Contents Country Fact Sheet 2 Executive Summary 3 Political Overview 4 Economic Overview 5 Market Overview and Strategy 11 Company Reviews Commercial Bank of Ceylon PLC 17 Hatton National Bank PLC 23 Sampath Bank PLC 29 National Development Bank PLC 37 Tokyo Cement Company (Lanka) PLC 45 Royal Ceramics PLC 51 Colombo Dockyard PLC 57 Distilleries Company of Sri Lanka PLC 63 Aitken Spence Hotel Holdings PLC 69 Dialog Axiata PLC 75 Aitken Spence PLC 83 John Keells Holdings PLC 91 JKSB Contact Information 99A JKSB Research Publication
2 | John Keells Stock Brokers (Pvt) Limited | Market StrategyCountry Fact Sheet Income distribution Gini coefficient of household income (2009) : 0.47GOVERNMENT Mean household Income (‘09) : Rs. 35,495 (US$ 320) Median household Income (‘09) : Rs. 24,106 (US$ 217)Unicameral Parliament: 225 seats; members elected by popular vote on the basis Poverty of an open-list, proportional representation system by Poverty Head Count Ratio (2009/10) : 7.6% electoral district to serve six-year terms Population below US $ 1 a day (1990-2005) : 5.6% Population below US $ 2 a day (1990-2005) : 41.6%General Elections: Last held in April 2010 (next - 2016) Human Development Index (2010)Chief of state: President Mahinda Rajapaksa (since 19 - Rank among 169 countries : 91 November 2005); The President is both the chief of state and head of government Employment Unemployment rate (3Q 2010) : 4.9%Presidential Elections: President elected by popular (Excluding Northern Province) vote for a six-year term (eligible for multiple terms); Employed Persons election last held on 26th January 2010 (next to be held Agriculture : 31.2% in 2017) Industry : 25.1% Services : 44.3%Cabinet: Cabinet appointed by the President in consultation with the Prime Minister. Water Supply Access to safe drinking water : 84.8%PHYSICAL FEATURES AND CLIMATE Access to pipe borne water : 35.5% Total area : 65,610 sq. km Electricity Land area : 62,705 sq.km Households with Electricity : 86% Inland waters : 2,905 sq.km Per capita Electricity Consumption (kWh) : 412.8 Highest elevation : 2,524m/8,281ft Low country (min/max) : 24.4oC – 31.7oC Communication Hill country (min/max) : 17.1oC – 26.3oC Fixed lines per 100 persons : 17 Mobile Subscriber penetration (SIMs) : 79% Avg. Annual Rainfall : 2397mm Internet & Email (Fixed) penetration : 1.26% Mobile Broadband penetration : 0.58%POPULATION AND VITAL STATISTICS Mid year population 2010 : 20.65mn Public Health Age distribution (‘000) – 2009 Public Hospital Beds per 1000 persons : 3.4 0 - 14 yrs : 5,205 (25.1%) Persons per Doctor : 1500 15 - 59 yrs : 12,991 (62.9%) Gov. Expenditure on Health- % of GDP : 1.5% 60 years and over : 2,457(11.9%) Population density (per sq km) : 318 persons Crude birth rate (2009) : 18.4 per ‘000 Education School Density (Area per school – sq km) : 6.5 Crude death rate (2009) : 5.9 per ‘000 Primary/Secondary education (5-19yrs) : 96.1% Rate of natural inc. (2009) : 12.6 per ‘000 Pupil/teacher ratio (Public Schools-2009) : 18 Infant mortality (2006) : 10.0 per ‘000 Eligibility for public universities : 62.5% Dependency ratio (2006) : 48.35% Admission to university as a % of eligible : 16% Average household size (2009) : 4.0 Gov. Expenditure on Education - % of GDP : 2.1%Life Expectancy (2007) Banking Density Male : 70.3 years Commercial Bank Branches (per 100k persons) :10.8 Female : 77.9 years Area (sq km) per commercial bank branch : 29.41 ATM’s per 100,000 persons : 9.6Literacy rate (2008) Credit Cards per 100 persons : 3.77 Overall : 91.3% Male : 92.8% Female : 90.0%Source : CBSL, Department of Census and Statistics
John Keells Stock Brokers (Pvt) Limited | Market Strategy | 3Executive Summary>> With the peace dividend filtering in, the economy is expected to have grown at8% in CY2010 having gathered healthy momentum with 5 consecutive quarters ofaccelerating growth from 2Q2009 to 2Q2010.>> The economy has witnessed a significant improvement in business sentimentand business activity stemming from a benign interest rate regime and fiscal reformsresulting in a lower and simplified taxation and tariff structure. Furthermore overallmacro level stability and an increased infrastructure spend together with an upturn indomestic demand have collectively underpinned a strengthened economy.>> The resurgence of intra provincial trade with the reintegration of the North andEast provinces to the main stream economy and the significant infrastructure spendacross the island in road, power, port and rural infrastructure development togetherwith the consequent multiplier effects feeding into increased domestic consumptionunderlie our medium term expectations of 8%+ GDP expansion. Sustaining thisgrowth momentum beyond will however require a significant increase in FDI acrossa number of sectors to drive scale and productivity enhancements in the economy.