DSR Sri Lanka Value is Back in Equities

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Provides an overview of the equity bull market that ensued the end the war in Sri Lanka during 2009-2011, along with an outlook for the equity market and macroeconomic environment into 2012-13

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DSR Sri Lanka Value is Back in Equities

  1. 1. SRI LANKA: VALUE IS BACK IN EQUITIES 150, St. Joseph’s Street, Colombo 14, Sri Lanka. Tel: +94 112490900, Email: jbs@jb.lk, www.jbs.lk JULY 2012 PRIVATE & CONFIDENTIAL
  2. 2. Page 2JB Securities Research July 2012 Contents The party – end of the 30 year conflict The inevitable after party – exuberance led to irrationality Sobering reality – some concerns remain The lion is not beaten – And… the good news…
  3. 3. Page 3JB Securities Research July 2012 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 20.9 Million Total Area 65,610 Sq.km Density 333/Sq.km Currency Sri Lankan Rupee (LKR) Exchange rates LKR 135.38/US$| LKR 168.20/€ | LKR 210.53/£ Economic size (2011) GDP (Nominal) USD 59.2 Billion GDP (PPP) Int’l D 115.2 Billion GDP per capita (Nominal) USD 2,836 GDP per capita (PPP) Int’l D 5,609 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 06/07/2012 Sri Jayawaredenepura Colombo
  4. 4. Page 4JB Securities Research July 2012 Valuations Market Capitalisation LKR 1,881.7Bn USD 13.89Bn Market P/E* 10.18x Market P/B 1.76x Dividend Yield 2.55% Indices Current Change MTD Change YTD All Share Price Index 4,986.7 1.0% -27.7% Milanka Price Index 4,439.3 -0.1% -31.0% S&P Sri Lanka 20 Index 2,797.4 0.8% -22.4% Liquidity Average daily Turnover** LKR 1,397.4Mn Annualised share volume velocity*** 17.9% Free Float**** 40.9% * P/E data is as per Bloomberg L.P. ** and *** Figures are based on data from June 2011 to June 2012. Year-to-date figures are as follows: Average Daily Turnover – 796.12Mn, Velocity – 4.9% ****Free Float reflects the public shareholding of the companies that comprise the top 50% of CSE market capitalisation Diversified 23% Banks & Finance 22%F&B, Tobacco 17% Hotels & Travels 7% Telecoms 6% Oil Palms 6% Other 19% Market Index Decomposition* *As at 05/07/2012 Equity Market Snapshot
  5. 5. Page 5JB Securities Research July 2012 The party – end of the 30 year conflict May2009 Jul2009 Sep2009 Nov2009 Jan2010 Mar2010 May2010 Jul2010 Sep2010 Nov2010 Jan2011 Mar2011 May2011 Jul2011 Sep2011 Nov2011 Jan2012 Mar2012 May2012
  6. 6. Page 6JB Securities Research July 2012 LMDNielsonsBusinessConfidenceIndex 80 100 120 140 160 180 The news buzz set the tone … January 2009 – June 2011 Foreign ministers of UK and France, visit Sri Lanka in a bid to set up a temporary cease fire. The ruling United Peoples Freedom Alliance wins the parliamentary election with a large majority of seats (64%). The election saw the lowest ever voter turnout (62.26%). The parliament passes 18th amendment to the constitution. Removes presidential term limits and increases presidential power over the Judiciary, police and civil service. The Defeated candidate of the election Gen Sarath Fonseka arrested for allegedly violating rules preventing the discussion of political matters while being a member of the military. The President appoints an 8 member Lessons Learnt and Reconciliation commission, headed by former Attorney General C. R. De Silva UN panel led by Maruzuki Darusman publishes its report on war Accountability in Sri Lanka 2009 2011 Sri Lanka announces bid for Commonwealth Games 2018 in Hambanthota EU suspends Sri Lanka's preferential trade status (GSP +) over allegations of human rights violations. AG Mohan Pieris withdraws murder charges against former government MP. Former CJ questions legality. President Rajapakse opens the 1st phase of Hambanthota port, funded by China. Clashes over proposed new private sector pension bill intensifies. 1 worker killed and 60 seriously injured. Government temporarily suspends the bill. 2010 UNHCR holds a special day session on SL and under the backing of India, China and Russia, commends the government humanitarian effort. With the 2/3rd Majority in the parliament government sweeps through major legislative reforms Incumbent M. Rajapakse wins the presidential election with a clear majority against challenger Gen Sarath Fonseka, who led the SL Forces to victory in the recently concluded war. (6m votes to 4m). War Ends with the killing of LTTE leader V. Prabhakaran. 60,000-100,000 total civilian casualties estimated in the 30 year old conflict. The UPFA capitalizes on the war victory and gets fresh mandates with prescheduled elections, gets parliament supermajority. The Government distances itself more from Western powers and inclines towards China and India China lends USD 1.2 billion out of USD 2.2 billion, emerging as the largest lender surpassing ADB & World Bank in 2009. Latter stages of the war DOMESTICINTERNATIONAL International intervention fails to pause the war Start Value = 96 End Value = 141 Sources: Newspaper articles, Central Bank of Sri Lanka, LMD, The Nielson Company, JBS Research High point = 173 Low point = 87
  7. 7. Page 7JB Securities Research July 2012 Source: Parliament of Sri Lanka, JBS Research Analysis • UPFA won the Parliamentary election with 63% of the votes in April 2010 • UPFA is led by the President Mahinda Rajapakse who won the recent Presidential Election(Jan 2010) with 58% of the votes. • In Q3 2010 17MP’s crossed over from the UNF to support the 18th amendment. • UNP, JVP(DNA) and TNA contested separately for the parliamentary election after their common candidate was defeated at the presidential election in Jan 2010 • UNP is the main opposition party Composition of the 7th parliament-(2010-2016) UPFA 144 (64%) UNP-D 9 (4%) SLMC 8 (4%) UNP 43 (19%) DNA 7 (3%) TNA 14 (6%) Government (72%) Opposition (28%) 17 MP’s crossed over to the government to support the 18th Amendment The incumbent government consolidated power …
  8. 8. Page 8JB Securities Research July 2012 Real Interest Rates Source : Central Bank of Sri Lanka, JBS Research Analysis* CCPI 2002 – Core Inflation 12 month MA, 1 year treasury bill yield Conflict Post-conflict Post-conflictConflict Easing inflation drove real interest rates back up… 0% 5% 10% 15% 20% 25% Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 T-bill rate Inflation* -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11
  9. 9. Page 9JB Securities Research July 2012 Investment, private consumption and exports drove GDP growth 100% 110% 120% 130% 140% 150% 160% 170% 180% 190% 2009 2010 2011 Private consumption Government consumption Investment Exports of goods and services Total consumption (Private + Govt') Imports of goods and services CAGR 21.3% 35.3% 28.6% 6.6% 18.3% 21.3% Source: CBSL annual report 2011, JBS Research Analysis 64.3% 65.8% 69.8% -6.5% -9.1% -14.6% 24.5% 27.8% 29.9% 17.6% 15.6% 14.8% 2009 2010 2011 Private consumption Net exports Investment Government consumption Expenditure on GDP Growth in expenditure
  10. 10. Page 10JB Securities Research July 2012 Conflict affected areas rebounded from a low base … Source: Census and Statistics Sri Lanka, JBS Research Analysis Northern Eastern Central Southern North Central Western Uva Sabaragamuwa North Western CAGR % 2008/10 10.13 6.45 8.83 6.84 6.63 5.34 5.27 4.78 2.90 Conflict affected areas 45.4% 45.8% 45.1% 10.5% 10.5% 10.7% 9.8% 9.8% 10.0% 9.9% 9.6% 9.4% 6.4% 6.1% 6.3% 5.6% 5.8% 5.9% 4.5% 4.5% 4.5% 4.7% 4.6% 4.8% 3.2% 3.2% 3.4% 2008 2009 2010 Northern North Central Uva Eastern Sabara-gamuwa North Western Central Southern Western 5.95% 3.53% 8.01% YOY GDP growth Provincial contribution to GDP 100%= LKR5.6BnLKR4.8BnLKR4.4Bn Provincial growth 90% 95% 100% 105% 110% 115% 120% 125% 2008 2009 2010
