Seminar Lahore Stock Exchange

Initial Public Offering

AKD Securities Limited The Depth and Breadth
BY: MUHAMMAD FARID ALAM FCA MARCH 4TH 2011
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AKD Securities - Overview

The leading stock brokerage in Pakistan accounting for approximately 8% of average daily value traded on the Karachi Stock Exchange AKD Securities is in the top 5 brokers of all local Financial Institutions Key broker for foreign institutional investors with over US$1,300 million turnover in FY06-07 (25% of the total estimates FII turnover) Member of the National Commodity Exchange Limited (NCEL), currently in the process of launching commodity products to local and foreign investors Over 100 domestic institutional and high net worth clients handled by institutional desk comprising of: Commercial, Investment & Islamic Banks Development Financial Institutions Mutual Funds & Investment Companies Corporate Provident & Pension Funds Public & Private Sector Corporations

AKD Securities - Overview

AKD Securities Limited is a proud recipient of The Best Equity Brokerage House Award for the years 2005-06 and 200607, by CFA Association of Pakistan

The CFA Association is a global organization with over 84,000 members from the investment profession in 128 countries. It is also considered the most respected institution in setting investment industry standards of service performance and ethics.
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AKD Securities Area of Operations

Investment Banking Institutional Sales Online Trading Broking Research ENABLING our customers to achieve the best Investment Performance thro ugh: Best Research Best Execution Best Settlement Best Practices Best Service Training Marketing Compliance Technology Risk Management Administration
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Terms and Terminologies Used

IPO : Initial Public Offerings Primary Market

Secondary Market GDR: Global Depository Receipt
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Defining Initial Public Offering (IPO)

The first sale of stock by a company to the public. Companies offering an IPO are sometimes new, young companies, or sometimes companies which have been around for many years but are finally deciding to go public.

Factors Triggering the Timing for a Company of Going Public

Capital Needed Capital Needed Startup company Startup company needs needs large sums of large sums of capital, capital, beyond the beyond reach of a reach ofthe a private placement. private placement

Large Enough
Startup company is large enough and profitable enough to go public

Cheaper Cost
IPO will costs less than another round of venture capital

Prestige
Management, investors, want the glory of being associated with a highly successful company

Cash in Chips
Everyone wants to get liquid

Hot Stock Market

Stock market is hot and hungry for IPOs

Stakeholders in an IPO
A well-seasoned group of professionals facilitate the IPO Process
Investment Banker/Advisors Bankers CDC/Balloters Investors Underwriter Legal Council

Executive Management
Accounting / Financial Public Relation Independent Auditor AND

Members of the Exchange

What it takes for Listing

Taking a Company public requires a lot of commitment by Sponsors and effort by members and Advisors The following steps are involved in the listing process:
Structuring and Due diligence Valuation and Pricing Appointment of third parties Regulatory approvals Marketing and placement & Finally

IPO - Listing

Regulatory requirements An Insight

The following regulation needs to be complied with when listing a Company in Pakistan: The listing regulation Issue of Capital Rules, 1996 Companies Ordinance, 1984

SECP and Stock Exchanges guidelines for preparation of prospectus

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Regulatory requirements An Insight

For a Company to be listed on the Exchange the following conditions apply It should a public limited Company with a paid up capital of PkR 200 mn post IPO Incase the existing paid up capital of the Company is upto PkR 500 mn atleast 50% of the such capital shall be offered to the public Incase capital of the Company is beyond PkR 500 mn public offer shall be atleast PkR 250mn atleast or 25% of the Capital, whichever is higher The Issuer may allot upto 25% of the public offer to Overseas Pakistanis and upto 5% of the public offer to its employees A person who holds 10% of the shares of the Company may offer shares to public via Offer for Sale The size of capital to be offered through offer for sale shall not be less PkR 100 mn otr 25% of capital, whichever is less 11

Benefits to Stakeholders from a Listed Company

- Better terms from lenders - Management retains larger degree of control viz a viz private equity
Economy

- Foreign Portfolio Investment - Price discovery for public sector Companies

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Sponsor/Investor

- Marketable commodity

SIZE DOES NOT MATTER BUT LISTING DOES

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IPO Prospects
A falling

market combined with volatility & uncertainty gives an adverse Impact to the primary market. The fate of primary market (IPOs) is directly linked with that of the Secondary market. For a successful IPO, the secondary market needs to be stable if not buoyant.

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IPO Prospects
Specific

IPO related issues are: Quality of Issues Pricing of Issues Post Listing Performance Effects of Broader Market on IPOs.

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Has the IPO Market Finally Recovered?