>> We anticipate the fiscal deficit would decline to 7% of GDP for 2011stemming from lower interest expense on domestic financing, higher tax revenuesand lower defense expenditure relative to GDP.>> The loss of crop production due to the floods earlier this year will add furthersupply side pressure on food prices which we expect would push the CCPI up to8.8% by end 2011. The property market is still relatively subdued and non-food andnon-fuel inflation still remains under check although demand driven inflationaryeffects may begin to be evident towards the latter half of the year. The immediateconcerns for this year on inflation remain on supply side shocks from food and moresignificantly the impact on oil prices from the recent events in North Africa andthe Middle East. With inflation trending higher we believe that interest rates havebottomed out and prime lending rates may rise by 50bps by year end with prospectsof strong credit growth remaining intact.>> The ASPI has risen by 16.2% for the year to date on the back of a 96% increasein CY10 and a 280% increase since the end of the war. The recent upward movementin the ASPI is largely a result of strong retail and local HNI participation which hasseen significant price movements in second tier and illiquid stocks not necessarilyreflective of broad based healthy buying interest.>> Sustained local retail buying interest in the market has pushed near termmarket multiples to 15.2x FY12E earnings, with aggressive buying on selected midcap and speculative trading on illiquid counters having pushed the indices higher atan excessive pace thus far this year warranting a modest correction.>> Businesses will benefit from increased domestic demand in the medium but willalso be required to invest in building scale and enhancing productivity in anticipation ofnew competition that is inevitably ushered in by an improved operating environment>> We remain bullish on the medium to long term earnings growth prospects ofconstruction related Manufacturing, Banking and Leisure group stocks. A mediumterm outlook of sustainable normalized earnings of approximately 25% should see theindex trend higher over the medium to long term
4 | John Keells Stock Brokers (Pvt) Limited | Market Strategy Political Overview >> With the removal of the constitutional bar on the president having a two term limit on the 8th September 2010, Sri Lanka started a new chapter in its political history. With the ruling United Peoples Front Alliance (UPFA) having only 144 seats the amendment had a smooth passage with 161 members voting in favour, and only 17 voting against. Current administration firms up hold on power >> President Rajapaksa has astutely levered his post war popularity into what appears will be a long stay in the seat of power. The dominance of the Rajapakse administration is also partially due to the weakness of Sri Lanka’s second major political party the United National Party (UNP). Wracked by internal dissension the party has seen members defect once again to the ruling party while the remaining MPs have publically come out against Ranil Wickremasinghe’s party leadership. >> The executive president enjoys enormous powers under the 1978 constitution. He can dissolve the parliament and declare emergency. He also appoints judges, heads of armed forces and police, election commissioners and secretaries to the government. In a state of emergency, the president can even promulgate regulations to override laws enacted by the parliament. The state of emergency continues to be in force even now though the war ended in May 2009. Consolidation of power should deliver stability >> Sri Lanka has long suffered under political uncertainty with wafer thin majorities in Parliament exacerbating the effects of the turmoil of the nearly three decade long ethnic war. This focus on political uncertainty due to the possibility of a change in regime means many investment decisions were postponed. It is hoped that this current consolidation of political power will give an environment of stability in which faster economic growth can occur. The budget delivered in November 2010 underlined the importance the government places on catching up on the economic development that the country forfeited during its period of turmoil. >> Much of the success of the war effort can attributed to the Rajapakse administration’s foreign policy which prioritized improving relations with regional powers like India and China as well the Middle East. These relationships are also important from an economic standpoint. India and China are committing substantial amounts to investment in infrastructure in post-war Sri Lanka. China is now Sri Lanka’s largest donor of developmental assistance after Japan. India is also one of Sri Lanka’s most important trade partners and is one of the largest sources of tourists into the country. Sri Lanka’s increasing links to the Asian region should prove important in continuing export led economic growth in the coming years.
