jksb sri lanka summary

John Keells Stock Brokers Sri Lanka : Country & Market Overview – August 2011

John Keells Stock Brokers

Political Overview� The removal of the constitutional bar on the Executive President having a 2 year limit has

meant that the incumbent has astutely levered his post war popularity into what appears will be long stay in the seat of power.

� The main opposition remains weak, wracked by internal dissension.

� Delayed and piecemeal infrastructure development has given way to broad based accelerated development.

� Essential reforms long left unattended, appears to be receiving due consideration in an environment of

� The administration’s foreign policy that prioritised relations with India and China have helped submerge pressure from the west over human rights concerns whilst also resulting in substantial investments in infrastructure in post war Sri Lanka.

� The Executive President continues to enjoy enormous powers. He can dissolve the parliament and declare emergency. He also appoints judges, heads of armed forces and police, election commissioners and secretaries to the government. In a state of emergency, the president can even promulgate regulations to override laws enacted by the parliament

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Key Socio Economic IndicatorsLiteracy rate (2009)Overall : 91.4%Male : 92.8%Female : 90.0%

Life Expectancy (2007)Male : 70.3 yearsFemale : 77.9 years

Mid year population 2010 : 20.65mnAge distribution (‘000) – 20100 - 14 yrs : 26.3%15 - 64 yrs : 67.4%65 years and over : 6.3%

Population density (per sq km) : 329 personsCrude birth rate (2010) :17.6 per ‘000Crude death rate (2010) : 6.2 per ‘000Average household size (2010) : 4.0

Income distributionGini coefficient of household income (2009) : 0.47Mean household Income (‘09): Rs. 35,495 (US$ 320)Median household Income (‘09) : Rs. 24,106 (US$ 217)Poverty Head Count Ratio (2009/10) : 7.6%

EmploymentUnemployment rate (3Q 2010) : 4.9% (Excluding Northern Province)Employed Persons - Agriculture : 32.7%

Industry : 24.2%Services : 43.1%

Water Supply : Access to safe drinking water : 85%Electricity : Households with Electricity : 86%

CommunicationFixed lines penetration : 17.3%Mobile Subscriber penetration (SIMs) : 83.5%Internet & Email (Fixed) penetration : 2.08%Mobile Broadband penetration : 0.58%

Public HealthPublic Hospital Beds per 1000 persons : 3.4Persons per Doctor : 1462

EducationSchool Density (Area per school – sq km) : 6.3Primary net enrolment rate : 89.9%Pupil/teacher ratio (Public Schools-2009) : 18Admission to public university as a % of eligible students : 16%

Source : Central Bank of Sri Lanka Publications , Department of Census and Statistics

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Key Economic IndicatorsDemography (2010)Labour force participation rate : 48.1%Population growth : 1.0%Labour Force : 8.11mnUnemployment rate : 4.9% (Excluding Northern Province)

Output (2010)GDP Rs ‘bn : 5,602 (US$ 50bn)Per capita GDP : US$ 2,399GDP Growth : 8.0%

Aggregate Demand & Savings (% of GDP - 2010)Consumption : 81.3

Private : 65.8State : 15.6

Investment : 27.8Private : 21.6State : 6.2

Net Exports : -10.5Exports : 16.7Imports : 27.2

Domestic Savings : 18.7Net factor income from abroad : 6.0National Savings : 24.7

Government Finance (% of GDP - 2010)Revenue and grants : 14.9

Tax Revenue : 13.0Expenditure and Net Lending : 22.9

Current Expenditure : 16.7Capital Expenditure and net lending : 6.1

Current Account (Deficit)/Surplus : (2.1)Overall (Deficit)/Surplus : (7.9)Deficit Finance : 7.9

Foreign : 4.4Domestic : 3.6

Government Debt : 81.9Foreign : 36.1 Domestic : 45.8

Interest Rates (%)1 Yr T-Bill : 7.33AWPL : 9.17AWDR (12mth) : 8.16

Exchange Rates (Rs/US$) : 110.33

Source : Central Bank of Sri Lanka Publications , Department of Census and Statistics

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Economic Overview - GDP� Post war rebound will the country growing at 8%

over the next two years. Sustained growth momentum would require a sharp rise in FDI inflows and private investment which remains relatively benign.

� The resurgence of intra provincial trade with the reintegration of the North and East provinces, significant infrastructure spend and the consequent multiplier effects feeding into increased domestic consumption underlie our medium term expectations of 8%+ GDP expansion

� War affected provinces account for 13.5% of the country’s population, one third of land mass and over half the country’s coastline.

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1Q C

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032Q

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4QC

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Y20

063Q

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061Q

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Y20

073Q

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2007

4Q C

Y20

071Q

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2008

2Q C

Y20

083Q

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2008

4Q C

Y20

081Q

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2009

2Q C

Y20

093Q

CY

2009

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Y20

091Q

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Y20

103Q

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2010

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Y20

101Q

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2011

%Quarterly GDP Growth (%)


� Large scale nationwide infrastructure projects ranging from power generation, roadways, ports and airports already well underway with foreign funding commitments in place.

