dsr sri lanka value is back in equities

SRI LANKA:

VALUE IS BACK IN EQUITIES

150, St. Joseph’s Street, Colombo 14, Sri Lanka.

Tel: +94 112490900, Email: [email protected], www.jbs.lk

JULY 2012

PRIVATE & CONFIDENTIAL

JB 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…


Market Snapshot Country 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


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


The party – end of the 30 year conflict

May

20

09

Jul 2

00

9

Sep

20

09

No

v 2

00

9

Jan

20

10

Mar

20

10

May

20

10

Jul 2

01

0

Sep

20

10

No

v 2

01

0

Jan

20

11

Mar

20

11

May

20

11

Jul 2

01

1

Sep

20

11

No

v 2

01

1

Jan

20

12

Mar

20

12

May

20

12


LMD

Nie

lso

ns

Bu

sin

ess

Co

nfi

de

nce

Ind

ex

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

DO

MES

TIC

IN

TER

NA

TIO

NA

L

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


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 …


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-conflict Conflict

Easing inflation drove real interest rates back up…

0%

5%

10%

15%

20%

25%

Jan

-07

Ap

r-0

7

Jul-

07

Oct

-07

Jan

-08

Ap

r-0

8

Jul-

08

Oct

-08

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

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

Ap

r-0

7

Jul-

07

Oct

-07

Jan

-08

Ap

r-0

8

Jul-

08

Oct

-08

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1


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


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%= LKR5.6Bn LKR4.8Bn LKR4.4Bn

Provincial growth

90%

95%

100%

105%

110%

115%

120%

125%

2008 2009 2010


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


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%



Strong economic growth led to fiscal consolidation…

Fiscal Deficit Government Revenue Government Expenditure

Source : Central Bank of Sri Lanka

LKR Bn

Deficit as a % of GDP Revenue 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


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


Country Credit Standing improved…

Post-conflict Conflict

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 analyst Jul ‘11

Sovereign ratings IMF Stand-by Agreement

Review 1

Review 2+3

Review 4

Review 6

Feb ‘11 USD 216.6 Mn Review 5

Minister Sarath Amunugama highlights

the importance of the IMF program for Sri Lanka

Oct ‘10

Dec ’08 Jul ‘11 Jun ’10


Foreign appetite for sovereign paper increased

Post-conflict Conflict Conflict Post-conflict

Sep ‘10 Jul ‘11 Oct ‘07 Oct‘09

$500mn 5yr

8.25%

$500mn 5.25yr 7.40%

$1billion 10yr

6.25%

$1billion10yr

6.25%

3 X 7.5 X 6 X 13 X

Number of times oversubscribed

397 bp 373 bp 332 bp 499 bp

Spread over US treasury

Foreign holding of government securities Sovereign bond issue

Templeton fund invests USD 875 mn (approx. LKR 100 Bn)


LKR Bn

50 18

145

184 187

6

40

57 64

2007 2008 2009 2010 Jun 11

Treasury bills

Treasury bonds


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)

231 244 219 16 195

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


Reserves increased due to borrowed funds

Months of Imports Reserves built-up

Gross official reserves Total reserves


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

No

v-0

9

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-1

0

Jan

-11

Mar

-11

May

-11

Jul-

11

Jan

-09

Mar

-09

May

-09

Jul-

09

Sep

-09

No

v-0

9

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-1

0

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


Credit, Monthly Change

Credit to SOEs Net 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

No

v-0

9

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-1

0

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

No

v-0

9

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-1

0

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

No

v-0

9

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-1

0

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

No

v-0

9

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-1

0

Jan

-11

Mar

-11

May

-11

Jul-

11

Private

Corps.

Govt.


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

Ap

r-0

9

Jun

-09

Jul-

09

Au

g-0

9

Sep

-09

No

v-0

9

De

c-0

9

Jan

-10

Feb

-10

Ap

r-1

0

May

-10

Jun

-10

Au

g-1

0

Sep

-10

Oct

-10

No

v-1

0

De

c-1

0

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

No

v-0

9

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-1

0

Jan

-11

Mar

-11

May

-11

Consolidated Broad Money(M2b)

Reserve Money

M2b growth


Reserve Money growth


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

Ap

r-0

9

May

-09

Jul-

09

Au

g-0

9

Oct

-09

No

v-0

9

De

c-0

9

Feb

-10

Ap

r-1

0

May

-10

Jul-

10

Au

g-1

0

Oct

-10

No

v-1

0

Jan

-11

Feb

-11

Ap

r-1

1

May

-11

Repo

Reverse Repo

AWPLR

AWDR

Call Money Rate

3 month t-bill


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


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


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

All

Sh

are

Pri

ce I

nd

ex


377%


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*


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


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


Bullish expectations drove the market …

Disaggregation of Market Cap growth Contribution 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 EarningsGrowth

