FY19E market-weighted average P/E of 12.86x where EV/ton stands at USD 61 (based on closing prices
of 8th Oct’18), where our top picks are LUCK & DGKC. The scrips are currently trading at FY19E P/E of 16.42x/6.9x along with dividend yield
of 2%/5.8% respectively. Pioneer Cement and Kohat Cement are our preferred pick. PIOC trades at FY19E P/E of 8.17x and EV/ton of USD99,
whereas KOHC trades at a P/E of 7.30x and EV/ton of USD37.
Cement Sector
Table of Contents
Introduction …………………………………………………………….……04
Local Cement Demand Outlook………..…………………………..05
Export Demand Outlook………………………………………………..11
Supply Analysis………………………….…………………………………..18
Scenario Analysis…………………………..…..……………………….… 22
Outlook on Input Cost……………………………………………….……24
Outlook on Cement Prices …..……………………………………..…28
AAH Cement Universe
Lucky Cement …………………………………………………………..…...31
DG Khan Cement ……………………………………… …………….…….35
Kohat Cement ……………………………..…………………..…….….....38
Pioneer Cement………………………………………………..…………….41
Fauji Cement ……………….…………………………….…………….……..44
Cherat Cement …………….………………………….………………….…..47
Attock Cement ………….……………………………………….……….…..50
Introduction to Pakistan’s Cement Industry Introduction
LOGISTICS
Slowdown in cement demand to hurt margins; fundamental

to overcome fear in the long run Local Demand
Outlook
AAH universe performance
The cement industry is very important for the overall growth of an economy with
KOHC LUCK ACPL FCCL
its demand driven by a spur in construction activities. Presently, Pakistan is blessed PIOC CHCC DGKC KSE-100
with sufficient cement supply to meet its growing demand (15-year CAGR of 8%) Export
Export Demand
Demand
125
with an installed annual capacity of 55.62mn tons. The industry is undergoing a Outlook
Outlook
100
major transformation by expanding its capacity. Cumulatively, 26mn tons of
cement capacity would be added by FY18 to FY21, taking total industry capacity to 75
75.22mn tons. The industry consists of 17 cement players which operate in two 50 Supply
Supply
separate regions namely South and North with the Northern region representing 25
Analysis
Analysis
~74% of total installed capacity and south representing 26% of total capacity.
-
Besides this the industry has a great potential to tap the exports market as well
May-…
Jul-18
Apr-18
Jun-18
Aug-17
Nov-17
Sep-17
Dec-17
Jan-18
Feb-18
Mar-18
Aug-18
Sep-18
Oct-17
with the Players in the South region being the main beneficiaries due to port Rising
Rising
advantage. However, the export potential for manufacturers in the North region is input
inputcost
cost
limited to Afghanistan and India only. Source: AAH Research
Capacity additions by FY21
Since Pakistan’s entry into MSCI EM, the sector has shed its value by ~47% mainly Outlook on
75.22
concerned by 1) disruptions in marketing arrangement 2) higher input cost coupled 14.28 4.15
with pricing pressure which has eroded sector’s margins by 10pps in FY18 3) Cement prices
7.34
expected slowdown in demand ahead of possible entrance in IMF program 4) 47.35 2.11
excess supply to keep the prices low in the regions (North and South) and 5)
immense selling of foreign investors in the sector. AAH Cement
Universe
FY17
FY18
FY19
FY20
FY21
FY22
Regional
Industry
Source: AAH Research 4
Comparison
Multiples
Factors affecting cement demand Introduction
LOGISTICS
Infrastructure development remains a key concern Local Demand

Outlook
Cement sector remained the prime beneficiary of GoP’s prime focus on Federal PSDP
Pkr mn
infrastructure development vis-a-vis China Pakistan Economic Corridor related 800,000 Export Demand
projects. However, the new government stance on CPEC related projects will remain Outlook
700,000
a key concern where the recent news flow suggests that the Prime Minister Imran
600,000
Khan wants to renegotiate the agreements and have shown concerns to hold the
projects for a year (though the report rejected by the minister). However, a 500,000
Supply
continuation of CPEC related projects is expected to support demand in upcoming 400,000
Analysis
years. 300,000
Cement consumption (kgs) per capita 200,000
1,800
100,000 Rising
1,600
1,553 1,500 - input cost
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
1,400
1,200 Source: AAH Research
1,000
950 Outlook on
863 Local cement dispatches have benefited from the growth in PSDP
800 Cement prices
650 expenditure (12-year correlation stands at 0.97). This time around,
600 476 450 we raise our concerns on the sector outlook for FY19, where the
327
400 298
225 new Govt. has already announced a cut in PSDP allocation of PKR
200
194 184
120 125bn to PKR675bn. From FY19 onwards, we expect cement AAH Cement
- demand to continue its pace on account of government’s plan to Universe
Indonesia
India
Saudi Arabia
Bangladesh
Turkey
Brazil
USA
China
Vietnam
Russia
Thailand
Iran
Pakistan
build Diamer-Bhasha and Mohammad Dam that are expected to

generate cement demand of 20-25 million ton.
Source: https://nation.com.pk/30-Sep-2018/psdp-cut-by-rs125b- Industry
Source: Global Cement & AAH Research to-restrict-deficit 5
Multiples
Factors affecting cement demand Introduction
LOGISTICS
Low- Cost housing to drive cement demand Local Demand

Outlook
Annexure. 1
According to the 2017 census, Pakistan’s population has reached to 208mn with Expected cement demand to be generated from 5mn housing
a 20-year average growth rate of 2.4%, resulting in an annual demand of 0.7mn Export Demand
No of Houses 720 ft 2/80 yd2 900ft 2/100yd2 1080 ft 2/120 yd2
for new homes. As per the SBP low-cost housing policy, only about half of this Outlook
demand is currently being met where the country is currently facing a housing 1mn house mn tons 14.4 18.0 21.6
shortage of about 10mn units. As per the agenda of newly elected PM (Imran 2mn house ,, 28.8 36.0 43.2
Khan), the government is likely to build 5m low-cost housing units across the 3mn house ,, 43.2 54.0 64.8 Supply
country. If this happens, this would generate cement demand and improve the 4mn house ,, 57.6 72.0 86.4 Analysis
profitability of cement players. (Refer annexure 1 for expected cement demand
to be generated in a different scenario). 5mn house ,, 72.0 90.0 108.0
0.4bag required per ft2* (20 bags = 1 tonne of cement)
Rising
Bank credits to the infrastructure sector development have been steadily Source: AAH Research
input cost
increasing over the past few years, attributing the increase in dispatches growth Private sector credit offtakes for construction activities
of the cement industry. In the past few years, construction activities that
PKRmn
accounts 3% of total GDP, has continued to grow with a CAGR of 5% over FY10- 2,000 Construction Dispatches growth (RHS)
18, where private sector credit offtakes have increased with a CAGR OF 10% 1,800
30% Outlook on
25%
during the same period, depicting its contribution in the overall growth in the 1,600 Cement prices
20%
1,400
construction industry. 1,200 15%
1,000 10%
800 5% AAH Cement
600
400
0% Universe
200 -5%
- -10%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Industry
6
Multiples
Source: SBP & AAH Research
But now the question arises, growth in local
Introduction
dispatches would continue or not?
Macro-economic concerns to slowdown local demand in the
current fiscal year Local Demand
Outlook
At present, Pakistan is surrounded by major economic concerns including rising Facility
Date of Expiration
current account deficit (PKR18bn in FY18), depleting foreign exchange reserves and Arrangement Date Export Demand
large import bill that has created the possibility of approaching IMF as a last resort. Extended Fund Facility Sep 04, 2013 Sep 30, 2016 Outlook
Recall that Pakistan has frequently approached IMF for standby loans, adjustment Standby Arrangement Nov 24, 2008 Sep 30, 2011
facility (adjustment lending) and Economic stabilization packages in the past. Since Extended Credit Facility Dec 06, 2001 Dec 05, 2004
these loans are accompanied by a structural package, therefore, it compels Pakistan Standby Arrangement Nov 29, 2000 Sep 30, 2001 Supply
to meet certain targets for economic stabilization. Pakistan has joined IMF on July Extended Credit Facility Oct 20, 1997 Oct 19, 2000 Analysis
11, 1950. However, the Fund extended its first standby loan to Pakistan in 1958. Extended Fund Facility Oct 20, 1997 Oct 19, 2000
Since FY94, Pakistan has entered into nine different agreements with IMF, where Standby Arrangement Dec 13, 1995 Sep 30, 1997
the stabilization program calls for tightening of monetary and fiscal policy to bring Extended Credit Facility Feb 22, 1994 Dec 13, 1995 Rising
down inflation and to strengthen external position. Extended Fund Facility Feb 22, 1994 Dec 04, 1995 input cost
Standby Arrangement Sep 16, 1993 Feb 22, 1994
We highlight the risk of approaching to IMF if the government would not be able to Structural Adj Facility Dec 28, 1988 Dec 27, 1991
cater the economic concerns. It is expected that the objectives of the program will
Standby Arrangement Dec 28, 1988 Nov 30, 1990 Outlook on
going to be consistent with the earlier program, which would include reducing the
Extended Fund Facility Dec 02, 1981 Nov 23, 1983
budget deficit, bringing down public expenditures, increasing Foreign exchange Cement prices
Extended Fund Facility Nov 24, 1980 Dec 01, 1981
reserves, reducing external debt, controlling inflation, reducing domestic borrowing
Standby Arrangement Mar 09, 1977 Mar 08, 1978
for budgetary support and currency devaluation. The combined impact of these
Standby Arrangement Nov 11, 1974 Nov 10, 1975
measures would discourage aggregate demand, in our view. We highlight that the AAH Cement
effect of unstable macro-economic concerns has started showing off in the shape of Standby Arrangement Aug 11, 1973 Aug 10, 1974
Standby Arrangement May 18, 1972 May 17, 1973
Universe
cut in development expenditures by PKR125bn to curtail growing budget deficit.
Standby Arrangement Oct 17, 1968 Oct 16, 1969
Standby Arrangement Mar 16, 1965 Mar 15, 1966
Standby Arrangement Dec 08, 1958 Sep 22, 1959 Industry
Source: IMF and AAH Research Multiples
Introduction
LOGISTICS
Entrance in IMF program might slowdown cement demand Local Demand

Annexure. 2 Outlook
Dispatches Growth Entrance in IMF Program Local Dispatches GDP
The red bar indicates the period of Year
26% Dispatches Growth Growth
23%
economic slowdown (IMF entrance) Export Demand
that resulted in to the decline of FY01 9.93 0% 4%
cement dispatches growth.
Outlook
22% FY02 9.83 -1% 2%
18% FY03 10.98 12% 6%
18% 17% Supply
FY04 12.54 14% 8%
15% 15%
14% 15% FY05 14.79 18% 8% Analysis
14% 13%
12% FY06 17.05 15% 6%
FY07 21.03 23% 6%
10% 9%
8%
Rising
8% 7% 8% FY08 22.58 7% 5%
input cost
FY09 20.53 -9% 0.4%
6% 5% 5% 4%
3% 3% FY10 23.54 15% 3%
2%
2%
FY11 22.00 -7% 4% Outlook on
FY12 23.95 9% 4% Cement prices
-2% 0% FY13 25.06 5% 4%
-1%
-2% FY14 26.15 4% 4%
-6% -5% FY15 28.21 8% 4% AAH Cement
-7% FY16 33.00 17% 5% Universe
-10% -9% FY17 35.65 8% 5%
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY18 41.15 15% 6%
Industry
Source: IMF and AAH Research Multiples
Current account deficit reached to USD18bn in FY18 Introduction
LOGISTICS
Foreign exchange reserves hit a low of USD16bn in FY18 Local Demand