John Keells Stock Brokers (Pvt) Limited | Market Strategy | 5 Economic Overview GDP Growth10.00 % Quarterly GDP Growth (%) >> With the peace dividend filtering in, the economy is expected to have grown 9.00 8.00 at 8% in CY2010 having gathered healthy momentum with 5 consecutive quarters 7.00 6.00 of accelerating growth from 2Q2009 to 2Q2010. The last 8 months have seen 5.00 4.00 a sharp improvement in business activity after a rebound in the wider economy 3.00 2.00 lagged initial expectations as businesses adjusted to an abrupt end in hostilities in 1.00 0.00 mid 2009 and then held back till the conclusion of parliamentary and legislative elections in early 2010. The economy has witnessed a significant improvement 1Q CY2000 2Q CY2000 3Q CY2000 4Q CY2000 1Q CY2001 2Q CY2001 3Q CY2001 4Q CY2001 1Q CY2002 2Q CY2002 3Q CY2002 4Q CY2002 1Q CY2003 2Q CY2003 3Q CY2004 4Q CY2004 1Q CY2005 2Q CY2005 3Q CY2005 4Q CY2005 1Q CY2006 2Q CY2006 3Q CY2006 4Q CY2006 1Q CY2007 2Q CY2007 3Q CY2007 4Q CY2007 1Q CY2008 2Q CY2008 3Q CY2008 4Q CY2008 1Q CY2009 2Q CY2009 3Q CY2009 4Q CY2009 1Q CY2010 2Q CY2010 3Q CY2010 4QCY2003 1QCY2004 2QCY2004-1.00-2.00-3.00 in business sentiment and business activity stemming from a benign interest rate-4.00-5.00 regime and fiscal reforms resulting in a lower and simplified taxation and tariff structure. Furthermore overall macro level stability and an increased infrastructure spend together with an upturn in domestic demand have collectively underpinned a strengthened economy. >> Credit growth which was marginal for much of 2008 and marginally negative for 2009 picked up sharply in the 2H of 2010 to end the year up an estimated 22.6% for CY2010. The resurgence of intra provincial trade with the reintegration of the North and East provinces to the main stream economy, the significant and simultaneous infrastructure spend across the island in road, power, port and rural infrastructure development and the consequent multiplier effects feeding into increased domestic consumption underlie our medium term expectations of 8%+ GDP expansion. Sustaining this growth momentum beyond will however require a significant increase in FDI across a number of sectors to drive scale and productivity enhancements in the economy. >> Severe floods earlier this year in the North Central and Eastern provinces will result in a significant reduction in agricultural production in the first half of the year as a result of lost cultivation and damage caused to irrigation infrastructure. >> The agriculture forestry and fisheries sector recorded a 6.2% growth for the 3Q stemming from the highest ever recorded paddy production during the 2009/2010 ‘Maha Season’; which accounts for approximately 65% of total paddy production in the country. The ‘Yala Season’ also witnessed a 21.4% increase in the area harvested over the previous year while yields also improved. The total gross area harvested during the ‘Maha’ and ‘Yala’ season in 2009 amounted to 943,000Ha which could increase by as much as 10%-15% in 2011/2012 should weather conditions be favourable, with increased land in the North and East being cultivated. The revised production figure following the floods for the ‘Maha Season’ is 2.3mn MT which is marginally lower than the 2009 output and a 24.5% decline for this years expected crop levels. Other field crops have seen a similar effect in loss of cultivated area. The fisheries sector grew by 14.4% in the 3Q 2010 with marine fishing growing by 15.3% with some of the most fertile fishing grounds of the North and East coast representing two thirds of the country’s coast line seeing increased production. Output of the country’s traditional exports witnessed sound growth with record prices for tea and rubber benefiting from strong external demand for commodities. >> The commercial construction sector is gathering pace with loan disbursements for construction related activity increasing by 25.2% in the 3Q 2010 while cement production was up 20.6% yoy for the first 11 months of 2010.
