Sri lanka outlook for equities 2013-14

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Provides an overall take on the outlook for the Sri Lankan equity market and the general macroeconomic enivronment for 2013-14

Provides an overall take on the outlook for the Sri Lankan equity market and the general macroeconomic enivronment for 2013-14

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  • 1. 150, St. Joseph’s Street, Colombo 01400, Sri Lanka. Tel: +94 112490900, Email: info.securities@jb.lk, www.jbs.lk 31st July 2013 Sri Lanka: Outlook for Equities - 2013/14 Searching for value… Gold Winner - Equity Research Report 2013
  • 2. Page 2JB Securities Research July 2013 Market SnapshotCountry Snapshot Name Democratic Socialist Republic of Sri Lanka Capital Sri Jayewardenepura Commercial Capital Colombo Time zone Standard time zone UTC +5.30 Nationality Sri Lankan Population 20.3 Million Total Area 65,610 Sq.km Density 324/Sq.km Currency Sri Lankan Rupee (LKR) Exchange rates* LKR 131.62/US$| LKR 174.68/€ | LKR 201.96/£ Economic size (2012 ) GDP (Market) USD 59.4 Billion GDP (PPP) Int’l D 126.9 Billion GDP per capita (Market) USD 2,923 GDP per capita (PPP ) Int’l D 6,136 Sovereign rating Moody’s: (B1) ‘Positive’ S&P: (B+) ‘Stable’ Fitch: (BB-) ‘Stable’ Official languages Sinhala, Tamil Business language English Literacy rate 91.9% 6°54′N 79°54′E *As at 1300h - 30/07/2013, Sources: Bloomberg L.P., Annual Report 2012 – CBSL 2013, IMF Sri Jayawaredenepura Colombo
  • 3. Page 3JB Securities Research July 2013 Financials, 29.3% Consumer Staples, 28.1% Industrials, 20.0% Consumer Discretionary, 9.5% Telecom, 6.2% Energy, 2.6% Healthcare, 1.9% Materials, 1.8% Utilities, 0.5% IT, 0.0% Colombo Stock Exchange Market Decomposition - GICS Retailing, 2.2%Textiles, Apparel & Luxury Goods, 0.6% Auto Components, 0.2% Household Durables, 0.1% Consumer Discretionary Hotels, Rest. & Leisure, 6.5% Construction & Engineering, 1.0% Machinery, 1.0% Building Products, 0.9% Other, 0.9% Industrials Industrial Conglomerates, 16.2% Food, 12.3% Tobacco, 8.0% Beverages, 4.9% Food & Drug Retailing, 2.7% H.H & Personal Products, 0.1% Consumer Staples Insurance, 2.5% Real Estate, 2.1% Financials Div. Financials , 11.3% Banks, 13.4% Source: JBS Research, CSE, GICS Market Cap – LKR 2.3 Trillion, USD 17.8 Billion (26 July 2013)
  • 4. Page 4JB Securities Research July 2013 Recap of the last 12 months… Potential risks exist… Investment case remains…
  • 5. Page 5JB Securities Research July 2013 80 100 120 140 160 180 Start Value = 105 End Value = 125 Low Point = 90 News flow was mixed… Amended Divineguma bill passed. The bill would create a new department by amalgamating 3 authorities which will come under the purview of Economic Development Minister, Basil Rajapakse. Riot breaks out in main prison facility in Welikada, a ward of Colombo City. The riot left 27 people dead and 40 injured. 2012 Q1 INTERNATIONALDOMESTIC Sources: Newspaper articles, Central Bank of Sri Lanka, LMD, The Nielsen Company, JBS Research High Point = 158 Government denies UN report that it intimidated UN staff investigating abuses at the end of the war. The report also said UN human rights agencies had failed to fulfill their responsibility to protect civilians in the final months of the conflict. 178 Sri Lankan visitors to a Christian shrine in Velankanni TN were stopped by protestors, and in another instance five buses of pilgrims stoned. Canadian PM to boycott the CHOGM to be held in SL end of this year, unless the HR & accountability issues are resolved. Protests intensify in Tamil Nadu ahead of UN vote on SL HR record. SL government warns its nationals against traveling to TN India. UN Human Rights Council passes highly- critical resolution urging Sri Lanka to conduct "independent and credible investigation" into alleged war crimes during Tamil Tiger insurgency. Parliament passes impeachment motion against Chief Justice Shirani Bandaranaya ke. Opposition says move politically motivated. Two Sri Lankan Buddhist monks attacked in Tamil Nadu by small mobs. Australia rejects calls to boycott CHOGM in Sri Lanka over alleged human rights violations. Parliament passes legislation that increase police power. Under the new bill police may detain and question a person for up to 48 hours. President reshuffles cabinet portfolios. Increases the number of ministers to 102, including 67 cabinet ministers, out of 225 MP’s. Intense diplomatic pressure exercised by Western nations & India over SL Government HR issues and Judicial Independency, throughout the year Duminda Silva returns from Singapore after being treated for injuries sustained in a gun battle which lead to 3 deaths. He is incarcerated on arrival but allowed to take medical treatment in a Private hospital. Mattala Rajapakse int'l Airport ceremonia lly opened by the President. Racially incited mob attacks “Fashion bug” clothing retailer owned by Muslims in a suburb of Colombo. Mass pubic protest against the 50% - 127% rise in electricity prices. Azad Sally , ex deputy mayor arrested & subsequently released for alleging that the gov’t was behind the racially charged attacks against Muslims. The Queen to miss CHOGM to be held later this year in SL, Prince Charles to take her place. 4 yr low = 87 4 yr high = 173 Communal unrest increases Political Human R.Infrastructure UnrestLEGEND Q4 Q2Q3Q2 2013 SL extends power cuts (3 ½ h per day) due to downtime at the Chinese built power plant & drought affecting hydro power production. Government sweeps through major reforms to strengthen its hand LMD-NielsenBusinessConfidenceIndex
  • 6. Page 6JB Securities Research July 2013 8.25% 8.00% 6.44% 4.77% 6.31% 6.41% 5.95% Q1 Q2 Q3 Q4 Q1 2011 Annual 2012 Quarterly 2012 Annual 2013 16.77% 13.15% 15.10% 13.36% 20.67% 15.87% 15.16% Economic growth slowed... Nominal Growth Real Growth Source: Census and Statistics Sri Lanka, JBS Research Analysis
  • 7. Page 7JB Securities Research July 2013 Investments leading growth… Source: CBSL annual report 2012, JBS Research Analysis 24.90% 21.36% 21.69% 69.69% 64.33% 65.77% 16.18% 17.65% 15.58% 21.07% 17.90% 21.43% 6.48% 6.64% 6.35% -38.32% -27.87% -30.82% 2010 2011 2012 Imports of goods and services Exports of goods and services Private consumption Government consumption Investment-Private Nominal (Real) GDP growth Investment-Public 15.89% (6.41%)16.78% (8.25%) 100%=GDP in LKR Bn. (Nominal) 12.37%42.51% 24.16% 14.61% 15.47% 23.98% 14.66% 28.54% 5,062 6,542 7,582 GDP Decomposition and sector growth
  • 8. Page 8JB Securities Research July 2013 Contribution to Growth %, YE2009-12 (3yrs) External flows fuelling growth… Source: Central Bank of Sri Lanka, JBS Research Analysis 2,927 3,608 4,583 5,339 3,330 4,116 5,145 5,985 4,732 5,715 7,533 7,809 2009 2010 2011 2012 11.27% 11.53% 12.73% 13.14% % of GDP 41.19% 100.00% 45.90% 12.90% Leaders Steady Laggards Total,2009/12 12.46% 7.26% 3.57% Note: Includes net remittances, grants, net borrowings (govt. + commercial bank net ), capital transfers and net income outflows Net External Flows (USD/Mn) CAGR% 7.55% 100% = LKR.598Bn Net Private Remittances Gross Remittances Inflows Leaders - Hotels, mining & quarrying, construction, fishing, post & telecommunication, cargo-ports & civil aviation, passenger goods & railway transport. Steady - Import trade, banking, insurance & real estate, domestic trade, electricity, gas & water, manufacturing. Laggards - Private services, export trade, agriculture, livestock & forestry, Ownership of dwellings, government services.