Outlook
Large current account deficits pushed BOP Depleting FX reserves created pressure on PKR
USD bn
Export Demand
10
Current account balance USD mn Deteriorating twin deficit put
Outlook
25,000
enormous pressure on FX reserves.
CAD elevated by 42% to USD18bn in

5
FY18. Fiscal deficit also remained on
20,000
Supply
the higher side.
Analysis
0
15,000
-5 Rising
10,000
input cost
-10
5,000 Outlook on
-15
Cement prices
0
-20
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
2017-18
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
AAH Cement
Universe
Source: SBP and AAH Research Source: SBP and AAH Research
The deteriorating economic situation has created the high possibility of Industry
approaching IMF. Multiples
Investment case Introduction
LOGISTICS
GDP multiplier to indicate cement demand ahead Local Demand

Outlook
Demand growth remains a function of economic growth and during the Local Demand expected at 5.5% CAGR during FY19-23E
period of FY02 and FY09 (the year Pakistan entered into IMF’s program) Mn tons Local Demand Growth Export Demand
the GDP of growth of the country remained relatively flat (FY02: 2% 60 18%
15.4% 50.06 52.81
16%
Outlook
47.45
growth; FY09: 0.4%) where GDP multiplier remained negative 0.42x and 50
41.15 42.63 44.97
14%
25.09x during the said period (refer annexure: 2). Our investment case 40 35.65 12%
stems from GDP growth rate, which is expected to slowdown in FY19 (GDP 30
10% Supply
FY19: 4.5% - 5%). In this regard, we expect cement demand to remain 8.0% 5.5% 8%
20
5.5% 5.5%
6% Analysis
subdued during the current fiscal year. Going forward, we have assumed 3.6%
4%
10 5.5%
conservative assumptions on housing projects (construction of 5mn low- 2%
cost houses is the agenda of the new government) and timelines of dams - 0%
Rising
FY17
FY18
FY19E
FY20E
FY21E
FY22E
FY23E
coupled with average GDP growth of 5%; which translates into an
expected growth in cement demand of 5.5% (GDP multiplier: 1.10x) over input cost
FY20-23F. Source: AAH Research
Multiplier
25% GDP Growth Local dispatches GDP Mulitiplier (RHS) 10 Outlook on
20% 5 Cement prices
15% 0
10% -5
5% -10
0% -15 AAH Cement
-5% -20 Universe
-10% -25
-15% -30
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY25
Industry
10
Multiples
Source: AAH Research
Exports Introduction
LOGISTICS
In the absence of growth in cement demand, export to be the

rescuer for the cement players Local Demand
Outlook
Pakistan cement industry has witnessed a continuous steep decline in export Pakistan’s export dispatches (mn tons)
dispatches for the past 7 consecutive years with a CAGR of -10%. The continuous Mn tons
Export Demand
decline in exports dispatches could be attributable to several factors such as a) 12
10.65
Outlook
imposition of anti-dumping duties by different countries b) influx of Iranian 10.66
10 9.43
cement in Afghanistan c) PKR overvaluation that resulted in lack of 8.57 8.37
8.14
competitiveness in export region and d) Higher margins in local market. 8
7.72
7.19 Supply
5.87 Analysis
Amid availability of surplus capacity on account of upcoming capacity additions, 6
4.66 4.75
PKR devaluation has created a room for the local players to search for new 4 3.23
avenues in export market. To highlight, this is not the first time that the cement Rising
companies would explore new avenues for the export. History foretells that 2 input cost
export dispatches have gained momentum whenever the industry has
-
experienced a turnaround of the expansionary cycle. Similarly, we have seen
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
export dispatches witnessing a meager growth of 2% in FY18 which is mainly
Outlook on
contributed by the south players accompanied by post-expansion of ACPL & Source: APCMA & AAH Research
LUCK. Moreover, we present some regions where the opportunity for export Cement prices
exists for cement players.
AAH Cement
Universe
Industry
11
Multiples
Exports to be the rescuer for the cement players Introduction
LOGISTICS
Afghanistan cement market Local Demand

Outlook
Location of cement plants
Afghanistan has always remained a steadiest market for the Pakistan cement
industry. However, for the past couple of years, Pakistan’s cement export is on a Export Demand
declining path owing to the availability of cheaper Iranian cement in Afghanistan. Outlook
The exports (4.72mn tons) peaked in FY11 and since then cement import from
Pakistan has fallen with a CAGR of -52%.
Supply
Afghanistan currently has annual production capacity of 2.2mn tons (Jabal Seraj Analysis
Cement Plant: 1Mtpa and Ghori-1: 1.2Mtpa) where the country is only able to
produce 0.2/0.1Mtpa of cement in 2018/17 due to plant inefficiencies. With the
cement demand of 2-4Mtpa, the country largely depends on imports to meet its Rising
local demand. Albeit this, the negative trend could turn into a positive one as the input cost
country has exported 4.75Mt of cement to Afghanistan during the FY18
showcasing a growth of 6% YoY after declining in past 6 consecutive years. Source: Cemnet
Total Imports of Afghanistan (mn tons) Outlook on
Mn tons
Cement prices
Afghanistan (mn tons) 2012 2013 2014 2015 2016 2017 2018 8.00 7.20
7.00 6.07
6.00
Total demand 2.58 6.14 7.28 3.48 2.64 2.17 4.24 5.00 4.13
3.41 AAH Cement
Production 0.04 0.07 0.09 0.07 0.10 0.19 0.11 4.00
2.55 2.54
3.00 1.98 Universe
Import 2.55 6.07 7.20 3.41 2.54 1.98 4.13 2.00
1.00
Source: Central Statistical Organization of Afghanistan & AAH Research
-
Industry
2012
2013
2014
2015
2016
2017
2018
Source: Central Statistical Organization of Afghanistan
12
Multiples
LOGISTICS
Srilanka cement market Local Demand

Outlook
Location of cement plants
Since the end of civil war in 2009, the cement consumption in the country is on
an upward trajectory due to the increase in infrastructure development. The total Export Demand
cement consumption in the country has witnessed a growth of 25% /6% YoY in Outlook
2016/17 out of which 65-67% of the demand was mainly met through
imports. Due to poor availability of limestone in the country, the Puttalam
Cement Plant is the only fully integrated cement manufacturing plant in Sri Lanka. Supply
However, few grinding mills had exited the country as they heavily relied on an Analysis
imported clinker. To meet its local demand, the country imports cement from its
neighboring countries like India, Vietnam, Pakistan, Malaysia, Indonesia, and
Thailand. Rising
The country’s heavy reliance on imports has open up opportunities for Pakistani input cost
cement players to mark their footprints. Additionally, the Free trade agreement
with the country (no tariffs) will provide further benefit to tap the market.
Outlook on
Cement prices
Srilanka (mn tons) 2010 2011 2012 2013 2014 2015 2016 2017
Local production 1.74 1.97 2.07 1.91 1.88 2.29 2.70 2.82
AAH Cement
Import 2.01 2.58 3.80 4.12 4.36 4.09 5.30 5.68
Universe
Total demand 3.75 4.56 5.86 6.03 6.25 6.38 7.99 8.50
Source: Central Bank of Srilanka & AAH Research
Source: Cemnet Industry

13
Multiples
LOGISTICS
Bangladesh cement market Local Demand

Outlook
Bangladesh is one of the fastest developing country and since the liberation war Location of cement plants
in 1971, major urbanization and industrialization took place in the country, which Export Demand
led to a rise in cement demand. Currently, 45 companies are producing cement in Outlook
the country, out of which only two have clinker production facility. One is Chhatak
Cement Factory Ltd, a government-owned company and another is Lafarge Surma
Cement Ltd, where Lafarge accounts for only 10% of the country’s annual cement Supply
demand. Due to this, the country is highly dependent on the imported raw Analysis
material that translates into an import of 14-16mn tons of clinker every year
(approx. 80% of clinker used is imported). Therefore, the country imports their
raw materials from Thailand, Indonesia, Malaysia, China, Philippines, and India. Rising
As per daily star, Bangladesh has recently experienced a hike in clinker prices, input cost
slag, and gypsum, where clinker prices have gone up to a peak of USD54/ton,
making exports viable for Pakistani cement players. Further, as per our discussion
with the DGKC’s and ACPL’s management, the company is in the process of Outlook on
making arrangements to export clinker through availing the facility of sea port. Cement prices
AAH Cement
Universe
Industry
Source: Cemnet 14
Multiples
LOGISTICS
India cement market Local Demand

Outlook
India is the second largest cement producer in the world with the annual installed Local of cement plants
capacity of around 455MT as of 2017-18. The demand is mainly supported by
Export Demand
increased activity in real estate and Govt. spending on building smart cities and
urban infrastructure. Consequently, on the back of increasing cement demand, Outlook
the industry is all set to add 51MTPA of capacity addition by the end of 2020.
Despite adding such a hefty capacity from the local players coupled with the Supply
availability of abundant limestone reserves, (According to the Indian Bureau of Analysis
mines, total resources of limestone stands at ~203bn tonnes, of which ~16.33bn
tonnes (8.03%) are available under reserve category), some parts of the country
rely on imports, as most of the integrated plants are either located in the south, Rising
east or central regions of the country. Whereas, the north region which mainly
comprises of grinding units has limited availability of limestone (except Rajasthan,
input cost
which has large limestone reserves in the region owns integrated plants), requires
clinker to produce cement and thus high transportation cost from other regions
makes import more feasible from Pak-Iran border. Outlook on
Mn tons Imports Pak's share in total imports Mn tons Cement prices
200.0 174.4
3.7
139.8 3.2
150.0
110.3 104.2 2.7
100.0
92.5 91.9 2.2 AAH Cement
68.3 1.7
50.0 0.70
0.99 1.25 1.21
1.2
Universe
0.61 0.48 0.68
0.7
0.0 0.2
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Source: Cemnet
Industry
Source: IBF & AAH Research
15
Multiples
LOGISTICS
Oman cement market Local Demand

Outlook
Demand for cement in Oman has remained healthy in the last couple of years and Location of cement plants
is expected to remain steady on the back of ongoing construction activities in the Export Demand
country. It is estimated that the demand for cement in Oman is around 9mn tons, Outlook
out of which 50-60% of the demand is covered by local players. At present, the
country consist of three local players namely Raysut Cement, Oman cement and
Al- Madinah Cement having a combined capacity of 7.85mn tons. Supply
Analysis
At present the country mainly imports cement from UAE. However, Oman and
Raysut Cement have recently registered a new company named as Al Wusta
Cement Company with a plan to set up a cement plant in the near future, a joint Rising
venture with the Duqm Special Economic Zone Authority. Though, we believe this
process will take a time to complete (approx. 5 years). input cost
Outlook on
Cement prices
AAH Cement
Universe
Industry
Source: Cemnet 16
Multiples
Investment thesis Introduction
LOGISTICS
Conclusion Local Demand