  11. 11. Page 11JB Securities Research July 2012 Tourist arrivals increased Tourist nights increased… Record number of tourist arrivals… Earnings grew… Source : Sri Lanka Tourism 494,008 438,475 447,890 654,476 855,975 331,238 321,079 358,188 516,538 668,343 52,116 37,261 38,473 83,270 68,097 110,654 80,135 51,229 54,668 119,535 -11.7% -11.2% 2.1% 46.1% 30.8% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% - 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 2007 2008 2009 2010 2011 Other Business Pleasure Growth 410 384 320 349 576 839 13.2% -6.3% -16.9% 9.3% 64.9% 45.7% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% - 100 200 300 400 500 600 700 800 900 2006 2007 2008 2009 2010 2011 Tourist Receipts (USD millions) Growth 5,793 4,940 4,166 4,075 6,548 8,560 21.9% -14.7% -15.7% -2.2% 60.7% 30.7% (0) (0) - 0 0 0 0 1 1 1 - 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 2006 2007 2008 2009 2010 2011 Tourist Nights('000)* Growth * Tourist nights spent in both graded and ungraded establishments
  12. 12. Page 12JB Securities Research July 2012 GDP growth accelerated 1.63% 2.14% 4.22% 6.12% 7.06% 8.47% 7.95% 8.57% 7.91% 8.16% 8.44% 8.32% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2009 2010 2011 12.08% 4.76% 5.27% 16.37% 16.62% 17.04% 18.52% 16.64% 17.00% 15.58% 7.52% Avg. Real Growth 15.28% Avg. Nominal Growth 14.59%15.19% Source: Census and Statistics Sri Lanka, JBS Research Analysis
  13. 13. Page 13JB Securities Research July 2012 Strong economic growth led to fiscal consolidation… Fiscal DeficitGovernment Revenue Government Expenditure Source : Central Bank of Sri Lanka LKR Bn Deficit as a % of GDPRevenue as a % of GDP Expenditure as a % of GDP 3yr CAGR 12.3 % 3yr CAGR 12.0 % 22.6% 24.9% 22.8% 21.4% 2008 2009 2010 2011 15.6% 15.0% 14.9% 14.5% 2008 2009 2010 2011 -7.0% -9.9% -8.0% -6.9% 2008 2009 2010 2011 996 1,202 1,280 1,400 2008 2009 2010 2011 686 726 834 950 2008 2009 2010 2011 (310) (476) (446) (450) 2008 2009 2010 2011
  14. 14. Page 14JB Securities Research July 2012 Primary balance improved… - * 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 -1.8% -2.2% -3.4% -1.7% -1.4% 2007 2008 2009 2010 2011 6.9% 7.0% 9.9% 8.0% 6.9% 2007 2008 2009 2010 2011 5.1% 4.8% 6.4% 6.3% 5.5% 2007 2008 2009 2010 2011
  15. 15. Page 15JB Securities Research July 2012 Country Credit Standing improved… Post-conflictConflict Dec ’08 S&P: Downgraded to B ‘Stable’” Feb ‘09 Fitch: Lowered to B+ ‘Negative’ Aug ‘09 • S&P: Outlook lifted to B 'stable‘ • Fitch: Outlook lifted to B+ 'stable‘ Jun ’10 S&P: Outlook lifted to B ‘positive‘ Jun ’10 Central Bank appoints top committee to boost sovereign rating Sep ’10 •Moody's initiating coverage with B1 ‘Stable’ •S&P: Rating raised to B+ ‘Stable’ •Fitch: B+ Outlook lifted to ‘Positive’ Jul ‘11 •Moody's: B1 Outlook lifted to ‘Positive’ •Fitch: BB- ‘Stable’ •S&P: B+ ‘Positive’ May ‘09 S&P: Cut outlook to B ‘Negative’ Source: Lanka Business Online, IMF Negative Positive * Feb ‘10 Jun ‘10 Nov ‘09 Jul ‘09 Sep ‘10 Apr ‘11 USD 329.1 Mn USD 329.4 Mn USD 218.3 Mn USD 212.5 Mn USD 407.8 Mn IMF approves 20 month Stand-By Arrangement of USD 2.6bn equal to 400% of the country’s quota IMF holds back third tranche after Q409 budget goes off track Sri Lanka may not take last IMF loan tranche: Fitch analystJul ‘11 Sovereign ratingsIMF Stand-by Agreement Review 1 Review 2+3 Review 4 Review 6 Feb ‘11 USD 216.6 MnReview 5 Minister Sarath Amunugama highlights the importance of the IMF program for Sri Lanka Oct ‘10 Dec ’08 Jul ‘11Jun ’10
  16. 16. Page 16JB Securities Research July 2012 Foreign appetite for sovereign paper increased Post-conflictConflictConflict Post-conflict Sep ‘10 Jul ‘11Oct ‘07 Oct‘09 $500mn 5yr 8.25% $500mn 5.25yr 7.40% $1billion 10yr 6.25% $1billion 10yr 6.25% 3 X 7.5 X6 X13 X Number of times oversubscribed 397 bp 373 bp 332 bp499 bp Spread over US treasury Foreign holding of government securitiesSovereign bond issue Templeton fund invests USD 875 mn (approx. LKR 100 Bn) Source : Central Bank of Sri Lanka LKR Bn 50 18 145 184 187 6 40 57 64 2007 2008 2009 2010 Jun 11 Treasury bills Treasury bonds
  17. 17. Page 17JB Securities Research July 2012 Foreign sources funded the fiscal deficit easing pressure on domestic sources Foreign borrowing Domestic bank Domestic non bank Budget deficit Financing of budget deficit 101 (5) 231 244 21916 195 49 (2) 192 129 119 197 204 39 2007 2008 2009 2010 2011 41.0% -1.5% 48.4% 54.7% 48.6% 6.4% 63.0% 10.3% -0.4% 42.6% 52.6% 38.5% 41.2% 45.8% 8.8% 2007 2008 2009 2010 2011 246 310 476 446 450 Source : JBS Research Analysis, Central Bank of Sri Lanka * Foreign borrowings include the non resident holding of government treasuries Foreign borrowing Domestic bank Domestic non bank LKR Bn 97% with CBSL
  18. 18. Page 18JB Securities Research July 2012 Reserves increased due to borrowed funds Months of ImportsReserves built-up Gross official reserves Total reserves Source : Central Bank of Sri Lanka USD Mn - 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 - 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00
  19. 19. Page 19JB Securities Research July 2012 Credit, Monthly Change Credit to SOEsNet Credit to Govt. Credit to Private Sector Source : Central Bank of Sri Lanka*All amounts in LKR Bn Crowding out effect decreased enabling private sector credit expansion -20% 0% 20% 40% 60% 80% 100% 120% - 100 200 300 400 500 600 700 800 900 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Net Credit to Government Annual Change (%) -50% 0% 50% 100% 150% 200% 250% - 20 40 60 80 100 120 140 160 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Credit to SOEs Annual Change (%) -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Credit to the Private Sector Annual Change (%) -150 -100 -50 0 50 100 150 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Private Corps. Govt.
  20. 20. Page 20JB Securities Research July 2012 Monetary conditions eased LKR Bn Monetary policy instruments Growth in monetary aggregates * SRR – Statutory Reserve Requirement Unsterilized absorption of the USD 1 billion sovereign bond LKR Bn -40 -20 0 20 40 60 80 100 120 140 160 5% 6% 7% 8% 9% 10% 11% 12% 13% Jan-09 Feb-09 Mar-09 Apr-09 Jun-09 Jul-09 Aug-09 Sep-09 Nov-09 Dec-09 Jan-10 Feb-10 Apr-10 May-10 Jun-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Feb-11 Mar-11 May-11 Jun-11 Liquidity Repo Reverse Repo SRR* -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% - 500 1,000 1,500 2,000 2,500 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Consolidated Broad Money(M2b) Reserve Money M2b growth Credit to the Private Sector Reserve Money growth
  21. 21. Page 21JB Securities Research July 2012 Improved liquidity kept interest rates in check… Policy Rate Pass-through to Market Interest Rates Source : Central Bank of Sri Lanka, JBS Research Analysis 5% 7% 9% 11% 13% 15% 17% 19% 21% Jan-09 Feb-09 Apr-09 May-09 Jul-09 Aug-09 Oct-09 Nov-09 Dec-09 Feb-10 Apr-10 May-10 Jul-10 Aug-10 Oct-10 Nov-10 Jan-11 Feb-11 Apr-11 May-11 Repo Reverse Repo AWPLR AWDR Call Money Rate 3 month t-bill
  22. 22. Page 22JB Securities Research July 2012 Earnings rapidly picked up… 11.7 6.3 14.5 25.7 29.0 30.0 40.7 46.7 45.7 43.3 -10 0 10 20 30 40 50 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Diversified Banking & Finance Food, Bev and Tobacco Manufacturing Telecommunications Oil Palms Investment Trusts Hotels & Travels Other 270% CSE Quarterly Earnings March 2009 – June 2011 LKR Bn Source : JBS Research Analysis, Colombo Stock Exchange*Earnings figures have not been adjusted for the effect of Cross Holdings
  23. 23. Page 23JB Securities Research July 2012 1.1% 1.0% 4.0% 8.0% Sep. 2008 Sep. 2009 Sep. 2010 Dec. 2011 6.7 7.4 33.3 79.0 Sep. 2008 Sep. 2009 Sep. 2010 Dec. 2011 EPF is the largest investor in the CSE LKR Bn Equity asset allocation Source : CBSL Financial System Stability Reviews and Annual Reports Overall equity exposure Employee Provident Fund* increased their asset allocation into equities *The Employee Provident Fund (EPF) is the largest superannuation fund in the country. As at September 2011, the EPF accounted for close to 13.25% of financial sector assets of the country, with over 2.3 million active accounts. It is administered by the Commissioner of Labour, while the management of the fund is undertaken by the Monetary Board of the Central Bank of Sri Lanka