� GDP growth would stem from Tourism, Banking, Public Utilities, Construction and Agriculture and Fisheries sub sectors in the medium term.

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Economic Overview - GDP


Government Finance� Revenue target of 14.8% and deficit target of

6.8% GDP likely to be met for CY11.

� Fiscal deficit expected to decline on lower interest expense on domestic financing, higher volume driven indirect tax revenues and lower defense expenditure relative to GDP.

� The taxation reforms spelt out at budget proposals marked significant changes with a reduction and simplification of tariff and taxation structures for corporates and individuals

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� Exports earnings were up significantly in the first 2

months of 2011 up 52% off a lower base, driven by

a 78.1% growth in textiles and garments which

traditionally accounts for 45% of total exports.

� Imports were up 25.2% in the same period driven

by a growth in consumer goods and motor vehicles

following tariff reductions last year.

� Trade deficit is expected to widen by 21% in CY11

as a result of a continued rise in imports expected

in the latter half of the year driven by Petroleum

and Intermediate Goods.

� Current account reduced significantly by strong net

worker remittances of approximately US$4bn.

External Trade

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� Annual average inflation has picked up to

6.6% in April 2011, will point to point

inflation has risen to 9.8%, primarily as a

result cost push inflationary effects as food,

fuel and commodity price rises are passed to

the consumer.

� Strong consumer credit growth has resulted

in early signs of demand driven inflationary

effects. However if the recent dip in fuel and

commodity prices are sustained, annual

average inflation is likely to fall marginally

short of our CY11 forecast of 8.8%.

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Inflation


� The 1yr T Bill and AWPLR have

continued to trend lower to 7.33% and

9.12% respectively down by 214bps and

136bps respectively over the last year.

� Interest rates appear to have bottomed

and may trend moderately higher towards

the end of the year with prospects of

strong private sector credit growth

remaining in tact.

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Interest rates


� Net private remittances have grown to US$

3.4bn up 24.6% over the last year and up

23.6% yoy in the first 2 months of CY11.

� Aid and inflows to government securities on

the back of the IMF stand by facility has

pushed gross official reserves to US$ 6.6bn as

of Dec.’09 sufficient to fund 6.2 months of

imports.

� Outlook for the currency is stable given

potential for increased inflows over the short

to medium term.

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Remittances, External Reserves and Currency


Summary of Key Economic Indicators

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Growth ProspectsExtensive Colombo City Development Plan

Power Projects

900 MW Norochcholai Coal Power Plant (Phase 1 - 300MW Completed, Phase 2 : 2013)

150 MW Upper Kothmale Hydro Power Plant (Completion by 2011)

Uma Oya Hydro Power Project (Completion by 2015)

Moragahakanda and Kaluganga Reservoir Project (Commenced)

Road Development Projects

The Southern Highway Project, (Completion by 2011)

The Colombo - Katunayake Airport Expressway (Completion by 2012)

The Colombo Outer Circular Road Project (Completion by 2013)

Port Development Projects

The South Colombo Harbour Project, (Phase 1 Completion by 2012)

The Hambantota Port Development Project (Phase 1 : Completed)

The Oluwil Port Development Project (Completion by 2011)

Water supply projects and on-going rural infrastructure development

Targeted 100% electricity coverage in the Island

The South Colombo Harbour Project

Shipping routes off Sri Lanka

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Growth Prospects• Geo-physical studies show significant potential for presence of

petroleum deposits in 3 offshore basins in Sri Lanka:

• First exploration licensing round was held in 2007.

• Cairn Lanka Private Limited (CLPL) was offered the block No. 2

(M2) of the Mannar Basin.

• Government signed a Petroleum Resource Agreement (PRA) with

CLPL on 07th July 2008.

• CLPL completed acquiring 1,750 Sq km three dimensional (3D)

seismic data in March 2010.

• CLPL plans to commence drilling 5 exploration wells in 2011.

• Government is planning to hold the second licensing round in due

course.

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Growth Prospects

• Sri Lanka possesses a territorial sea of 21,500 sq. km and an Exclusive

Economic Zone (EEZ) of 517,000 sq. km up to 200 nautical miles from

the coastline.

• Sri Lanka will have sovereign rights for the purpose of exploring and

exploiting its natural resources in these new seabed areas

• Sri Lanka has claimed its rights to its continental shelf.

• Sri Lanka’s EEZ is expected to expand even further with the

delimitation of the outer edge of the continental margin of the country.

• This would permit Sri Lanka to enjoy the ownership of an EEZ

equivalent to 20 times (approximately 1,400,000 sq. km) the land mass it

possesses.

• These new seabed areas where Sri Lanka will have sovereign rights for

the purpose of exploring and exploiting its natural resources, which are

going to be new frontiers for hydrocarbon (petroleum and gas)

exploration.

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Index Growth

• ASPI up 265% since the end of the war in

mid May. ‘09 (up, 2.97% YTD)

• Number of active trading accounts doubled

in the last year

An 8 fold increase in post war average daily

turnover levels.

Turnover Drivers

• Leveraged buying, Influx of local HNI and retail funds with shift from fixed income to equities.

