Message Of MD / CEO

DIRECTORS' REPORT : The Board of Directors of Lahore Stock Exchange (Guarantee) Limited (LSE) is pleased to present the Annual Report for the financial year 2006-07 along with the audited accounts for the year-ended on June 30, 2007 and the Auditors’ report thereon.

The Economic Review

Pakistan’s real GDP growth rate for FY07 (July 01, 2006 to June 30, 2007) was 7.0% as against 6.6% for FY06 and 8.4% for FY05. High oil prices and a devastating earthquake in October 2005 dampened the growth potential. Moreover, last year’s spectacular cotton crop production could not be maintained this year, affecting the agriculture sector growth and hence the overall real GDP growth rate. The economy’s growth in FY07 is attributed mainly to the services and the industrial sectors. In the current fiscal year, large scale manufacturing sector grew by 8.4% (FY06: 9.0%), services sector grew by 8.0% (FY06: 9.6%) and the agriculture sector grew by 5.0% (FY06: 1.6%).

For FY07, exports were $16.92 billion (FY06: $14.9 billion) whereas imports were $26.65 billion (FY06: $25.7 billion). The unanticipated jump in imports was largely driven by higher petroleum costs which also exacerbated the trade deficit.

Inflation was 10.3% which is partly due to higher fuel import costs and higher food prices.

Stock Market Performance

During FY07, the LSE-25 index increased from 4379 to close at 4850 on June 30, 2007 i.e. an increase of 471 points or 10% year-on-year. The period’s high was on October 10, 2006 when the LSE-25 touched 5031. Improved economic indicators and enhanced corporate earnings are some of the factors having a positively impact on our markets during the year under review. On the other hand unstable political conditions and increasing inflation and interest rates have been the negative factors. The first half of FY07 witnessed a decline of 8% while the second half saw an increase of 16% in LSE-25 index.

Turnover of ready market shares was an average of 33.78 million shares per day as against 61.26 million shares traded daily on average during 2005-06. The traded value decreased to an average of Rs.3.44 billion per day as against Rs.6.05 billion worth of shares that were traded daily on average during 2005-06. The decrease in volume is mainly due to doubling of CVT on purchase of shares and other transaction taxes on trades with effect from July 01, 2006.

The market capitalization of LSE stood at Rs.2.693 trillion equivalent to US$45 billion approximately, on July 01, 2006 and Rs.3.860 trillion equivalent to US$64 billion approximately, on June 30, 2007, representing an increase of 43% for the period.

Listing Activity

During the period under review, 25 new securities were listed at LSE, of which 10 were new companies with listed capital Rs.47.412 billion, 11 were open ended funds and 4 were Term Finance Certificates with total issue size of Rs.2.050 billion Listed capital increased by 26% from Rs.470 billion to Rs.595 billion.

Further, LSE through a capital markets expert conducted a research study for the development of the Corporate Bonds/TFCs segment of LSE’s business. The Exchange is in the process of implementing some of the recommendations of this study as a result of which issuers are being urged to appoint a Market Maker for all issues of TFCs in an effort to promote the secondary market of these products.

Unified Trading Platform

In another trend-setting example, Lahore Stock Exchange and Islamabad Stock Exchange on 30th April joined hands to establish a Unified Trading Platform which will help to bring increased liquidity in the market, improve price discovery, maximize transparency, increase turnover, broaden investor base, curtail risks and distortions in trade, provide cost effective service to the investing public and enhance the image of both the Exchanges. UTS will allow Members of each exchange to trade only in the commonly listed shares or the shares of the companies listed in their respective exchanges. Members of both LSE and ISE shall have an access to bigger pool of liquidity which would result in greater volumes, realistic price discovery mechanism, better surveillance, address the issue of market fragmentation, in relative sense and offer scalability to execute, much bigger trades.

Derivatives

Trading activity at the Future counter of Lahore Stock Exchange has decreased significantly. Future Market volume has almost dried up. The Members and management need to take a serious notice of this trend and need to put forward suggestions as to how this situation can be improved. The inactive “Futures Market” both at LSE and ISE is likely to be activated with more market participants and Joint Steering Committee’s decision to have future trades, without any “excess fee” for first six months, is expected to serve as a catalyst.

Demutualization and Integration

One major step forward taken by international and some of the regional bourses is the demutualization and integration of exchanges. Pakistani exchanges too are in the final stages of demutualization and we expect this to be finalized by the end of this year. An agreement has been signed with Rothschild and Abacus, who will jointly act as our Advisor for the demutualization. Demutualization will give us the room to expand and to take up ventures which are probably not possible in mutualized exchanges. Demutualization will also pave the way for international mergers of exchanges that would be quite beneficial in sharing new ideas and developments.

Future Outlook

With the advent of technology, now around 49% of the trading volume is being generated through remote trading terminals. It is also because of technology that the LSE was able to establish its trading floors in other cities as well. Lahore Stock Exchange has Trading Floors in cities of Faisalabad and Sialkot and is now considering opening trading floors in Multan and Peshawar as well.

Introduction of Index Trading and derivatives products such as Options and Swaps and other products will increase the products offered by the exchange, giving investors more choices and hence increasing trading activity of the exchange.

Integration of the exchanges is also being considered and is likely after demutualization.

Another concept that will help greatly in expanding investor base is cross listings and GDRs. Work is underway in this regard.