  24. 24. Page 24JB Securities Research July 2012 Massive bull market ensued… 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 CBSL reaffirms its commitment to equity investment with a “long term” outlook Janus Fund enters the market Share Volume increased rapidly during the boom Galleon Fund begins exiting the market AllSharePriceIndex Source : Central Bank of Sri Lanka, JBS Research Analysis 377%
  25. 25. Page 25JB Securities Research July 2012 Excess liquidity chased a limited number of shares… 31.0% 78.5% 28.0% 70.3% 60.0% 53.9% 15.6% 14.7% 15.8% 5.5% 18.5% 49.0% 84.5% 18.7% 7.3% 7.1% 6.5% 3.9% 3.1% 3.1% 3.0% 2.8% 2.5% 2.4% 2.3% 2.0% 2.0% 1.8% 50% BUKI JKH CARS COMB HNB SPEN LOLC DIAL CTC SLTL CARG DFCC SAMP AHPL Free Float* Contribution to Growth . Company wise contribution to market cap growth March 2009 – June 2011 Source : JBS Research Analysis *Free float has been calculated as the average of period beginning and period end public holding percentage ** The ASI started from a low of 1639 to peak at 7811 within the period. More than 50% of the Market Cap growth during the period can be attributed to growth in 14 companies, most of which have relatively small free floats*
  26. 26. Page 26JB Securities Research July 2012 New capital raisings exploded …….Money like jam CSE - Primary and secondary offerings January 2009 to December 2011 Average degree of oversubscription at IPOs* January 2009 to December 2011 - 5,000 10,000 15,000 20,000 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 Secondary offerings Primary offerings 1.1 1.7 11.9 15.9 21.2 21.8 141.0 2.9 4.4 1.4 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 Total amount of capital attracted by IPOs Total amount of capital offered in IPOs Quarterly degree of oversubscription = Secondary offerings accounted for approx. 75% LKR Mn Source: JBS Research Analysis, CSE Data
  27. 27. Page 27JB Securities Research July 2012 and penny stocks became the new craze… Penny stocks - Share volume velocity* Volatility of returns* *Figures have been annualized Penny stocks – stocks whose prices were less than LKR 10 at either the beginning or end of a given quarter. Source: JBS Research Analysis, CSE Data 9% 19% 20% 17% 27% 31% 53% 71% 94% 135% 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 37% 35% 44% 30% 25% 36% 59% 20% 26% 21% 15% 6% 6% 10% 5% 6% 8% 4% 9% 5% 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 Penny Stocks Overall Market
  28. 28. Page 28JB Securities Research July 2012 Bullish expectations drove the market … Disaggregation of Market Cap growthContribution to Market Cap growth 64.3% 15.4% 20.3% P/E Growth Earnings Growth Combined Effect 100% 132% 32% 42% 305% Jun-09 P/E Growth Earnings Growth Combined Effect Jun-11 Source: JBS Research Analysis
  29. 29. Page 29JB Securities Research July 2012 The future looked increasingly rosy…. 56.1% 50.5% 45.9% 43.9% 49.5% 54.1% 18% 20% 22% Decomposition of market value June 2009 Franchise Value Tangible Value Cost of Equity Cost of Equity Decomposition of market value June 2011 31.3% 27.4% 24.4% 68.7% 72.6% 75.6% 14% 16% 18% Source: JBS Research Analysis
  30. 30. Page 30JB Securities Research July 2012 The inevitable after party – exuberance turned to irrationality May2009 Jul2009 Sep2009 Nov2009 Jan2010 Mar2010 May2010 Jul2010 Sep2010 Nov2010 Jan2011 Mar2011 May2011 Jul2011 Sep2011 Nov2011 Jan2012 Mar2012 May2012
  31. 31. Page 31JB Securities Research July 2012 LMDNielsonsBusinessConfidenceIndex Hubris displaced humility and benevolence …. Nearly 20,000 metric tonnes of tainted petrol released to the public causing close to a thousand vehicles to suffer engine failure. President appointed commission on Lessons Learnt and Reconciliati publishes its report. Makes key recommend ations. Sarath Fonseka, ex-army chief jailed for three years over charges of making false statements about the president’s brother, who is also the secretary of defense. Q2Q4Q3 Clashes over proposed new private sector pension bill intensifies. 1 worker killed and 60 seriously injured. Government temporary suspends the bill. Parliament scraps emergency laws for the first time in 6 years. Strengthens Prevention of Terrorism Act temporarily. Former parliamentari an Bharatha Laksman and others killed in a post election interparty shoot-out. Dozens more injured. Controversial expropriation bill nationalizing 37 businesses deemed to be “underperfor- ming or underutilized” Q2 2011 Q1 With the 2/3rd Majority in the parliament government sweeps through major legislative reforms INTERNATIONALDOMESTIC Sources: Newspaper articles, Central Bank of Sri Lanka, LMD, The Nielson Company, JBS Research Low point = 105 80 100 120 140 160 180 Start Value = 150 End Value = 107 Sri Lanka announces bid for Commonwealth Games 2018 in Hambanthota 2012 High point = 173 Sri Lanka loses bid to host the 2018 Commonwe alth games. EU expresses concerns over censorship of dissident websites in Sri Lanka. Natural gas deposits discovered for the first time in Sri Lanka by Cairn India. US issues sanctions on Iranian oil. SL currently imports 93% of all its crude oil from Iran. British Television station Channel 4 airs video footage of claimed atrocities against civilians in the latter stage of the war News report appears stating India may not support Sri Lanka at the UN HR vote due to increased political pressure from parties in Tamil Nadu. SL loses key UNHRC vote on war crimes. The council urges Sri Lanka to “credibly investigate” allegations of war crimes during the end of the conflict. Left wing political activists Kumar Gunarathnam and Dimuthu Atygala abducted by unknown gunmen. Abductees found left near a police station. Activist Gunarathna deported from country citing visa irregularities Presidential pardon given to Sarath Fonseka. Civic rights abolished. Intense diplomatic pressure exercised by Western nations over SL Government
  32. 32. Page 32JB Securities Research July 2012 Credit growth persisted… Credit, Monthly Change Net Credit to Govt. and SOEs Credit to Private Sector Source : Central Bank of Sri Lanka *All amounts in LKR Bn -20 0 20 40 60 80 100 120 140 160 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Private Corps. Govt. 32.5% 33.0% 33.5% 34.0% 34.5% 35.0% 35.5% 0 500 1,000 1,500 2,000 2,500 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Credit to the Private Sector Annual Change (%) 0% 20% 40% 60% 80% 100% 120% - 200 400 600 800 1,000 1,200 1,400 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Credit to SOEs Net Credit to Government Credit to Govt. growth Credit to SOEs growth
  33. 33. Page 33JB Securities Research July 2012 CBSL attempted the impossible trinity – fixed exchange rate … *NEER is the weighted average of nominal exchange rates of the 24 trading partner and competitor countries including USD, GBP, JPY, INR and SDR Source : Central Bank of Sri Lanka, JBS Research Analysis 95 96 97 98 99 100 101 102 103 104 95 100 105 110 115 120 125 130 135 140 Apr11 May11 Jun11 Jul11 Aug11 Sep11 Oct11 Nov11 Dec11 Jan12 Feb12 Mar12 Apr12 May12 LKR/USD(RHS) NEER(LHS) REER(LHS) President in his capacity as Finance Minister depreciates the rupee by 3% CBSL sold USD to hold the peg Reserves drained out USD Mn CBSL says intervention will be limited to settlement of oil bills USD Mn -28% - 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 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 LKR Currency mispriced… INR devaluation (700) (600) (500) (400) (300) (200) (100) - 100 200 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 Peg maintained
