Sri Lanka Market Strategy, along with Individual Company Reports

3. 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 99
A JKSB Research Publication

4. 2 | John Keells Stock Brokers (Pvt) Limited | Market Strategy
Country Fact Sheet Income distribution
Gini coefficient of household income (2009) : 0.47
GOVERNMENT 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 : 9.6
Literacy 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

5. John Keells Stock Brokers (Pvt) Limited | Market Strategy | 3
Executive Summary
>> With the peace dividend filtering in, the economy is expected to have grown at
8% in CY2010 having gathered healthy momentum with 5 consecutive quarters of
accelerating growth from 2Q2009 to 2Q2010.
>> The economy has witnessed a significant improvement in business sentiment
and business activity stemming from a benign interest rate 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.
>> The resurgence of intra provincial trade with the reintegration of the North and
East provinces to the main stream economy and the significant infrastructure spend
across the island in road, power, port and rural infrastructure development together
with 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.
>> We anticipate the fiscal deficit would decline to 7% of GDP for 2011
stemming from lower interest expense on domestic financing, higher tax revenues
and lower defense expenditure relative to GDP.
>> The loss of crop production due to the floods earlier this year will add further
supply side pressure on food prices which we expect would push the CCPI up to
8.8% by end 2011. The property market is still relatively subdued and non-food and
non-fuel inflation still remains under check although demand driven inflationary
effects may begin to be evident towards the latter half of the year. The immediate
concerns for this year on inflation remain on supply side shocks from food and more
significantly the impact on oil prices from the recent events in North Africa and
the Middle East. With inflation trending higher we believe that interest rates have
bottomed out and prime lending rates may rise by 50bps by year end with prospects
of strong credit growth remaining intact.
>> The ASPI has risen by 16.2% for the year to date on the back of a 96% increase
in CY10 and a 280% increase since the end of the war. The recent upward movement
in the ASPI is largely a result of strong retail and local HNI participation which has
seen significant price movements in second tier and illiquid stocks not necessarily
reflective of broad based healthy buying interest.
>> Sustained local retail buying interest in the market has pushed near term
market multiples to 15.2x FY12E earnings, with aggressive buying on selected mid
cap and speculative trading on illiquid counters having pushed the indices higher at
an excessive pace thus far this year warranting a modest correction.
>> Businesses will benefit from increased domestic demand in the medium but will
also be required to invest in building scale and enhancing productivity in anticipation of
new competition that is inevitably ushered in by an improved operating environment
>> We remain bullish on the medium to long term earnings growth prospects of
construction related Manufacturing, Banking and Leisure group stocks. A medium
term outlook of sustainable normalized earnings of approximately 25% should see the
index trend higher over the medium to long term

6. 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.

7. John Keells Stock Brokers (Pvt) Limited | Market Strategy | 5
Economic Overview
GDP Growth
10.00
% 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.

8. 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 2011E
Agriculture 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 12.0
Industry 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 13.0
Services 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 9.0
Total 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 2011E
Agriculture 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 1.3
Industry 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 7.1
Services 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

9. 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 Points
30.0 250 the state boldly reducing and simplifying taxation structures for corporates and
27.0
24.0 200
individuals in a bid to improve revenues by facilitating growth as opposed to the
21.0 imposition of a host of adhoc taxes as was seen in the past. We do not anticipate
18.0 150
15.0 a significant curtailment of recurrent expenditure in 2011 except for a moderate
12.0 100 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

10. 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 Movements
25.00
22.50 Interest Rates
20.00
17.50
15.00
>> Interest rates have continued to trend lower with the 1 yr T-bill and weighted
12.50 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 Trade
20000 50%
15000 40%
30%
External Trade
10000
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.

11. 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 first
LKR/Unit of foreign Currency 11 months in 2010, a 24.6% increase over the previous year. Total net remittances
240
230 are expected to amount to US$ 4.1bn CY11 substantially offsetting the trade
220
210
200
deficit. Strong inflows to government securities in 2010 along with the sixth
190
180
tranche of the IMF stand by facility have pushed gross official reserves to US$
170
160
6.6bn, equivalent to 6 months of imports. Upto US$ 1.5bn has now been released
150
140
by the IMF as part of a US$ 2.6bn stand by facility.
130
120
110
Exchange Rates
100
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