6 | John Keells Stock Brokers (Pvt) Limited | Market Strategy A strong pipeline of large scale infrastructure projects relating to expressways, increased power generation capacity, sea ports and airports as well as rural infrastructure development initiatives across the island will sustain this growth momentum over the medium term. The manufacturing segment which accounts for nearly 75% of industrial output in the country recorded steady growth of 6.8% in the 3Q with the garment sector remaining resilient following the suspension of the EU GSP + facility whilst other sub sectors will see increased capacity utilization. >> Expansion of the import trade sector as well as a pick up in domestic trade into the North and East provinces and increased consumer spending across the island is expected to drive growth in the services sector. Import trade increased by 11.8% in the 3Q 2010 benefiting from a reduction in import tariffs in July for motor vehicles and a whole range of consumer products. Credit penetration has also increased sharply with the Banking, Insurance and Real Estate sector expanding by 8.5% in the 3Q, with private sector credit growth which was moderate for the 1H 2010 increasing sharply up 25% upto November last year. We anticipate credit growth to the private sector to average at 25% over the next two years. The Hotel and Restaurant sector benefited from an anticipated 46% increase GDP Growth (%) Sector 2004 2005 2006 2007 2008 2009 2010E 2011EAgriculture 0.0 1.8 6.3 3.4 7.5 3.2 6.1 5.6 Agriculture, Livestock and Forestry -0.1 6.9 3.5 2.3 7.3 2.8 5.2 4.8 Fishing 0.5 -43.0 53.5 15.6 9.9 6.9 14.0 12.0Industry 5.4 8.0 8.1 7.6 5.9 4.2 8.0 8.6 Mining and Quarrying 5.5 17.8 24.2 19.2 12.8 8.2 11.0 10.0 Manufacturing 5.2 6.2 5.5 6.4 4.9 3.3 6.4 6.6 Electricity, Gas and Water 6.0 14.0 14.8 4.6 2.7 3.7 8.2 8.3 Construction 5.9 9.0 9.2 9.0 7.8 5.6 11.0 13.0Services 6.7 6.4 7.7 7.1 5.6 3.3 8.3 8.3 Wholesale and Retail Trade 7.4 6.4 7.1 6.1 4.7 -0.3 7.7 8.2 Hotels and Restaurants 21.5 -14.1 2.5 -2.3 -5.0 13.3 32.5 25.0 Transport and Communication 9.7 9.5 12.6 10.5 8.1 6.6 11.2 9.8 Banking, Insurance and Real Estate etc. 5.8 7.0 8.5 8.7 6.6 5.7 9.0 9.0Total GDP Growth 5.4 6.2 7.7 6.8 6.0 3.5 8.0 8.1% Share of Total GDP (Sectors / key sub sectors) 2004 2005 2006 2007 2008 2009 2010E 2011EAgriculture 13.0 12.5 12.3 11.9 12.1 12.0 11.8 11.6 Agriculture, Livestock and Forestry 11.7 11.7 11.3 10.8 10.9 10.9 10.6 10.3 Fishing 1.3 0.7 1.0 1.1 1.1 1.2 1.2 1.3Industry 27.7 28.1 28.2 28.5 28.4 28.6 28.6 28.8 Mining and Quarrying 1.3 1.5 1.7 1.9 2.0 2.1 2.2 2.2 Manufacturing 18.1 18.1 17.7 17.7 17.5 17.4 17.2 17.0 Electricity, Gas and Water 0.7 0.7 0.7 0.6 0.6 0.6 0.6 0.6 Construction 6.0 6.2 6.3 6.4 6.5 6.6 6.8 7.1Services 59.3 59.4 59.5 59.6 59.5 59.3 59.5 59.7 Wholesale and Retail Trade 24.7 24.7 24.6 24.5 24.2 23.3 23.2 23.3 Hotels and Restaurants 0.6 0.5 0.5 0.4 0.4 0.4 0.5 0.6 Transport and Communication 11.5 11.9 12.4 12.8 13.1 13.5 13.9 14.1 Banking, Insurance and Real Estate etc. 8.4 8.4 8.5 8.7 8.7 8.9 9.0 9.1 Other 14.1 13.9 13.5 13.3 13.1 13.3 12.9 12.7