CombinedEffect

Jun-11

Source: JBS Research Analysis


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


31.3% 27.4% 24.4%

68.7% 72.6% 75.6%

14% 16% 18%

Source: JBS Research Analysis


The inevitable after party – exuberance turned to irrationality

May

20

09

Jul 2

00

9

Sep

20

09

No

v 2

00

9

Jan

20

10

Mar

20

10

May

20

10

Jul 2

01

0

Sep

20

10

No

v 2

01

0

Jan

20

11

Mar

20

11

May

20

11

Jul 2

01

1

Sep

20

11

No

v 2

01

1

Jan

20

12

Mar

20

12

May

20

12


LMD

Nie

lso

ns

Bu

sin

ess

Co

nfi

de

nce

Ind

ex

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 Reconciliatipublishes its report. Makes key recommendations.

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.

Q2 Q4 Q3

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 parliamentarian 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

INTE

RN

ATI

ON

AL

DO

MES

TIC

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 Commonwealth 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


Credit growth persisted…

Credit, Monthly Change

Net Credit to Govt. and SOEs

Credit to Private Sector


*All amounts in LKR Bn

-20

0

20

40

60

80

100

120

140

160

Jun

-11

Jul-

11

Au

g-1

1

Sep

-11

Oct

-11

No

v-1

1

Dec

-11

Jan

-12

Feb

-12

Mar

-12

Ap

r-1

2

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

Au

g-1

1

Sep

-11

Oct

-11

No

v-1

1

Dec

-11

Jan

-12

Feb

-12

Mar

-12

Ap

r-1

2

May

-12


Annual Change (%)

0%

20%

40%

60%

80%

100%

120%

-

200

400

600

800

1,000

1,200

1,400

Jun

-11

Jul-

11

Au

g-1

1

Sep

-11

Oct

-11

No

v-1

1

Dec

-11

Jan

-12

Feb

-12

Mar

-12

Ap

r-1

2

May

-12

Credit to SOEs

Net Credit to Government

Credit to Govt. growth

Credit to SOEs growth


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


95

96

97

98

99

100

101

102

103

104

95

100

105

110

115

120

125

130

135

140

Ap

r 1

1

May

11

Jun

11

Jul 1

1

Au

g 1

1

Sep

11

Oct

11

No

v 1

1

Dec

11

Jan

12

Feb

12

Mar

12

Ap

r 1

2

May

12

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

Au

g-1

0

Sep

-10

Oct

-10

No

v-1

0

Dec

-10

Jan

-11

Feb

-11

Mar

-11

Ap

r-1

1

May

-11

Jun

-11

Jul-

11

Au

g-1

1

Sep

-11

Oct

-11

No

v-1

1

Dec

-11

Jan

-12

Feb

-12

Mar

-12

Ap

r-1

2

LKR Currency mispriced…

INR devaluation

(700)

(600)

(500)

(400)

(300)

(200)

(100)

-

100

200

Jun

-10

Jul-

10

Au

g-1

0

Sep

-10

Oct

-10

No

v-1

0

Dec

-10

Jan

-11

Feb

-11

Mar

-11

Ap

r-1

1

May

-11

Jun

-11

Jul-

11

Au

g-1

1

Sep

-11

Oct

-11

No

v-1

1

Dec

-11

Jan

-12

Feb

-12

Mar

-12

Ap

r-1

2Peg maintained


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

Ap

r-1

1

May

-11

Jun

-11

Jul-

11

Au

g-1

1

Sep

-11

Oct

-11

No

v-1

1

De

c-1

1

Jan

-12

Feb

-12

Mar

-12

Ap

r-1

2

Consolidated Broad Money(M2b:)

Reserve Money

M2b growth


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%

Ap

r-1

1

Ap

r-1

1

May

-11

Jun

-11

Jul-

11

Jul-

11

Au

g-1

1

Sep

-11

Sep

-11

Oct

-11

No

v-1

1

De

c-1

1

De

c-1

1

Jan

-12

Feb

-12

Mar

-12

Ap

r-1

2

Ap

r-1

2

May

-12

Jun

-12

Money market liquidity

Repo

Reverse Repo

SRR*

Monetary aggregates expanded


Imports exploded leading to a doubling of the trade deficit in 2011…

Increase in Exports Increase in Imports

USD Mn


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

9,706 1,754

1,078

802

698

509

506

472 426

254

245 182

835

327 321

289 123 100 71 50 9 85

2010 Petroleum OtherIntermediate

Goods

BuildingMaterials

Diamondsand Precious

Metals

Textiles OtherConsumer

Goods

TransportEquipment &

Other

Vehicles Machineryand

Equipment

Food andBeverages

CeramicProducts

Textiles andGarments

RubberProducts

OtherIndustrialExports

PetroleumProducts

Gems,Diamonds

andJewellery

Coconut OtherAgricultural

Products

Tea Mineral Unclassified* 2011

As a % of GDP

9.7%

16.4%


…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 Privatereceipts

Privatepayments

Officialtransfers(net)

