Exactly 7 years ago I met a big client. I was pitching stocks but he was interested in setting up a company that was about to be eaten up by this giant and biggest of all Jins.
For all those who have just joined the community, we are discussing types of stocks that you should stay away from in Pakistan if you are a "one-time research and monthly inflow guy".
I explained the first Jin here and second Jin here.
Sub se mota Jin - the biggest of all Jins in the stock market - The state-owned companies!
Do you want Apple or Google ruined? Let the government manage it. All the innovation, growth, and momentum will die in ONE DAY!
This is why I call it the biggest Jin of the stock market!
Companies managed by the government of Pakistan are in itself Jins, unlike others where Jins get attached to companies from time to time.
Don’t be fooled by thinking that if you stay away from companies owned by the government of Pakistan you will be safe. They also include companies that do the majority of their business with the government.
So we have three types of companies we will talk about.
Owned by the State, managed by no-one
Owned by Private sponsors, but managed by the government
They look like commercial banks but there is nothing commercial about them
Owned by the State, managed by no-one
Approx. 10% of the KSE100 index today is represented by companies that are directly owned by the government. This is not small.
And each passing year their performance has been going down.
This is because the government use it for social support instead of managing it to make money for itself and other shareholders.
PSO - imports LNG but isn’t paid for it (called circular debt)
PPL and OGDC - subsidize our gas bills (again circular debt)
SSGC and SSGC - line losses
If you are a shareholder of this entity think about yourself as doing social service.
Owned by Private sponsors, but managed by the government
This is the second category I was talking about.
These companies are owned by private owners and that is deceptive.
They make money by selling their output/products only to the government.
The government is their single buyer and when this happens, sooner or later they become state-owned companies.
The government delays their payments, fines them, and changes their selling price whenever they want.
Example?
The most obvious is power generation companies
They make up 5% of the KSE100 index (denoted by blue highlight in the table below). This isn’t huge but when you add them with the above-mentioned truly state-owned companies, the number becomes 15% - big!
My big client set up a power generation plant and now government owes him in billions.
They look like commercial banks but there is nothing commercial about them
And this is the third and the latest addition to the list.
You: Bro, Commercial banks are private and they have no single buyer issue, why would you include it in the list?
Me: Because they have chosen to become a single supplier to the government.
Now this isn’t bad in normal circumstances but is there anything in Pakistan normal today?
These commercial banks have given so much debt to the government that if the government defaults, these banks might also.
In Srilanka and Ghana, IMF made sure that before these countries get a new debt they do local debt restructuring. And these are the headlines today in Pakistan also.
By no means I am saying that commercial banks today have become state-owned or they have a regulatory single-buyer issue.
But every passing quarter they are willfully choosing to become a single supplier to the government. This brings up the same issues as we discussed above.
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🖊️ Things aren’t as simple as I discussed above since government pays them interest against the money it borrows and unlike the power sector, these interests are paid in full but the logic stands true.
Otherwise, their stock performance would have been better and there would be no headlines about local debt restructuring.
Now if we add banks to this list of companies (highlighted in orange below) that have the biggest Jin on them, they are now 35% of the KSE100 index!
This is 1/3rd of all the stocks listed at PSX!!!
Have you ever read an analyst report writing about this?
But why do they always look cheap?
By the heading, it's given that they trade at cheaper multiples than the overall market.
And by virtue of this, these companies become a value trap.
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🖊️ A "value trap" is when an investor thinks they've found a good deal on a stock because it seems cheap based on the company's financial information and the current price in the market.
However, in reality, the stock is not actually a good deal and may end up being a bad investment.
So, it's like a trap that tricks the investor into thinking they're getting a bargain, but they end up losing money instead.
Example:
When you will compare OGDC or PPL (both state-owned) with POL and MARI (no Jins attached), they will always look cheaper. The analyst will do this comparison and suggest buying OGDC and PPL. But does this make sense?
Will OGDC and PPL ever be managed like POL and MARI are?
Will OGDC and PPL ever say no to their owner (the government)?
If not, how will they decide what is best for minority shareholders?
And this is why my friends, they trade cheaper to the market and better companies.
And this is why they become a value trap!
Should you buy them?
I don’t think so especially if you are a one-time research and continuous inflow type investor.
If you want to play cycles like buy when you read that government might end the circular debt or the power sector is getting money, then you may.
I understand that I am saying to think hard before you buy 35% of the listed stocks, but there are companies that have no Jins attached. We will discuss what these companies look like soon! Don't worry!
no-jins-attached email coming on 31st May!!!
So stay subscribed and if you are liking this, help me get more eyes on this newsletter 😃
Founder at InvestKaar.com. 15 years of investing and wealth management experience. Worked at most renowned brokerage houses in Pakistan. Won the best sales trader award for 2021 by CFA Society of Pakistan.