  34. 34. Page 34JB Securities Research July 2012 Impossible trinity …and an accommodative monetary policy… Source: Central Bank of Sri Lanka, JBS Research Analysis Policy instruments accommodative * SRR – Statutory Reserve Requirement LKR Bn LKR Bn 5% 10% 15% 20% 25% 30% 35% 40% - 500 1,000 1,500 2,000 2,500 3,000 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 Consolidated Broad Money(M2b:) Reserve Money M2b growth Credit to the Private Sector Reserve Money growth -20 0 20 40 60 80 100 120 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0% Apr-11 Apr-11 May-11 Jun-11 Jul-11 Jul-11 Aug-11 Sep-11 Sep-11 Oct-11 Nov-11 Dec-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 Apr-12 May-12 Jun-12 Money market liquidity Repo Reverse Repo SRR* Monetary aggregates expanded
  35. 35. Page 35JB Securities Research July 2012 Imports exploded leading to a doubling of the trade deficit in 2011… Increase in ExportsIncrease in Imports USD Mn Source: Central Bank of Sri Lanka, JBS Research Analysis 2.01 X 6,926 = 1.52 X 2010 1,933 = 1.22 X 2010 *Change in unclassified imports of USD 108mn and unclassified exports of USD 193mn have been netted off 4,821 9,7061,754 1,078 802 698 509 506 472 426 254 245 182 835 327 321 289 123 100 71 50 9 85 2010 Petroleum Other Intermediate Goods Building Materials Diamonds and Precious Metals Textiles Other Consumer Goods Transport Equipment & Other Vehicles Machinery and Equipment Food and Beverages Ceramic Products Textiles and Garments Rubber Products Other Industrial Exports Petroleum Products Gems, Diamonds and Jewellery Coconut Other Agricultural Products Tea Mineral Unclassified* 2011 As a % of GDP 9.7% 16.4%
  36. 36. Page 36JB Securities Research July 2012 …and built pressure on the Current Account… 12% 19% 96% 25% 11% 15% 329% 25%101% 22%51% 45% Services Account Income Account 20,269 9,710 9,258 4,615 10,559 3,084 1,985 467 1,114 5,145 562 60 Imports Exports Trade deficit Receipts Payments Receipts Payments Private receipts Private payments Official transfers(net) Merchandise trade Services Income Goods, Services and Income(net) Current transfers Current account deficit USD Mn Services and Income Accounts almost offsetting each other Private remittances easing the pressure Percentage increase over 2010 1,392 1,098 954 830 501 355 507 531 Inflows Outflows Inflows Outflows Inflows Inflows Outflows Transportation Travel BPO, ITES Other Total 709 647 448 385 10 19 8 Outflows Inflows Outflows Inflows Outflows Inflows Interest and Other Charges Direct Investment Compensation of Employees Income account balance As a % of GDP 16.4% 7.8% 15.6% Source: Central Bank of Sri Lanka, JBS Research Analysis
  37. 37. Page 37JB Securities Research July 2012 …resulting in a depletion of reserves Months of ImportsReserves fell by USD 2.2 Bn in 8 months Gross official reserves Total reserves USD Mn Source: Central Bank of Sri Lanka Jul-11 Aug-11 Aug-11 Sep-11 Oct-11 Oct-11 Nov-11 Dec-11 Dec-11 Jan-12 Feb-12 Feb-12 Mar-12 Apr-12 - 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 - 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 -23%
  38. 38. Page 38JB Securities Research July 2012 Liquidity rapidly dried up… Interest rates shot up… Money market net liquidity Loan to deposit ratio of banks 70% 70% 61% 76% 85% 2007 2008 2009 2010 2011 LKR Bn Source: Central Bank of Sri Lanka, JBS Research Analysis -20 0 20 40 60 80 100 120 140 160 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% Nov-10 Dec-10 Jan-11 Mar-11 May-11 Jun-11 Aug-11 Sep-11 Nov-11 Dec-11 Jan-12 Mar-12 May-12 Jun-12 Money market liquidity Repo Reverse Repo AWPLR AWDR Call Money Rate 3 month t-bill
  39. 39. Page 39JB Securities Research July 2012 The MPI was an early precursor of the impending collapse… ASIMPI The ASI and MPI ≈ 4½ months MPI peaks in early October 2010 ASI peaks in mid February 2011 3,000 3,500 4,000 4,500 5,000 5,500 6,000 6,500 7,000 7,500 8,000 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Source : JBS Research Analysis The All Share Price Index (ASI) and the Milanka Price Index (MPI) are market capitalization weighted indices. Whereas the ASI includes every company listed in the CSE, the MPI only contains 25 companies. Criteria for inclusion in the MPI are as set out in http://cse.lk/mpi.do
  40. 40. Page 40JB Securities Research July 2012 The regulator tried in vain… 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 SEC suspends trading of heavily manipulated shares and imposes a 10% price band on all securities SEC mandates stock broker companies to refrain from extending credits to any investor beyond T+3 days SEC mandates the force sale of securities by T+5 SEC relaxes rules on debt settlement SEC introduces new rules on share allotment to retail investors, while Central Bank places a cap on total number of bank guarantees to be issued for IPO subscriptions SEC relaxes rules on price bands SEC further relaxes rules on debt settlement SEC revokes directive on price bands all together SEC directive permits brokers to extend credit to investors up to three times net adjusted capital SEC Chairperson resigns SEC Director General leaves office The regulator became regulated… MPI ASI Source : Securities and Exchange Commission of Sri Lanka
  41. 41. Page 41JB Securities Research July 2012 Earnings plateaued out… 30.0 40.7 46.6 45.7 43.3 46.3 47.3 0 10 20 30 40 50 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Diversified Banking & Finance Food, Bev and Tobacco Manufacturing Telecommunications Oil Palms Investment Trusts Hotels & Travels Other LKR Bn Source : JBS Research Analysis, Colombo Stock Exchange*Earnings figures have not been adjusted for the effect of Cross Holdings
  42. 42. Page 42JB Securities Research July 2012 Even the penny stocks began to lose their luster…. 31% 53% 71% 94% 135% 126% 45% 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 36% 59% 20% 26% 21% 37% 17% 6% 8% 4% 9% 5% 1% 3% 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 Penny Stocks Overall Market Penny Stocks - Share volume velocity* Volatility of returns* *Figures have been annualized Source : JBS Research Analysis,
  43. 43. Page 43JB Securities Research July 2012 The market lost more than 40% of its value during the bust… MPI ASI 3,000 3,500 4,000 4,500 5,000 5,500 6,000 6,500 7,000 7,500 8,000 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 ASI -38.6% MPI -45.8%
  44. 44. Page 44JB Securities Research July 2012 Sobering reality – some concerns remain May2009 Jul2009 Sep2009 Nov2009 Jan2010 Mar2010 May2010 Jul2010 Sep2010 Nov2010 Jan2011 Mar2011 May2011 Jul2011 Sep2011 Nov2011 Jan2012 Mar2012 May2012
  45. 45. Page 45JB Securities Research July 2012 51.7 40.7** 2004 2006 2008 2010 56.9 52.6** 2004 2006 2008 2010 42.8 31.8** 2004 2006 2008 2010 Concentration of power leading to a weakening of state and civil institutions… Control over corruption and unfair dealing is slipping “ the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as "capture" of the state by elites and private interests. “ The perception of the rule of law has deteriorated “ the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts… “ Social freedoms and rights of franchise are under friction “the extent to which a country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media. “ 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.* Source: World Bank, http://info.worldbank.org/governance/wgi/index.asp Governance is slipping… *Three of the six major dimensions of governance that are included in the World Banks’s indicative framework for governance as they apply to Sri Lanka are highlighted above. **The ranking is based on a percentile; Higher values imply a better score. *** The rankings provide a directional indication and not an absolute measure of governance. Therefore they should not be construed an absolute quantification of the country’s level of governance, and at higher confidence levels the directional weakening suggested by the indicators may become statistically insignificant.