Merchandise trade Services Income Goods,Services andIncome(net)

Current transfers Currentaccountdeficit

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 OtherCharges

Direct Investment Compensation ofEmployees

Incomeaccountbalance

As a % of GDP

16.4%

7.8%

15.6%



…resulting in a depletion of reserves

Months of Imports Reserves fell by USD 2.2 Bn in 8 months

Gross official reserves Total reserves

USD Mn

Source: Central Bank of Sri Lanka

Jul-

11

Au

g-1

1

Au

g-1

1

Sep

-11

Oct

-11

Oct

-11

No

v-1

1

De

c-1

1

De

c-1

1

Jan

-12

Feb

-12

Feb

-12

Mar

-12

Ap

r-1

2

-

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

Au

g-1

1

Sep

-11

Oct

-11

No

v-1

1

De

c-1

1

Jan

-12

Feb

-12

Mar

-12

Ap

r-1

2

-23%


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


-20

0

20

40

60

80

100

120

140

160

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

No

v-1

0

De

c-1

0

Jan

-11

Mar

-11

May

-11

Jun

-11

Au

g-1

1

Sep

-11

No

v-1

1

De

c-1

1

Jan

-12

Mar

-12

May

-12

Jun

-12

Money market liquidity Repo

Reverse Repo AWPLR

AWDR Call Money Rate

3 month t-bill


The MPI was an early precursor of the impending collapse…

ASI MPI

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


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

http://cse.lk/mpi.do

http://cse.lk/mpi.do


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


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


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,


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%


Sobering reality – some concerns remain M

ay 2

00

9

Jul 2

00

9

Sep

20

09

No

v 2

00

9

Jan

20

10

Mar

20

10

May

20

10

Jul 2

01

0

Sep

20

10

No

v 2

01

0

Jan

20

11

Mar

20

11

May

20

11

Jul 2

01

1

Sep

20

11

No

v 2

01

1

Jan

20

12

Mar

20

12

May

20

12


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.

http://info.worldbank.org/governance/wgi/index.asp




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


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

Ap

r-1

0M

ay-1

0Ju

n-1

0Ju

l-1

0A

ug-

10

Sep

-10

Oct

-10

No

v-1

0D

ec-1

0Ja

n-1

1Fe

b-1

1M

ar-1

1A

pr-

11

May

-11

Jun

-11

Jul-

11

Au

g-1

1Se

p-1

1O

ct-1

1N

ov-

11

Dec

-11

Jan

-12

Feb

-12

Mar

-12

Ap

r-1

2M

ay-1

2Ju

n-1

2

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

Ap

r-1

0M

ay-1

0Ju

n-1

0Ju

l-1

0A

ug-

10

Sep

-10

Oct

-10

No

v-1

0D

ec-1

0Ja

n-1

1Fe

b-1

1M

ar-1

1A

pr-

11

May

-11

Jun

-11

Jul-

11

Au

g-1

1Se

p-1

1O

ct-1

1N

ov-

11

Dec

-11

Jan

-12

Feb

-12

Mar

-12

Ap

r-1

2M

ay-1

2Ju

n-1

2

Food Inflation

Non Food Inflation

7.1%

11.2%

9.3%

5.8%


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

TaxTax + Non taxTax + 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…


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 BoardAirlinesCeylon Electricity BoardCeylon Petroleum Corporation


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


Shift in reliance to non-concessional and commercial loans…


-

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


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



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%

Vie

tnam

Mal

aysi

a

Thai

lan

d

Sri L

anka

Ind

ia

Ban

glad

esh

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



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


The lion is not beaten – And… the good news…


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 51/139 38/139

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

Competitiveness High Low


Key contributor being the greater stability from the end of the conflict…

Competitiveness High 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


Ease of doing business rank has improved

134 132

78

98 102

2011 2012India 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


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%


Dependency Ratio % of population in productive age


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%


91.9% 92.8%

62.8%

55.5%


8.4

6.4

5.1 5.6



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


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%


S. Asia Avg. 3.8%

Total Healthcare Expense* (% of GDP | 2010)

Source :World Development Indicators 2012 – World Bank 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 < 15Years

Working AgePopulation, 15+

Years

Not Participating

Total Labor Force

UnemployedLabor Force

Employed Labor

26% 74%

66% 34%

Male Female

In 000’


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

1,307 327 208

345

425

392 730 1067

1372

1388

1,382

2006 2007 2008 2009 2010

other

Law L.L.B.