Outlook
Export Demand expected at 4% CAGR during FY19-23E
In the light of the above-mentioned opportunities, cement manufacturers of Mn tons Export Demand Growth
Pakistan (mainly the players of the South region) can tap these markets. Besides 6.00
5.29 5.50
5.72 Export Demand
5.09 25.0%
the aforementioned countries, the players can also tap the markets of Oman, 5.00 4.66 4.75 4.89
Outlook
Sudan, Madagascar, Tanzania or West and East African countries (Recently, ACPL 15.0%
4.00
received an order of clinker export to Kenya and West Africa). 3.0% 4.0% 4.0% 4.0% 4.0% 5.0%
3.00 1.8% Supply
However, considering the deteriorating macro-economic situation, primarily on 2.00 -5.0%
Analysis
account of the rising trade deficit, which has pushed CAD to PKR18bn. The new 1.00 -15.0%
government is taking measures in order to curb imports and to increase exports. -20.6%
- -25.0%
The increase in exports of cement would not just help in reducing the CAD of the Rising
FY17
FY18
FY19E
FY20E
FY21E
FY22E
FY23E
country but also help in maintaining the high utilization level which would lessen
the probability of pricing pressure in the country. Source: AAH Research
input cost
Our investment case assumed exports to show a meagre growth of 3% in FY19 Pakistan’s export share
(2% growth witnessed during FY18). However, from FY20, we expect cement Mn tons Others AFghanistan India Outlook on
7.00
exports to pick up on account of above mentioned opportunities. Remaining Cement prices
6.00
conservative, we have assumed exports to grow at a CAGR of 4% during FY20-23.
5.00
4.00
AAH Cement
3.00
2.00
Universe
1.00
-
Industry
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
17
Multiples
Source: APCMA & AAH Research
Third Expansionary Cycle Ahead Introduction
LOGISTICS
26MTPA capacity addition over FY19-20 Local Demand

Outlook
A spurt in cement demand has witnessed over the period of FY15-18 on account of growth in housing and government infrastructure
projects. Currently, Pakistan’s cement industry is experiencing a third and largest expansionary cycle of the history. Based on announced Export Demand
capacities till date, 26mn tons of additional capacity is expected to be added by the end FY21. Maximum capacity is expected to be
added in the North region (19 MTPA), whereas, the south region is expected to add a total of 6.5MTPA of capacity.
Outlook
Industry reached to its
High Growth Period led to better utilizations highest utilization level
Supply
Growth in cement volumes Higher utilization levels in FY16-18
Analysis
Total Dispatches Dispatches Growth
31% Total utilization
25% 91% 89% 92%
19% 20% 85% 87%
15% 14%
13%
10% 10% 79% 80% 80%
77% 78%
Rising
3% 3% 3% 3% 3% 4% 74% 75% 74% 73% 75%
70% input cost
-8%
46
39 40 Outlook on
34 34 35
30 31 31 33 33 Cement prices
24
19
16
14
11 AAH Cement
Universe
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Industry
18
Multiples
Third Expansionary Cycle Ahead Introduction
LOGISTICS
Local Demand
Outlook
Since demand is not likely to increase with the same pace as supply, utilization level for the industry would decline as a result of capacity
additions which would create pricing pressure, leading to lower profitability and hence a decline in return profiles. Same trend is Export Demand
expected to continue
Increase in utilization level led
going forward on the Outlook
companies to earn better return
Industry Capacity utilization Average ROE EBITDA/ton back of increase in
pricing pressure.
Supply
20% 27% 24% 23% 24%
20% Decline in utilization level 2,568 Analysis
11% 17% 10% 16% 12% 15%
6% resulted in the decline of 2,324
16% companies return profile, as
2% 93% pricing pressure increased. 2,110
-1% Rising
85% 87% 84% 1,872 1,883
80% 78%
77% 78% 1,721 1,724 input cost
74% 75% 74% 73% 75% 74% 1,697
70% 70%
1,398 1,487
1,334
1,213
Outlook on
940
Cement prices
673
478
394
AAH Cement
Universe
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
Industry
19
Multiples
Supply Analysis Introduction
LOGISTICS
Analyzing the cement cycle 1995-2010 Local Demand

Outlook
Supply is the key determinant in cement cycle; the capex cycle round Industry’s First expansionary cycle
began as the utilization levels reached near to its peak levels (i.e. 85%- Mn tons Capacity Dispatches Utilization
90%). Better return profiles of the players led to a spurt in capacity 94% 15.53
16.41
100% Export Demand
16.0 93%
additions. But as the capacities came online, the industry’s utilization 14.0
87%
90%
82% 12.50 90% Outlook
82%
levels gradually declined. Since demand is not likely to increase with the 12.0
10.17 77% 80%
10.17
same pace as supply, the industry witnessed a price war that later 10.0 8.89 8.89 8.89 9.05
resulted into lower profitability and hence a decline in return profiles. 8.0 70%
Supply
6.0 59%
4.0
59% 60% Analysis
To recall, the industry experienced its first expansionary cycle during the 2.0
50%
period of 1995-1999 where the industry added a total of 7.36mn tons of - 40%
capacity. Resultantly, the utilization level dropped by 30% from its peak of Rising
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
90% and settled at around 60%. input cost
The industry witnessed it second expansionary cycle during the period of
Industry’s second expansionary cycle
2005-10, where initially the capacity enhanced by 20mn tons from
Mn tons Capacity Dispatches Utilization Outlook on
17.91mn tons to 37.68mn tons over 2005-08. Subsequently, the capacity 45.34
100%
additions outran the volume growth leading to a decline in utilization
45.0 91%
89% 37.68
42.28 Cement prices
40.0 90%
30.50
levels. Correspondingly, the industry experienced its first cut in prices 35.0 79%
80% 80% 80%
30.0 74%
from its peak of PK296/bag to PKR243/bag (a drop of PKR53/bag) and a 25.0 20.83
75%
70%
declined in utilization level from 91% to 80%. Furthermore, during the 20.0 17.28 17.91 AAH Cement
60%
second phase (2008-10) an addition of 7.66mn tons led the industry’s 15.0
Universe
10.0
capacity to increase to 45.34mn tons followed by a further declined in 5.0
50%
cement prices by PKR 64/bag thus resulting in a utilization level of 75%. - 40%
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Industry
20
Multiples
Supply Analysis Introduction
LOGISTICS
26MTPA of capacity addition over FY19-20 Local Demand

Outlook
North Region FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24
AWL Askari Cement Limited 2.68 2.68 2.68 2.68 2.68 2.68 2.68 2.68 2.68 2.68 BWCL’s Farooqia Line II oF 1.89mn tons has its
BWCL Bestway Cement Limited 6.48 8.47 8.65 8.65 10.54 10.54 10.54 10.54 10.54 10.54 commenced its operation from 1QFY19
Export Demand
CHCC Cherat Cement Company Limited 1.10 1.10 1.76 2.43 2.43 3.54 4.66 4.66 4.66 4.66 CHCC’s Line II of 1.32mn tons has commenced
DGKC D.G. Khan Cement Company Limited 4.22 4.22 4.22 4.22 4.22 4.22 4.22 4.22 4.22 4.22 operation from 3QFY17. Outlook
Second expansion of 2.24mn tons is expected to
DNCC Dandot Cement Company Limited 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 come online by 1QFY20
DCL Dewan Cement Limited 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13
FCCL Fauji Cement Company Limited 3.43 3.43 3.43 3.45 3.45 3.45 3.45 3.45 3.45 3.45
FECTC’ Line II of 1.89mn tons is expected to
Supply
FECTC Fecto Cement Limited 0.82 0.82 0.82 0.82 0.82 0.82 2.62 2.62 2.62 2.62
FLYNG Flying Cement Company Limited 0.60 0.60 0.60 0.60 0.60 1.20 1.20 1.20 1.20 1.20
commence from 1QFY21 Analysis
GWLC Gharibwal Cement Limited 2.11 2.11 2.11 2.11 2.11 4.63 4.63 4.63 4.63 4.63 GWLC Line II of 2.52mn tons is expected in 1QFY20
KOHC Kohat Cement Limited 2.81 2.81 2.81 2.81 2.81 4.18 5.41 5.41 5.41 5.41 KOHC Line III of 1.80mn tons is expected in 2HFY20
LUCK Lucky Cement Limited 4.00 4.00 4.00 4.15 4.30 6.90 6.90 6.90 6.90 6.90 LUCK Line III of 2.60mn tons is expected in 1HFY20 Rising
PIOC Pioneer Cement Limited 2.09 2.09 2.09 2.09 2.09 4.61 4.61 4.61 4.61 4.61 PIOC Line III of 2.52mn tons is expected in 1QFY20 input cost
MLCF Maple Leaf Cement Factory Limited 3.53 3.53 3.53 3.53 4.10 5.83 5.83 5.83 5.83 5.83 MLCF Line III of 2.30mn tons is expected in 4QFY19
Total North Region Capacity 35.51 37.50 38.33 39.17 41.78 54.24 58.38 58.38 58.38 58.38
South Region FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24
Outlook on
ACPL Attock Cement (Pakistan) Limited 1.83 1.83 1.83 2.46 3.09 3.09 3.09 3.09 3.09 3.09 ACPL’s Line IiI of 1.26mn tons has commenced its Cement prices
operation from 3QFY18.
DCL Dewan Cement Limited 1.95 1.95 1.95 1.95 1.95 1.95 1.95 1.95 1.95 1.95
LUCK’s Line II of 1.30mn tons has commenced its
LUCK Lucky Cement Limited 3.75 3.75 3.75 4.40 5.05 5.05 5.05 5.05 5.05 5.05 operation from 3QFY18.
POWER Power Cement Limited /Al Abbas 0.95 0.95 0.95 0.95 1.56 3.38 3.38 3.38 3.38 3.38 POWER new line of 2.40mn tons is expected
in 4QFY19
AAH Cement
THCCL Thatta Cement Company Limited 0.47 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54 0.54
DGKC D.G. Khan Cement Company Limited - - - - 2.84 2.84 2.84 2.84 2.84 2.84 DGKC’s Line of 2.84mn tons has commenced its Universe
operation from 1QFY19.
Total South Region Capacity 8.95 9.01 9.02 10.30 15.02 16.84 16.84 16.84 16.84 16.84
Total Capacity 44.46 46.51 47.35 49.46 56.80 71.07 75.22 75.22 75.22 75.22 Industry
Source: APCMA & AAH Research Multiples
*All the figures are in mn tons
Investment Thesis Introduction
LOGISTICS
Scenario Analysis: utilization levels to settle at 78% by FY23 Local Demand

