Test-driving Pakistan: Going from worst to best in the world
Burton Flynn and Ivan Nechunaev
April 2025
The worst in the world
Arriving in Lahore, Pakistan for company meetings felt like we were in the middle of the Covid pandemic all over again: everyone was wearing medical face masks when getting off the plane, and the immigration officer at the border asked if there was any reason for us to come and do business in Pakistan in person.
Luckily, there was no pandemic this time. Unfortunately though, the air quality in Lahore was by far the worst in the world on the day of our arrival, caused by busy traffic in the city, farmers burning remaining agricultural waste after harvest, and citizens' use of coal for energy production – all of which was exacerbated by seasonally dry weather with long spells of no wind or rain.
Ironically, the timing of our trip could not have been better: our first scheduled visit was to a company having a windfall and making it rain thanks to this air pollution crisis. We masked up – buying medical-grade face masks literally in the middle of the road near the airport from an entrepreneurially inclined local man – and went on to meet the firm's management and get a breath of fresh air.
We made a research trip to Pakistan in very challenging environmental conditions
Beneficiary of US tariffs
Our meeting with the senior management of a $100m manufacturer of home appliances and electrical devices at its headquarters in Lahore was marked by inhaling Alpine-fresh air made breathable by air purifiers produced by the company under its own brand. Needless to say, amid the ongoing air pollution crisis, these purifiers are instantly sold out, helping the country’s citizens improve air quality at home while boosting the company’s sales. The firm is also making Panasonic TVs and ACs – the complex production of which we observed during a tour of the company’s appliances factory – as well as other types of home products for various high-quality upscale foreign brands.
The company is also active in the power segment, manufacturing products such as energy meters and electric power transformers. This business has been one lucky unintended beneficiary of the current US administration’s tariff policy: amid higher tariffs by the US on China, the company’s electric transformers have become an all the more appealing choice for the US-based AI-driven data center businesses, given their lower cost and faster delivery times relative to competition. For example, it takes only six months to manufacture, ship, and deliver the company’s transformers to the US, while it is more expensive now to get them from China and it takes up to two years to source them from Mexico.
When touring the company’s energy meter factory, we observed how energy meters were calibrated without human touch by only using high-tech software that the company has built in-house, and we were impressed that less than 0.5% of meters end up being rejected for quality reasons. We also met the head of energy meter production who arguably has the strongest handshake in emerging markets – the pressure pleasure was ours.
Meeting with the management of a $100m manufacturer of home appliances and power transformers in Pakistan
Our fund had first invested in this business 10 years ago – and the stock more than doubled in the first 12 months during that prior ownership period. The company then had a rough stretch but has been making a spectacular comeback in the last couple of years, and so the fund bought its shares again a year ago. At the time, we wrote the following lines about it in our monthly update:
“The fund also bought a $75m home appliances firm in Pakistan trading at a forward P/E of only 5x, which guides for over 150% earnings growth this year on the back of strong demand and relaxation of import rules. This firm’s stock price had already doubled for our fund nearly a decade ago and we are looking for a repeat.”
Our team’s investment objective is very ambitious – to find stocks that can double in 12 months – and we were happy to make such a commitment to doubling in this stock: the investment case of high earnings growth coupled with decreasing debt levels and cheap valuation was screamingly obvious to us.
Coincidentally, the day we met the company on this trip was marked not only by the challenging air quality in Lahore but also by exactly the 1-year anniversary of our ownership of the firm's shares. And this stock did double, once again, and it got right over the 100% return for 12 months on the day we were in Lahore!
It felt fitting to mark this honorable occasion with the company’s management after our meeting and the factory tours with a tasty takeaway lunch served from a reputable local Chinese restaurant.
Enjoying Chinese takeaway lunch with the company’s management
Favorable demographics herald a smartphone boom
Our next meeting was with the management of a $300m manufacturer and distributor of smartphones, laptops, and smart TVs. By making and selling affordable Chinese-branded smartphones, the company is truly capitalizing on the advantageous demographic trends in Pakistan, a country home to the world's fifth-largest population of 250 million people where 40% of consumers still use feature phones and the 5G technology is not even rolled out yet. We estimate that regardless of the macro situation in Pakistan, the digital transition to smartphones and 5G technology alone can drive multi-year earnings growth of over 20% for this firm.
We toured a highly sophisticated factory where the company produces its smartphones and followed along from the very start of the manufacturing process through dozens of steps to the final stages, including a jaw-dropping station where the final product free-falls screen-down onto a granite rock from the height of two meters. We were amazed that none of the phones we saw tested had their screens shattered – we are fairly sure that most of our readers that own a California-branded smartphone had their screen broken at least once.