  • 9. Page 9JB Securities Research July 2013 6,619,958 6,751,793 6,839,087 7,261,077 2009 2010 2011 2012 1.99% 1.29% 6.17% 369,974 391,828 418,728 419,673 2009 2010 2011 2012 5.91% 6.78% 0.23% Growth is generating new jobs… Employed Population Labour Productivity (LKR) GDP/Employed Population GDP Growth Decomposition Source: CBSL annual report 2012, JBS Research Analysis 5.91% 6.87% 0.23% 1.99% 1.29% 6.17% 2010 2011 2012 8.02% 8.25% 6.41%Employment growth Productivity growth All in LKR constant 2002 XX% Growth Note: Growth in GDP = [(1+Growth in Productivity)*(1+Growth in Employment)]-1
  • 10. Page 10JB Securities Research July 2013 1.13 1.14 1.13 1.10 2009 2010 2011 2012 0.89% -3.04% -0.98% Capital Productivity GDP/Capital stock 327,034 343,298 370,497 382,958 2009 2010 2011 2012 4.97% 7.92% 3.36% Capital Intensity (LKR) Capital stock/Employed population Capital intensity driving labour productivity… XX% Growth All in LKR constant 2002 Source: CBSL annual report 2012, JBS Research Analysis Note: Growth in Productivity = [(1+Growth in Capital Intensity)*(1+Growth in Capital Productivity)]-1 Capital stock is calculated using perpetual inventory method. 369,974 391,828 418,728 419,673 2009 2010 2011 2012 5.91% 6.78% 0.23% Labour Productivity (LKR) GDP/Employed Population
  • 11. Page 11JB Securities Research July 2013 Erratic rainfall affected agricultural output… 2,125 2,384 2,630 1,996 2,717 1,750 1,268 1,671 1,898 1,129 2008 2009 2010 2011 2012 Paddy Production - 500 1,000 1,500 2,000 2,500 3,000 3,500 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec mm Monthly Rainfall MT ‘000 Yala Maha * Average rainfall in 6 paddy growing districts (60% of output) - Ampara, Anuradhapura, Batticaloa, Hambantota Kurunegala and Polonnaruwa 2011 2012 Avg. * Source: Department of Meteorology, Department of Census and Statistics
  • 12. Page 12JB Securities Research July 2013 Fewer rains… less hydro in generation mix… more expensive thermal 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Hydro contribution Reservoir storage 45% 20% 61% 53% 77% 38% 2% 3% 1% Jun-11 Jun-12 Dec-12 Hydro Thermal Other + 75MW + 75MW Upper Kotmale Source: PUCSL, Ceylon Electricity Board, Central Bank of Sri Lanka Reservoir Storage & Hydro Contribution Generation Mix
  • 13. Page 13JB Securities Research July 2013 Foreign arrivals continued to grow… 2010 2011 2012 1,005.6 2010 2011 20122010 2011 2012 Foreign Arrivals 1 (‘000s) Source SLTDA Foreign Guest Nights (‘000s) 1 Foreign arrivals – Total of tourist arrivals and VFR (Visiting Friends and Relations) 5,375.7 7,410.07,258.9 Tourism Earnings (US$ Mn) 575.9 830.3 1,038.7 619.1 785.4 888.1 35.4 70.5 117.5 VFRTourist arrivals 10 10 10 Avg. length of stay 855.9 654.5 30.8% 17.5% 35.0% 2.1% 44.2% 25.1%
  • 14. Page 14JB Securities Research July 2013 High room tariffs + Inadequate promotion… less demand for the formal sector 2010 2011 2012 2010 2011 2012 Formal sector 1 Room Inventory 70.2% Foreign Guest Nights in Graded establishments 1 Graded accommodation establishments Source SLTDA occupiedavailable 77.1% 71.1% 252 14,653 269 15,510 4,126,544 5,011,480 5,038,000 253 14,714 Establishments Room inventory
  • 15. Page 15JB Securities Research July 2013 Cheaper tariffs… more demand for the informal sector Supplementary Establishments Room Inventory 1 Informal sector - supplementary accommodation establishments and other unregistered establishments Source SLTDA 2,418,216 3,548,270 5,018,050 2010 2011 2012 Foreign Guest Nights in Informal Sector 1 2010 2011 2012 654 6,141 625 6,632 530 5,895 Establishments Room inventory 1,303 2 2 Total accommodation listings on www.agoda.com
  • 16. Page 16JB Securities Research July 2013 2,474 3,030 3,358 901 1,117 1,346 449 658 862 175 195 222 2010 2011 2012 5,144 5,986 56.1% 16.5% 22.5% 22.2% 14.4% 38.6% 3.7% 12.6% 2.2% 26.9% 1.1% 37.3% 2012 2012 Middle East Europe Americas Other Australia and NZ Asia Share % CAGR All amounts in USD millions 4,116 Source : Central Bank of Sri Lanka Remittance growth continued to be strong…
  • 17. Page 17JB Securities Research July 2013 14.6% 14.3% 13.0% 9.0% 12.5% 14.0% 17.9% 21.0% 26.4% 2010 2011 2012 India Bangladesh Phillippines Thailand Malaysia Vietnam 725 813 845 93 122 143 17 15 16 2010 2011 2012 Tax Non tax Grants Government revenue growth slowed… lower than peers 13.9% 5.7% 834 950 1,004 *Excludes grants **Peer data as of 2011 Government Revenue Government Revenue* to GDP LKR Bn. Source: Central Bank of Sri Lanka, Asian Development Bank Sri Lanka
  • 18. Page 18JB Securities Research July 2013 22.8% 21.4% 19.7% 14.9% 15.2% 15.8% 19.8% 25.9% 28.0% 2010 2011 2012 India Bangladesh Phillippines Thailand Malaysia Vietnam 1,280 1,400 1,493 937 1,007 1,094 41 30 25 2010 2011 2012 Lending minus Repayments Recurrent Expenditure and Lending minus Repayments Government expenditure growth slowed… higher than peers 9.4% 6.6%1,280 1,400 1,493 Government Expenditure to GDPGovernment Expenditure Source: Central Bank of Sri Lanka, Asian Development Bank LKR Bn. *Peer data as of 2011 Sri Lanka
  • 19. Page 19JB Securities Research July 2013 -8.0% -6.9% -6.4% -5.9% -4.8% -2.9% -2.5% -2.0% -1.8% 2010 2011 2012 India Malaysia Bangladesh Vietnam Phillipines Thailand (446) (450) (489) 2010 2011 2012 0.9% 8.6% Deficit increased… higher GDP growth reducing ratio… high relative to peers Source: Central Bank of Sri Lanka, Asian Development Bank Fiscal Balance to GDPFiscal Balance LKR Bn. *Peer data as of 2011 Sri Lanka
  • 20. Page 20JB Securities Research July 2013 Primary balance is a deficit… * Primary balance is government revenue minus all expenses excluding interest. Assuming nominal interest rates equal nominal GDP growth a primary surplus reduces debt to GDP. Deficit as a % of GDP Interest Cost as a % of GDP Primary* Deficit as a % of GDP Source : JBS Research Analysis, Central Bank of Sri Lanka 8.0% 6.9% 6.4% 2010 2011 2012 6.3% 5.5% 5.4% 2010 2011 2012 1.7% 1.4% 1.1% 2010 2011 2012
  • 21. Page 21JB Securities Research July 2013 244 219 286 (2) 192 132204 39 71 2010 2011 2012 Financing of Budget Deficit Foreign borrowing Domestic bank Domestic non bank LKR Bn. 446 450 489 Foreign borrowing Domestic bank Domestic non bank Financing of Budget Deficit (% mix of funding) Source: Central Bank of Sri Lanka Foreign sources funded the fiscal deficit easing pressure on domestic sources 62.6% 57.0% 49.5% 30.2% 32.8% 34.1% 7.3% 10.1% 16.4% 2010 2011 2012
  • 22. Page 22JB Securities Research July 2013 Concessional Loans Non-Concessional Loans Commercial Loans * Sovereign bonds and foreign holding of treasuries are classified as commercial loans Foreign Borrowings of the Government (%GDP) Foreign Borrowings of the Government (% composition) Source: Central Bank of Sri Lanka Shift in reliance to non-concessional and commercial loans… 22.6% 20.3% 18.1% 10.9% 11.7% 12.4% 2.6% 3.6% 6.0% 2010 2011 2012 36.1% 35.6% 36.5% Concessional Loans Non-Concessional Loans Commercial Loans 62.6% 57.0% 49.5% 30.2% 32.8% 34.1% 7.3% 10.1% 16.4% 2010 2011 2012
  • 23. Page 23JB Securities Research July 2013 Real Interest Rates Source : Central Bank of Sri Lanka, JBS Research Analysis* CCPI 2002 – Core Inflation 12 month MA, 1 year treasury bill yield Inflation trended up … nominal rates adjusted up … real rates + 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 0% 2% 4% 6% 8% 10% 12% 14% Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 T-bill rate Inflation*
  • 24. Page 24JB Securities Research July 2013 Domestic credit growth retarded… credit to gov’t increased… Source: Central Bank of Sri Lanka All amounts in LKR Bn. In 2013, credit to govt. was 3.8X private sector credit 36.7 9.1 7.6 -150 -100 -50 0 50 100 150 200 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 Credit, Monthly Change Private Corps. Govt. 1,217 18.3% -20% -10% 0% 10% 20% 30% 40% 50% 60% - 200 400 600 800 1,000 1,200 1,400 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 Net Credit to Govt. Net Credit to Government Annual Change (%) 345 34.0% 0% 50% 100% 150% 200% 250% - 50 100 150 200 250 300 350 400 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 Credit to Corporations Credit to SOEs Annual Change (%) 2,403 10.2% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 0 500 1,000 1,500 2,000 2,500 3,000 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 Credit to Private Sector Credit to the Private Sector Annual Change (%)
  • 25. Page 25JB Securities Research July 2013 Credit growth funded via external borrowings… All amounts in LKR Bn. Source: Central Bank of Sri Lanka Net Foreign Assets of the Banking System 420 (143) (372) (95) Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Foreign currency Banking Units Domestic Banking Units Monetary Authorities Net Foreign Assets of the Banking System Consolidated Broad Money (M2b) 3,133 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Net Domestic Assets of the Banking System 2,403 1,217 345 (737) 3,228 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Other Items Credit to Corporations Net Credit to Government Credit to the Private Sector Net Domestic Assets of the Banking System Foreign borrowings funding domestic credit