Outlook
Based on the last cement upcycle, we believe the improvement in cement companies’ return profiles would be contingent upon
utilization levels. As the industry touches utilization levels of 80%, cement players’ pricing power will improve. We performed a scenario Export Demand
analysis to determine a timeline when the demand-supply scenario would become favorable for the cement sector (80-85% utilization). Outlook
As mentioned earlier, in our base case, we have assumed 5.5% CAGR volume growth in local dispatches and 4% CAGR volume growth in
export dispatches. Supply
Analysis
Refer Annexure 3 for worst case and best case scenarios.
Demand/Supply Analysis FY16 FY17 FY18 FY19F FY20F FY21F FY22F FY23F FY24F FY25F Rising
Total Capacity 45.62 46.39 49.46 56.80 71.07 75.22 75.22 75.22 75.22 75.22 input cost
Total Demand (CAGR: 5.4%) 38.87 40.32 45.89 47.52 50.06 52.73 55.56 58.53 61.66 64.96
Outlook on
Total Utilization 85% 87% 93% 84% 70% 70% 74% 78% 82% 86%
Cement prices
Local Demand (CAGR: 5.5%) 33.00 35.65 41.15 42.63 44.97 47.45 50.06 52.81 55.71 58.78
Demend Growth 17.0% 8.0% 15.4% 3.6% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% AAH Cement
Universe
Export demand (CAGR: 4.0%) 5.87 4.66 4.75 4.89 5.09 5.29 5.50 5.72 5.95 6.19
Demend Growth -18.4% -20.6% 1.8% 3.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%
Source: AAH Research Industry
22
Multiples
Scenario Analysis Introduction
LOGISTICS
Optimum utilization level to reach by FY24 Local Demand

Outlook
Export Demand
Annexure. 3
Outlook
Demand/Supply Analysis FY16 FY17 FY18 FY19F FY20F FY21F FY22F FY23F FY24F FY25F FY26F FY27F FY28F
Total Capacity 46.51 47.35 49.46 56.80 71.07 75.22 75.22 75.22 75.22 75.22 75.22 75.22 75.22
Supply
Total Demand (CAGR: 7%) 38.87 40.32 45.89 48.9 52.1 55.4 59.0 62.9 67.0 71.3 76.0 80.9 86.1
Best case Total Utilization 84% 85% 93% 86% 73% 74% 78% 84% 89% 95% 101% 108% 115% Analysis
Base case Total Demand (CAGR: 5.4%) 38.87 40.32 45.89 47.5 50.1 52.7 55.6 58.5 61.7 65.0 68.5 72.2 76.1
Total Utilization 84% 85% 93% 84% 70% 70% 74% 78% 82% 86% 91% 96% 101% Rising
input cost
Worst case Total Demand (CAGR: 3%) 38.87 40.32 45.89 47.3 48.7 50.1 51.7 53.2 54.8 56.4 58.1 59.9 61.7
Total Utilization 84% 85% 93% 83% 69% 67% 69% 71% 73% 75% 77% 80% 82%
Source: AAH Research Outlook on
In best case, Optimum utilization Cement prices
level expected to reach by FY22-23
In base case, Optimum utilization
level expected to reach by FY24-25 AAH Cement
In worst case, Optimum utilization Universe
level expected to reach by FY27-28
Industry
23
Multiples
Lower retention prices amid high input cost to
Introduction
LOGISTICS
dent sector’s profitability
Rising coal prices continue to hurt margins Local Demand
Outlook
Coal remains the backbone of the cement industry as it accounts for ~40-45% in total Richard’s Bay Coal prices
cost mix. Global commodity prices have been on a bull run since the start of FY18 and Per tonne
120 108 106
in the same way prices of coal have been increasing that has led to the depressed 100 95 Export Demand
margins for the cement players. Coal prices have been gradually gaining their strength 100 93 90
(35% up since the start of FY18) on account of strong Asian demand coupled with 76
85
77 77 Outlook
80 65
tight supplies (due to recent environmental wave in China that has led closure of coal 53
mines in the country). 60
However, recent price correction of 10% has been witnessed in coal prices on account 40 Supply
of lower demand from China driven by monsoon season. Moreover, we highlight the 20 Analysis
risk of coal prices to revert back given trade war between the US & China as Beijing
might hit US LNG imports with 25% duty for equivalent retaliation ahead of winter 0
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19F
FY20F
FY21F
season. However, China has reduced the tariffs to 10% on US products which were
initially planned as 25%. To highlight, Washington has also reduced the tariffs to 10% Rising
for Chinese products. Therefore, in the wake of the above mentioned factors we Source: SBP & AAH Research input cost
continue to keep our FY19/20/21 international coal prices forecast at USD100/95/90
per ton respectively. Hence, we provide the impact of USD5/ton change in coal prices
on AAH Cement universe FY19 earnings.
Annexure. 4 Earnings sensitivity to changes in coal prices Outlook on
FY19 Base Cement prices
Companies USD90/ton USD95/ton USD100/ton USD105/ton USD110/ton
LUCK 31.05 29.75 28.45 27.14 25.84
DGKC 14.04 13.17 12.30 11.44 10.57 AAH Cement
ACPL 15.28 13.76 12.23 10.70 9.17 Universe
CHCC 11.60 10.69 9.78 8.86 7.95
PIOC 5.72 5.30 4.88 4.46 4.04
KOHC 17.52 16.63 15.73 14.84 13.94
FCCL 2.03 1.88 1.74 1.59 1.44
Industry
24
Multiples
Source: Company Accounts & AAH Research
Currency depreciation remains another risk Introduction
LOGISTICS
Imposition of additional duties & taxes will adversely impact

profitability Local Demand
Outlook
Currency depreciation remains another risk; exports to provide some breather PKR/USD
PKR
Hefty Currency depreciation through higher input cost (cost of coal, RLNG and 180
153
Export Demand
other imported fuels) may further deteriorate primary margins of the cement 160 142 147
140 129 136 Outlook
manufacturers. While, in our base case assumption, we have already 110
incorporated 4% p.a depreciation in currency. However, any incremental 120 101 104 105
100
depreciation would result in contraction of gross margins. Moreover, we believe 80 Supply
the increase in export dispatches would provide some respite to the 60
manufacturers, but the overall impact should remain negative. Analysis
40
20
-
Rising
FY15
FY16
FY17
FY18
FY19E
FY20F
FY21F
FY22F
FY23F
Imposition of additional duties and taxes on local cement will adversely impact
on the profitability
input cost
Source: SBP & AAH Research
In FY19 Budget the government has announced a further increase in FED by 1,500
PKR0.25/kg, taking total FED to increase up to PKR1.5/kg. However, the pricing
1,600 FED per ton Outlook on
1,400 1,500
power of the sector led the players to ultimately pass this impact of increased 1,200 1,250 Cement prices
cost to the consumers. Nevertheless, considering a scenario of limited pricing 1,000 1,000
power and unfavorable supply-demand dynamics, any more cost pressures (as 800
the companies would not be in a position to pass on the impact) will adversely 600
… 400 400
AAH Cement
400 400
impact the profitability of cement players. Universe
200
-
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
Industry
Source: AAH Research 25
Multiples
Lower retention prices amid high input cost to
Introduction
dent sector’s profitability LOGISTICS
Monetary tightening to further squeeze profitability Local Demand

Outlook
Profitability to contract further in the higher interest rate environment 6 Months KIBOR
16% 14.2%
13.4% Export Demand
Rising oil prices coupled with hefty currency depreciation is expected to 14%
12% 10.4% 12.4% Outlook
keep inflation on the rise, translating into higher interest rate 12.4% 9.8%
10% 8.7%
9.2% 10.5% 9.9% 9.0% 6.3%
environment. With cement industry debt to asset ratio asset ratio 8%
6.1% 8.6%
averaging at 25% and long term debt to asset averaging at 20%, cement 6%
6.5%
Supply
4%
companies are likely to witness a manifold increase in their financial 2%
Analysis
charges, causing depletion in profitability. 0%
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
Rising
Source: SBP & AAH Research input cost
Annexure. 5 Earnings sensitivity to changes in interest rates
FY19 Base 30% Total Debt to Asset Long term to asset
25%
Outlook on
Companies 6.5% 7.5% 8.6% 9.5% 10.5% 25% 22% Cement prices
DGKC 12.30 12.43 12.30 12.18 12.05 20%
20%
16% 16%
ACPL 12.73 12.48 12.23 11.97 11.72
15%
CHCC 10.12 9.95 9.78 9.62 9.45 AAH Cement
10% 8%
PIOC 4.91 4.89 4.88 4.86 4.85 Universe
KOHC 15.76 15.74 15.73 15.72 15.71 5%
FCCL 1.76 1.75 1.74 1.73 1.72 0%
FY17
FY18
FY19
Source: Company accounts & AAH Research Industry
Source: Company accounts & AAH Research
26
Multiples
Outlook on Cement prices Introduction
LOGISTICS
Capacity additions to increase pricing pressure Local Demand

Outlook
Cement sector has been witnessing a see-saw in cement prices since the beginning of 2017. To delve into details, manufacturers in the
north region underwent a major cut in prices, where the discounts were majorly initiated after the commencement of CHCC’s new line. Export Demand
As a result of which the region witnessed a decline in prices by an average of PKR20-25/bag in FY17, whereas, prices in the South region Outlook
sustained at their levels.
On the contrary, cement prices started to improve from 1st July 2017 in order to pass on the impact of an increase in FED that was Supply
announced in the budget FY18. However, in the wake of scheduled capacity additions, the disruption in the marketing arrangement has Analysis
resulted in the failure of price sustainability in the North region which reached a low of PKR502/bag.
620
North Region South Region Prices in the South region Rising
600 remained stable input cost
580
560
540
Outlook on
520
Cement prices
500
Cement prices declined in North post commissioning of Cement prices started to gain its momentum from 1st
480
CHCC’s 1.3mn tons of expansion in Jan 2017. Prices July’18 to pass on the impact of increased FED cost, AAH Cement
460 went down from an avg PKR543/bag to PKR524/bag however, the region failed to sustained its momentum Universe
from jan’17 to May’17. due to disruption in the marketing arrangement.
440
Jul'16
Nov'16
Apr'17
Jul'17
Nov'17
Apr'18
Oct'16
Mar'17
May'17
Oct'17
Mar'18
May'18
Sep'16
Dec'16
Feb'17
Sep'17
Dec'17
Feb'18
June'18
Aug'16
Jan'17
Jun'17
Aug'17
Jan'18
Industry
27
Multiples
Source: PBS & AAH Research
Outlook on Cement prices Introduction
LOGISTICS
Capacity additions to increase pricing pressure

Local Demand
Outlook
Nevertheless, in the backdrop of continuous hike in input cost and further increased in FED by the Govt (Budget FY19), the cement
industry’s margins eroded by 10pps in FY18. Prices in the north region have so far recovered by PKR90-95/Bag to an average of Export Demand
PKR595/bag. Moreover, despite the rising concerns of a breakdown in pricing discipline of South, cement prices remained relatively Outlook
stable within the region. However, we believe, it’s time for the southern region to taste the cut in prices, as the expansion of DGKC’s plant
in the hub has commenced its operation which might result in a drop of cement prices.
Supply
Hence, we remain pessimistic with regard to the pricing level in FY19 and FY20, as the demand is expected to remain subdued in the Analysis
current fiscal year coupled with upcoming capacity expansions. We believe cement players might not be able to increase cement prices.
Our base assumption includes cement prices to decline in both north and south region in FY19 from its current level, with a reduction of
9%/7% in North and South region respectively. However, beyond FY19, we anticipate prices to increase by PKR5/-bag on the back of Rising
higher inflationary environment. input cost
700 120
Coal prices (RHS) North prices South prices
600 100 Outlook on
500
80 Cement prices
400
60
300
40 AAH Cement
200
Universe
100 20
- -
Industry
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
28
Multiples
Source: PBS & AAH Research
Introduction
LOGISTICS
Earnings sensitivity to changes in cement prices Local Demand