John Keells Stock Brokers (Pvt) Limited | Market Strategy | 7 in tourist arrivals with the sector growing by 32.2% for the 3Q in 2010 which followed a 20.6% expansion in the sub sector in the 3Q 2009. The transportation sector is also expected to expand sharply over the medium term driven by growth in cargo throughput and container handling at the port which was up by 18.9% and 12.9% respectively in the 3Q. Increased air travel as well as passenger and goods transportation within the country will further augment growth in the sector. Fiscal Deficit >> Government revenue from taxes and grants increased by 14.4% for the first 11 months of CY10 whilst recurrent expenditure recorded a modest growth of just 3.7% in the same period, and as such we believe that approved estimates for CY10 of revenue to GDP of 14.8% and a budget deficit of 8% will be met. The budget proposals announced for 2011 express an intention to bring down the fiscal deficit to 6.8% in 2011 and 5% in 2012, with the initial MEFP attached to the LOI signed for the IMF Standby facility being to bring down the fiscal deficit to 5% by 2011. We anticipate the fiscal deficit would decline to 7% for 2011 stemming from lower interest expense on domestic financing, higher tax revenues and lower defense expenditure relative to GDP. Government Finance (% of GDP) 2004 2005 2006 2007 2008 2009 2010E 2011E Revenue and Grants 15.3% 16.8% 17.3% 16.6% 15.6% 15.1% 14.7% 14.8% Tax revenue 13.5% 13.7% 14.6% 14.2% 13.3% 12.8% 12.8% 12.6% Non tax revenue excl. Grants 1.4% 1.7% 1.7% 1.6% 1.6% 1.7% 1.6% 1.9% Total expenditure 22.8% 23.8% 24.3% 23.5% 22.6% 24.9% 22.7% 21.8% Current expenditure 18.6% 18.1% 18.6% 17.4% 16.9% 18.2% 17.1% 16.9% Budget deficit -7.5% -7.0% -7.0% -6.9% -7.0% -9.9% -8.0% -7.0% >> The taxation reforms spelt out at budget proposals for 2011 announced on the 22nd of November were well received and marked significant changes with % CCPI Movement Points30.0 250 the state boldly reducing and simplifying taxation structures for corporates and27.024.0 200 individuals in a bid to improve revenues by facilitating growth as opposed to the21.0 imposition of a host of adhoc taxes as was seen in the past. We do not anticipate18.0 15015.0 a significant curtailment of recurrent expenditure in 2011 except for a moderate12.0 100 reduction in defense expenditure to GDP. 9.0 6.0 50 3.0 0.0 0 Inflation >> The CCPI has been trending higher from an annual average of 3.1% in Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 May-06 May-07 May-08 May-09 May-10 Jan-11 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 CCPI Annual Average Change (RHS) CCPI Point to Point Change (RHS) CCPI Index (LHS) February 2010 to 6.0% in January 2011 driven primarily by higher food prices which account for approximately 47% of the CCPI index. The loss of crop % Inflation and Interest Rate Movement production due to the floods earlier this year will add further supply side pressure 24.0 22.0 on food prices which we expect would push the CCPI up to 8.8% by end 2011, 20.0 which is subject to revision depending on movements in oil prices. 18.0 16.0 14.0 12.0 10.0 >> Increased food production in the North and East provinces and improved 8.0 yields should cushion the country’s exposure to imported inflation on food items 6.0 4.0 in the medium to long term although the country’s exposure to supply side shocks 2.0 0.0 still remains significant with its sensitivity to global commodity prices such as petroleum imports. The property market is still relatively subdued and non-food Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Sep-06 Dec-06 Sep-07 Dec-07 Sep-08 Dec-08 Sep-09 Dec-09 Sep-10 Dec-10 Jan-06 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 CCPI Annual Average 364-day TB Yield