  46. 46. Page 46JB Securities Research July 2012 Devolution of Power – 25 years and still a work-in-progress The 13th Amendment is a product of the Indo-Sri Lanka Accord of 1987. Drawing closely on the Indian federal system, it proposes a framework for devolution of power which constitutes of the following:  Establishment of a Provincial Council (PC) along with a High Court for each province.  Making Tamil an official language while setting English as the link language.  Delegation of certain legal and executive powers into the hands of the PCs as stipulated under three lists; the Reserved List, Provincial Council List and the Concurrent List.  Limited executive and legislative powers are delegated to PCs under the Provincial Council and Concurrent Lists. These powers cover issues related to law and order, land and land settlement, provincial finances and education. However, despite the 13th amendment being cited as one of the major stepping stones in achieving reconciliation, full implementation of the provisions enshrined in the amendment has remained elusive under various governments over the past quarter of a century. Signing of Indo-Lanka Peace Accord Indian Peace Keeping Force (IPKF) arrives in Sri Lanka 13th Amendment debated and certified 1st ever PC election takes place in 4 provinces President Jayawardena authorises the merger of North & East provincial councils Sri Lanka & India agree on terms of withdrawal for IPKF IPKF withdrawal completed Supreme Court orders demerger of North and East President Rajapakse pledges 13+ solution to India President discusses 13+ solution with Indian FM and Congress Party delegation President announces that a 13+ solution should be sought through a Parliamentary Select Committee (PSC) President reaffirms his confidence in a PSC in reaching a lasting solution Further to the 13th amendment, several committees have been appointed by various government to explore the issue of devolution of power and other matters relating to the 13th Amendment. These include the Mangala Moonesinghe PSC of 1992, the Gunewardena Committee of 1995, the All Party Representative Committee (APRC) of 2006. 1987 1988 1989 1990 1991 1992 2006 2009 2010 2011 2012
  47. 47. Page 47JB Securities Research July 2012 Source : Ministry of Finance and Planning Inflation is on the increase… 2% 3% 4% 5% 6% 7% 8% 9% 10% 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 Headline - YoY Core - YoY Headline - 12m MA Core - 12m MA -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 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 Food Inflation Non Food Inflation 7.1% 11.2% 9.3% 5.8%
  48. 48. Page 48JB Securities Research July 2012 27.6% 24.7% 21.4% 18.5% 14.5% 12.0% Vietnam Malaysia Thailand India Sri Lanka Bangladesh Revenue as a % of GDP Source : IMF, Central Bank of Sri Lanka 14.2% 13.3% 12.8% 12.9% 12.4% 13.3% 15.8% 14.9% 14.5% 14.6% 14.3% 14.7% 16.6% 15.6% 15.0% 14.9% 14.5% 15.0% 2007 2008 2009 2010 2011 2012 F Tax Tax + Non tax Tax + Non tax + Grants Sources of revenue 85.5% 85.3% 85.3% 86.9% 85.5% 9.4% 10.1% 11.1% 11.1% 12.9% 5.1% 4.5% 3.6% 2.0% 1.6% 2007 2008 2009 2010 2011 Grants Non tax Tax Government revenue low compared to peers…
  49. 49. Page 49JB Securities Research July 2012 73.8 58.2 146.3 182.7 2008 2009 2010 2011 -0.5% -1.5% -0.5% -0.3% -1.8% 2007 2008 2009 2010 2011 120.0 26.4 0.15 16.4 1.08 0.17 19.3 0.59 64.0 0.23 Combined loss (LKR Bn) Combined loss (USD Bn) 5 year average of -0.9% Combined operating losses of main State Owned Enterprises Combined earnings of the market Combined operating loss as a % of GDP LKR Bn LKR Bn 1.29 1.65 0.51 Combined earnings (USD Bn) Source: Ministry of Finance and Planning, CSE, JBS Research Analysis 0.68 * Cross holdings have not been eliminated The SOE monsters keep bleeding … 7.1 (11.1) (7.7) (20.3) (85.2) (22.3) (33.9) (7.4) 5.0 (19.3) 2.0 (11.0) (6.6) (0.3) (13.5) (6.1) (8.0) (4.6) (0.8) (2.0) 2007 2008 2009 2010 2011 Sri Lanka Transport Board Airlines Ceylon Electricity Board Ceylon Petroleum Corporation
  50. 50. Page 50JB Securities Research July 2012 30.7% 27.8% 26.3% 22.6% 20.3% 5.1% 3.7% 8.5% 10.9% 11.7% 1.3% 1.3% 1.6% 2.6% 3.6% 2007 2008 2009 2010 2011 82.9% 84.7% 72.2% 62.6% 57.0% 13.7% 11.3% 23.3% 30.2% 32.8% 3.4% 4.0% 4.5% 7.3% 10.1% 2007 2008 2009 2010 2011 Concessional Loans Non- Concessional Loans Commercial Loans 37.1% 32.8% 36.4% 36.1% 35.6% * Sovereign bonds and foreign holding of treasuries are classified as commercial loans Foreign borrowings of the government (%GDP) Loan mix Source : Central Bank of Sri Lanka Shift in reliance to non-concessional and commercial loans…
  51. 51. Page 51JB Securities Research July 2012 - 17.9% 21.6% 23.7% 6.6% 6.2% 6.3% 2009 2010 2011 Government Private Private Net private transfers Government 21.7% 20.8% 16.5% -3.7% -2.1% -1.1% 5.8% 6.0% 6.7% 2009 2010 2011 National Savings/GDP -0.7% -3.1% -7.8% 2009 2010 2011 Investment savings gap/GDP Investment - savings gap has widened Investment/GDP Source: Central Bank of Sri Lanka , JBS Research
  52. 52. Page 52JB Securities Research July 2012 Government borrowing Grants and transfers FDI FPI Trade liabilities Reserve movement Other – Commercial bank net assets & errors -0.7% -3.1% -7.8% 2009 2010 2011 Investment savings gap/GDP 0.9% 0.9% 1.5% -0.5% -0.3% 0.7% 0.4% 0.4% 5.3% 4.7% 4.2% 0.7% -1.8% -0.1% -6.5% 1.6% -1.1% -0.4% -2.2% -1.8% Financing the resource gap/GDP 0.0% Mostly financed by govt. borrowings Source: Central Bank of Sri Lanka, JBS Research Analysis
  53. 53. Page 53JB Securities Research July 2012 USD Mn Source : Central Bank of Sri Lanka, World Bank 1.86% 1.85% 0.96% 0.96% 1.62% 2007 2008 2009 2010 2011 Foreign Direct Investment FDI as a % of GDP 223 411 154 195 218 221 131 19 44 33 159 210 231 239 705 2007 2008 2009 2010 2011 603 752 404 478 956 * FDIs excludes loans as per the UNCTAD presentation 7.5% 3.9% 3.0% 1.6% 1.4% 0.9% Vietnam Malaysia Thailand SriLanka India Bangladesh Low compared to peers… * All data for 2010 except for Sri Lanka(2011) FDI yet low… Reinvested earnings Other capital Equity capital Includes land purchases
  54. 54. Page 54JB Securities Research July 2012 Source: Census and Statistics Sri Lanka, JBS Research Analysis 2,365,501 2,863,854 396,853 -11,938 113,439 GDP-2008 Capital intensity Capital productivity Labour force growth GDP-2011 CAGR 2008/11 =-0.14% CAGR 1.33% CAGR 6.58% CAGR X 80% -2% 22% Contribution to GDP 5.31% CAGR X Labour productivity LKR Mn 5.19% Capital intensity driving growth NOT total factor productivity (TFP) Note CAGR of GDP = [(1+CAGR of Capital Intensity)*(1+CAGR of Capital Productivity)*(1+CAGR of Labour Force)]-1
  55. 55. Page 55JB Securities Research July 2012 The lion is not beaten – And… the good news…
  56. 56. Page 56JB Securities Research July 2012 Competitiveness is improving relative to peers… 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 End of war 61/75 59/80 68/102 73/104 98/117 79/125 70/131 77/133 Ranking/No of countries ranked 57/75 54/80 56/102 55/104 45/117 43/125 48/131 50/133 33/75 35/80 32/102 34/104 36/117 35/125 28/131 34/133 Thailand Sri Lanka India 36/133 79/133 49/133 Source: World Economic Forum, World investment report 2011 UNCTD, Central Bank of Sri Lanka, JBS Research Analysis 62/139 51/13938/139 39/142 52/142 56/142 Competitiveness ranking has increased by 38% after the war 60/75 65/80 60/102 77/104 81/117 77/125 68/131 70/133 Vietnam 75/133 59/139 65/142 CompetitivenessHigh Low
  57. 57. Page 57JB Securities Research July 2012 Key contributor being the greater stability from the end of the conflict… CompetitivenessHigh Low 0% 25% 50% 75% 100% Innovation Business sophistication Innovation & sophistication Market size Technological readiness Fin. market development Labour market efficiency Goods market efficiency Higher education & training Efficiency enhancers health & primary education Macroeconomic environment Infrastructure Institutions Basic requirements Overall Ranking Improving competitiveness will depend on improving these key problem areas 37% 57% 2012 Ranking out of 142 Countries 2009 Ranking out of 134 Countries Improvement Source: World Economic Forum, World Investment Report 2012 UNCTD, JBS Research Analysis Current Rank - 2012 Improvement over 2009 Deterioration over 2009 Overall Ranking Efficiency Enhancements Basic Requirements Innovation & Sophistication
  58. 58. Page 58JB Securities Research July 2012 Ease of doing business rank has improved 134 132 78 98102 2011 2012 India Vietnam Sri Lanka Sri Lanka Vietnam 2011 2012 2011 2012 Overall 102 89 78 98 Starting a business 34 38 100 103 Construction permits 169 111 62 67 Getting electricity n/a 95 n/a 135 Registering property 155 161 43 47 Getting credit 72 78 15 24 Protecting investors 74 46 173 166 Paying taxes 166 173 124 151 Trading across borders 72 53 63 68 Enforcing contracts 137 136 31 30 Resolving insolvency 43 42 124 142 89 The World Bank Doing Business Ranking out of 183 countries Source: Doing Business, The World Bank, 2012 Thailand 17 Sri Lanka 89 Vietnam 98 India 132 Philippines 136 India 2011 2012 134 132 165 166 177 181 n/a 98 94 97 32 40 44 46 164 147 100 109 182 182 134 128
  59. 59. Page 59JB Securities Research July 2012 Country is experiencing a demographic dividend… Population between the age of 15-64 years Population aged 0-14 and above 64, divided by 15-64 age Source : Key Indicators for Asia and the Pacific 2011 - ADB 2010 2010 66.0% 69.5% 64.1% 60.0% Sri Lanka Vietnam India Pakistan 51.5% 43.9% 56.0% 66.7% Sri Lanka Vietnam India Pakistan Dependency Ratio% of population in productive age
  60. 60. Page 60JB Securities Research July 2012 Labour force is literate… Primary school completion rate * Literacy rate Average years of schooling** *Latest data available ** The years of formal schooling received, on average, by adults over age 15 * The primary completion rate =(No. of primary school graduates/No. of children in primary school age). The ratio can go above 100 percent, which can be a symptom of late entry, grade repetition, or of an enrollment push at some point in the past, perhaps as a consequence of a school enrollment campaign Source: Key Indicators for Asia and the Pacific 2011 – ADB, Annual Report 2011 97.5% 102.3% 94.8% 61.1% Sri Lanka Vietnam India Pakistan 91.9% 92.8% 62.8% 55.5% Sri Lanka Vietnam India Pakistan 8.4 6.4 5.1 5.6 Sri Lanka Vietnam India Pakistan