Annexure. 6 Outlook
North Region FY19 Base
Companies PKR530/bag PKR535/bag PKR540/bag PKR545/bag PKR550/bag Export Demand
CHCC 8.21 8.99 9.78 10.56 11.34 Outlook
% change -16% -8% 8% 16%
PIOC 4.14 4.51 4.88 5.25 5.61
% change -15% -8% 8% 15% Supply
KOHC 14.29 15.01 15.73 16.45 17.17 Analysis
% change -9% -5% 5% 9%
FCCL 1.49 1.61 1.74 1.86 1.98
% change -14% -7% 7% 14% Rising
input cost
South Region FY19 Base
Companies PKR535/bag PKR540/bag PKR550/bag PKR555/bag PKR560/bag
ACPL 10.46 11.34 12.23 13.11 14.00 Outlook on
% change -14% -7% 7% 14% Cement prices
North/South Region FY19 Base
LUCK* 26.18 27.31 28.45 29.58 30.71
AAH Cement
% change -8% -4% 4% 8%
Universe
DGKC* 10.99 11.65 12.30 12.96 13.61
% change -11% -5% 5% 11%
*Based on weighted average calculation
Industry
29
Multiples
Cement Sector
AAH
AAH Cement
Cement Universe
Universe; Valuation Basis
Our TP for KOHC, PIOC, CHCC, DGKC, FCCL and ACPL
has been derived using a discounted free cash flow to
equity valuation. We have used a risk free rate of 10%,
beta of 1.0 and market risk premium of 7% to arrive at
cost of equity of 17%.
Our TP for LUCK has been derived using a sum-of-the

parts (SOTP) analysis. LUCK’s domestic cement
business is valued using DCF (PKR319/share, 56% of
total). The other businesses are valued as follows: i)
Iraq at PKR41/share (7% of total); ii) DR Congo at
PKR28/share (5% of total); iii) ICI Pakistan at
PKR103/share (18% of total); iv) 660MW coal plant at
PKR60/share (10% of total); and v) Yunus Energy at
PKR6/share (1% of total).
Introduction
LOGISTICS
Cement Universe: LUCK Local Demand

Outlook
Lucky Cement Company Limited LUCK - Over weight
Target Price: PKR571 Export Demand
A market leader that continues to cement its position Current Price: PKR480 Outlook
Key Data
We initiate our coverage on Lucky cement with a ‘BUY’ call, with Jun-19 TP of 571/sh
PSX Ticker LUCK
offering an upside of 25% to the current market price of PK467/sh. The scrip is Year End June
Supply
currently trading at a premium with forward P/E & EV/ton of 16.4x & USD81 on FY19 Shares Outstanding 323.38 mn. Analysis
earnings respectively. The premium is justified due to its diversified business portfolio Free Float 129.35 mn.
and a history of value creation for its shareholders. Market Cap 151 bn.
52 Week High 723.19 Rising
The company has underperformed the broader market by 23% since the start of FY18 52 Week Low 445.8 input cost
primarily on account of uncertainty in marketing arrangement among local cement RELATIVE PERFORMANCE (1 Year)
players coupled with expectations of a slowdown in GDP (which leads to cut in PSDP
see: page no. 5). However, Lucky provides a better hedge relative to other cement 300
KSE-100 LUCK Outlook on
players due to its lower financial cost and diversified business portfolio. Being the Cement prices
250
biggest cement exporter in AAH universe it also provides a hedge to expectations of a
slowdown in cement demand and the likelihood of competition within the industry. 200
Moreover, the company’s upcoming expansion of 2.60mn tons in North region 150 AAH Cement
(expected to come online by 1QFY19 vs management guidance of 4QFY18), is likely to Universe
100
create value for its shareholders.
50
- Industry
2-Oct-17 2-Dec-17 2-Feb-18 2-Apr-18 2-Jun-18 2-Aug-18 2-Oct-18
31
Multiples
Introduction
LOGISTICS

Outlook
Over the last decade LUCKY has transformed from a cement maker to a Key Financial Highlights
conglomerate with its foot stemming in chemicals (PKR103/sh), power (660MW FY18A FY19F FY20F FY21F
In PKRmn,unless otherwise stated Export Demand
coal based power plant with an investment of USD221mn and ROE of 29.5% on
Revenue 47,542 54,221 63,753 68,529 Outlook
local coal) and automobile business (KIA Lucky Motors Pakistan Ltd with an
investment of PKR14bn). Revenue growth 4% 14% 18% 7%
Gross profit margin 36% 30% 32% 32%
LECPL to add PKR79/sh: Backed by attractive USD based ROE of 27.2% and hedge EBITDA 18,135 16,374 19,399 20,746 Supply
against local & foreign inflation and interest rate changes, LUCKY’s 660MW coal EBITDA margin 38% 30% 30% 30% Analysis
based power plant creates a value of 60/sh. The project entails an equity Net income 12,197 9,199 13,116 12,636
investment of USD221mn (75:25 D/E) and is scheduled to be completed in 1ST EPS (PKR) 38 28 41 39
Mar 2021. LEPCL would have to rely on imported coal for the first two years, for DPS 13 11 14 16 Rising
which it would receive an ROE of 27.2%. However, a coal supply agreement for BVPS 267 283 312 337 input cost
the supply of 3.6mn tons of coal p.a with SECMC would be enough to cater Dividend yield 3% 2% 3% 3%
minimum guaranteed availability (85%) of the project. Hence, it will be P/E 12.38 16.42 11.51 11.95
transitioned to local coal for the remaining life of the project with ROE of 29.5%. EV per ton 119 81 54 47 Outlook on
EV/EBITDA 0.72 0.64 0.38 0.32 Cement prices
LUCK is the most efficient energy player in the industry that relies competently on ROA 11% 8% 10% 9%
its in-house cheap power production facility. The company has installed a ROE 14% 10% 13% 12%
180MW/75MW of a gas-based power plant in both North and South region Source: Company accounts & AAH Research AAH Cement
respectively along with 25/21MW of WHR in each region. The high dependency Universe
on CPP and WHR makes it cost competitive among other players in the industry.
However, in the wake of increasing coal prices coupled with uncertainty on
cement prices, we expect Lucky’s core gross margin to drop from the highs of Industry
48/47% (FY16/FY17) to an average of 32% over FY19-24. 32
Multiples
Introduction
LOGISTICS

Outlook
Stemming foot in auto-mobile business: Backed by increasing demand of auto
industry, a 10 year tax holiday and lesser duties under the Automotive
Development Policy for 5 years, are the prime benefits that led the company to Export Demand
enter into a joint venture with KIA Motors Corporation, which is expected to Outlook
commence its commercial operation in second quarter of CY19. The company has
a stake of 70% in the project with an equity contribution of PKR14bn. We have
not incorporated this investment into our TP. However, the investment is Supply
estimated to add Rs42/sh in our TP that remains a key upside to our estimates. Analysis
LUCK is in a suit of installing a clinker production unit in Iraq (Samawah) that is

expected to come online by the last quarter of CY19. The production unit will not Rising
only increase the company’s share in Iraq market but will provide a route of input cost
cheaper clinker availability to the grinding mill installed in Basra. It is pertinent to
note that the company is currently purchasing clinker from UAE, where the
increase in clinker cost has dropped the company’s Iraq mill margins from 28% in Outlook on
FY17 to 24% in FY18. We expect margins to hover same in FY19, however, the Cement prices
later commencement of integrated plant might improve margins in long run.
Taking into account all above-mentioned businesses, LUCK is expected to bode AAH Cement
well in the long run, however, in the short-run margins are expected to shrink on Universe
the back of uncertainty of marketing arrangement among cement players coupled
with rising coal prices. We see earnings to increase with a CAGR of 5% from FY19-
24. Hence, we have a BUY call on the scrip with Jun-19 TP of PKR571/sh. Industry
33
Multiples
Introduction
LOGISTICS

Outlook
Key risks to our investment case are: i) lower than expected demand growth ii)
higher than expected increase in input cost iii) disruption in marketing
arrangements resulting a reduction in cement prices from our base case iv) Export Demand
greater than expected currency devaluation v) Delay in execution of projects Outlook
Key upside to our investment case are i) early commencement of new line that
results in higher dispatches growth ii) higher than estimated increase in cement Supply
prices iii) higher than the estimated decrease in input prices. Analysis
Valuation snapshot PKR/Sh Share in TP
Rising
Cement 319 56%
Lucky Electric power 60 10% input cost
ICI 103 18%
Iraq mill 41 7%
Outlook on
DR Congo plant 28 5%
Cement prices
NutriCo Pakistan 14 2%
Yunus Energy 6 1%
KIA motors* 42 - AAH Cement
Universe
Target Price 571
*Not incorporated in TP
Industry
34
Multiples
Introduction
LOGISTICS

Outlook
EPS (PKR) USD/Ton PKR Mn EBITDA/ton
60 EPS EPS growth
50% EV/ton
140 2,500
43% 49 40% 119 2,121
50 44 120 1,915
2,066 Export Demand
41 39 30% 2,000 1,751
40
38 100 81 1,623 1,736 Outlook
13% 20%
28 80 1,500
30 10% 10% 54
0% 60 47 39
20 32 1,000
-4% -10% 40 Supply
-11%
10 20 500
-25%
-20% Analysis
0 -30% - -
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
Rising
input cost
ROE ROA Market share

18%
15%
24%
Outlook on
14% 19% 19% 19% 18% Cement prices
15% 13%
12% 12% 12% 12%
11% 10% 10% 10% 20% 16% 17% 16% 17%
12% 10% 9% 16%
9% 9% 12%
8%
6%
6%
8%
AAH Cement
3%
3% 4% Universe
0% 0% 0%
FY16A
FY17A
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
FY19E
FY20E
FY21E
FY22E
FY23E
FY18A
FY18
FY19E
FY20E
FY21E
FY22E
FY23E
A
Industry
35
Multiples
Introduction
LOGISTICS
Cement Universe: DGKC Local Demand

Outlook
DG Khan Cement Company Limited DGKC - Over weight
Target Price: PKR 139 Export Demand
Robust expansion online Current Price: PKR 85.97 Outlook
DGKC has underperformed KSE-100 index by ~39%, since the start of FY18 which Key Data
PSX Ticker DGKC
seems to be unjustified. With an upside of 68% from our Jun-19 TP of PKR139/sh, a Supply
Year End June
forward P/E of 6.9x and EV/ton of USD30 on FY19 earnings, we have a BUY call on the Analysis
Shares Outstanding 438.12 mn.
scrip. Our liking for the scrip is premised on i) 2.84mn tons of capacity addition in Free Float 219.06 mn.
south region (3rd largest capacity share in south region) that is expected to boost Market Cap 37.66 bn.
company’s volumetric growth by 30%/6% in FY19/20 ii) diversified investment 52 Week High 171.58 Rising
portfolio in banking, textile and energy sector that would provide a support to the 52 Week Low 91.54 input cost
company’s bottom-line in both near and long-term (historically on average,
RELATIVE PERFORMANCE (1 Year)
investment from dividends and associated income contributed 22-24% in the
company’s EPS) iii) 5 year tax exemption on Hub plant that would further support to 160 DGKC KSE-100
Outlook on
company’s earnings and iv) installation of 30MW coal-fired power plant that would 140
Cement prices
reduce company’s dependency on national grid. 120
100
Therefore, in the light of above-mentioned scenario, we expect DGKC’s 80
AAH Cement
revenue/earnings to grow with a CAGR of 12%/13% over the period of FY19-24 60
Universe
respectively. However, higher dependency on coal is also a key risk for the company, as 40
the company is not only dependent on coal for fuel but also for power generation that 20
accounts for 20-25% of its total energy requirement. (refer annexure 4 for coal price -
sensitivity). But it is pertinent to note that the dependency on coal is still cheaper than 4-Oct-17 4-Dec-17 4-Feb-18 4-Apr-18 4-Jun-18 4-Aug-18 4-Oct-18 Industry
Source: Company accounts & AAH Research 36
Multiples
fully reliance on the national grid.
Introduction
LOGISTICS