Good Companies willing to compromise on valuations to be able to raise capital and grow & glow rather than eternally wait for GOOD TIMES
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An IPO Is An IPO Till Listed

Once a stock is listed, investing in it as like investing in any secondary market stock. The price is influenced by: General Economy Trends Sector Condition Companys Specific Performance

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IPOs CANNOT BE SOLD BUT HAVE TO BE BOUGHT

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Role of SECP
To Develop and Regulate Capital Market in Pakistan

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Finally a Development Book Building

Traditionally a company intending to raise funds from the public only had an option of going for a fixed price IPO However, fortunately enough as part of the Government initiative for development of financial markets, the SECP formally launched the book building rules in April 2008, thereby starting a new era of listing The book building mechanism may be new to Pakistan, but has been widely practiced in public offerings globally

India has been leading player in book building which is evident from the fact that all the new listings in India during last two years have been through the book building mechanism
Fortunately for Pakistan capital markets, the investors now have flexibility to bid at the price they feel feasible to subscribe to a new stock
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Finally A Development
It would be pertinent to highlight that AKD Securities Limited was the first one to apply these rules in Pakistan by offering shares of Ghani Gases Limited via the book building mechanism. The issue was oversubscribed

AKD Securities is currently working on the listing of two major infrastructural projects namely:
Tuwairqi Steel Mills Limited International Steel Limited

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Book Building Comparison with Traditional Offering

Features
Pricing

Traditional Offering
Price at which securities are offered/allotted are known in advance

Book Building process

Demand

Price at which securities will be offered/allotted is not known in advance to the investor. Only an indicative price range is known. Demand for the securities offered is Demand for the securities offered can be known only after the closure of the known everyday as the book is built. issue The Issuer has no discretion over the The issuer can decide to allocate shares to quality of investors as the shares are any investors falling within the cut-off issued to general public price range. Includes certain fixed costs to be The cost of the transaction is significantly borne by the Issuer that push the reduced as the public portion is smaller overall cost of transaction at higher and hence fixed costs are reduced. side
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Investors

Cost of the Transaction

Book Building Process

Book building is a process whereby investors bid for a specific number of shares at various prices The Lead Manager & Book Runner (LM & BR), with the consent of Offeror sets a floor price which is the minimum bidding price an investor can bid at An order book of bids from investors is maintained by the BR, which is then used to determine the cut off/strike price through the Dutch Auction Method A bid by a potential investor can be a Limit Bid, Strike Bid or a Step Bid a. Limit Price: Maximum price an investor is willing to pay b. Step Bid: A series of limit bids at increasing prices c. Strike Order: A bid for the specified number of shares at strike price 23

Book Building Benefits

IPOs via the book building process are gaining popularity globally over the fixed price IPO methodology A fair mechanism of price discovery and demand for shares in the market The greater control and flexibility of book building method provides substantial benefits to the Offeror Assists in capitalizing over the demand of shares in the market thereby reducing the risk of under pricing Lower issue cost compared to traditional method resulting in cost savings Offeror also has the option to select the quality of investors
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Book Building Benefits

In traditional IPO methodology the investor mix is usually general public as preference is given to investor subscribing for 500 shares. However, in book building mechanism institution interest can be solicited thereby improving the quality of investors

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Book Building Procedure

Preliminary prospectus are sent to institutional investors and HNWIs (who are individuals having net worth of at least PkR1.0 Million) to solicit their interest to participate in the bidding process Identities of the investors are be kept confidential Bids can be a limit bid (maximum price willing to pay) or a strike bid (price at which demand is enough to raise the minimum targeted capital) or a step bid (series of limit bids at increasing prices)

Bidders have the right to revise or withdraw their bids during the bidding period
BR shall collect not less than 25% of application money as margin from corporate and 100% for HNWIs BR on receipt of books shall build an order book and maintain record of bids received 26

Book Building Procedure

The Offeror in consultation with the LM & BR shall determine the strike price at the close of the bidding period Successful bidders to be intimated within one working day of closure of bidding period, strike price and no. of shares provisionally allotted Successful bidders to deposit balance money within 3 working days, otherwise margin money will be forfeited Offer to general public shall be equal to or at a discount to the final determined strike price through the Book Building Process Final allotment to be made after receipt of full subscription money and completion of public subscription

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GDR Through Book Building

Recent GDR (Global Depository Receipt) of Pakistani Companies through the Book Building process are as follows:
Amount Raised (mn) $150.00 $650.30 $800.00 $1,600.30

Company Name MCB UBL OGDC Total

Global update Singapores largest IPO

Hutchinson Port Holding Trust aims to raise upto USD 6.4 bn in an IPO 28

PERCEPTION THAT RATTLE US

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Government: Perceptions that Rattle Us

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Government: Perceptions that Rattle Us

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Economists cause the crisis, failed to spot it and have no idea how to fix it!

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Listed Corporate: Perceptions that Rattle Us

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Listed Corporate: Perceptions that Rattle Us

Companies May go sick but Promoters rarely do ! Once you become Big, you become Honest ! Is Trading & Insider Trading Inseparable ?