At the moment, all of the company's smartphones are made and sold locally as the government doesn't allow exports; however, in our view, exports should be allowed in the future for the benefit of Pakistan’s economy which had often experienced current account deficit in the past with too much dependence on imports and too little production for exports resulting in economic and currency turbulence. If exports are finally allowed, the company would stand ready to ramp up production and substantially increase sales – its factories still have 50% of production capacity available for manufacturing expansion.
Meeting with the management of a $300m manufacturer and distributor of smartphones in Pakistan
Other ventures of this firm are also progressing well: the laptop business launched recently is picking up quickly, and smart TVs have begun manufacturing. The two emerging markets investing sleuths we are, in front of the company's headquarters we noticed two mesmerizingly beautiful electric cars which had recently arrived from China: they had a Stuttgart look but only cost a quarter of their luxury German peers. If the company starts manufacturing or at least distributing these wonders of Chinese EV-making in Pakistan, that could be another strong growth catalyst.
After our meeting with the management and a factory tour, we went unannounced to one of the company's retail shops selling smartphones – both Chinese brands made by the company and imported prime global brands. We appreciated the friendliness and eagerness to help expressed by the customer service representatives, and we enjoyed the clean, modern, consumer-centric design of the store.
Appreciating the design of a modern electric vehicle imported from China
Most popular hybrid SUV in the country
For our next company rendezvous, instead of heading to the headquarters (no pun intended) of a $200m car manufacturer, we decided to show up at its largest showroom in Pakistan – not only to speak directly to salespeople to assess the demand but also to get our hands behind the wheel of the firm's best-selling model to test its quality and comfort.
The company makes both “three-wheelers” (a traditional mechanized vehicle popular in Pakistan) and “four-wheelers” (also known as “cars” or “automobiles” in most of the world). About a year ago, it started producing and selling a hybrid SUV four-wheeler under a well-known Chinese brand, which has become a big hit in Pakistan. Such is the demand for this SUV that the company doesn't have to offer installment payments to its customers who pay cash in full and wait for 2-3 months to have the car delivered – essentially, they buy cars that are not even made yet; and if customers really want to get their vehicle right away, they have to pay an extra 5% on top of the total car price. Even some of the executives of other companies we met on this trip have already bought this SUV and told us they absolutely cherish their smooth hybrid rides.
Despite the chaotic Brownian movement of vehicles (and particles in the air) on exceptionally busy streets of Lahore, we thoroughly enjoyed our test drive in this legendary sleek Chinese hybrid SUV made in Pakistan, appreciating the comfort of its spacious salon, safety of navigation, and high-tech specifications. We concur with the Pakistani consumer that this car offers great value for money – akin to a cheap value stock that also comes with massive earnings growth.
Driving through the busy streets of Lahore on our test drive of the best-selling hybrid SUV in Pakistan made by a local $200m car manufacturer
The showroom we visited was opened in 2021 through an investment by three brothers who come from a fifth-generation carpet business family. Since then, they have managed to become the best-selling showroom of the company in Pakistan in every year of operation and achieved an annualized return over 30% on their initial investment. According to the brotherly management team, their showroom sales have been beyond expectations, with a 50% year-on-year growth driven (pun intended) by the company's dominant position in the hybrid SUV space amid lack of relevant competition on the one hand and high demand for non-petrol vehicles on the other hand. The family is now focused on doubling after-sales service capacity.
We extend our thanks to these hard-working entrepreneurial brothers (one of whom even moved back to Pakistan after 20 years in Germany to participate in this family business) – they are making their showroom a success, driving strong sales growth for their auto brand and its local manufacturer. After meeting them and observing their work we are not surprised they are the best in the country at what they do.
Meeting with the owner-operator family running the best hybrid SUV showroom in Pakistan
Having completed our showroom due diligence and test drive, we made sure to send a polite message to the company's headquarters: we believe it will be in the best interest of the company's shareholders if the company executes a stock split to the magnitude of 10 new shares for each 1 existing share. The reasoning behind this friendly recommendation is that when we look at absolute stock prices, the company's stock is more expensive than 97% of all stocks listed on Pakistan stock exchange (PSX), making it very difficult for retail investors to actively invest in it; at the same time, the company's valuation of under 5x LTM P/E sits in the cheapest third of all PSX companies. We hope our message will not fall on deaf ears and will be taken into serious consideration, especially in light of the very recently issued stock split guidelines by the PSX which comprehensively educate publicly listed companies on stock splits and the benefits thereof.
Cementing Pakistan’s macro story
While most investors globally would never look at Pakistan as an investment destination, in the last dozen years we have found a great number of hidden gems in Pakistan that performed very well for the fund – with 12 stocks having more than doubled in the first 12 months after investing. We must stress that this came as a result of our bottom-up focus, and not because we liked Pakistan from a top-down perspective which, to be fair, we never did. However, despite our chronic suspicion of all things Pakistan macro, we believe today the economic environment in Pakistan is the most attractive we have seen since when we began investing in Pakistan in 2013.
