Domestic cement consumption surged 10.10% in Pakistan in January 2013, according to All Pakistan Cement Manufacturers Association. On top of 8% increase in Fiscal Year 2011-12, it jumped another 8% for the first seven months of Fiscal Year 2012-13.

Cement production is an important barometer of national economic activity,  according to a research report compiled by a Credit Suisse analyst.  Last year, CS analyst Farhan Rizvi said in his report that "higher PSDP (Public
Sector Development Program) spending has led to a resurgence in domestic
cement demand in FY12 (+8%) and with increased PSDP allocation for FY13
(+19%) and General Elections due in 2013, domestic demand is
likely to remain robust over the next six-nine months".

Ongoing public sector projects include new large and small dams,
irrigation canals, power plants, highways, rapid transit systems, flyovers, airports, seaports,
etc. Most of these were already in the pipeline when the PPP government
assumed control in 2008. Recent pre-election increases in PSDP funding
allowed work to resume on these projects in 2011-12.

 In addition to public sector infrastructure projects, there is a lot of
privately funded real estate development activity visible in all major
cities of the country.

Ocean Tower Karachi

Among the high-profile new construction projects completed this month is Ocean Tower in Karachi. At 393 feet high with 30 floors, it is now the tallest building in Pakistan. Ocean Tower has a shopping mall, food courts, corporate offices, a business club, car-parking area and 4 cinemas.

The Centaurus Islamabad

The Centaurus, at 361 feet, is another new project in Islamabad completed this month. It consists of three towers---office tower, residential tower and a 5-star hotel. The three will be linked by a shopping mall.

Big real estate developers like Bahria Town and
Habib Construction are developing both commercial and housing projects
in Islamabad, Karachi and Lahore. Other cities like Faisalabad,
Hyderabad, Larkana, Multan, Mirpur, Peshawar and Quetta are also seeing
new housing communities, golf courses, hotels, office complexes,
restaurants, shopping malls, etc.

Per capita cement consumption in Pakistan was only 70 Kg in 2003. It has more than doubled in the last decade.  With back-to-back increases in domestic cement demand, per capita consumption has now risen to 154 Kg which is still below average for Asia. But the rising demand is a good sign of economic recovery since 2009 when the GDP growth hit a low of 1.7%.

Centaurus Mall Opening Day

Credit Suisse is bullish on Pakistan's cement sector in particular and Pakistani shares in general.

CS analyst Farhan Rizvi has initiated coverage with "an OVERWEIGHT
stance, as we believe compelling valuations, improving domestic demand
outlook, better pricing power and easing cost pressures make the sector
an attractive investment proposition. Despite better growth prospects
(3-year CAGR of 17% over FY12-15E) and improving margins, the sector
trades at an attractive FY13E EV/EBITDA of 3.8x, 49% discount to the
historical average multiple of 7.4x. Moreover, FY13E EV/tonne of US$74
is approximately 29% discount to historical average EV/tonne of US$104
and 50% discount to the region".

A New Housing Construction Project in Rawalpindi

Another CS analyst Farrukh Khan, based in Credit Suisse’ Asia Pacific
headquarters in Singapore,says in his research report that “liquidity in 2012 has been concentrated in stocks offering positive
earnings surprises (e.g., United Bank, Lucky Cement, DG Khan Cement and
Bank Alfalah), enabling them to be strong outperformers. With further improvements in
liquidity, we expect a broad-based price discovery to take hold in
attractively valued oil and fertilizer stocks as well.”

 A string of strong earnings announcements by Karachi Stock Exchange
listed companies and the Central Bank's 1.5% rate cut have already helped Karachi's KSE-100 index surge nearly 50% (37% in US $ terms) in 2012 to top all Asian market indices. It was followed by Bangkok's SET index which advanced 36%. It also
easily beat India's Sensex index which was the top performer among BRICs
with 25.19% annual gain.

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