  61. 61. Page 61JB Securities Research July 2012 Socio Economic indicators are healthy… 14 51 11 48 38 0 10 20 30 40 50 60 Sri Lanka Vientnam Thailand India Bangladesh S. Asia Avg. 52 Global Avg. 41 Life Expectancy (Years | 2010) Infant Mortality Rate (Per 1,000 live births | 2010) *Total Healthcare expenditure includes private and government expenditure on healthcare 75 75 74 65 69 60 62 64 66 68 70 72 74 76 Sri Lanka Vientnam Thailand India Bangladesh Global Avg. 70 S. Asia Avg. 65 2.90% 6.80% 3.90% 4.10% 3.50% 0% 1% 2% 3% 4% 5% 6% 7% 8% Sri Lanka Vientnam Thailand India Bangladesh S. Asia Avg. 3.8% Total Healthcare Expense* (% of GDP | 2010) Source :World Development Indicators 2012 – World Bank 2012
  62. 62. Page 62JB Securities Research July 2012 Labour supply conditions are favourable… Source: United Nations ,Population Division (2011). World Population Prospects: The 2010 Revision/ Sri Lanka Labour Force Survey 2011 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, YE2011 20,869 15,459 7,013 6,691 5,410 8,446 322 Total Population Population < 15 Years Working Age Population, 15+ Years Not Participating Total Labor Force Unemployed Labor Force Employed Labor 26% 74% 66% 34% Male Female In 000’
  63. 63. Page 63JB Securities Research July 2012 Relatively higher tertiary educated labour force.…quality concerns exist Source: McKinsey Global Institute -The world at work – Jobs, pay, and skills for 3.5billion people, June 2012/CBSL annual report 2012 30% 25% 70% 46% 53% 61% 23% 46% 16% 13% 7% 8% Sri Lanka Malaysia India Indonesia Primary or lower Secondary Tertiary 4,405 5,142 4,012 4,830 4,432 2,198 2,301 2,547 2,705 2,704 2,348 1,492 2,274 2,504 2,028 896 901 1294 943 797 809 894 1,114 1,157 1,307327 208 345 425 392730 1067 1372 1388 1,382 2006 2007 2008 2009 2010 other Law L.L.B. Engineering B.Sc. (Eng.) Medicine M.B.B.S. Science B.Sc. Commerce & Mgt. Studies Arts & Oriental Studies Educational attainments of the workforce, 2010 (% of working age population) No of graduates from the government universities 11,713 12,005 12,958 13,952 13,042
  64. 64. Page 64JB Securities Research July 2012 Urbanization will be a growth enabler… 0% 5% 10% 15% 20% 25% 30% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Urbanization* forecasted to increase Urbanization* is officially defined as people belonging to the smallest administrative division (i.e. Municipal Council or village council). Other methodologies place Sri Lanka’s real urbanization rate as high as 40%. Economic Density* low compared to the region Western Southern Central North. W. Sab. North. C Nothern - 250 500 750 1,000 1,250 1,500 1,750 - 50 100 150 200 250 300 350 400 450 500 PopulationDensity(pplperKm2) Gross Regional Product Per Capita (LKR 000’s) Potential for bridging the gap R2 =0.89 Economic Density = GDP per unit Area Sri Lanka: Reshaping Economic Geography – WB 2011World Urbanization Prospects: The 2011 Revision – UNDESA 2011, Annual Report 2011 – CBSL 2012 Colombo = $15Mn/km2 Bangkok = $88Mn/km2 Singapore= $269Mn/km2 Ho Chi Minh city = $73Mn/km2
  65. 65. Page 65JB Securities Research July 2012 Diaspora opportunity… Mid. East (000's) Saudi Arabia 600 U.A.E. 300 Kuwait 300 Qatar 100 Lebanon 100 Israel 8 1,408 W. Europe (000's) France 150 Germany 60 Switzerland 55 Netherlands 10 275 *Currently living or working on a temporary or permanent basis outside of SL *Not official estimates of the Government of Sri Lanka Canada 300,000 Italy 60,000 Australia 100,000 India 200,000 New Zealand 7,000 Sweden 8,000 Norway 14,000 U.K. 200,000 S. Korea 20,000 Japan 20,000 Denmark 13,000 Aggregate (000's) Mid. East 1,408 Europe 560 N. America 335 S. & East Asia 240 Australasia 107 2,650 U.S.A. 35,000 Regions with significant populations of Sri Lankans*
  66. 66. Page 66JB Securities Research July 2012 Ongoing infrastructure development plans – Power and Highways Source: Ministry of Ports and Highways, Ministry of Power and Energy, Department of External Resources, Treasury Annual Reports, Central Bank of Sri Lanka, RDA Project Investment Completion Upper Kotmale Hydro Power Plant (150MW) USD 335Mn June 2012 Norochcholai Coal Fired Power Plant – Phase II (600MW) USD 891Mn 2013 Uma Oya Development Project (120MW) USD 526Mn 2015 Trincomalee Coal Power Plant (500MW) USD 500Mn 2017 Project Investment Completion Southern Expressway Extension (35km) USD 168Mn* 2013 Colombo-Katunayake Expressway (25km) USD 292Mn 2012/13 Colombo Outer Circular Highway (29.1km) USD 935Mn 2015 Colombo-Kandy Expressway (98km) USD 1,231Mn (Feasibility Stage) n/a Major Power Projects underway and planned Major Road Development projects underway and planned *Estimated figure 5 6 7 8 1 3 2 4 4 3 2 1 5 6 7 8
  67. 67. Page 67JB Securities Research July 2012 Project Investment Completion Colombo – South Harbour Development Project – 9.6mn TEU of transshipments USD 1,075Mn 2013&14 Hambantota – Commercial operations & Bunkering tank farm (80,000MT) USD 1,037Mn 2011,12&15 Galle – Yacht marina and general infrastructure development JPY 14.5Bn + LKR 525Mn n/a Oluvil – Fisheries port development EUR 46.1Mn n/a Mattala International Airport (1 million passengers p/a) USD 209Mn 2012 Bandaranaike International Airport Expansion – (6 million passengers p/a) USD 425Mn 2015 Major Port and Airport Projects undergoing and planned Telecommunications – National Backbone (NBN) • Telecommunication Regulatory Commission of Sri Lanka (TRCSL) has initiated an island-wide fibre backbone network • The key goal is to provide all-island broadband connectivity through 5 fibre optical cable rings • Completion by 2014 • This will provide high speed internet connectivity to all regions of the country Major Telecommunications projects currently undergoing 1 2 3 4 5 6 1 2 3 4 5 6 Source : Sri Lanka Ports Authority, Ministry of Ports and Highways, TRCSL Ongoing infrastructure development plans – Ports and Telecommunications
  68. 68. Page 68JB Securities Research July 2012 0% 1% 2% 3% 4% 5% 6% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 - March • 2.3 Mn Internet users as of Dec/11 Source: www.internetworldstats.com, TRCSLSource: TRC Sri Lanka • Mid-year population 20.9 Mn in 2011 Internet and Email Subscribers (As a percentage of tot. population |Dec 2011) Internet and Broadband usage expanding but trailing peers 1.09 1.23 Indonisia India Sri Lanka Vietnam Thailand Broadband connections (Per 100 people| 2012) Fixed Wireless 0.90 0.79 4.61 4.13 2.32
  69. 69. Page 69JB Securities Research July 2012 Primary balance improvements not at the expense of capital exp... 15.6% 15.0% 14.9% 14.5% 15.0% 2008 2009 2010 2011 2012 F 12.5% 12.7% 11.2% 10.4% 10.3% 5.3% 5.7% 5.4% 5.5% 6.0% 2008 2009 2010 2011 2012 F -2.2% -3.4% -1.7% -1.4% -1.3% 2008 2009 2010 2011 2012 F Revenue as a % of GDP Primary Expenditure as a % of GDP Primary deficit as a % of GDP - Primary Recurrent Expenditure + Net Lending Capital Expenditure 16.3% 17.8% 18.5% 16.6% 15.9% Source: Central Bank of Sri Lanka, JBS Research Analysis
  70. 70. Page 70JB Securities Research July 2012 122,706 407,702 59,183 132,054 90,835 62,107 Tamil Nadu Andhra Pr. Karnataka Kerala GDP of Southern states of India Sri Lanka 7x Four southern states of India - 7x Sri Lanka’s GDP (2011, Nominal GDP $Mn) Source: Directorate of Economics Statistics of respective State Governments, and for All-India — Central Statistical Organization / CBSL Annual report 2011 Large economic opportunity at the country’s door step… GDP CAGR* 8.41% Contribution to national economy In 2011 5.73% GDP CAGR* 8.09% Contribution to national economy In 2011 3.96% GDP CAGR* 8.68% Contribution to national economy In 2011 7.82% GDP CAGR* 8.01% Contribution to national economy In 2011 8.01% GDP CAGR* 6.42% CAGR 2007/11*
  71. 71. Page 71JB Securities Research July 2012 Major Trade Route Sri Lanka is ideally located along the major East-West trade route. Regional Growth Trade growth in the Indian Subcontinent (ISC) Poor Regional Infrastructure Congestion within Indian ports and strict cabotage laws make transshipments at Sri Lankan ports a more viable option for ship owners Sri Lanka’s Competitiveness as a Maritime Hub Regional trade routes with Sri Lanka as a Hub Sri Lanka 2.7 2.9 3.0 3.2 3.2 3.6 4.6 5.2 5.8 7.1 China - ME & Africa EU - China EU - Other Asia EU -ME & Africa US - China Other Asia - EU China - Other Asia Other Asia - Other Asia China - EU China - US World’s top 10 liner routes (TEU Mn)* Colombo’s reckoning as a maritime hub 2.4 Mn TEU 4.1 Mn TEU 2005 2010 2005 Ranked 35th among the world’s major ports 2010 Ranked 29th among the world’s major ports Source : IHS Fairplay, World Trade Service, World Shipping Council.* Liner Volumes are for 2009 Sri Lanka’s strategic location places it on 6 of the 10 largest trade routes in the world and within reach of over 26% of all the world’s container traffic Trade routes that pass by Sri Lanka Sri Lanka’s strategic location places it on 6 of the 10 largest trade routes in the world and within reach of over 26% of all the world’s container traffic Progressing towards a ports and maritime hub
  72. 72. Page 72JB Securities Research July 2012 Colombo & Hambantota Current Sri Lankan transshipment capacity: ≈ 4.5mn TEU Capacity after completion of proposed expansion: > 14mn TEU Transshipment Services - 5 10 15 20 2000 2003 2006 2009 TEUMillions Transshipment Activity in the Indian Subcontinent Total container volume handled at ports within the Indian Subcontinent Container volume transshipped from Colombo Total transshipment activity related to the ISC Bunkering Services Colombo & Hambantota Current Sri Lankan bunkering capacity: ≈ 35,000 MT Capacity after completion of proposed expansions: > 115,000 MT 168 253 133 259 524 2007 2008 2009 2010 2011 Bunkers and Aviation fuel sales in Sri Lanka (USD Mn) Commercial Ship repair Colombo, Galle & Hambantota Current maximum commercial dry docking capacity : 125,000dwt (at Colombo) Capacity for afloat repairs should increase at Colombo once port expansion concludes. Major Ports of Sri Lanka Colombo Galle Hambantota Trincomalee 89 78 66 74 74 101 82 82 75 91 2007 2008 2009 2010 2011 Dry dockings Afloat repairs Ship repair volumes - Colombo Source : Colombo Dockyard PLC annual reports, Drewry Maritime Research, Treasury Annual Reports Ports and maritime hub cont...