  • 26. Page 26JB Securities Research July 2013 457 406 222 12 -4 6 116 173 121 30 119 6 2011 2012 Apr-13 LKR Deposits LKR Borrowings FCY Borrowings FCY Deposits 515 434 60 -36 2 111 108 42 3 142 221 8 -4 4 2011 2012 Apr-13 LKR Loans Debt securities and others FCY Loans Government Securities Shares and Unit trusts Change in Key Liabilities Change in Key Assets Commercial banks leaned towards foreign borrowings... All amounts in LKR Bn. Source: Central Bank of Sri Lanka
  • 27. Page 27JB Securities Research July 2013 5% 7% 9% 11% 13% 15% 17% 30-Dec-11 09-Jan-12 18-Jan-12 26-Jan-12 03-Feb-12 15-Feb-12 24-Feb-12 05-Mar-12 15-Mar-12 23-Mar-12 02-Apr-12 11-Apr-12 23-Apr-12 02-May-12 11-May-12 21-May-12 29-May-12 07-Jun-12 15-Jun-12 25-Jun-12 04-Jul-12 12-Jul-12 20-Jul-12 30-Jul-12 08-Aug-12 16-Aug-12 24-Aug-12 04-Sep-12 12-Sep-12 20-Sep-12 01-Oct-12 09-Oct-12 17-Oct-12 25-Oct-12 05-Nov-12 14-Nov-12 22-Nov-12 03-Dec-12 11-Dec-12 19-Dec-12 31-Dec-12 08-Jan-13 17-Jan-13 28-Jan-13 07-Feb-13 15-Feb-13 26-Feb-13 07-Mar-13 15-Mar-13 25-Mar-13 04-Apr-13 12-Apr-13 23-Apr-13 03-May-13 13-May-13 21-May-13 30-May-13 07-Jun-13 17-Jun-13 25-Jun-13 03-Jul-13 11-Jul-13 19-Jul-13 Repo Reverse Repo AWPLR AWDR Call Money Rate SLIBOR(1 month) T bill(3month) gross T bill(3month) AWFDR AWLR Policy Rate Pass-through to Market Interest Rates Monetary policy was loosened… Source: Central Bank of Sri Lanka 7.00% 9.00% 10.07% 11.79% 10.56% 8.72% 9.59% 8.63% 13.61% 16.25% * Latest figures as at 24th July 2013
  • 28. Page 28JB Securities Research July 2013 10% 11% 12% 13% 14% 15% 16% 17% 30-Dec-11 09-Jan-12 18-Jan-12 26-Jan-12 03-Feb-12 15-Feb-12 24-Feb-12 05-Mar-12 15-Mar-12 23-Mar-12 02-Apr-12 11-Apr-12 23-Apr-12 02-May-12 11-May-12 21-May-12 29-May-12 07-Jun-12 15-Jun-12 25-Jun-12 04-Jul-12 12-Jul-12 20-Jul-12 30-Jul-12 08-Aug-12 16-Aug-12 24-Aug-12 04-Sep-12 12-Sep-12 20-Sep-12 01-Oct-12 09-Oct-12 17-Oct-12 25-Oct-12 05-Nov-12 14-Nov-12 22-Nov-12 03-Dec-12 11-Dec-12 19-Dec-12 31-Dec-12 08-Jan-13 17-Jan-13 28-Jan-13 07-Feb-13 15-Feb-13 26-Feb-13 07-Mar-13 15-Mar-13 25-Mar-13 04-Apr-13 12-Apr-13 23-Apr-13 03-May-13 13-May-13 21-May-13 30-May-13 07-Jun-13 17-Jun-13 25-Jun-13 03-Jul-13 11-Jul-13 19-Jul-13 AWPLR AWLR 3.54% 1.58% 2.67% Credit Quality Spread Transmission mechanism delayed pass through… Source: Central Bank of Sri Lanka
  • 29. Page 29JB Securities Research July 2013 SRR* cut created greater liquidity... 8.42% Money Market Net Liquidity & Overnight Interest Rate Source: Central Bank of Sri Lanka All amounts in LKR Bn. *Statutory Reserve Ratio 1.86 0% 2% 4% 6% 8% 10% 12% -20 -10 0 10 20 30 40 50 60 70 02-Jan-12 10-Jan-12 19-Jan-12 27-Jan-12 06-Feb-12 16-Feb-12 27-Feb-12 06-Mar-12 16-Mar-12 26-Mar-12 03-Apr-12 16-Apr-12 24-Apr-12 03-May-12 14-May-12 22-May-12 30-May-12 08-Jun-12 18-Jun-12 26-Jun-12 05-Jul-12 13-Jul-12 23-Jul-12 31-Jul-12 09-Aug-12 17-Aug-12 27-Aug-12 05-Sep-12 13-Sep-12 21-Sep-12 02-Oct-12 10-Oct-12 18-Oct-12 26-Oct-12 06-Nov-12 15-Nov-12 23-Nov-12 04-Dec-12 12-Dec-12 20-Dec-12 01-Jan-13 09-Jan-13 18-Jan-13 29-Jan-13 08-Feb-13 18-Feb-13 27-Feb-13 08-Mar-13 18-Mar-13 27-Mar-13 05-Apr-13 16-Apr-13 24-Apr-13 06-May-13 14-May-13 22-May-13 31-May-13 10-Jun-13 18-Jun-13 26-Jun-13 04-Jul-13 12-Jul-13 23-Jul-13 Net Liquidity Repo rate CBSL cuts SRR from 8% to 6%
  • 30. Page 30JB Securities Research July 2013 Change in Imports Change in Exports 9,710 9,326 244 117 161 10 73 54 263 386 405 488 331 200 117 79 64 25 28 29 2011 Petroleum Machinery and equipment Building material Other consumer goods Transport equipment Textiles and textile articles Food and beverages Vehicles Other Intermediate Diamond and Precious Metals Other Industrial Textiles and garments Other Agri Tea Food, beverages and tobacco Rubber products Mineral products Undisclosed 2012 % Increase 5.1% 10.0% 15.0% -6.8% -2.3% -16.8% -19.0% -43.8% -9.9% -45.4% -12.9% -4.8% -11.3% -5.3% -18.4% -2.9% 86.3% - - Trade Deficit Trade Deficit Lower imports and exports… trade deficit reduced marginally… USD millions As a % of GDP 16.4% 15.8% Gold imports drop from 604mn in 2011 to 170mn in 2012 Vehicle imports drop from 881mn. in 2011 to 495mn. in 2012 following duty hike Source: Central Bank of Sri Lanka, JBS Research Analysis
  • 31. Page 31JB Securities Research July 2013 Service account is a surplus… income account is a deficit Source: Central Bank of Sri Lanka, JBS Research Analysis 1,634 1,251 1,172 1,039 710 436 680 656 Inflows Outflows Inflows Outflows Inflows Inflows Outflows Transportation Travel BPO, ITES Other Surplus 991 1,149 292 445 15 34 14 Outflows Inflows Outflows Inflows Outflows Inflows Interest and Other Charges Direct Investment Compensation of Employees Deficit Income AccountService Account USD millions 23.0%17.4% 41.7% 34.1% 23.5% 78.9% 75.0% 77.4% 25.2% 22.8% 50.0%15.6% -34.8%39.8% 13.7% Tourism flows External debt service As a % of GDP 2.10% 1.93% 1.7% Percentage increase over 2011
  • 32. Page 32JB Securities Research July 2013 19,183 9,409 9,307 3,915 9,774 3,788 2,538 321 1,469 5,985 646 53 Imports Exports Trade deficit Receipts Payments Receipts Payments Private receipts Private payments Offical transfers (net) 32.3% 16.5% 15.8% 6.4% 4.3% 0.5% 2.5% 15.7% 10.1% 1.1% 0.1% 6.6% Merchandise trade Services Income Goods, Services and Income (net) Current transfers Current account deficit Increasing remittances reduced the current account balance… Source: Central Bank of Sri Lanka, JBS Research Analysis -7.4%-5.4% 27.9% 16.3%22.8%-3.1% 14.9% -11.7% -15.2% -31.3% 31.9% 0.5% USD millions Remittance flows Percentage increase over 2011 Percentage of GDP
  • 33. Page 33JB Securities Research July 2013 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0% 10.5% 11.0% 11.5% 12.0% 12.5% 13.0% 50 60 70 80 90 100 110 5-Jan-11 5-Mar-11 5-May-11 5-Jul-11 5-Sep-11 5-Nov-11 5-Jan-12 5-Mar-12 5-May-12 5-Jul-12 5-Sep-12 5-Nov-12 5-Jan-13 5-Mar-13 5-May-13 Foreign holdings As a % of total T-bills Foreign Limit Switch from bills to bonds 9.0% 9.5% 10.0% 10.5% 11.0% 11.5% 12.0% 12.5% 13.0% 13.5% 14.0% 14.5% 15.0% 15.5% 16.0% 150 200 250 300 350 400 450 5-Jan-11 5-Mar-11 5-May-11 5-Jul-11 5-Sep-11 5-Nov-11 5-Jan-12 5-Mar-12 5-May-12 5-Jul-12 5-Sep-12 5-Nov-12 5-Jan-13 5-Mar-13 5-May-13 Foreign holdings As a % of total T-bills Foreign Limit Positive investor sentiment flows on to treasuries following the sovereign bond being oversubscribed 10.5X …rule relaxation… Jan ’13: Foreigners allowed to subscribe upfront the entire allocation for the year – this was previously capped at 12.5% of outstanding stock Foreign Holding of Treasury BondsForeign Holding of Treasury Bills Foreign limit of 12.5% not imposed… yield seeking investors flowed in Source: Central Bank of Sri Lanka All amounts in LKR Bn. (4) * Latest figures as at 26th June 2013 101
  • 34. Page 34JB Securities Research July 2013 75 80 85 90 95 100 105 95 100 105 110 115 120 125 130 135 140 Jan11 Feb11 Mar11 Apr11 May11 Jun11 Jul11 Aug11 Sep11 Oct11 Nov11 Dec11 Jan12 Feb12 Mar12 Apr12 May12 Jun12 Jul12 Aug12 Sep12 Oct12 Nov12 Dec12 Jan13 Feb13 Mar13 Apr13 May13 Jun13 Jul13 REER NEER LKR Appreciation of the USD Against Regional Currencies LKR range bound… REER appreciating due to higher relative inflation Source: forexpros.com, Central Bank of Sri Lanka, JBS Research REER > NEER due to higher domestic inflation Readjustment after depreciation -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% Jan11 Mar11 May11 Jul11 Sep11 Nov11 Jan12 Mar12 May12 Jul12 Sep12 Nov12 Jan13 Mar13 May13 Jul13 Sri Lankan rupee (LKR) Bangladeshi taka (BDT) Vietnamese dong (VND) Indian rupee (INR) Chinese yuan (CNY) * Latest figures as at 23rd July 2013
  • 35. Page 35JB Securities Research July 2013 Frontier markets equity inflows increased including into Sri Lanka 67.62 55.03 40.56 75.41 July - Sep Oct - Dec Jan - Mar April - June 2012 2013 Net Inflows of Foreign Companies (July 2012 – June 2013) Major FII Inflows ( July 2012 – March 2013 ) Source : JBS Research estimates base on top 20 shareholders list, CSE Aberdeen Group 12.84 9.92 5.06 JKH SPEN LLUB COMB OTHER 81.29 49.21 JKH SAMP LOLC 16.33 5.87 4.42 BBH –Matthews Asia Fund 26.63 JPLMU Franklin Templeton Investment Fund 31.90 COMB Wasatch fund 7.96 All amounts in USD Millions
  • 36. Page 36JB Securities Research July 2013 Large liquid caps attracted most of the flows… Source : CSE , JBS research estimates Foreign Net Equity Portfolio Investment 1 July 2012 – 30 June 2013 (Total for the period = 240.98 ) 185.57 124.15 18.36 16.90 11.73 8.09 8.01 4.00 1.06 0.16 -5.35 - 1.55 JKH DIST SAMP CARG LION NEST CTC DFCC COMB HNB SPEN 51.52% 7.62% 7.01% 4.87% 3.36% 3.32% 1.66% 0.44% 0.07% - 2.22% - 0.64% Net inflow into the stock in comparison to the market Foreign net equity portfolio investment TOTAL 77.00% All amounts in USD Millions
  • 37. Page 37JB Securities Research July 2013 5.0% 2.4% 2.7% 2.2% 2.0% 1.7% 1.3% 1.2% 1.0% 0.9% -1.0% 2.8% 22.1% JKH CTC COMB NDB SAMP LLUB DIST DFCC HNB NEST BUKI Other Total Attribution of S&PSL20 Growth June 2012 – June 2013 Which in turn drove up the index… Source: CSE, S&P, JBS Research
  • 38. Page 38JB Securities Research July 2013 Indices recorded healthy gains… Source: CSE, S&P, JBS Research 2,500 3,100 3,700 4,500 5,500 6,500 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Movement in ASI & S&PSL20 Series1 Series2ASI S&PSL20 ASI S&PSL20 22.3%* 30.5%* *Returns are shown for ASI only.