• Significant increase in state run institutional funds.

• Retail credit driven speculative trading on illiquid and second tier counters.

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Index Growth

• Recent upward movements in the ASPI is largely driven by strong local retail and HNI

participation with significant price movements evident on second tier illiquid stocks; not

necessarily reflective of broad based buying interest.

• The more liquid MPI constituted by the more heavily traded large cap stocks is still 13.5%

off its peak in early October 2010

• Current excessive broker credit issued to clients by the industry as well as concerns in the

West are headwinds the market is facing at present.

• Average daily turnover levels upto Rs. 2.6bn YTD from Rs. 2.4bn will rise further with

expectations of upto 50 new listings in 2011/2012.

• The IPO pipeline includes a host of finance companys, state run entities, and firms in the

retail, logistics and construction space.

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Market ParticipationForeign Participation

- Recent foreign selling on account of higher near term valuations in comparison to regional

peers that also offer better liquidity.

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CSE Trading Statistics

CSE- Trading Statistics 2005 2006 2007 2008 2009 2010 2011YTD

Annual Turnover (US$Mn) Equity 1,140 1,011 949 1,020 1,244 5,125 3,238

Domestic % 78% 67% 61% 46% 69% 81% 89%

Foreign % 22% 33% 39% 54% 31% 19% 11%

Market Days (No) 238 241 241 238 240 237 84

Daily Average Turnover (US$Mn) Equity 4.8 4.2 3.9 4.3 5.2 21.7 27.4

Domestic (% of Trades) 94% 95% 95% 94% 94% 96% 96%

Foreign (% of Trades) 6% 5% 5% 6% 6% 4% 4%

Companies Listed 239 237 235 235 231 240 2647

Market Capitalization (US$ Bn) 5.8 8.0 7.4 4.5 9.5 20.6 22.5

Market Velocity (%) 23.7 14.8 12.7 16.9 26.3 32.8 34.7

Market Cap. / GDP 24.6 29.8 22.9 11.1 22.6 41.1 42.3

ASP INDEX 1,922 2,722 2,541 1,503 3,386 6,636 6,833

ASPI y-o-y Change % 28 42 (7) (41) 125 96 2.67

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Sectoral Valuations

SectorPrice/Book

Value (x)

ROE (%)

FY11E

PER (x) EPS Growth (%)

FY10 FY11E FY12E FY10 FY11E FY12E

Banking Finance &

Insurance3.13 23.49 25.8 13.3 13.6 28.6 93.7 (2.3)

Food & Beverage 4.06 32.36 22.3 12.5 13.6 6.9 77.5 (8.1)

Engineering 2.23 27.25 7.9 8.2 6.7 48.1 (3.3) 22.4

Conglomerates 2.36 12.96 25.8 18.2 14.4 28.9 42.1 26.0

Leisure 2.61 9.79 81.5 26.7 22.1 102.3 205.2 20.8

Manufacturing 2.95 20.90 20.7 14.1 11.0 50.9 46.9 28.5

Telecommunications 2.00 10.69 N/A 18.7 17.3 (423.9) 171.1 8.1

Energy 1.50 12.08 N/A 12.4 10.6 110.5 1697.6 16.5

Plantations 1.66 24.76 19.2 6.7 8.5 10.0 186.2 (20.6)

Market 2.43 16.57 34.3 14.7 13.1 (5.4) 133.7 12.1

* FY10 - Based on actuals; FY11E / FY12E excludes exceptional items (Prices as of 12th August

2011)

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Trading on the CSEFOREIGN OWNERSHIP

• No Restrictions on Foreign Ownership

- Ownership upto 100% is permitted except for a 40% cap on Plantations

and a 15% cap on banks for any local or foreign individual or entity or entities acting in concert

• Disclosure of a local/foreign buyer upon acquiring 10% of a listed entity

• Acquisition of 30% of the voting shares of a company by an individual/entity or a group acting in concert triggers a mandatory offer to purchase all outstanding shares

TAXATION

- No Capital Gains Tax on quoted securities.

- 10% Tax on dividends withheld at source.

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Transaction Costs• Brokerage and transaction costs are fixed for trades upto the value of Rs 50mn by the CSE and are

common to all brokers.

• Brokerage for transactions in excess of Rs. 50mn are negotiable down to a minimum of 0.2% for the local broker.

Transactions upto Rs. 50mn (Effective 1st Jan 2011) Charge

Brokerage Fees 0.640%

Securities and Exchange Commission Fees 0.072%

Colombo Stock Exchange fee 0.084%

Central Depository System fee 0.024%

Share Transaction Levy 0.300%

Total 1.120%

Transactions over Rs. 50mn (Effective 1st Jan 2011) Charge

Minimum Brokerage Fees 0.2000%

Securities and Exchange Commission Fees 0.0450%

Colombo Stock Exchange fee 0.0525%

Central Depository System fee 0.0150%

Share Transaction Levy 0.3000%

Minimum Total Transaction Cost 0.6125%

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jksb sri lanka summary

Travel

unemployment rate

population growth

net lending

post war sri lanka

primary net enrolment

net exports

domestic savings

gdp rs bn