  73. 73. Page 73JB Securities Research July 2012 Tourism – “One Island, A Thousand Treasures” Note: 2011/12 VFF figures are based on 14-16% of total arrivals, this category is forecasted to grow at 10% till 2016 Source : SLTDA Total tourist arrivals including VFF (SLTDA) Tourists 537,569 725,889 275,438 329,479 2,300,000 1,451,777 116,907 130,086 52,464.32 58,143 200,000 200,000 2010 2011 Jan-May 2011 Jan-May 2012 Scenario 1 Scenario 2 3x 2x F2016 654,476 855,975 327,902 387,622 2,500,000 1,651,777 F2016 Scenario 1: Tourist arrivals estimated by SLTDA(2.5Mn) Scenario 2: Tourist arrivals increase by 2x Visiting Friends and Family (VFF) VFF=SLTDA arrivals –(Foreign guest nights /10) Tourist arrivals (adjusted for VFF)
  74. 74. Page 74JB Securities Research July 2012 Tourism – Room inventory projected to increase … Forecast assumptions Avg. occupancy 70% Avg. stay 8days Avg. room sharing 1.6persons Scenario 1: Tourist arrivals estimated by SLTDA (2.5Mn) Scenario 2: Tourist arrivals increase by 2x of YE2011 Approved new hotel projects 209 Expected investment $2,046Mn Incentives on offer for selected hotel projects: • Tax holidays for 1st 10 yrs. • Reduced tax rate of 6% or half the applicable rate (currently 12%) • Payee tax exemptions on expatriate workers • Withholding tax exemptions (i.e. interest on deposits, management fees, royalty & marketing fees) • Exemptions on VAT, PAL & Customs duty on imported or locally purchased project related goods Source : SLTDA ,JBS Research Analysis Required room stock 14,653 42,074 28,411 6,141 13,967 6,350 7,313 Scenario 1 Scenario 2 Inventory mismatch Expected room inventory based on approved projects Current room inventory (YE2011) Un-graded Graded Note: Major portion of room inventory expected in 2016 20,794 Projectedroominventory tomeetdemandin YE2016 Major hotel brands entering Sri Lanka + -
  75. 75. Page 75JB Securities Research July 2012 C1 C2 C3 C4 C5 M1 M2 M3 M4 M5 M8 M6 M7 M9 M10 S1 Exploration Blocks : M1 $2,250Mn Seismic Surveys Exploratory Drilling Appraisal of commercial viability Setting up sub- sea completion (Upstream) Setting up transport infrastructure (midstream) Downstream activities 2010 2011 2012 2013 2014 2015 2016 2017 2018 150 100 1,500 1,000 500 Time line Cost ($Mn) incurred by Cairn Lanka Open to investors Operated by Cairn Lanka Pvt. Ltd Potential for bridging the fossil fuel deficit… Source : PRDS Sri Lanka, CBSL annual report 2011,JBS Research Mannar basin Cauvery basin Southern Reserve Guestimate for the Mannar basin Confirmed existence of Working Hydrocarbon systems 5%4% 6% 17% 21% 47% Diesel Furnace Oil LPG KeroseneOther139.5 4.4 Expected energy yeild from exploration Energy demand (YE2011) TOEMn 32 X Petrol TOE-Ton of oil equivalent : Energy released by burning 1 MT of crude oil Energy decomposition (TOE basis) Expected energy yield from exploration
  76. 76. Page 76JB Securities Research July 2012 Presence Sri Lanka is an experienced player with a comparatively long involvement in the global apparel industry Labour Highly skilled labor force combined with closely involved local entrepreneurship Capabilities Broader skill set that transcends the ability to simply cut-make and trim, extending into greater value added portions of the supply chain Value Addition Increasing tendency of exporters to extend product lines into the greater value added segments and develop strategic relationships with buyers Reputation Solid CSR track record , close compliance with labour laws and reputation for being the source of “clothing with a conscience” Source: World Bank, Central Bank of Sri Lanka Drivers of competitiveness 1,786 1,921 1,774 1,887 2,068 1,816 1,898 1,764 1,842 1,892 2007 2008 2009 2010 2011 Knit Woven 84.6 87.2 87.8 92.3 102.3 2007 2008 2009 2010 2011 Apparel Exports - Composition Apparel Exports – Value added* * 2002 Constant Factor Prices USD Mn LKR Bn Apparel – largest industry…moving up the value chain
  77. 77. Page 77JB Securities Research July 2012 475 623 598 695 667 185 202 179 220 251 121 136 117 135 145 89 102 95 120 126 155 209 196 271 302 2007 2008 2009 2010 2011 Source: World Bank, Central Bank of Sri Lanka, Sri Lanka Tea Board Higher value addition Composition of Black tea Exports (MT) Greater diversification of markets Export destinations – USD Mn 211 208 185 142 133 74 85 79 148 155 22 21 20 31 28 2007 2008 2009 2010 2011 Bulk Packets Bags Ceylon tea … the connoisseur’s choice 2.87 3.14 3.28 3.26 2.99 2.31 2.49 2.71 2.73 2.47 2008 2009 2010 2011 2012 Mombasa Colombo World Kolkata Chittagong Cochin Commanding a price premium.. Annual average tea prices (USD/kg)* *World price is as at 31st March of every year. March 2012 prices are spot prices and have not been averaged over a given period. Middle East Russia EU Other OECD Other Mar 2012
  78. 78. Page 78JB Securities Research July 2012 Source: Treasury Report 2011, Ministry of Finance & Planning, AT Kearney Global Services Location Index – 2011, ATKEARNEY Industry recovering after the global economic crisis NominalUSDMn. Sri Lanka Ranked 21st in the AT Kearney Global Services Location Index 2.45 3.23 3.23 3.21 0.76 2.54 2.14 3.05 2.97 3.20 2.48 2.84 0.45 2.82 0.91 2.41 2.48 2.56 2.02 2.31 2.44 3.18 3.27 3.05 2.68 3.24 3.10 2.78 2.62 3.11 1.58 0.78 1.16 0.69 2.17 1.03 1.27 0.81 0.77 0.95 1.79 0.94 2.88 0.88 2.26 0.94 0.93 0.93 2.07 0.95 1.27 1.31 1.19 1.38 1.60 1.53 1.36 1.38 2.55 2.76 1.09 1.11 0.76 1.28 2.27 1.65 1.81 1.37 1.49 1.11 1.07 1.56 2.01 1.67 2.23 2.05 2.02 1.96 1.38 2.24 1.82 1.16 1.24 1.29 1.44 1.01 1.35 1.83 1.31 1.14 0 2 4 6 8 Argentina Senegal Pakistan Ghana Germany Romania Poland Tunisia Jordan Sri Lanka Russia Costa Rica USA Bulgaria UK UAE Lithuania Latvia Brazil Estonia Chile Philippines Vietnam Thailand Mexico Indonesia Egypt Malaysia China India Financial attractiveness People skills and availability Business environment 175 230 245 265 387 79% 31% 7% 8% 46% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 0 50 100 150 200 250 300 350 400 450 2007 2008 2009 2010 2011 Series1 Series2Industry Export Revenue Year on Year Growth IT/BPO industry – a rising star Moved up 4 places in 2011
  79. 79. Page 79JB Securities Research July 2012 108,709 113,777 113,087 107,816 50,848 61,320 71,114 67,703 60,757 56,194 64,755 67,612 18,707 15,918 17,489 19,829 2008 2009 2010 2011 No. of persons House Maids Skilled Semi and Unskilled Other 1,745 1,995 2,474 3,030 525 603 724 885 175 203 247 401 128 148 177 232 90 100 144 206 55 57 82 103 200 224 568 288 2008 2009 2010 2011 Middle East EU Far East Non EU SE Asia AUS & NZ Other 5,141 4,416 3,330 2,918 USD Mn262,960266,445 247,209 239,021 Departures for Employment Inward Remittances Remittances remain healthy… As a % of GDP 8.7% 8.9% 7.9% 7.2% Source: Central Bank of Sri Lanka