  • 39. Page 39JB Securities Research July 2013 -10% 0% 10% 20% 30% 40% 50% 60% Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Beverage, Food and Tobacco sector outperformed… Source: CSE, JBS Research *See glossary for acronyms BFT* BFI ASI S&P DIV H&T
  • 40. Page 40JB Securities Research July 2013 Foreign holding as a % of public holding* 18.32 22.74 30.01 10.46 8.20 7.99 10.46 15.65 15.37 64.37 30.52 3.08 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% JKH CTC NEST COMB DIAL HNB DIST SPEN LLUB CARG LION NDB Large cap stocks are well owned by FIIs…. Source : CSE , Bloomberg market data , JBS research estimates 64.23 % 77.01 % 43.87 % 40.10 % 51.66 % 29.12 % 24.49 % 67.82 % 61.78 % 39.45 % 59.21 % 41.22 % * Public Holding : The total number of shares publicly owned and available for trading 88.36% 15.87% 9.18% 85.00% 14.73% 69.81% 29.53% 40.07% 49.00% 18.35% 15.15% 95.54% JKH CTC NEST COMB DIAL HNB DIST SPEN LLUB CARG LION NDB 7 93 421 10 11 12 13 17 18 P/E Ratio Public holding % Rank based on market capitalization
  • 41. Page 41JB Securities Research July 2013 11.0% Domestic institutions recorded outflows … -13.73 47.29 15.90 2012 (DEC)2011 (Dec)2010 (Dec) 5.4% 0.81 2.35 -0.60 201220112010 Employee Trust Fund -2.35 10.27 -10.62 201220112010 Insurance Companies -0.03 -1.20 -0.09 201220112010 Unit Trusts Equity net cash flows (LKR Bn) Equity allocation % of total portfolio Source : SEC Sri Lanka , JBS research estimates 4.0% 8.0% 16.0% 15.0% 53.0% 42.0% 29.0% 4.0% 5.0% 4.7% Assumption: Annual return of institutional funds equal to ASI index return 2010 2011 2010 2011 20122012 Employee Provident Fund
  • 42. Page 42JB Securities Research July 2013 168.43 91.31 115.45 154.37 203.67 97.85 133.79 211.80 July - Sep Oct - Dec Jan - Mar April - June 2012 2013 Retail investors were net sellers… Purchases and Sales of Local Individuals (July 2012 – June 2013) Local individuals purchases Local individuals sales Source : CSE All amounts in USD Millions
  • 43. Page 43JB Securities Research July 2013 Credit extended by margin providers remained stable… Source : Securities and Exchange Commission of Sri Lanka * Loan-to-Value ratio is calculated considering only the loans extended by margin providers 10.60 11.67 11.63 Aug-12 Dec-12 May-13 Loans Outstanding from Margin Providers (LKR Billions) 27.98% 31.50% 29.87% Aug-12 Dec-12 May-13 Loan-to-Value Ratio *
  • 44. Page 44JB Securities Research July 2013 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Regulation became more “market friendly”… ASI Source : Securities and Exchange Commission of Sri Lanka SEC relaxes rules on price bands SEC further relaxes rules on debt settlement SEC Director General leaves office SEC Chairperson resigns SEC directive permits brokers to extend credit to investors up to three times net adjusted capital SEC revokes directive on price bands all together SEC Chairman resigns with an additional commissioner following suite SEC Director General resigns SEC Director of Surveillance resigns
  • 45. Page 45JB Securities Research July 2013 Equity issuances were low… take off in debt issuances… In LKR Mn Source: CSE, SEC, WFE, JBS Research - 5,000 10,000 15,000 20,000 25,000 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 Secondary issuances Primary issuances Debt issuances
  • 46. Page 46JB Securities Research July 2013 M&A activity was subdued… 2,770 1,811 949 2,928 4,200 328 7,000 130 843 - 350 - - 3,400 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2010 2011 2012 2013 Quarterly Volume of Mergers & Acquisitions In LKR Mn Source: JBS Research
  • 47. Page 47JB Securities Research July 2013 90.2% 8.1% 1.8% Contribution to Growth P/E Growth Earnings Growth Combined Effect 100% 21.7% 1.9% 0.4% 124% Jun-12 P/E Growth Earnings Growth Combined Effect Jun-13 Disaggregation of Market Cap Growth Expectations have driven the market… Source: CSE, JBS Research
  • 48. Page 48JB Securities Research July 2013 0 5 10 15 20 25 0 5 10 15 20 25 TRD P&E Sample PER Sample PER Ex BFI Bifurcated market… 23.7% 4.5% 25.3% 4.7% 7.3% 22.6% 1.3% 3.4% 1.9% 1.3% 1.3% 1.2% 0.4% Market PER 29 July 2013 Sample: 60 Largest Companies, represents 80% total Market Cap 12.1 14.7 P/E (Sample Sector capitalization)/(Total sample capitalization)Data: Bloomberg L.P. , JBS Research. BFT OIL DIV H&T TLE BFI MFG HLT C&E INV L&P MRT 1.0% *See glossary for acronyms
  • 49. Page 49JB Securities Research July 2013 Equity Risk Premium has fallen… risk is being under priced 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Source: JBS Research In calculating the implied equity risk premium the following assumptions have been made: Nominal Earnings Growth Years 1-5: 20% Years 6-15: 16% Perpetual : 14% 10 Year T-bond (09.00%2023A): 11.59%
  • 50. Page 50JB Securities Research July 2013 Relative valuations high compared to peers … 6.3% 5.0% 7.3% 6.1% 5.9% 8.2% 4.1% 3.7% 3.9% 3.9% 8.1% 11.6% Malaysia Phillipines Vietnam Thailand India Sri Lanka Earnings Yield 10Y Bond Yield as at 30/07/2013 Source: Bloomberg LP, CBSL, AsianBondsOnline.org BEER Ratio* 0.65 0.74 0.53 0.63 1.37 1.41 Interpretation of BEER* (Bond Equity Earnings Yield) Ratio, calculated as (Bond Yield/Earnings Yield): This is best used as a measure of exclusion, i.e. when BEER ratio > 1, the market can be interpreted as being overvalued. However, a BEER < 1 does not imply that equities are undervalued; it simply indicates that valuations merit further investigation.