12. 10 | John Keells Stock Brokers (Pvt) Limited | Market Strategy
Summary of Economic Indicators 2003 2004 2005 2006 2007 2008 2009 2010E 2011E
GDP
GDP at current market Prices (Rs.b) 1,822 2,091 2,453 3,014 3,565 4,394 4,825 5,564 6,535
Per Capita GDP at current prices (US$) 981 1,059 1,237 1,450 1,655 1,949 2,063 2,424 2,833
GDP Growth (%) 6.0 5.5 6.2 7.7 6.8 6.0 3.5 8.0 8.1
Population
Mid year Population (m) 19.3 19.4 19.7 19.9 20.0 20.2 20.5 20.7 20.9
Government Finance (% of GDP)
Revenue and Grants 15.2 14.9 15.5 16.3 16.6 15.6 15.1 14.7 14.8
Expenditure 22.9 22.8 23.8 24.3 23.5 22.6 24.9 22.7 21.8
Budget Deficit (7.7) (7.9) (8.4) (8.0) (7.7) (7.0) (9.9) (8.0) (7.0)
Government Debt (% of GDP)
Domestic Debt 57.9 54.7 51.6 50.3 47.9 48.5 49.8 47.2 45.8
Foreign Debt 47.9 47.6 39.0 37.6 37.1 32.8 36.5 36.8 35.4
Total Debt Stock 102.3 102.3 90.6 87.9 85.0 81.4 86.2 84.0 81.2
Interest Rates & Inflation (%)
364 day T-bill (Year end) 7.2 7.6 10.4 13.0 20.0 19.1 9.3 7.6 7.8
AWDR (Year end) 5.3 5.3 6.2 7.6 10.3 11.6 8.0 6.2 6.5
AWPR 9.3 10.2 12.2 15.2 18.0 18.5 10.9 9.8 10.3
CCPI ( Annual average) 6.3 8.8 11.0 10.0 15.8 22.6 3.4 5.9 8.8
External Trade (US $ m)
Exports 5,133 5,757 6,347 6,887 7,640 8,111 7,084 8,162 9,245
Imports 6,672 8,001 8,863 10,256 11,297 14,091 10,206 13,563 15,964
Trade Balance (1,539) (2,244) (2,516) (3,369) (3,657) (5,980) (3,122) (5,401) (6,719)
Trade Account (Deficit)/Surplus (% of GDP) (8.2) (11.1) (10.3) (11.9) (11.3) (14.7) (7.4) (10.8) (11.4)
Current Account (Deficit)/Surplus (% of GDP) (0.4) (3.1) (2.7) (5.3) (4.3) (9.5) (0.5) (3.4) (3.9)
External Reserves ( months of imports) 4.2 3.3 3.7 3.3 3.7 2.2 4.7* 4.8* 5*
Year-end Exchange Rate (LKR/$) 96.7 104.6 102.1 107.7 108.7 113.1 114.4 111.2 110.6
* Excluding IMF Stand-By Facility Draw down

13. 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

14. 12 | John Keells Stock Brokers (Pvt) Limited | Market Strategy
Sectoral earnings prospects
>> Corporate earnings growth has also been strong with expectations for a 108% yoy
growth in earnings for the current Dec/Mar financial year as businesses benefit from low
finance expense and increased capacity utilization. The increase in volume driven growth
across most sectors has resulted in several listed entities crossing breakeven thresholds and
returning to profitability. Increased volumes are driving core earnings higher whether it
is excess liquidity in the banks being mopped up by sharp growth in private sector credit,
or increased capacity utilization at manufacturing plants, higher occupancy levels at hotels
or even a modest rise in minutes of use among mobile phone subscribers. The current
December 2010 quarterly results for 192 companies reported filings thus far in the earnings
season amount to 84% yoy growth. Earnings are also driven by lower finance expense which
has helped drive increased private investment with private sector credit growth expanding
by over 25% in 2010. Downward revisions in taxation will enhance earnings prospects
further in tandem with increased volumes. Businesses will benefit from increased domestic
demand in the medium but will also be required to invest in building scale and enhancing
productivity in anticipation of new competition that is inevitably ushered in by an improved
operating environment.
>> Sustained local retail buying interest in the market has pushed near term market
multiples to 15.2x FY12E earnings, with aggressive buying on selected mid cap and
speculative trading on illiquid counters having pushed the indices higher at an excessive
pace thus far this year, warranting a modest correction. A medium term outlook of
sustainable normalized earnings of approximately 25% should see the index trend higher
over the medium to long term.
>> We remain bullish on the medium to long term earnings growth prospects of
Manufacturing, Banking and Leisure stocks. The sharp earnings growth in the Telco and
Energy sector is due to a recent return to profitability, while earnings growth in plantation
stocks have been driven by steep appreciation in rubber prices caused by a significant drop
in global supply.
>> The banking sector witnessed a sharp increase in credit growth over the 2H of 2010
with loan book expansion estimated to be 22.6% for 2010. The sharp loan growth helped
push earnings higher for the sector in comparison to the previous year where bond trading
gains augmented earnings. The outlook for credit expansion over the next three years is
approximately 20-25% yoy given increased private investment and consumer spending. Net
interest margins will moderate on account of competitive pressures and therefore would
require more robust management of the asset/liability mix. Asset quality has improved
significantly reflective of the lower credit default risk in the present environment. Increased
recoveries has seen gross NPLs in the industry declining from 8.49% in 2009 to 5.33% as
at end 2010 while provision cover the industry is estimated to have increased to 44.9%. A
15.6% growth in deposits has seen a steady shift towards low cost savings deposits on account
of the narrow rate differential against term deposits. The reduction in corporate tax and
financial VAT has resulted in effective tax rates for the banking sector declining from 60%
to 45%. As a result average ROE at banks which ranged from 13% to 16% has increased to
a range of 16% to 20% across the listed banks. This permits greater capital accumulation to
fund aggressive loan book expansion. Scope for a further sharp improvement in ROE could
potentially stem from consolidation in the sector in the medium to long term. Banks have
also recently started to issue scrip dividends in favour of cash dividends in a bid to retain
further Tier 1 capital. The collective result of these measures as well as the fact that most
banks still exhibit a statutory liquidity ratio in excess of 25% means that banks are unlikely
to require fresh capital infusions over the next 18mths. Government plans of a doubling of
per capita GDP in the country by 2015 would effectively warrant a doubling of credit into