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Broker & Advisory: Perceptions that Rattle Us

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Broker & Advisory: Perceptions that Rattle Us

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Players: Perceptions that Rattle Us

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Players: Perceptions that Rattle Us

Demand Side

Financial Literacy
Awareness and Demanding Accountability, Transparency & Risk Information to make Informed Choices to save, borrow or Invest empowering people to change behavior. Trained Counselors being there real-time when financial decisions are made. Timeliness is vital

Supply Side Financial Inclusion Providing what People Demand. Increasing Penetration at the Grass root level by leveraging on Communications and Technology. Low cost models
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Pakistan Market Outlook

Flags for FY11
Post-flood rehabilitation and funding Soft commodity spike and Agri incomes Liquidity trajectory Central banks monetary policy Trade performance (EU concessions) Corporate results and Earnings outlook Leverage product reintroduction IMF tranches & Reform process Valuation expansion if political risk continues reducing & economic growth rebounds post floodimpacted FY11. Can take the KSE-100 Index to 13,250 by June 2011, particularly if leverage product is introduced KSE-100 Index can reach 13,100 if it reverts to historical average PER multiple Downside limited by: High dividend yield (2011F: 6.4%) Corporate earnings resilience Cash Market (downward sticky/reduced volatility)

KEY MACRO RISKS

Major terrorism event Disruptive political change Commodity price shock (esp. oil) Delayed recovery in export markets Weather related agri-sector failure
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Index Outlook Underpinned by

Regional Discount Convergence

While average historical discount has been 35% to regional markets, Pakistan equities currently trade at a ~44% discount to regional multiples. The broader market should return 16% as Pakistans risk premium converges to historical levels. Upside increases to 35% if OGDC is ignored. The market PER multiple has averaged 9x in the last 10 years. Convergence to the mean multiple implies an upside of 15%.. FY11F targeted EPS growth for Universe stands at 14%. Upside increases to 34% if heavyweight OGDC is removed from current valuations. Mapping AKD Universe target prices results in a Jun'11 KSE-100 Index target of 13,250 points.

Mean PER Reversion

Target Price Mapping

KSE 100 Index Forward PER Band (x)

(x) 14.5 Pakistan 11.0 Thailand Singapore 7.5 Malaysia Indonesia China CSI 300 4.0 Hong Kong India Philippines Regional Average Jul-04 Jun-05 May-06 Apr-07 Mar-08 Jan-09 Jan-10 Dec-10 Disc. to Region PER (x) 2010A/E 8.8 14.6 15.4 15.9 18.1 17.4 14.7 18.9 15.2 16.3 -45.9%

Regional Valuations
P/BVS (x) 2011F 7.8 12.2 14.1 14.2 14.9 14.2 12.7 15.7 13.8 14.0 -44.1% 2010A/E 1.7 2.1 1.8 2.2 3.5 2.6 1.9 3.2 2.4 2.4 -32.2% 2011F 1.6 1.9 1.7 2.1 3.2 2.2 1.7 2.7 2.2 2.2 -27.5% ROE (%) 2010A/E 18.9 14.1 11.5 14.0 19.4 15.0 12.9 16.7 15.6 14.9 26.6% 2011F 20.1 15.5 11.7 14.5 21.3 15.8 13.7 17.4 15.8 15.7 27.9% Dividend Yield (%) 2010A/E 5.9 3.3 3.0 3.3 1.9 1.5 2.9 1.2 2.9 2.5 2.4x 2011F 6.9 3.5 3.3 3.6 2.3 1.8 3.3 1.4 3.2 2.8 2.5x

Source: Bloomberg

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Pakistan Market volatility is an opportunity

KSE-100 Index Volatility
High Low 2001 1,550 1,075 2002 2,701 1,273 2003 4,604 2,359 2004 6,218 4,472 2005 10,303 6,218 2006 12,274 8,767 2007 14,815 10,041
167%

2008 15,676 5,865

2009 9,846 4,815

2010* 11,407 9,230

Difference between KSE-100 High & Low

112% 95% 66% 44% 39% 40% 48%

104%

24%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

KSE-100 Index YoY Performance

CY % 2001 -16% 2002 112% 2003 66% 2004 39% 2005 54% 2006 5% 2007 40% 2008 -58% 2009 60% 2010* 22% *CYTD 41

How Technology has Impacted Our Models!

Online Trading

Share has become a commodity

Hybrid & Purely Online Models The Role of Mutual Funds will assume more focus in channelizing savings to Capital Markets. Institutional and Retail Foray facilitated. The Broking Pie will grow biggerforays into multi asset class products.

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How Technology has Impacted Our Models!

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DOS & DONTS FOR IPOs

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Avoid Herd MentalityDevelop Independent Thinking

Youre jumping on because others are. Do you know where the bus is going?
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Expect the Unexpected!

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Be Flexible and Adapt to Changing Situations

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PATIENCETEMPERAMENT CONTROLHOLDLONG TERM

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DONT BE IN A HURRY

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At the End of the Day Pray!

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and Believe in Yourself !

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Thank You

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