  • 51. Page 51JB Securities Research July 2013 Recap of the last 12 months… Potential risks exist… Investment case remains…
  • 52. Page 52JB Securities Research July 2013 Three-speed post conflict economy … Leaders > CAGR 8.70% Steady CAGR 6.40% - 8.70% Laggards < CAGR 6.40% Hotels and Restaurants Construction Mining and Quarrying Post and Telecommunication Cargo-Ports and Civil Aviation Import Trade Domestic Trade Electricity, Gas and Water 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 - 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 2,200 2,400 Private Services Export Trade Agriculture, Livestock and Forestry Government Services Ownership of Dwellings % CAGR, YE2009-12 GDP real sector size, YE2009: LKR2,449Bn Growth,YE2009/12: 7.55% Source: Central Bank of Sri Lanka, JBS Research Analysis Passenger, Goods and Railway Transport Banking, Insurance and Real Estate etc. Fishing Manufacturing
  • 53. Page 53JB Securities Research July 2013 Construction Manufacturing Domestic Trade Bank’,Insur’ & Real Est’ etc. Import Trade Mining & Quarrying Agri’, Livestock & Forestry Export Trade Electricity, Gas and WaterFishing Private Services Hotels and Restaurants Government Services Cargo and Civil Aviation Ownership of Dwellings 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% % Contribution to growth, YE2009-12 Leaders > 8.70% Steady 6.40% - 8.70% Laggards < 6.40% All in CAGR 2009-12 Passenger, Goods & Railway Transport Post & Telecommunication % GDP Sector share, YE2009 Source: Central Bank of Sri Lanka, JBS Research Analysis Non-tradable sectors driving growth…
  • 54. Page 54JB Securities Research July 2013 Concerns about estimates used in compiling National Accounts… Note 1. 75% of mining & quarrying (excluding gem mining) is estimated through growth in cement demand. 2. Cement is a key proxy in estimating residential construction which is a large component of the construction industry. 13% 28% 22% 21% Industry estimate CBSL estimate Construction industry growth Mining & Quarrying industry Growth excluding Gem Mining Cement 5.2 Mn/MT 5.8 Mn/MT Real Growth, YE2012 Source: Central Bank of Sri Lanka, JBS Research Analysis Contribution to growth 2011/12 24% 7%
  • 55. Page 55JB Securities Research July 2013 937 1,025 1,131 343 408 426 2010 2011 2012 Limited fiscal space due to high committed spending… 32.1% 31.2% Personnel 37.6% 34.8% Interest 20.9% 21.1% Subsidies and Transfers 9.4% 12.9% Other Goods and Services 2010 2011 2012 20.0% 4.4% 1,280 30.7% 36.1% 20.8% 12.4% 46.4% 45.0% Transport and Communication 18.7% 19.7% Energy and Water Supply 7.0% 6.8% Agriculture and Irrigation 5.3% 5.3% Education 5.7% 6.8% Civil Administration 5.1% 4.5% Community Services3.7% 3.5% Health8.0% 8.4% Other 2010 2011 2012 19.3% 46.1% 6.5% 6.0% 7.6% 6.8% 3.9% 3.9% Current Expenditure Capital Expenditure and Net Lending Committed Spending Source: Central Bank of Sri Lanka LKR Bn. Gov’t Expenditure 9.4% 10.3% 1,557 1,433 11.9% 8.6%
  • 56. Page 56JB Securities Research July 2013 (20.3) (94.5) (89.7) 5.0 (19.3) (61.2) (0.3) (21.6) (28.8) (0.8) (7.4) (10.0) 2010 2011 2012 Sri Lanka Transport Board Airlines Ceylon Electricity Board Ceylon Petroleum Corporation Combined Operating Losses of Main State Owned Enterprises Combined Earnings of the Market Combined Operating Loss as a % of GDP LKR Bn LKR Bn Combined earnings (USD Bn) Source: Ministry of Finance and Planning, CSE, JBS Research Analysis * Cross holdings have not been eliminated The SOE monsters keep bleeding… (189.6) (1.5) (142.8) (1.3) (16.4) (0.1) Combined loss (LKR Bn.) Combined loss (USD Bn.) -0.3% -2.2% -2.5% 2010 2011 2012 146.3 182.7 214.7 2010 2011 2012 1.65 1.68 1.29
  • 57. Page 57JB Securities Research July 2013 96 114 134 2009 2010 2011 12.9% 12.4% 11.1% 1.7% 1.9% 1.9% 0.3% 0.2% 0.2% 2010 2011 2012 Tax buoyancy low…needs further broad basing and rebalancing 14.6% 14.3% 13.0% 30.7% Revenue to GDP Tax revenue LKR Bn. Grants Non-tax Tax 725 846 909 CBSL profit transfers were 30% of non-tax revenue Estimated Sin Taxes* Source: Central Bank of Sri Lanka, Ministry of Finance and Planning JBS Research Analysis LKR Bn. 18.7% 18.6% 19.0% 30.4% 26.7% 25.3% 17.9% 24.2% 24.6%8.9% 9.4% 8.8% 6.8% 7.8% 7.7% 9.6% 7.2% 6.6% 6.4% 4.2% 4.3% 1.4% 1.8% 3.7% 2010 2011 2012 1 Special Commodity Levy Other Excise Tax Ports & Airports Development Levy Import Duties VAT Income Tax Nation Building Tax Direct Indirect Percentage of total taxes 16.5% 15.7% 15.6% * Taxes collected from tobacco and liquor industries 16.7% 7.4% 1 6. 7 % 1 6. 7 % 18.8% 17.5%
  • 58. Page 58JB Securities Research July 2013 Government indebtedness is increasing… Better Indicator?Is this the Best Indicator? 81.9% 78.5% 79.1% 66.8% 52.1% 44.3% 41.9% 2010 2011 2012 India Vietnam Thailand Philippines 550% 541% 600% 348% 234% 206% 198% 2010 2011 2012 India Philippines Vietnam Thailand Total Debt to Government RevenueGovernment Debt / GDP Source: Central Bank of Sri Lanka, Asian Development Bank Peer data as of 2011Peer data as of 2011 Sri Lanka Sri Lanka
  • 59. Page 59JB Securities Research July 2013 78% 82% 79% 22% 18% 21% - 1.0 2.0 3.0 4.0 5.0 6.0 7.0 2006 2011 2012 Philippines India Thailand Vietnam Decline in spending on social infrastructure… Recurrent Capital Public Expenditure on Education (% of GDP) Public Expenditure on Healthcare (% of GDP) 76% 83% 83% 24% 17% 17% - 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2006 2011 2012 India Philippines Vietnam Thailand Recurrent Capital Sri Lanka Sri Lanka World Bank Metadata, Annual Report 2012 – CBSL 2013 Peer nations - 2010 Peer nations - 2011
  • 60. Page 60JB Securities Research July 2013 Inadequate public expenditure on Tertiary Education… 6.4 2.4 1.1 0.3 1.0 Sri Lanka Vietnam Thailand Philippines India Outbound Mobility Ratio Students studying abroad as a percentage of tertiary enrolment 32 43 22 10 70 Sri Lanka Vietnam Thailand Philippines India Public Expenditure Spent on Pupil, Tertiary Percentage of Per Capita GDP | 2010 14 24 48 30 10 Sri Lanka Vietnam Thailand Philippines India Tertiary Gross Enrolment Ratio Percentage of population of tertiary age in tertiary education Source: World Bank, AT Kearney, Key Indicators for Asia and the Pacific 2011 – ADB, Annual Report 2012
  • 61. Page 61JB Securities Research July 2013 USD/Oz Banks heavily exposed to pawning*… Asset Quality will suffer -30% -20% -10% 0% 10% 20% 30% 40% Jan12 Feb12 Mar12 Apr12 May12 Jun12 Jul12 Aug12 Sep12 Oct12 Nov12 Dec12 Jan13 Feb13 Mar13 Apr13 May13 Jun13 1,000 1,100 1,200 1,300 1,400 1,500 1,600 1,700 1,800 1,900 Gold Annual Change Gold Price Crashed… 454 196 124 41 34 12 12 585 251 147 55 48 17 11 Industry PB BoC SAMP HNB SEYB COMB 2011 2012 Banks’ Exposure 10.7% 17.5% 38.5% 22.0% 13.0% 23.0% 3.6% 13.1% 18.6% 38.0% 20.5% 15.6% 25.4% 2.8% Pawning as a % of total gross loans Source: Central Bank of Sri Lanka, kitco.com, JBS Research Analysis LKR Bn. *Pawning – gold back loan where interest and principle is paid at the end, maturity is 12 months
  • 62. Page 62JB Securities Research July 2013 Lower gold prices + lower LTV… pawning advances will contract Growth in Total LKR LendingLower Pawning Advances… Falling LTV ratios combined with lower gold prices will reduce pawning advances 515 434 60 All amounts in LKR Bn. 277 454 585 593 475 2010 2011 2012 Apr-13 2013E 16.9% 21.1% 22.6% 22.8% - - 100 200 300 400 500 600 700 64.1% 28.7% 1.5% -20.0% Pawning as a % of total LKR lending 338 304 51 177 130 9 2011 2012 Apr-13 64.1% 28.7% 1.5% 31.5% 20.2% 2.3% Pawning advances Other advances Pawning growth LKR lending growth Source: Central Bank of Sri Lanka, JBS Research Analysis
  • 63. Page 63JB Securities Research July 2013 0 5 10 15 20 25 0 5 10 15 20 25 BFT OIL DIV H&T TLE BFI HLT TRD MFG INV L&P P&E MRT P/E Sample P/E Ex BFI Sample P/E P/E 12.1 14.7 14.4% 3.0% 18.3% 4.1% 8.3% 36.4% 0.8% 0.8% 3.9% 2.5% 1.9%1.8% 2.6% 1.3% Data: Bloomberg L.P. , JBS Research. (Sample sector earnings)/(Total sample earnings) Market PER 29 July 2013 Sample: 60 Largest Companies, represents 83% total Market Earnings C&E Financial sector represents 37% of market earnings …. *See glossary for acronyms
  • 64. Page 64JB Securities Research July 2013 Exports’ share has declined … Competitiveness is eroding … -1.0 -0.5 0.0 0.5 1.0 -1.0 -0.5 0.0 0.5 1.0 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 Economic Complexity Score² Sri Lanka India Thailand Philippines LKA PHL IND THA Source: The Atlas of Economic Complexity, Mapping paths to prosperity, Hausmann, Hidalgo et al. (2008). Observatory of Economic Complexity :http://atlas.media.mit.edu Retrieved: 30th June 2013, World Bank Economic Database, Annual Report 2012: CBSL 2013. Economic Complexity² refers to the “amount of productive knowledge that each country holds” Is measured by the complexity of exported goods Exports¹ – Exports of Goods and Services 0 5 10 15 20 25 30 35 40 45 50 0 5 10 15 20 25 30 35 40 45 50 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 Exports¹ and Remittances as % of GDP Average exports Average (Exports + Remitances) % of GDP % of GDP Exports (G&S) Remittances Remittances have Cushioned the Impact of Declining Exports Complexity of Exported Goods have not Kept Pace with Peers
  • 65. Page 65JB Securities Research July 2013 Sri Lanka - Composition of exports have remained stagnant Net Goods Exports Tree Map - 2010Net Goods Exports Tree Map - 1995 $2,847Mn $7,363Mn 0 10 20 30 40 50 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 Exports (G&S) “Sri Lanka’s export share of GDP has been declining” % of GDP 19% 2.6X Source: Observatory of Economic Complexity :http://atlas.media.mit.edu Retrieved: 30th June 2013 , World Bank Economic Database, Annual Report 2012: CBSL 2013
  • 66. Page 66JB Securities Research July 2013 In comparison Thailand - Composition of exports have diversified Net Goods Exports Tree Map - 2010Net Goods Exports Tree Map - 1995 $36,244Mn $118,715Mn 0 20 40 60 80 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 “Thailand’s export share % of GDP has been steadily increasing” Exports (G&S) % of GDP 79% 3.3X Source: Observatory of Economic Complexity :http://atlas.media.mit.edu., Retrieved: 30th June 2013 World Bank Economic Database.