EngineeringB.Sc. (Eng.)

MedicineM.B.B.S.

Science B.Sc.

Commerce &Mgt. Studies

Arts & OrientalStudies

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


Urbanization will be a growth enabler…

0%

5%

10%

15%

20%

25%

30%

19

50

19

55

19

60

19

65

19

70

19

75

19

80

19

85

19

90

19

95

20

00

20

05

20

10

20

15

20

20

20

25

20

30

20

35

20

40

20

45

20

50

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

Po

pu

lati

on

De

nsi

ty (

pp

l pe

r K

m2

)

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 2011

World 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


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*


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


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



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


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, TRCSL Source: 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


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%



122,706

407,702

59,183

132,054

90,835

62,107

Tamil Nadu

Andhra Pr.

Karnataka

Kerala

GDP of Southernstates 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%


3.96%


7.82%


8.01%

GDP CAGR* 6.42%

CAGR 2007/11*


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


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

TEU

Mill

ion

s 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...


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-May2011

Jan-May2012

Scenario1

Scenario2

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)


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

,65

3

42,074

28,411

6,1

41

13,967

6,350 7,313

Scenario 1

Scenario 2

Inventory mismatch

Expected room inventory based on approved projects

Current room inventory (YE2011) U

n-g

rad

ed

Gra

de

d

Note: Major portion of room inventory expected in 2016

20,794

Pro

ject

ed

ro

om

inve

nto

ry

to m

eet

de

man

d in

Y

E20

16

Major hotel brands entering Sri Lanka

+ -


C1

C2

C3

C4

C5

M1

M2

M3

M4

M5

M8

M6

M7

M9 M10

S1

Exploration Blocks : M1

$ 2

,25

0 M

n

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

Kerosene Other 139.5

4.4

Expected energy yeildfrom exploration

Energy demand(YE2011)

TOE

Mn

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


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


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 2011Source: 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 2011Bulk 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


Source: Treasury Report 2011, Ministry of Finance & Planning, AT Kearney Global Services Location Index – 2011, ATKEARNEY

Industry recovering after the global economic crisis

No

min

al U

SD M

n.

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 andavailability

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


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 Mn 262,960 266,445

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


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

. Pe

r Lt

r

Rs.

Pe

r Lt

r

Merchandise trade USD Mn

115

73

51

32

149

115

106

90

Petrol (90Octane)

Auto Diesel

Kerosene

Furnace Oil 2012

2009

40%

29.6%

57.5%

181.3%

15%

Ele

ctri

city

ta

riff

(R

s./K

Wh

)

1,5

68

1,2

36

1,6

34

1,4

90

1,6

83

1,6

69

1,7

70

1,8

37

1,7

63

1,7

57

1,9

86

1,8

76

1,9

15

1,5

81

1,6

97

1,4

41

92

3

81

7 93

1

74

9 83

6

82

0 9

62

95

4

85

8

88

9

88

6

93

3

91

8

88

0

83

6

68

0

-64

5

-41

9

-70

3

-74

2

-84

7

-84

8

-80

8

-88

3

-90

4

-86

8

-1,1

01

-94

2

-99

7

-70

1

-86

1

-76

1

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

Jan

11

Feb

11

Mar

11

Ap

r 1

1

May

11

Jun

11

Jul 1

1

Au

g 1

1

Sep

11

Oct

11

No

v 1

1

Dec

11

Jan

12

Feb

12

Mar

12

Ap

r 1

2

Imports

Exports

Balance of Trade107.8%


-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Jan

11

Feb

11

Mar

11

Ap

r 1

1

May

11

Jun

11

Jul 1

1

Au

g 1

1

Sep

11

Oct

11

No

v 1

1

De

c 1

1

Jan

12

Feb

12

Mar

12

Ap

r 1

2

May

12

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

Jan

11

Feb

11

Mar

11

Ap

r 1

1

May

11

Jun

11

Jul 1

1

Au

g 1

1

Sep

11

Oct

11

No

v 1

1

Dec

11

Jan

12

Feb

12

Mar

12

Ap

r 1

2

May

12

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


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 Newlyindustrialized

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…


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 July 2012

Cost of Equity Cost of Equity

Franchise Value

Tangible Value


Equity valuations have reversed to more reasonable levels…

*Current treasury rates: 1yr 12.99%, 5yr 14.15%, 10yr 14.75% (6th 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…


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


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


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%.


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.


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.


For further information contact: Murtaza Jafferjee CFA

+94 11 2490900 [email protected]

150, St. Joseph’s Street, Colombo 14, Sri Lanka.

Tel: +94 112490900, Email: [email protected], www.jbs.lk

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