  80. 80. Page 80JB Securities Research July 2012 7.50 10.50 10.50 12.08 Domestic(> 60 units) Industrial * April 2011 – April 2012 figures are provisional Structural reforms easing pressure on the trade account… Source: Central Bank of Sri Lanka, Ceylon Petroleum Corporation 30 50 70 90 110 130 150 2007 2008 2009 2010 2011 2012 Petrol (90 Octane) Auto Diesel Kerosene Furnace Oil Price subsidies being reduced… LKR.PerLtr Rs.PerLtr Merchandise trade USD Mn 115 73 51 32 149 115 106 90 Petrol (90 Octane) Auto Diesel Kerosene Furnace Oil 2012 2009 40% 29.6% 57.5% 181.3% 15% Electricity tariff (Rs./KWh) 1,568 1,236 1,634 1,490 1,683 1,669 1,770 1,837 1,763 1,757 1,986 1,876 1,915 1,581 1,697 1,441 923 817 931 749 836 820 962 954 858 889 886 933 918 880 836 680 -645 -419 -703 -742 -847 -848 -808 -883 -904 -868 -1,101 -942 -997 -701 -861 -761 -1,500 -1,000 -500 0 500 1,000 1,500 2,000 2,500 Jan11 Feb11 Mar11 Apr11 May11 Jun11 Jul11 Aug11 Sep11 Oct11 Nov11 Dec11 Jan12 Feb12 Mar12 Apr12 Imports Exports Balance of Trade107.8%
  81. 81. Page 81JB Securities Research July 2012 -10% -5% 0% 5% 10% 15% 20% 25% 30% Jan11 Feb11 Mar11 Apr11 May11 Jun11 Jul11 Aug11 Sep11 Oct11 Nov11 Dec11 Jan12 Feb12 Mar12 Apr12 May12 Sri Lankan rupee (LKR) Bangladeshi taka (BDT) Vietnamese dong (VND) Indian rupee (INR) Chinese yuan (CNY) USD against regional currencies 95 96 97 98 99 100 101 102 103 104 105 105 110 115 120 125 130 135 140 Jan11 Feb11 Mar11 Apr11 May11 Jun11 Jul11 Aug11 Sep11 Oct11 Nov11 Dec11 Jan12 Feb12 Mar12 Apr12 May12 LKR/USD(RHS) NEER(LHS) REER(LHS) Source: forexpros.com, Central Bank of Sri Lanka, JBS Research LKR devaluation has kept up with peers…expected to stabilise… LKR
  82. 82. Page 82JB Securities Research July 2012 8.0% 8.3% 7.8% 6.8% 6.0% 7.8% 5.9% 4.1% 2010 2011 CBSL Estimate* IMF Estimate JBS Estimate** Developing Asia ASEAN-5 Newly industrialized Asian economies * CBSL expects GDP growth of 7.2% in 2012 and 8% in the medium term ** JBS estimate = Investment rate (27%) / ICOR average (4.5) Source : Central Bank of Sri Lanka, IMF, JBS Research Medium term GDP growth projections (2012 – 2017) Sustainable GDP growth expected to average 6% in the medium term…
  83. 83. Page 83JB Securities Research July 2012 65.5% 57.8% 51.7% 34.5% 42.2% 48.3% 15% 17% 19% 31.3% 27.4% 24.4% 68.7% 72.6% 75.6% 14% 16% 18% Decomposition of market value June 2011 Decomposition of market value July 2012 Cost of Equity Cost of Equity Franchise Value Tangible Value Source : JBS Research Analysis Equity valuations have reversed to more reasonable levels… *Current treasury rates: 1yr 12.99%, 5yr 14.15%, 10yr 14.75% (6th July 2012)
  84. 84. Page 84JB Securities Research July 2012 1.28 3.42 1.37 1.32 2009 2010 2011 March 2011 1.71 1.75 1.12 Thailand Phillippines India Bank P/B Multiples – Sri Lanka* Bank P/B Multiples – Peers** *Peer comparisons are for March 2012 ** P/B Multiples are for “Systemically Important” banks. In cases where such classification was not available, the six largest listed banks by asset size were taken into consideration June 2012 Source: Various Stock Exchange Filings Sector Multiples – Banking…
  85. 85. Page 85JB Securities Research July 2012 Major Conglomerates – P/E Multiples Major Conglomerates – Returns on Equity Source: Various Stock Exchange Filings Sector Multiples – Diversified… 15.7 12.0 21.0 20.9 9.7 9.2 JKH SPEN CTHR CARS HAYL HHL 15.0% 15.8% 11.4% 16.9% 14.9% 12.2% JKH SPEN CTHR CARS HAYL HHL
  86. 86. Page 86JB Securities Research July 2012 Concluding remarks - Economy  Economy sailing through head winds in the short term due to weak global conditions and domestic structural imbalances.  Next major elections are in 2015 thus fiscal consolidation can continue – this will mean more taxes and fewer subsidies. Ideally it should be done by casting the tax net wider and better targeting of subsidies.  Inflation differentials accumulated over the last 5 years led to the large depreciation of the currency – the currency should stabilize going forward.  Tight monetary conditions will have to continue for at least the next 12 months to keep inflation and the exchange rate in check.  Absence of a conflict is a necessary condition but not a sufficient condition for high rates of economic growth. Sustainable medium term economic growth will be around 6% due to low domestic savings and low capital productivity.  Higher economic growth is possible by focusing on improving total factor productivity – this will require economic restructuring (shift of resources to more productive activity - SOE privatization, a more liberal trade policy, controlling rent seeking behaviour, etc.), investments in human resources (education and skills upgrading) and technical progress (technological and organization advances).  The best years for the country lie ahead – there lies a real possibility of Sri Lanka being a “Breakout Nation*” * Cited in “Breakout Nations” by Ruchir Sharma, Head of Emerging Market Equities & Global Macro at Morgan Stanley Investment Management
  87. 87. Page 87JB Securities Research July 2012 Concluding remarks - Equities  Bull markets are 7 year cycles (1993-4, 2002-3 and 2009-11) – next one is not due anytime soon. Thus there will be no rising tide to lift ALL boats.  Equity market is in its consolidation phase – market will go sideways for the remainder of this year. Nevertheless, a sideways market offers many opportunities to invest in undervalued securities as the potential for mispricing is larger.  The low free float large market cap stocks in the indices are masking the true extent of the fall in the market – many stocks have fallen 50-60% from their peak.  Nominal GDP growth will be around 13-14% in the medium term – large firm revenues will grow at a CAGR of around 16-17%, EBITDA will grow 18-19%.  Free float is further constrained since there will be reluctance to sell at a loss especially amongst state controlled institutions.  Value is returning to the market – some stocks are now trading below their intrinsic values.  Trying to time the market is futile – jumping on the band wagon when its moving is a losing proposition.  Build a diversified portfolio by accumulating equities in stages – 10%:20%:30%:40%.
  88. 88. Page 88JB Securities Research July 2012 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. The core ethical values of the family have been enshrined in all its businesses. All employees of JB Securities have signed off on a code of ethics and standards of professional conduct that is based on that of the CFA Institute.
  89. 89. Page 89JB Securities Research July 2012 Legal disclosures © Copyright 2012, 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.
  90. 90. Page 90JB Securities Research July 2012 For further information contact: Murtaza Jafferjee CFA +94 11 2490900 murtaza.jaff@jb.lk 150, St. Joseph’s Street, Colombo 14, Sri Lanka. Tel: +94 112490900, Email: jbs@jb.lk, www.jbs.lk

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