8 | John Keells Stock Brokers (Pvt) Limited | Market Strategy and non-fuel inflation still remains under check reflecting unutilized capacity in the system although demand driven inflationary effects may begin to be evident towards the latter half of the year. The immediate concerns for this year however remain on supply side shocks from food as mentioned earlier and more significantly the impact on oil prices from recent events in the Middle East. Key interest Rate Movements25.0022.50 Interest Rates20.0017.5015.00 >> Interest rates have continued to trend lower with the 1 yr T-bill and weighted12.50 average prime lending rate down to 7.33% and 9.12% from 9.47% and 10.83%10.00 7.50 respectively a year earlier. The Central Bank eased policy rates in January with the 5.00 Central Banks’ repurchase rate brought down by 25bps to 7.00% and the reverse 2.50 - repo rate down by 50bps to 8.50%. With inflation trending higher we believe that interest rates have bottomed out and prime lending rates may rise by 50bps by year Mar-99 Feb-02 Feb-05 Feb-08 Mar-10 Dec-97 Sep-01 Sep-04 Dec-05 Sep-07 Dec-08 May-98 May-06 May-09 Oct-98 Oct-06 Oct-09 Jan-11 Jan-00 Jan-03 Nov-00 Nov-03 Jul-05 Jul-08 Apr-01 Apr-07 Jun-00 Jun-03 Apr-04 Aug-99 Aug-02 Aug-10 364 day T Bill Yield (%) PLR (%) end with prospects of strong credit growth remaining intact. US$ M External Trade20000 50%15000 40% 30% External Trade10000 Exports 20% 5000 >> Export earnings for the first 11 months of 2010 were up 15.4% stemming 10% 0 0%-5000 -10% from industrial exports and agricultural exports. Industrial exports recorded a-10000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 -20% 13.6% growth on the back of exports of product categories such as boats and rubber Exports (US$ m) (LHS) Imports (US$ m) (LHS) Trade Balance (US$ m) (LHS) products while garment exports increased by 3.7% in the same period. Much of Exports (% of GDP) - (RHS) Imports (% of GDP) - (RHS) Trade Balance (% of GDP) - (RHS) the growth in the sector stemmed from agricultural exports which grew by 21.7% accounting for 25.2% of exports for the period. This was largely due to high tea and rubber prices. >> The garment sector is expected to remain resilient despite the loss of the GSP + facility, aided by a modest recovery in key western markets and increasing labour costs in China and labour unrest in Bangladesh enhancing the local industries’ competitiveness. We expect exports to grow by 15.2% in CY10 and by 13.3% in CY11. Imports >> Total imports for the first 11 months of 2010 were up 32.6% driven by a 45.2% increase in import of consumer goods and a 33.6% increase in intermediate goods. The increase in consumer goods was predominately a result of non-food consumer goods led by motor vehicles while the 33.6% increase in intermediate goods was a result of a value driven growth of 45.8% in petroleum imports. Continued import of non-food consumer goods such as consumer electronics and motor vehicles together with an increasing oil import bill and import of industrial input materials is expected to see imports grow by 18% in CY11.