Outlook
On the other hand, the operations in the south region will be majorly reliant on Key Financial Highlights
national grid (Company shifts it DG khan site’s 24MW FO based plant to Hub site) FY18A FY19F FY20F FY21F
that will limit company’s ability to improve margins in the long run amid pricing
Revenue 30,668 40,096 44,751 47,333 Outlook
pressure that prevails nationwide. However, we expect the company to soon
Revenue growth 2% 31% 12% 6%
announce a WHR or captive power plant installation in its south. Assuming no
captive plant in the south region, we expect gross margins to average at 21% over Supply
EBITDA 10,098 11,060 11,823 12,582
FY19-23 compared to 36.3% (historic 5 year average). Analysis
EBITDA margin 33% 28% 26% 27%
Key risks to our investment case are: i) lower than expected demand growth iii) Net income 8,838 5,391 6,151 7,119
higher than expected increase in energy cost iv) lower cement prices v) greater EPS (PKR) 20.17 12.30 14.04 16.25
than expected currency devaluation. DPS 4.25 5.00 5.50 6.50
Rising
BVPS 178 187 198 210 input cost
Key upside to our investment case are i) higher than estimated increase in
cement prices iii) higher than the estimated decrease in energy cost. iv) strong Dividend yield 4.9% 5.8% 6.4% 7.6%
local demand v) installation of CPP/WHR on hub plant. P/E 4.26 6.99 6.12 5.29
Outlook on
EV per ton 80 30 19 10
Cement prices
EV/EBITDA 6.65 5.53 4.53 3.64
ROA 8% 5% 5% 6%
ROE 11% 7% 7% 8% AAH Cement
Universe
Industry
37
Multiples
Introduction
LOGISTICS

Outlook
EPS (Pkr) EPS EPS growth USD/Ton PKR Mn EBITDA/ton
25 30%
EV/ton
140 126 3,000
20.17 14% 16% 18.88 21.00 20% 114 Export Demand
120 2,392
20 11% 2,500
16.25 11%10% 2,040 Outlook
16% 0%
100
80 2,000 1,676 1,783 1,944
15 12.30 14.04 80 1,567
-10% 1,500
10 60
-20%
40 30 1,000 Supply
-30% 19
5
-39% -40% 20 500 Analysis
- -50% - -
FY16A
FY17E
FY18E
FY19E
FY20E
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
Rising
input cost
ROE 10% ROA Market share

18%
15%
8% Outlook on
11% 8% 7% 13% 14% 13% 13% 12%
12%
6%
7% 14% 11% 11% Cement prices
8% 9% 5% 10%
9% 7% 8% 6% 5%
7% 10%
6% 4%
6% AAH Cement
3% 2%
2%
Universe
0% 0%
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
FY19E
FY20E
FY21E
FY22E
FY23E
FY16A
FY17A
FY18A
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
-2%
Industry
38
Multiples
Introduction
LOGISTICS
Cement Universe: KOHC Local Demand

Outlook
Kohat Cement Company Limited KOHC - Over weight
Attractive valuations warrants a ‘BUY’ Current Price: PKR 114 Outlook
Key Data
We initiate our coverage with a ‘BUY’ call on Kohat Cement Company (KOHC), with PSX Ticker KOHC
Jun-19 TP of 141/sh (implying a total return of 28%). Our investment thesis is based Year End June
Supply
on its upcoming capacity expansion that will increase KOHC’s capacity by 87% to Shares Outstanding 154.51 mn. Analysis
5.4mn tons, its recent grinding mill installation of 105tph which will translate into Free Float 46.35 mn.
dispatches growth of 19% by FY20 and a tax credit of PKR1.6bn under section 65B Market Cap 17.62 bn.
which will boost its earnings by 80% YoY. The commencement of the new plant would 52 Week High 172.98 Rising
not just augment dispatches growth (↑19%/42% YoY during FY20/21), but would also 52 Week Low 103.33 input cost
increase its market to 7.6% by FY21. We expect the company to post a 5-year earning RELATIVE PERFORMANCE (1 Year)
CAGR of 10%. The key driver would be a capacity expansion of 2.5mn tons that is KOHC KSE-100
estimated to add PKR1.25/4.07 per share (excluding tax credit) to FY20/21 earnings Outlook on
160
respectively. 140
Cement prices
120
In the near term, we expect KOHC’S margins to remain depressed on account of 100
higher reliance on national grid (Average gross margins are likely to clock in at 25% 80
AAH Cement
during FY19-23 compared to 39.6% during FY14-18). As a result, FY19 earnings are 60
Universe
expected to decline by 18% YoY where FY19 onwards, we expect earnings to grow at a 40
CAGR of 18% from FY20-23 mainly driven by the upcoming capacity expansion and a 20
tax benefit. - Industry
4-Oct-17 4-Jan-18 4-Apr-18 4-Jul-18 4-Oct-18 39
Multiples
Introduction
LOGISTICS

Outlook
Recent decline in KOHC’s price (28% since FY18) have created attractive Key Financial Highlights
valuations with the scrip currently trading at an attractive forward P/E & EV/ton FY18A FY19F FY20F FY21F
In PKRmn,unless otherwise stated
of 7.2x/USD37 on CY19 earnings respectively. The stock looks expensive on CY19 Export Demand
Revenue 13,439 14,780 18,577 27,032
earnings but in our view is justified due to its capacity expansion that is expected
Revenue growth -1% 10% 26% 46%
Outlook
to come online in 2HFY20. Moreover, the right metric to see KOHC is PEG ratio
which the company is trading at 0.42. Hence, KOHC remained our top pick in AAH Gross profit margin 32% 27% 25% 23%
universe. EBITDA 4,583 4,187 5,070 6,496 Supply
EBITDA margin 34% 28% 27% 24% Analysis
Key risks to our investment case are: i) delay in commencement of new line ii) Net income 2,980 2,429 4,569 3,546
lower than expected demand growth iii) higher than expected increase in input EPS 19.29 15.72 29.57 22.95
cost iv) disruption in marketing arrangements resulting reduction in cement DPS 5.00 4.00 6.00 9.00 Rising
prices from our base case v) greater than expected currency devaluation. BVPS 116 127 153 170 input cost
Dividend yield 4.4% 3.5% 5.3% 7.9%
Key upside to our investment case are: i) early commencement of new line that P/E 5.92 7.26 3.86 4.97
result higher volumetric growth ii) higher than estimated increase in cement
EV per ton 31 37 28 16
Outlook on
prices iii) higher than estimated decrease in input prices iv) installation of WHR
on line II. EV/EBITDA 0.74 1.15 0.74 0.36 Cement prices
ROA 13% 8% 12% 9%
Universe
Industry
40
Multiples
Introduction
LOGISTICS

Outlook
PKR Mn EPS EPS growth USD/ton
35 29.60 100%
EV/ton Pkr mn
31.61 EBITDA/ton
48 1,800
30 80% 1,552 1,513 Export Demand
88% 25.91 42 37 1,600 1,418
22.98 1,332
25
19.29
60% 36 31 1,400 1,212 1,200 Outlook
20 40% 30
28 1,200
15.73 1,000
15 22% 20% 24
13%
16 800
10 0%
18 12 600 Supply
-16% 12 7 400
5 -18%
-22%
-20%
6 200
Analysis
- -40% 0 -
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
Rising
input cost
25% ROE ROA Market share 7.6%

13%
8% Outlook on
20% 19% 13% 12% 11%
10% 6% 5.4% 5.1% 5.6% Cement prices
17% 14% 10% 9% 4.9% 4.9%
15% 14% 15%
12% 8% 4%
10% 7%
AAH Cement
5% 2%
4% Universe
0% 1% 0%
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
FY19E
FY20E
FY21E
FY22E
FY23E
FY18A
FY16A
FY17A
FY18A
FY19E
FY20E
FY21E
Industry
41
Multiples
Introduction
LOGISTICS
Cement Universe: PIOC Local Demand

Outlook
Pioneer Cement Company Limited PIOC - Over weight
Target Price: PKR 46.4 Export Demand
Growth contingent on project execution Current Price: PKR 39.8 Outlook
Key Data
PIOC is our preferred play in AAH universe due to its expansion plan of installing a trio PSX Ticker PIOC
plant which includes 2.52mn tons of new cement line, 24MW coal-fired power plant, Year End June
Supply
and 12MW WHR. The company has upgraded its grinding mill to utilize its full capacity Shares Outstanding 131.22 mn. Analysis
that was previously limited due to technical issues. The combined impact of these Free Float 72.17 mn.
projects will result in a 2.8ppts increase in market share (~6.1%) by FY21. Moving Market Cap 9.04 bn.
forward, we expect revenue/earnings to grow with a CAGR of 16%/50% over the 52 Week High 36.00 Rising
period of FY21-23 respectively. Hence, we have a BUY call on the scrip with an upside 52 Week Low 15.09 input cost
of 22% to Jun-19 TP of PKR46.4/sh. The stock is currently trading at a P/E & EV/ton of RELATIVE PERFORMANCE (1 Year)
8.2x/ USD99 on CY19 earnings respectively while the scrip is trading at a PEG ratio of
0.20. KSE-100 PIOC Outlook on
130.0
Cement prices
Subdued cement prices, limited volumetric sales (due to technical issues in grinding 110.0
mill) and discounts offered by the company were the main reason behind the decline 90.0
in PIOC’s profitability in FY18. Moreover, an obstacle in capacity addition due to katas 70.0 AAH Cement
raj issue had created difficulty for the company as well. 50.0 Universe
30.0
10.0
4-Oct-17 4-Jan-18 4-Apr-18 4-Jul-18 4-Oct-18 Industry
Multiples
Introduction
LOGISTICS