  • 67. Page 67JB Securities Research July 2013 Source: Central Bank of Sri Lanka, Asian Development Bank Foreign Direct Investment FDI as a % of GDP * FDIs excludes loans as per the UNCTAD presentation * Peer data as of 2011 except Thailand (2010) FDIs* remain low …. Reinvested earnings Other capital Equity capital USD millions 195 218 246 44 33 71 239 705 582 2010 2011 2012 956 1.0% 1.6% 1.5% 0.6% 0.7% 1.2% 2.8% 3.7% 6.0% 2010 2011 2012 Phillippines Bangladesh India Thailand Malaysia Vietnam 478 899 100.0% -6.0% Sri Lanka
  • 68. Page 68JB Securities Research July 2013 -2.2% -7.8% -6.6% -4.0% 0.2% 0.9% 3.1% 3.2% 11.1% 2010 2011 2012 India Vietnam Bangladesh Phillipines Thailand Malaysia (1,075) (4,615) (3,915) 2010 2011 2012 Current account deficit remains high… funding it may be a challenge Current Account Deficit to GDPCurrent Account Deficit USD millions Source: Central Bank of Sri Lanka, Asian Development Bank *Peer data as of 2011 329.3% -15.2% Sri Lanka
  • 69. Page 69JB Securities Research July 2013 4,150 5,072 4,011 4,162 2,880 3,549 3,979 4,423 8.3 7.7 4.7 5.4 0 1 2 3 4 5 6 7 8 9 - 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 2009 2010 2011 2012 Reserve Adequacy*Gross Reserves Reserve adequacy – depends on what you look at… USD millions Net reserves 7,030 8,621 7,990 8,585 77.5% 84.4% 48.2% 41.3% 131.3% 143.5% 96.1% 85.3% 2009 2010 2011 2012 Net foreign reserves/short-term debt Gross foreign reserves/short term debt Source: Athukorala, P (2013), “Sri Lanka’s Post-conflict Development Challenge: Learning from the Past“ * Net reserves as estimated by the IMF after netting out short-term borrowings from gross reserves Import Cover
  • 70. Page 70JB Securities Research July 2013 • Third Amendment 27th August 1982 President was given power to seek re-election after 4 years of a term of office. • Seventh Amendment 4th October1983 President was given power to appoint Commissioners of the High Court temporarily when requested by the Minister in charge of the subject of justice. • Eighth Amendment 6th March 1984 President was given power to appoint President’s Counsel. By this President can influence the judiciary. • Thirteenth Amendment 14th November 1987 President was given power to appoint the Governor for a Provincial Council. • Seventeenth Amendment 3rd October 2001 Setting up Constitutional Council and Independent Commissions. • Eighteenth Amendment 8th September 2010 Two term limit on the tenure of the Executive has been removed, there are currently no term limits. President was given power to appoint members to the Independent Commissions. The current constitution was introduced in 1978, provides for a unicameral parliament and an Executive President. Up to date it has been formally amended 18 times. Constitutional amendments have strengthened the executive at the expense of other branches of government. This relative weakening of parliamentary and judicial powers along with other civil institutions has contributed to greater concerns regarding the quality of governance in the country. Constitution has weak checks and balances…
  • 71. Page 71JB Securities Research July 2013 Recap of the last 12 months… Potential risks exist… Investment case remains…
  • 72. Page 72JB Securities Research July 2013 Favorable rains… more hydro in generation mix … less thermal Total hydro capacity (MW) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Hydro contribution Reservoir storage 20% 61% 68% 77% 38% 27% 3% 1% 5% Jun-12 Dec-12 Jun-13 Hydro Thermal Other Source: Ceylon Electricity Board, Central Bank of Sri Lanka, Ministry of Finance and Planning, JBS Research 1,574 1,596 1,601 Reservoir Storage & Hydro Contribution Electricity Generation Mix
  • 73. Page 73JB Securities Research July 2013 20.1% 21.0% 21.3% 21.4% No. of Persons ‘000 114 113 108 119 83 94 92 100 50 60 63 63 2009 2010 2011 2012 Housemaid Unskilled Skilled1 247 267 262 282 SLBFE JBS Estimate % of Labour Force2 1 Skilled Category includes skilled, semiskilled, professional, clerical and middle level categories 2 JBS Estimates are used to calculate the % of Labour Force Source : Sri Lanka Bureau of Foreign Employment, JBS Research Analysis 1,831 1,932 1,680 1,762 1,820 1,862 2009 2010 2011 2012 Departure for foreign employment continues … Stock of Migrant EmployeesAnnual Registrations for Departures
  • 74. Page 74JB Securities Research July 2013 Qatar Kuwait UAE Libya Saudi Arabia Algeria Iraq Angola Nigeria Ecuador Iran 0 20 40 60 80 100 120 0 5 10 15 20 25 30 35 Dollarsperbarrel Oil Production (mb/d) OPEC has High Budget Breakeven Costs Breakeven Cost Budget Breakeven Oil prices expected to remain at current levels … 60 80 100 120 2010 2011 2012 2013 2014 2015 2016 Oil Price Forecast IMF Forecast World Bank Forecast EIA Forecast (Brent) 10.0% 15.0% 20.0% 25.0% 30.0% - 500 1,000 1,500 2,000 2,500 3,000 2008 2009 2010 2011 2012 Oil Imports Oil imports (% of total) (RHS) Total Imports (LHS) Oil Imports (LHS) Source: IEA, EIA, CBSL, IMF, World Bank, JBS Research In LKR Bn Forecast figures In constant USD
  • 75. Page 75JB Securities Research July 2013 377 473 524 393 470 490 503 550 546 415 475 549 415 507 541 2011 2012 2013 Amounts in USD millions 2,103 2,476 2,649 Annual Departures in Skilled Categories (No. of Persons ‘000) Annual Departures to non Middle Eastern Destinations (No. of Persons ‘000) Source : Sri Lanka Bureau of Foreign Employment, Central Bank of Sri Lanka1 Skilled category includes skilled, semiskilled and middle level categories 16 16 15 3 3 3 1 1 1 2010 2011 2012 Europe Asia Other 20 21 19 7.3% 7.9% 6.6% 83 78 80 8 10 16 3 4 4 2010 2011 2012 Professional Skilled1 Clerical and related 94 35.2% 92 100 34.8% 35.5% Total % of Total Total % of Total January February March April May Remittances will continue to grow … albeit at a slower pace
  • 76. Page 76JB Securities Research July 2013 Tourism arrivals continue to grow … albeit at a slower pace 397.1 484.3 2012 2013 172,602 196,355 173,214 194,924 31,167 37,697 2012 2013 Source SLTDA, CBSL Middle East Eastern Europe Australasia Asia Western Europe Other North America Tourist Arrivals by Major Region Jan - June Conferences and Meetings • SEARCC International conference, August 2013 • International Conference On Hospitality & Tourism management(ICOHT), October 2013 • Commonwealth Heads of Government Meeting(CHOGM) , 15 to 17 November 2013 Beach Festivals • Hikka Fest, July 2013 • EDM festival Mirissa , July 2013 • Vibes of Una, August 2013 Kandy Esala Perahera, 5 to 21 August 2013 Kataragama festival, July to August 2013 20132012 Upcoming Demand DriversTourism Earnings (US$ Mn) Jan- May 13.1% 22.0%
  • 77. Page 77JB Securities Research July 2013 Two large Integrated Resort Developments in the offing … Sources : Colombo Stock Exchange - Corporate Announcements, Newspaper Articles Waterfront Properties (Pvt) Ltd • Promoted by the largest listed company, conglomerate JKH. • Proposed investment - US $ 650Mn • Location - 17 acre land located at Glennie Street and Justice Akbar Mawatha, Colombo 2. • Scope - Luxury hotel, convention center, entertainment facilities, shopping complex, luxury condominiums and office units. • Expected employment generation – 3,000 Lake Leisure Holdings (Pvt) Ltd • Joint venture between Rank Holdings and Australia’s Crown Group. • Proposed investment - US $ 350Mn • Location - 500 perch block at D. R. Wijewardena Mawatha. • Scope - 36-floor casino complex and a super luxury resort coupled with a mega hotel with 400 rooms. • Expected employment generation – 2,600
  • 78. Page 78JB Securities Research July 2013 Source: Treasury Report 2012, Ministry of Finance & Planning, SLASSCOM, ATKEARNEY, Newspaper Articles Industry Revenues Growing at a Healthy Pace NominalUSDMn. IT/BPO industry continues to grow… Employment Increasing 34 39 43 50 63 67 - 10 20 30 40 50 60 70 80 2007 2008 2009 2010 2011 2012 000’s +15% CAGR Industry Direct Employment (000’s) 175 230 245 265 387 500 0 100 200 300 400 500 600 2007 2008 2009 2010 2011 2012 +23% CAGR Industry Export Revenue (USD Mn)
  • 79. Page 79JB Securities Research July 2013 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: www.internetworldstats.comSource: TRC Sri Lanka Internet and Email Subscribers (As a percentage of tot. population |Dec 2012) Internet and Broadband usage expanding rapidly Internet Penetration Rate (Mid-2012) 11% 15% 22% 30% 34% 61% India Sri Lanka Indonisia Thailand Viet Nam Malaysia
  • 80. Page 80JB Securities Research July 2013 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 2010 2011 2012 2013E Main Commodities are ~35% of Total Imports Milk & milk products 32.8% 33.3% 35.5% % of Total imports > $400m 0 50 100 150 200 250 300 2010 2011 2012 2013F Commodity Price Indices 2005 = 100 Source: International Monetary Fund Oil Base metals Sugar Milk and milk products Wheat and Maize Fertilizer 0.7% -6.1% 53.3% Oil Base metals Wheat and Maize Sugar Fertilizer Source : Central Bank of Sri Lanka, JBS Research USD Mn Softer commodity prices will reduce import bill…
  • 81. Page 81JB Securities Research July 2013 Rubber Tyres Gloves Other Rubber Products Raw rubber 0 200 400 600 800 1,000 1,200 2010 2011 2012 2012 Jan-Apr 2013 Jan-Apr Rubber Based Exports 3.203.803.34 4.84 3.35 Source : Central Bank of Sri Lanka Bulk Packets Bags Instant Tea 0 200 400 600 800 1,000 1,200 1,400 1,600 2010 2011 2012 2012 Jan-Apr 2013 Jan-Apr Tea Exports 4.30 4.90 Source : Central Bank of Sri Lanka 4.39 4.62 4.41 Average price (USD/kg) * All amounts in USD Mn. Falling prices… tea exports are holding up… but not rubber
  • 82. Page 82JB Securities Research July 2013 1,616 2,022 1,836 1,359 1,325 1,349 1,647 1,589 214 317 360 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 2010 2011 2012 2012 Jan-Apr 2013 Jan-Apr 90% of Apparel Exports are to North America & EU 49% 109.8100.0 113.5Volume index Source : Central Bank of Sri Lanka European Union North America Other 3,179 3,986 3,785 10% 42% * All amounts in USD Mn. Apparel exports are holding up …
  • 83. Page 83JB Securities Research July 2013 Structural adjustments continue … Electricity tariff hike 8.2 11.8 15.4 6.9 12.1 27.6 Off peak Day Peak Industrial* Previous Revised 10.5 29.4 33.6 50.4 13.2 37.1 42.7 58.8 61-90 91-120 121-180 >180 Consumption block (kWh/month) Domestic Previous Revised LKR/kWh Source: PUCSL, LECO *Assumptions User belongs to Industrial customer category 3, i.e. metered at 11,000 Volt. 79% 2% -16% 26% 26% 27% 17% LKR/kWh
  • 84. Page 84JB Securities Research July 2013 Structural adjustments continue … Fertilizer subsidy being reduced 26,935 26,028 29,802 36,456 37,800 2009 2010 2011 2012 2013E Fertilizer Subsidy 0.05% 0.05% 0.05%0.05% 0.04%% of GDP LKR million Source: CBSL, Ministry of Finance & Planning 350 350 350 350 1,845 2,245 2,913 2,996 2009 2010 2011 2012 Subsidy Subsidized price Fertilizer Price LKR/50Kg Recent Developments… • Government slashed subsidy by approximately 30%, citing health issues caused by chemical fertilizer. • Issuance of fertilizer has been limited to 76 kg’s per acre while the recommendation was 90 kg’s. • Government continues to delay the subsidy payments of Rs. 16 billion to fertilizer importers. • Fertilizer companies have restricted imports due to liquidity problems.