John Keells Stock Brokers (Pvt) Limited | Market Strategy | 9 Summary of External Trade 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E In US$ m Agricultural Exports 939 965 1,065 1,153 1,299 1,507 1,855 1,690 2,050 2,415 Industrial Exports 3,630 3,977 4,506 4,948 5,381 5,968 5,758 5,305 6,016 6,710 Mineral Exports 90 84 120 144 137 128 98 89 96 120 Other 41 108 66 102 70 38 - - - - Total Exports 4,700 5,134 5,757 6,347 6,887 7,640 7,711 7,084 8,162 9,245 Consumer Good Imports 1,189 1,345 1,442 1,503 1,784 1,768 2,184 1,713 2,458 2,929 Intermediate Good Imports 3,522 3,949 4,828 5,458 6,161 6,751 8,719 5,928 7,965 8,815 Investment Good Imports 1,169 1,320 1,670 1,869 2,246 2,686 3,049 2,450 2,980 4,050 Other 125 60 61 33 65 92 139 115 160 170 Total Imports 6,005 6,674 8,001 8,863 10,256 11,297 14,091 10,206 13,563 15,964 Trade Balance (1,305) (1,540) (2,244) (2,516) (3,369) (3,657) (6,380) (3,122) (5,401) (6,719) Trade Deficit >> The trade deficit is expected to have widened by 73% for CY10 as a result of a sharp rise in imports which contracted in 2009. Garment and textile exports which accounted for approximately 46% of total exports in 2010 is expected to grow at just 6% in 2011, with total exports expected to grow at 13.3%. Anticipated growth in imports of 18% driven by petroleum products and non food consumer goods is expected to result in the trade deficit expanding by 24% in 2011. Remittances and External Reserves Exchange Rate Movement >> Net remittances have remained strong amounting to US$ 3.4bn for the firstLKR/Unit of foreign Currency 11 months in 2010, a 24.6% increase over the previous year. Total net remittances240230 are expected to amount to US$ 4.1bn CY11 substantially offsetting the trade220210200 deficit. Strong inflows to government securities in 2010 along with the sixth190180 tranche of the IMF stand by facility have pushed gross official reserves to US$170160 6.6bn, equivalent to 6 months of imports. Upto US$ 1.5bn has now been released150140 by the IMF as part of a US$ 2.6bn stand by facility.130120110 Exchange Rates100 Feb-11 Feb-07 Feb-08 Feb-09 Feb-10 Oct-07 Oct-08 Oct-09 Oct-10 Dec-07 Dec-08 Dec-09 Dec-10 Apr-07 Apr-08 Apr-09 Apr-10 Jun-07 Jun-08 Jun-09 Jun-10 Aug-07 Aug-08 Aug-09 Aug-10 2004 2006 US$ Sterling Euro >> The central bank has continued its stance of retaining a soft peg against the US$ which has prevented a sharper appreciation of the LKR against the US$. The local currency has appreciated by a marginal 0.03% against the US$ since the start of this year whilst depreciating by 2.67% and 1.99% against the Sterling and Euro respectively. Whilst we expect investment flows to remain strong in the current year the Central Bank is expected to continue to intervene to help exporters retain competitiveness and retain stability in the exchange rates
John Keells Stock Brokers (Pvt) Limited | Market Strategy | 11 Market Overview and Strategy 14 Turnover - Rs. bn ASPI / MPI vs. Turnover Index 8,500 >> The ASPI has risen by 16.2% for the year to date on the back of a 96% 13 12 Turnover ASPI MPI 8,000 increase in 2010 and a 280% increase since the end of the war. The recent 7,500 upward movement in the ASPI is largely a result of strong retail and local HNI 11 10 7,000 9 6,500 8 7 6,000 participation which has seen significant price movements in second tier and illiquid 6 5 5,500 5,000 stocks not necessarily reflective of broad based healthy buying interest. Furthermore 4 3 4,500 4,000 the more liquid MPI index that contains most heavily traded large cap counters has increased by just 2% this year and is still 8.43% off its peak in early October 2010. 