Outlook
In near term, we expect earnings to decline by 33% YoY in FY19 on expectations of Key Financial Highlights
FY18A FY19F FY20F FY21F
subdued cement prices while in the long run, we anticipate earnings to normalize on In PKRmn,unless otherwise stated Export Demand
account of commencement of trio plant that would increase volumetric growth by Revenue 10,121 11,104 17,811 21,367 Outlook
21% over FY20-23. With the completion of power plants (coal-fired & WHR), we Revenue growth -5% 10% 60% 20%
expect a recovery in gross margins from 18% in FY19 to 30% by FY23. Moreover, PIOC’s Gross profit margin 28% 18% 19% 25%
capacity is likely to come online by 2HFY20 which will be financed through a D/E ratio EBITDA 2,805 2,593 4,059 6,213 Supply
of 75:25. Furthermore, PIOC is likely to book a tax credit of PKR2.8bn in FY20 with an Analysis
earnings impact of PKR12.4/sh.
Net income 1,645 1,106 4,116 1,941
Key risks to our investment case are: i) delay in commencement of new line ii) lower EPS (PKR) 7.24 4.87 18.12 8.55
Rising
than expected demand growth iii) higher than expected increase in energy cost iv) DPS 4.07 2.00 2.00 3.50
BVPS 45.1 47.9 64.1 69.1
input cost
lower cement prices v) greater than expected currency devaluation.
Dividend yield 10.2% 5.0% 5.0% 8.8%
Key upside to our investment case are i) early commencement of new line resulting P/E 5.50 8.17 2.20 4.66 Outlook on
higher volumetric growth ii) higher than estimated increase in cement prices iii) higher EV per ton 79 99 51 47 Cement prices
than the estimated decrease in energy cost. iv) strong local demand. EV/EBITDA 6.43 10.95 8.21 5.15
ROA 5% 3% 8% 4%
Source: Company accounts & AAH Research Universe
Industry
43
Multiples
Introduction
LOGISTICS

Outlook
EPS (Pkr) EPS EPS growth USD/ton
EV/ton Pkr Mn EBITDA/ton
25 300%
18.11 271% 19.36 250%
120
99
2,500 Export Demand
20 1,921
14.82
200% 100
79 2,000 1,702 Outlook
15 150% 80 1,339 1,235 1,340
1,500
8.51 74% 100% 60 51 47
10 7.24 50% 41 876
4.88 31% 40
34 1,000 Supply
0%
5 -44% -33%
-53% -50% 20 500 Analysis
- -100% 0 -
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
Rising
input cost
ROE
10% ROA 9%
28% 8% 8% Market share Outlook on
30%
8% 6.1% 6.5%
25% 22% 6% 6%
5.6% Cement prices
19%
20% 16% 6% 5%
12% 4% 4%
3.5% 3.5% 3.4% 3.7%
15% 10% 4%
10%
3% AAH Cement
2% 2% Universe
5%
0% 0% 0%
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
FY19E
FY20E
FY21E
FY22E
FY16A
FY17A
FY18A
Industry
44
Multiples
Introduction
LOGISTICS
Cement Universe: FCCL Local Demand

Outlook
Fauji Cement Company Limited FCCL – Over weight
Correction offers value; limited triggers in the Current Price: PKR 20.6 Outlook
medium term PSX Ticker

Key Data
FCCL Supply
Declining market share on account of limited opportunities to capture growing Year End June
Analysis
cement demand (due to higher utilization) has restricted the scrip’s upside to a Shares Outstanding 1379.8 mn.
meager 11% with Jun-19 TP of PKR21.9/sh. Like other cement players, the company Free Float 758.90 mn.
has intended to establish a new cement plant but details of the project have not been Market Cap 28.3 bn.
Rising
finalized which will restrict Fauji’s profitability in the upcoming years. Assuming no 52 Week High 31.87
expansion, the company is expected to lose its market share by FY20 from 7.4% to 52 Week Low 19.24 input cost
6.9%. RELATIVE PERFORMANCE (1 Year)
FCCL KSE
160 Outlook on
In the wake of rising coal prices, the company has decided to improve operational
efficiencies by installing a solar power plant (expected to meet 12%/17% power
140 Cement prices
120
requirement in FY20/21) which would further reduce its dependence on the national
100
grid after the installation of 9MW WHR on line II. The above-mentioned measure is
likely to improve gross margins by a meager 1.7pps/2pps during FY20/21 to 23%/25% 80 AAH Cement
respectively. 60 Universe
40
20
- Industry
4-Oct-17 4-Jan-18 4-Apr-18 4-Jul-18 4-Oct-18 45
Multiples
Introduction
LOGISTICS

Outlook
The expectation of a slowdown in cement demand coupled with higher input cost Key Financial Highlights
is likely to erode FCCL’s FY19 earnings by 26% YoY (adjusting normalized tax would FY18A FY19F FY20F FY21F
result in a decline of 12% YoY) where beyond FY19, earnings are expected to grow Revenue 21,161 21,422 22,178 23,105
at a CAGR of 15% during FY20-23. With the above-mentioned FY19 earnings Outlook
Revenue growth 4% 1% 4% 4%
outlook, the stock looks expensive at P/E & EV/ton of 11.8x/ USD62; hence we
believe the stock has almost realized its value with limited triggers that can create
value for the scrip. EBITDA 5,663 5,202 5,708 6,276 Supply
EBITDA margin 27% 24% 26% 27% Analysis
Key risks to our investment case are: i) lower than expected demand growth ii) Net income 3,222 2,396 2,843 3,219
higher than expected increase in input cost iii) disruption in marketing EPS (PKR) 2.34 1.74 2.06 2.33
arrangements resulting a reduction in cement prices from our base case iv) greater DPS 2.00 1.00 1.25 1.50 Rising
than expected currency devaluation. BVPS 14.8 15.6 16.1 15.7 input cost
Dividend yield 9.7% 4.9% 6.1% 7.3%
Key upside to our investment case are i) commencement of new line that results in P/E 8.80 11.83 9.97 8.81
higher dispatches growth ii) higher than estimated increase in cement prices iii) Outlook on
EV per ton 86 62 55 51
higher than the estimated decrease in input prices. EV/EBITDA 1.67 1.53 1.30 1.15
Cement prices
ROA 11% 8% 10% 11%
ROE 16% 11% 13% 15%
Source: Company accounts & AAH Research AAH Cement
Universe
Industry
46
Multiples
Introduction
LOGISTICS

Outlook
EPS (Pkr) EPS EPS growth USD/Ton EV/ton PKR Mn
100
EBITDA/ton
4 3.15 30% 2,500
86 2,172
3 2.34
19% 2.33 2.76 1,985 Export Demand
20% 80 2,000 1,763
17% 14% 62 1,591 1,603
3
2.06 18% 10% 55 1,461 Outlook
2 1.74 13% 60 51 47 1,500
0% 42
2 40 1,000
-10%
1 Supply
-20% 20 500
1
-26% Analysis
- -30% 0 -
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
FY19E
FY20E
FY21E
FY22E
FY23E
FY18A
Rising
input cost
25% ROE 16% ROA Market share

20% 15% Outlook on
20% 18% 13% 14% 9%
16% 15% Cement prices
13% 11% 7.3% 7.4% 7.2% 6.9%
6.6% 6.4%
15% 11% 10% 11% 7%
10%
10% 7% 8% 5% 6.1%
AAH Cement
5% 4% 3%
Universe
0% 1% 1%
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
FY17A
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
Industry
47
Multiples
Introduction
LOGISTICS
Cement Universe: CHCC Local Demand

Outlook
Cherat Cement Company Limited CHCC - Over weight
Price hike can materialize volumetric growth Current Price: PKR 74.56 Outlook
Key Data
The expected tax benefit of PKR1.3bn in FY20, tax exemption on Line II and volumetric PSX Ticker CHCC
growth with a CAGR 9% from FY19-23 (due to the commencement of line III Year End June
Supply
operations), implies an upside of 25% with Jun-19 TP of PKR 80.1/sh. The stock has Shares Outstanding 131.22 mn. Analysis
underperformed KSE-100 index by 39% since the start of FY18 and is trading at a P/E Free Float 72.17 mn.
& EV/ton of 6.85x/ USD79. With earnings 5-year earnings CAGR of 13%, we have a Market Cap 11.8 bn.
BUY call on the scrip. 52 Week High 140.72 Rising
52 Week Low 77.31 input cost
CHCC’s timely commencement of line II operations has resulted into a 10 year high RELATIVE PERFORMANCE (1 Year)
volumetric growth of 2.52mntons (↑63% YoY) in FY18 but due to high input cost and CHCC KSE-100
subdued cement prices, the impact of volumetric growth has been nullified (Gross 160 Outlook on
margins declined to 22% in FY18 vs 33% in FY17). Moreover, five-year tax benefit 140 Cement prices
online II has provided some breather to bottom-line. With ongoing disruption in the 120
marketing arrangement of cement players, we expect Cherat’s earnings to decline 100
further by 19% YoY in FY19. Beyond FY19, we expect Cherat’s earning to grow with a 80
AAH Cement
CAGR of 23% over FY19-23. 60
Universe
40
20
31-Aug-17 31-Oct-17 31-Dec-17 28-Feb-18 30-Apr-18 30-Jun-18 Industry
Multiples
Introduction
LOGISTICS

Outlook
Despite the expectations of volumetric growth in upcoming years, CHCC gross Key Financial Highlights
margins are expected to lag behind its peers’ margins to average around 22.4% FY18A FY19F FY20F FY21F
during FY19-23 owing to higher input cost (due to higher dependency on national
Revenue 14,388 15,386 21,974 23,259 Outlook
grid) coupled with lower retention prices (offering more discounts compared to its
peer). However, the installation of tri-fuel generators will reduce the company’s Revenue growth 49% 7% 43% 6%
dependency on the national grid to 5% by FY22 which will improve its margins by Gross profit margin 22% 19% 20% 21%
Supply
3pps to 23% by FY22. EBITDA 3,589 3,240 5,100 5,496
Analysis
Key risks to our investment case are: i) delay in commencement of new line ii) Net income 2,132 1,728 3,387 2,386
lower than expected demand growth iii) higher than expected increase in energy EPS (PKR) 12.07 9.78 19.18 13.51 Rising
cost iv) lower cement prices v) greater than expected currency devaluation.
DPS 5.00 4.00 4.50 5.50 input cost
BVPS 63.3 70.0 85.4 94.6
Key upside to our investment case are i) early commencement of new line resulting
higher volumetric growth ii) higher than estimated increase in cement prices iii) Dividend yield 7.5% 6.0% 6.7% 8.2%
P/E 5.55 6.85 3.50 4.96 Outlook on
higher than the estimated decrease in energy cost. iv) strong local demand.
. EV per ton 83 79 44 38 Cement prices
EV/EBITDA 7.76 9.51 5.55 4.61
ROA 7% 5% 9% 6% AAH Cement
ROE 19% 14% 22% 14% Universe
Industry
49
Multiples
Introduction
LOGISTICS

Outlook
EPS (Pkr) EPS EPS growth USD/Ton
EV/ton Pkr Mn EBITDA/ton
100 1,800 1,626
25 22.03 120% 83 1,480
19.18 96% 100%
79 1,600
1,336 1,374 Export Demand
80 1,400
1,099 1,184
20 17.15 80% 1,200 Outlook
15 13.51 60% 60
12.07 44 1,000
9.78 40% 38 800
10 27% 28%20% 40 32
26 600 Supply
9% 0%
5 20 400
-19% -20% 200 Analysis
-
-30% -40% 0 -
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
Rising
input cost
ROE ROA Market share

12%
25% 22% 10%
9%
Outlook on
10% 9%
20%
19% 18% 8% 6.8% 6.7% 6.7% Cement prices
16% 8% 7% 5.5% 5.2%
14% 14% 6% 6%
15% 6% 5% 3.8%
10% 4% 2.7% AAH Cement
3%
5% 2% Universe
0% 0% 0%
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
FY19E
FY20E
FY21E
FY22E
FY16A
FY17A
FY18A
Industry
50
Multiples
Introduction
LOGISTICS
Cement Universe: ACPL Local Demand