  • 85. Page 85JB Securities Research July 2013 LKR Debt Service Obligations External Debt Service Obligations 0 100 200 300 400 500 600 700 800 900 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 Interest Repayment - 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800 850 900 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 Interest Repayment Domestic liabilities are near term … External liabilities are longer term * All amounts in LKR Bn. Source: Central Bank of Sri Lanka Long dated liabilities
  • 86. Page 86JB Securities Research July 2013 Credit to GDP low… higher savings will be required to boost it Credit to GDP 19.3% 15.3% 17.0% 19.3% 28.3% 29.0% 31.0% 39.5% 2010 2011 2012 Bangladesh Vietnam India Thailand Malaysia 40.4% 46.4% 48.8% 70.4% 74.1% 120.7% 128.7% 159.2% 2010 2011 2012 Bangladesh India Vietnam Malaysia Thailand Gross Domestic Savings to GDP *Peer data as of 2011 Source: World Bank, Central Bank of Sri Lanka, Asian Development Bank Sri LankaSri Lanka
  • 87. Page 87JB Securities Research July 2013 132 132 98 99 89 2012 2013 India Vietnam Sri Lanka SL continues to gain further in the Doing Business ranking… Sri Lanka Vietnam 2012 2013 2012 2013 Overall 89 81 98 99 Starting a business 38 33 103 108 Construction permits 111 112 67 28 Getting electricity 95 103 135 155 Registering property 161 143 47 48 Getting credit 78 70 24 40 Protecting investors 46 49 166 169 Paying taxes 173 169 151 138 Trading across borders 53 56 68 74 Enforcing contracts 136 133 30 44 Resolving insolvency 42 51 142 149 81 The World Bank Doing Business Ranking out of 185 Countries Source: Doing Business, The World Bank, 2013 Thailand 18 Sri Lanka 81 Vietnam 99 India 132 Philippines 138 India 2012 2013 132 132 166 173 181 182 98 105 97 94 40 23 46 49 147 152 109 127 182 184 128 116
  • 88. Page 88JB Securities Research July 2013 2010 2011 2012 2013 2014 2015 2016 2017 Colombo - Galle Matara Extension Hambatota Extension Colombo - Katunayake Kottawa - Kaduwela Kaduwela - Kadawatha Kadawatha - Kerawalapitiya Enderamulla - Mirigama Mirigama - Kurunegala Mirigama - Kandy Kurunegala - Dambulla Southern Expressway Katun ayake Expre ssway OuterCircular Expressway North-Eastern Expressway Southern Expressway Katunayake Expressway USD1Bn Combined Outer Circular Expressway North East Expressway Eastern Expressway Northern Expressway Outer Circular Expressway Kandy Expressway Katunayake Expressway Southern Expressway Completed or Near Completion Contracted or ongoing Feasibility Stage Northern Expressway, Eastern Expressway and Extension of Southern Expressway to Mattala under consideration. USD168Mn USD330Mn USD219Mn USD400Mn USD521Mn Time Table for Major Expressway Development Projects Source: Ministry of Ports and Highways, RDA, CBSL, Government Treasury, JBS Research Major expressway network under construction…
  • 89. Page 89JB Securities Research July 2013 USD475Mn USD891Mn USD500Mn USD600Mn USD529Mn USD82Mn USD90Mn 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Norochcholai I Norochcholai II Sampur Hambantota Upper Kotmale Uma Oya Broadlands Moragolla Victoria Expansion Gin Ganga CoalHydro Power generation moving away from relying on petroleum fuels… Sampur Coal Time Table for Major Power Generation Projects Hydro Coal Norochcholai Coal Victoria Expansion Broadlands Hydro Upr. Kotmale Hydro Moragolla Hydro Gin Ganga Hydro Uma Oya Hydro Completed or Near Completion Contracted or ongoing Feasibility Stage 1,920GWh 3,840GWh 3,480GWh 3,679GWh 409GWh 312GWh 126GWh 81GWh 600GWh 143GWh Source: Ministry of Power and Energy, CEB, CBSL, Government Treasury, JBS Research
  • 90. Page 90JB Securities Research July 2013 Ports and Aviation infrastructure being expanded… Colombo Port South Harbour Development Project – USD875Mn (Incremental transshipment capacity of 7.2mn TEU) 4.5 2.4 4.8 11.7 2012 2013 2014 Completion Transshipment capacity build-up at Colombo (millions) Hambantota Port Phase I (Complete) – USD 306 Mn (Initial commercial operations commenced) Phase II (Ongoing) – USD 810 Mn (Expected to be operational in 2014) 80,000 MT Bunkering Tank Farm – USD 130 Mn (operational end 2013) Mahinda Rajapakse International Airport Phase I (Complete) – USD209Mn (Passenger capacity of 1 Mn p.a.) Phase II – Additional Passenger Capacity of 4 Mn p.a. (by 2015) Bandaranaike International Airport Expansion to end by 2015 – USD 425Mn (Passenger capacity of 6Mn p.a.) 1.0 4.0 5.0 2013 2014 2015 Completion Passenger capacity build-up at MRIA (millions) Colombo Port H’tota Port MRI Airport B’daranaike Airport Source: Ministry of Ports and Highways, Sri Lanka Ports Authority, CBSL, Government Treasury, JBS Research
  • 91. Page 91JB Securities Research July 2013 Labour supply conditions are favourable… Source: United Nations ,Population Division. World Population Prospects: The 2010 Revision/ Department of Census and Statistics Sri Lanka (Alternative estimates) 28% 21% 61% 63% 10% 16% 2010 E2017 100% (000’) = 13,921 14,402 Older (55+) Prime (25-54) Young (15-24) Composition of Working Age Population (aged 15 to 64 years) Current Labour Supply 000’, Q4-2012 9,990 7,614 5,040 4,883 10,287 2,246 8,646 2,573 2,562 157 2,378 1,823 6,084 184 Total population Population<15Yrs Working age population, 15+Yrs Not participating Total labour force Unemployed Employed 20,278 4,068 16,620 8,658 7,602 341 7,261 Male Female
  • 92. Page 92JB Securities Research July 2013 Source: Department of Census and statistics, June 2013, JBS Research analysis 5,040 5,222 5,916 2,562 2,686 4,532 2012 E2017 E2017 0.79% 6.57% 24% 66% 50% 75% Female Male 2012 F2017* 2012 F2017* Participation Rates Based on current participation rates Assuming participation rates at peer average Labour Force Prospects (000’) CAGRif participation rates increase up to average peer levels Note: We have used alternative estimates of Sri Lanka Labor Force Survey. Alternative estimates define employed persons as follows: 1. Minimum 20 hours of work a week rather that 1 hour a week used in the standard method. 2. Working age > 15 years. 3. Unpaid family workers are not counted. 7,602 7,908 10,449 Higher female labour participation can further expand the labour force …
  • 93. Page 93JB Securities Research July 2013 Higher urbanisation will drive economic growth… Movement in Urbanization and Per Capita GDP from 1950 to 2005 Source: World Bank Economic Database, Historical Statistics of the World Economy: 1-2008 AD - Angus Maddison 0 5,000 10,000 15,000 20,000 25,000 0 10 20 30 40 50 60 70 80 90 % of Urban Pop. With Official Urbanization Statistics With Consensus Estimates 0 1,000 2,000 3,000 4,000 5,000 10 15 20 25 30 2.5XPer Capita GDP (Constant 1990 Int$) Urbanization* is officially defined as people belonging to the smallest administrative division (i.e. Municipal Council or village council). Change of classification has made the official urbanization figure decrease from a high of 19% to about 15%. Other methodologies place Sri Lanka’s real urbanization rate as high as 35% - 45%. Dotted red line assumes a linear increase in urbanization to 35% in 2005. JPN KOR MLS CHN IND LKA LKA 2X
  • 94. Page 94JB Securities Research July 2013 Households Based on the Income Earning Category (SL) Source: McKinsey Global Institute – Urban world v1.1 (App) 1,621 788 2,494 2,995 770 1,953 82 356 2010 2025 2010 2025 2010 2025 2010 2025 Poor <$7,500 Middle income $7,500-20,000 Affluent $20,000- 70,000 Elite >$70,000 33% 13% 50% 49% 16% 32% 2% 6% 2010 2025 % of Households 2.54x 1.20x 4.34x 0.49x 100%=4,967 100%=6,092 In 000’/$PPP Rapid growth in projected affluent & elite households
  • 95. Page 95JB Securities Research July 2013 3% 5% 8% 16% 25% 42% Reserve Guestimate for the Mannar basin Confirmed existence of Working Hydrocarbon systems Diesel Furnace Oil LPGKerosene Other 139.5 5.1 Expected energy yeild from exploration Energy demand (YE2011) TOEMn 27X Petrol TOE-Ton of oil equivalent : Energy released by burning 1 MT of crude oil Energy decomposition (TOE basis) 2012 Expected energy yield from exploration Energy demand (YE2012) C1 C2 C3 C4 C5 M1 M2 M3 M4 M5 M8 M6 M7M9 JS1 JS2 JS3 JS4 JS5 JS6 Blocks : Mannar basin Cauvery basin Available to joint studies $2,300Mn Seismic Surveys Exploratory Drilling Appraisal of commercial viability Setting up sub- sea completion (Upstream) Setting up transport infrastructure (midstream) Downstream activities 2010 2011 2012 2014 2015 2016 2017 2018 150 1,500 1,000 500 Time line Cost ($Mn) incurred by Cairn Lanka Open to investors Operated by Cairn Lanka Pvt. Ltd 13 blocks waiting for the second round of bidding (30/09/2013) Potential for bridging the fossil fuel deficit… Source : PRDS Sri Lanka, CBSL annual report 2012,JBS Research 2013 150