2 1 3,500 0 3,000 >> Average daily turnover levels in the market have increased from 2.4bn in 2010 15-Feb-09 02-Mar-09 17-Mar-09 10-Feb-10 13-Sep-09 28-Sep-09 12-Dec-09 27-Dec-09 01-May-09 16-May-09 31-May-09 13-Oct-09 28-Oct-09 11-Jan-10 01-Jan-09 16-Jan-09 31-Jan-09 26-Jan-10 12-Nov-09 27-Nov-09 15-Jul-09 30-Jul-09 01-Apr-09 16-Apr-09 15-Jun-09 30-Jun-09 14-Aug-09 29-Aug-09 to Rs. 3.64bn year to date. Expectations of 50 – 60 new listings in 2011/2012 will push turnover levels even higher with small to mid-sized listings conducted during Turnover - Rs. mn ASPI / MPI vs. Turnover Index the year so far attracting overwhelming local interest. These proposed listings include a host of finance companies whilst a few sizeable state run entities as well as 36 8500 34 8000 32 7500 30 28 26 7000 6500 firms in the retail, logistics and construction space are expected to attract significant 6000 24 22 5500 5000 institutional interest. 20 4500 18 >> The market has witnessed a fresh influx of new funds stemming from 4000 16 14 3500 12 3000 10 2500 8 6 2000 1500 1000 investors shifting money from low yield fixed income securities into equities. In 4 2 0 500 0 addition the market has also experienced a sharp rise in credit driven investments. Last year witnessed a doubling of active trading accounts in the system with market Date 23-May-02 20-Feb-03 01-Mar-06 04-Sep-07 16-Mar-09 15-Dec-09 10-May-10 23-Sep-10 09-Feb-11 04-Oct-02 19-Nov-03 11-Jan-05 11-Oct-05 29-Nov-06 18-Jan-08 22-Oct-08 09-Jul-03 14-Apr-04 27-Aug-04 11-Jun-08 03-Aug-09 02-Jun-05 19-Jul-06 24-Apr-07 velocity increasing from 26.3% in 2009 to 32.8% in 2010 and market capitalistaion Turnover ASPI MPI to GDP rising to 41%. Rs. (Mn) AVERAGE NET FOREIGN INVESTOR PARTICIPATION >> Foreign participation in the market which amounted to 30% of turnover in 160 120 2009 has declined to 19% in 2010. Foreign selling in the market has increased in 80 40 recent months with near term valuations looking less favourble in comparison to - regional peers although Sri Lanka ranks more favourably in terms of a sustainable May-09 May-10 Sep-09 Sep-10 Dec-09 Dec-10 Feb-09 Feb-10 Mar-09 Mar-10 Feb-11 Nov-09 Nov-10 Jan-09 Jan-10 Aug-09 Oct-09 Aug-10 Oct-10 Jan-11 (40) Jun-09 Jun-10 Apr-09 Apr-10 2002 2003 2004 2005 2006 2007 2008 Jul-09 Jul-10 (80)(120) medium term earnings outlook. Several mid to large cap counters such as those in(160)(200) the Manufacturing and Banking sectors still hold sound medium to long term value(240)(280) with low double digit multiples.(320)(360)(400) Average Net Foreign Investor Participation (LHS) PER (x) EPS Growth (%) Country PBV (x) FY10 FY11E FY12E FY10 FY11E FY12E China 19.2 14.7 12.3 N/A 30.9 19.4 2.9 Hong Kong 14.7 12.6 11.0 21.5 16.1 15.1 2.1 India 16.3 17.1 14.4 18.1 -4.7 19.2 3.2 Indonesia 19.7 13.9 11.6 22.3 41.8 19.9 3.2 South Korea 15.0 10.1 9.0 17.1 48.9 11.9 1.3 Malaysia 17.1 14.9 13.4 15.8 15.0 10.9 2.4 Phillipines 12.4 12.4 11.0 N/A 0.2 12.4 2.3 Singapore 11.9 14.0 12.8 10.8 -15.0 10.0 1.7 Taiwan 15.4 13.1 11.7 8.6 17.6 11.8 2.0 Australia 17.3 14.0 12.1 16.6 23.7 15.3 2.1 New Zealand 50.8 15.4 13.0 48.7 230.0 18.8 1.5 Sri Lanka 39.6 19.0 15.2 -5.2 108.0 24.8 2.4 Source : Bloomberg, & JKSB Research