Outlook
Attock Cement Company Limited ACPL - Over weight
Operational efficiency a competitive advantage Current Price: PKR 106 Outlook
Key Data
ACPL, the second largest cement producer in the south region, has a total production PSX Ticker ACPL
capacity of 3.09mn tons p.a. With the commencement of its line II operation, ACPL Year End June
Supply
capacity share increased by 5pps to 25% in the south region (excluding DGKC’s Shares Outstanding 114.52 mn. Analysis
expansion). Moreover, the increase in capacity led ACPL to enjoy a high volumetric Free Float 22.90 mn.
growth of 20% YoY in FY18. Moving forward, we expect revenue/earnings to grow with Market Cap 12.16 bn.
a CAGR of 6%/10% over the period of FY19-23 respectively. Furthermore, the 52 Week High 199.48 Rising
company is also in process of setting up a 15MW WHR and installation of a grinding 52 Week Low 118.07 input cost
mill in Iraq which supports our ‘BUY’ call on the scrip with a TP of PKR158/sh, RELATIVE PERFORMANCE (1 Year)
providing an upside of 53% from its current close. ACPL currently trades at a forward
ACPL KSE-100
P/E of 8.68x and EV/ton of USD38. 160 Outlook on
140 Cement prices
Moreover, we expect earnings to decline significantly by 33% YoY in FY19 (excl tax 120
credit) on the back of expected pricing pressure in the South region coupled with high 100
input cost. The company is also moving its focus towards capturing the export market 80 AAH Cement
in the wake of increasing supply in the region post commencement of LUCK and DGKC. 60 Universe
We have already witnessed a change in sales mix of 27% exports in FY18 dispatches 40
from 24% during SPLY which bolstered the distribution cost to 30% YoY in FY18. 20
-
11-Aug-17 11-Oct-17 11-Dec-17 11-Feb-18 11-Apr-18 11-Jun-18
Industry
51
Multiples
Introduction
LOGISTICS

Outlook
We do not expect the export market to provide major upside in the company’s
Key Financial Highlights
earnings in near term due to lower export retention prices. However, in the long run, FY18A FY19F FY20F FY21F
In PKRmn,unless otherwise stated
we expect currency devaluation to provide some support in margins. Hence, in the Export Demand
Revenue 16,884 19,468 19,939 20,545
light of the above-mentioned scenario, we expect exports dispatches to grow with a Outlook
CAGR of 7% over FY19-23 that would make 30% of total dispatches. Revenue growth 15% 15% 2% 3%
The company is in the process of setting up a 15MW of WHR which is expected to EBITDA 3,919 3,152 3,865 4,325
Supply
come online by the end of Oct’18. The new WHR would reduce the company’s EBITDA margin 23% 16% 19% 21%
Net income 4,400 1,400 1,963 2,395
Analysis
reliance on the national grid and provide some respite in the margins. Currently, the
company has installed a 12MW WHR plant on line 1 which contributes 30-35% in the EPS (PKR) 38 12 17 21
total energy mix. The commencement of new WHR will reduce the company’s DPS 8 5 7 8
Rising
dependency on the national grid from 60-65% to 30-35% by FY20 and improved BVPS 130 133 146 160
input cost
margins by 3pps to 26%. Moreover, operations of company’s Iraq grinding mill would Dividend yield 8% 5% 6% 8%
commence from Nov’18 which contributes PKR45/- in our valuation. However, as per P/E 2.76 8.68 6.20 5.08
our discussion with the management, the political turmoil in the country would keep EV per ton 73 38 32 26
Outlook on
the margins suppressed in the near term. However, in the long run, we remain EV/EBITDA 4.57 6.01 4.45 3.48
Cement prices
optimistic with regards to company’s decision of installing a grinding mill in Iraq. ROA 17% 5% 7% 9%
ROE 30% 9% 12% 13%
Key risks to our investment case are: i) delay in commencement of Iraq grinding mill Source: Company accounts & AAH Research AAH Cement
ii) lower than expected demand growth iii) higher than expected increase in energy
Universe
cost iv) lower cement prices v) greater than expected currency devaluation.
Key upside to our investment case are i) higher than estimated increase in cement
prices iii) higher than the estimated decrease in energy cost. iv) strong local demand Industry
52
Multiples
v) better than expected earnings from Iraq project.
Introduction
LOGISTICS

Outlook
PKR Mn USD/ton EV/ton
EPS EPS growth Pkr mn EBITDA/ton
45 60% 80 73 2,000 1,843
38.42 40%
40
45% 40% 70 1,800 1,595 1,627 Export Demand
35 22% 25% 31.35 60 1,600 1,401
30 26.09 20%20% 1,400 1,252 Outlook
50
25 20.91 0% 38 1,200 1,021
17.14 40 32 1,000
20 -20%
12.23 30 26 800
15
-40% 19 600
Supply
10 20 12
5 -60%
10
400 Analysis
-68% 200
- -80% - -
FY19E
FY20E
FY21E
FY22E
FY23E
FY18A
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
Rising
input cost
25% ROA
35%
ROE 10% Market share
30%
20%
Outlook on
30% 8%
25% 17% 6.2% 6.0%
5.7% 5.6% 5.3%
Cement prices
15%
6% 5.1% 5.2% 5.4%
20% 15% 16% 11% 12%
12% 13% 10% 9%
15% 4%
10%
9%
5%
AAH Cement
5% 7%
5% 2% Universe
0% 0%
0%
FY19E
FY20E
FY21E
FY22E
FY23E
FY18A
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
FY16A
FY17A
FY18A
FY19E
FY20E
FY21E
FY22E
FY23E
Industry
53
Multiples
Introduction
LOGISTICS
Industry Multiples FY19 Local Demand

Outlook
EBITDA/ton 120
18,000 16,374 EV/ton
99
16,000 100 Export Demand
14,000 79 81
12,000 11,060 80 Outlook
62
10,000 60
8,000
5,202 37 38
6,000 4,187 40 30 Supply
4,000 2,587 3,152 3,240
20 Analysis
2,000
- -
CHCC
FCCL
DGKC
PIOC
ACPL
LUCK
KOHC
LUCK
CHCC
DGKC
ACPL
FCCL
PIOC
KOHC
Rising
input cost
18.0 P/E 16.4 35% Gross margins
16.0 30%
14.0
30% 27% Outlook on
11.8
12.0 25% 22% 23% Cement prices
8.7 19% 20%
10.0 8.2 20% 18%
8.0 7.0 7.3 6.9
15%
6.0
10%
AAH Cement
4.0
2.0 5%
Universe
-
0%
FCCL
KOHC
ACPL
CHCC
LUCK
PIOC
DGKC
CHCC
FCCL
PIOC
DGKC
ACPL
LUCK
KOHC
Industry
54
Multiples
Introduction
LOGISTICS
Industry Multiples FY19 Local Demand

Outlook
1.60 PEG RATIO 1.49
7% Dividend Yield
1.40 6% 6%
1.20
6%
5%
Export Demand
5% 5%
1.00 0.85 0.87
5% Outlook
4% 4%
0.80
0.60 3% 2%
0.33
0.42 0.43
2%
Supply
0.40
0.20
0.20
1%
Analysis
- 0%
PIOC
CHCC
FCCL
KOHC
ACPL
DGKC
LUCK
FCCL
KOHC
ACPL
LUCK
PIOC
CHCC
DGKC
Rising
input cost
9% ROA 8% 8% ROE
8% 16%
8% 14%
7%
14% 12% Outlook on
6%
12%
10% 10%
11%
Cement prices
5% 5% 10% 9%
5% 5%
4% 8% 7%
3% 3% 6% AAH Cement
2% 4% Universe
1% 2%
0% 0%
FCCL
ACPL
KOHC
PIOC
CHCC
LUCK
DGKC
FCCL
KOHC
ACPL
PIOC
LUCK
CHCC
DGKC
Industry
55
Multiples
Aba Ali Habib Securities
Registered Office: Room # 419, 419 A & 421, 4th Floor, Pakistan Stock Exchange, I.I. Chundrigarh Road, Karachi.
Contact: 32429665, Cell: +92 3313219274, +92 3212484950
URL: www.abaalihabib.com
DEFINITION OF RATINGS
Ratings Expected absolute returns over 12 months
BUY More than 10%
HOLD Between 10% and -10%
SELL Less than and equal to -10%
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1. The analyst(s) declares that neither he/ his relatives have a Beneficial or Actual ownership of > 1% of equity of subject company/companies
2. The analyst(s) declares that he has no material conflict of interest with the subject company/ companies of this report
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Cement Sector

Pakistan Cement Industry Rabia Asif AC

Aba Ali Habib Securities | 09th Oct 2018

Slowdown in cement demand to hurt margins; fundamental

Infrastructure development remains a key concern Local Demand

Cement consumption (kgs) per capita 200,000

build Diamer-Bhasha and Mohammad Dam that are expected to

Low- Cost housing to drive cement demand Local Demand

Entrance in IMF program might slowdown cement demand Local Demand

Foreign exchange reserves hit a low of USD16bn in FY18 Local Demand

CAD elevated by 42% to USD18bn in

GDP multiplier to indicate cement demand ahead Local Demand

In the absence of growth in cement demand, export to be the

Afghanistan cement market Local Demand

Srilanka cement market Local Demand

Source: Cemnet Industry

Bangladesh cement market Local Demand

India cement market Local Demand

Oman cement market Local Demand

Conclusion Local Demand

26MTPA capacity addition over FY19-20 Local Demand

Analyzing the cement cycle 1995-2010 Local Demand

26MTPA of capacity addition over FY19-20 Local Demand

Scenario Analysis: utilization levels to settle at 78% by FY23 Local Demand

Optimum utilization level to reach by FY24 Local Demand

Imposition of additional duties & taxes will adversely impact

Monetary tightening to further squeeze profitability Local Demand

FCCL 1.76 1.75 1.74 1.73 1.72 0%

Capacity additions to increase pricing pressure Local Demand

Capacity additions to increase pricing pressure

Earnings sensitivity to changes in cement prices Local Demand

Our TP for LUCK has been derived using a sum-of-the

Cement Universe: LUCK Local Demand

Cement Universe: LUCK Local Demand

Cement Universe: LUCK Local Demand

LUCK is in a suit of installing a clinker production unit in Iraq (Samawah) that is

Cement Universe: LUCK Local Demand

Cement Universe: LUCK Local Demand

ROE ROA Market share

Cement Universe: DGKC Local Demand

Cement Universe: DGKC Local Demand

Cement Universe: DGKC Local Demand

ROE 10% ROA Market share

Cement Universe: KOHC Local Demand

Cement Universe: KOHC Local Demand

Cement Universe: KOHC Local Demand

25% ROE ROA Market share 7.6%

Cement Universe: PIOC Local Demand

Cement Universe: PIOC Local Demand

Cement Universe: PIOC Local Demand

Cement Universe: FCCL Local Demand

medium term PSX Ticker

Cement Universe: FCCL Local Demand

Cement Universe: FCCL Local Demand

25% ROE 16% ROA Market share

Cement Universe: CHCC Local Demand

Cement Universe: CHCC Local Demand

Cement Universe: CHCC Local Demand

ROE ROA Market share

Cement Universe: ACPL Local Demand

Cement Universe: ACPL Local Demand

Cement Universe: ACPL Local Demand

Industry Multiples FY19 Local Demand

Industry Multiples FY19 Local Demand