  • 96. Page 96JB Securities Research July 2013 Diaspora opportunity… W. Europe (000's) France 39 Germany 41 Switzerland 30 Netherlands 10 120 Canada 106,000 Italy 60,000 Australia 94,000 New Zealand 7,000 Sweden 7,000 Norway 9,000 U.K. 131,000 S. Korea 20,000 Japan 9,000 Denmark 7,000 Aggregate (000's) Europe 337 N. America 154 Australasia 101 Asia 29 621 U.S.A. 48,000 OECD Countries with Significant Populations of Sri Lankan Born Individuals Source: OECD Migrant database http://stats.oecd.org/Index.aspx?DatasetCode=MIG
  • 97. Page 97JB Securities Research July 2013 Total local individuals Equities are under owned… Source : CSE fact book*Active local individuals : Investors who executed at least one transaction at the Colombo Stock Exchange 35 79 114 62 336 332 378 457 2009 2010 2011 2012 0.44 % 0.95 % 1.38 % 0.71 % Inactive local individuals Active local individuals* Active local individuals as a % of economically active population 371 411 493 519 All amounts in thousands
  • 98. Page 98JB Securities Research July 2013 Outlook for the Economy • Economic growth going forward will trend towards its potential rate of 6%. • Higher growth is possible if there is greater focus on improving productivity, greater fiscal consolidation and a stronger policy bias towards export industries. • Interest rates will hover around current levels due to a loose monetary policy bias and lack of demand for credit. Pawning that accounts for 22% of private sector credit will contract by 20% on the back of falling gold prices and lower LTVs. • Exchange rate will be range bound around USD/LKR 132-134 for the rest of 2013. Higher import demand fuelled by credit growth can create pressure on the exchange rate. • The start of a tapering program by the Federal Reserve of its quantitative easing program can have a fallout in the form of a partial pullback of the USD 3.8 billion invested in LKR GSECs by FIIs - this will impact both the exchange rate and interest rate. • Absence of major electoral pressure over the next 12 months provides space for further fiscal consolidation. With tax revenue to GDP at 11% and below peer countries, it is likely that further tax raising measures may be implemented in the upcoming budget that will impact both consumption and earnings of firms. • Remittances will continue to grow albeit at a slower pace - this will relieve pressure on unemployment and boost household income aiding consumption. • Potential benefits from a Natural Gas discovery is 3-4 years away and its viability will depend on high global gas prices. • Increasing foreign borrowings coupled with a slow down in economic growth can affect debt dynamics leading to a middle income debt trap.
  • 99. Page 99JB Securities Research July 2013 Outlook for the Equity Market • The sideway market continues into its 3rd year after the unprecedented bull market that ended in mid 2011. A sideway market is characterized by rising earnings but is negated by falling multiples thus prices remain range bound. • Although the market has pulled back in the last month, valuations especially on the large cap counters remain very high. Adjusted for the risk free rate and the equity risk premium, market PE multiples excluding financials are at elevated levels. • Financials account for 37% of total market earnings, outlook for the sector in 2013 is poor on the back of low credit growth, deteriorating asset quality, falling NIMs due to timing mismatches in repricing assets and liabilities and the absence of one off translation gains from a large depreciation of the currency. Lower earnings from financials in the absence of lower prices will increase the market PER going forward. • It is unlikely that FIIs would pull out of the market if the Federal Reserve starts tapering its QE program BUT the level of inflows that were witnessed in the previous 12 months will not be maintained. • Incremental demand for equities will have to come from domestic sources both institutional and retail - falling interest rates provide a favourable environment but concerns about lower earnings growth may negate this. • New supply of equities from primary and secondary capital raisings will be subdued over the next 12 months. We do not foresee any large sell downs especially from government controlled financial institutions over this period. • An investment strategy based on morphing the index or investing across the board will yield poor results due to potential gains being eroded by falling multiples. A more nuanced strategy based on hunting for value stocks has the potential to yield superior returns.
  • 100. Page 100JB Securities Research July 2013 Glossary BFI Banks, Finance & Insurance BFT Beverage, Food & Tobacco C&E Construction & Engineering DIV Diversified H&T Hotels & Tourism INV Investment L&P Land & Property MFG Manufacturing OIL Oil Palms P&E Power & Equipment TLE Telecom TRD Trading Indices ASI All Share Index S&PSL20 S&P Sri Lanka 20 Countries LKA Sri Lanka CHN China IND India MLS Malaysia KOR Korea JPN Japan PHL Philippines THA Thailand Colombo Stock Exchange Sectors Institutions ADB Asian Development Bank CBSL Central Bank of Sri Lanka CEB Ceylon Electricity Board EIA Energy Information Administration IMF International Monetary Fund OECD Organization for Economic Cooperation & Development OPEC Organization of the Petroleum Exporting Countries PRDS Petroleum Resource Development Secretariat RDA Road Development Authority SEC Securities & Exchange Commission SLASSCOM Sri Lanka Association of Software and Service Companies SLBFE Sri Lankan Bureau of Foreign Employment SLTDA Sri Lanka Tourism Development Authority TRC Telecom Regulatory Commission PUCSL Public Utilities Commission of Sri Lanka Units GWh Giga Watt Hours Int'l D International Dollars KWh Kilo Watt hour MT Metric Ton MW Mega Watt TEU Twenty-foot Equivalent Unit TOE Ton of Oil Equivalent Other CHOGM Commonwealth Heads of Government Meeting GICS Global Industry Classification Standard MRIA Mahinda Rajapkse International Airport PPP Purchasing Power Parity SOE State Owned Enterprises Financial Indicators AWDR Average Weighted Deposit Rate AWFDR Average Weighted Fixed Deposit Rate AWLR Average Weighted Lending Rate AWPLR Average Weighted Prime Lending Rate CCPI Colombo Consumer Price Index NEER Nominal Effective Exchange Rate REER Real Effective Exchange Rate SLIBOR Sri Lanka Interbank Offer Rate SRR Statutory Reserve Ratio
  • 101. Page 101JB Securities Research July 2013 About Us JB Securities Ltd is a full service brokerage firm that is licensed to operate on the Colombo Stock Exchange (CSE). The firm was a founding member of the Colombo Stock Exchange in 1985 and has extensive experience dealing with domestic and foreign institutional investors and high net worth individuals and family offices. In order to provide unique investment insights to our clients we conduct extensive deep-dive research in the industry verticals pertaining to the large listed companies to identify their industry and business dynamics. This process is aided by the largest team of equity analysts in the country, a majority of them either being CFA charter holders or CFA candidates who have undergone a 20 month intensive in-house training program based on international curricula. The firm continues to invest in the development of its analyst team to widen and deepen its research coverage. The firm is part of the family owned Jafferjee Brothers group based in Sri Lanka that was founded in 1944. The group’s business interest spans a wide array of activities in trading, manufacturing and services and has extensive experience dealing with global companies. Equity and Debt Brokerage Manager JB Unit Trust Margin Financing
  • 102. Page 102JB Securities Research July 2013 For further information contact: Murtaza Jafferjee CFA +94 11 2490900 murtaza.jaff@jb.lk 150, St. Joseph’s Street, Colombo 01400, Sri Lanka. Tel: +94 112490900, Email: info.securities@jb.lk, www.jbs.lk © Copyright 2013, JB Securities (Pvt) Ltd, All rights reserved. This research is for our clients only. Other than disclosures relating to JB Securities, this research is based on current publicly available information that we consider reliable, but we do not represent it as accurate or complete, and it should not be construed as such. We seek to update our research as appropriate. JB Securities shall have no liability, contingent or otherwise, to the user or to third parties, for the quality, accuracy, timeliness, continued availability or completeness of the data or calculations in this document, nor for any special, indirect, incidental or consequential damages which may be incurred or experienced because of the use of the data or calculations made available herein. JB Securities does and seeks to do business with companies covered in its research reports. Investors should be aware that the firm may have a conflict of interest that could affect the objective of this report. Investors would consider this report as only a single aid in making their investment decision. No part of this material may be modified or altered without the prior consent of the firm.