Let us have a quick overview of Pakistan’s key macro parameters:
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Inflation: The most recent inflation reading in Pakistan was 0.7% (March 2025), indicating the lowest inflation in the last 10 years.
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Interest rates: The central bank of Pakistan started lowering interest rates in June last year. Since then, interest rates decreased from 22% to the current 12%, making loans much more attractive to businesses and individuals.
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Currency: Since the start of last year, the Pakistani rupee has remained resilient against the US dollar and even strengthened slightly by a couple percentage points.
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Current account: Notorious for its chronic issues with a current account deficit (in the last 10 years, it had monthly deficits a staggering 100 times and monthly surpluses only 20 times), Pakistan has nonetheless been on a hot streak lately, having recorded a current account surplus in 4 months out of the last 6 months – quite a feat, with March 2025 recording the highest monthly surplus on record.
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IMF support: The country has just been approved for continuation of IMF support without much back-and-forth in a sign of satisfactory implementation of reforms.
The concurrent improvement in these most important macro indicators provides more confidence and more favorable investment terms to Pakistani businesses and individuals, promoting economic growth and strengthening investment climate in the country. From our conversations on the ground in Pakistan, it became clear to us that consumers’ propensity to spend as well as their ability and willingness to take out loans is recovering after a now-passed period of high inflation and low growth. Individuals are now willing to get car loans again and have already pushed real estate prices in Karachi by 20-40% in the last six months alone, according to Pakistan's best institutional equity broker whom we recently met in Dubai.
In our meeting in Lahore with the management of one of the leading cement companies in Pakistan, we learned that the demand for basic materials such as cement is gradually improving as lower interest rates help consumers consider construction-related activities again. As such, we expect earnings of cement producers – which like most companies in the market trade at low valuations under 10x P/E – to pick up strongly this year after a period of weakness caused by economic slowdown and higher interest rates that had followed.
Meeting with the CFO of a $200m cement manufacturer in Pakistan
Of course, one should be careful celebrating these milestones – history has seen a lot of crises in Pakistan, with some having arrived suddenly and then stayed stubbornly. The current environment, nonetheless, induces optimism for the future. If we look at the long-term picture, we should always keep in mind the fundamental strength of Pakistani businesses that are able to grow earnings in any economic environment: according to analysis shared on LinkedIn by a fellow frontier markets investor, Mattias Martinsson from Tundra Fonder in Sweden who has been investing in Pakistan for longer than we have, in the past 10 years Pakistani companies have grown earnings at a higher annualized rate (+9.2% earnings growth in the KSE100 index) than the companies in the US (+6.6% for S&P 500) or in India (+6.6% for Sensex) – all in USD terms! At the same time, the valuations are drastically different: Pakistan market trades at 6x LTM P/E (down from its peak of 14x in 2017), while the S&P 500 and Sensex trade closer to 25x LTM P/E. Our choice is clear: we always prefer cheaper companies with higher earnings growth which we find through our active bottom-up approach.
The best in the world
Pakistan is truly going through very special times: its macro factors have finally aligned positively while its stock market still trades at a very low valuation of 6x P/E – even after last year’s strong rally of +87% in USD terms which we thoroughly enjoyed and which placed Pakistan as the second-best-performing market in the world, right after Argentina (oh the IMF peer irony! – to date, Argentina and Pakistan have received 22 and 25 IMF arrangements respectively, among the highest of all countries that have participated in the IMF programs).
On this trip, we met with several promising companies – all of which trade under 10x forward P/E, can produce substantial earnings growth of over 20% in the next 12 months, and are run by motivated operators owning substantial stakes in their businesses. These stocks represent fundamentally sound investment cases within the best macro environment in Pakistan since at least 2013.
When we travel to emerging and frontier markets, not only do we meet companies but we also like to tour factories, assess assets, visit stores, and speak to local contacts. It helps us better understand the businesses and their operating environment as well as the sentiment in the economy and in the market. From that perspective, our trip to Pakistan was a well-coordinated success: we met with several management teams; toured a number of factories; due diligenced a retail smartphone store; visited a car showroom; tried to get cash from an ATM at a local bank whose stock more than doubled for our fund in 2024; met for dinner with a brilliant ex-colleague who is now building a large local paper and packaging business; and even did a test drive of the most popular hybrid SUV in the country.
And frankly, the worst air on the planet didn't even bother us that much – nor did the flight back after midnight on a low-cost Pakistani airline. Our intellectually stimulating work looking for hidden gems across the globe – and the stories from the ground (such as getting into an altercation at the ministry of finance when we spent an entire month in Pakistan in 2019) – and most importantly the people behind great businesses and amazing stories – all make our job the most fun, the best job in the entire world! – and thus render any challenges minute.
We absolutely enjoyed our time in Pakistan and look forward to many great returns – physically and financially. Until next time, Pakistan!
