Bangladesh growth report brac epl strat sales - feb 27 2013

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Bangladesh Growth Report 2013

Strategic Sales February 2013

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All cross-country data are obtained from the databases of development agencies including the World Bank and Asian Development Bank unless otherwise mentioned. Data for domestic and external sectors of Bangladesh are primarily obtained from the Bangladesh Bank database.

Estimates and projections herein are conducted by BRAC EPL Stock Brokerage Limited (hereafter “BESL”) officers and are based on assumptions that we believe to be reasonable.

Data on market size and growth rates have been obtained from sources we believe to be authoritative and almost in all cases, cross-checked with secondary sources and theoretical analysis. Nevertheless, with regard to all numerical estimates contained herein, we are not able to guarantee either to their accuracy or completeness.

This presentation is intended for those this is sent to via electronic, air or hand-delivered mail. No part of this material may, without BESL’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.

2

Disclaimer

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Glossary

ACU Asian Clearing Union ASEAN Association of Southeast Asian

Nations BDT Bangladesh Taka BERC Bangladesh Energy Regulatory

Commission BPDB Bangladesh Power Development

Board BSEC Bangladesh Securities Exchange

Commission (Note: SEC is more frequently used)

DESCO Dhaka Electric Supply Company DGEN DSE General Index DSE Dhaka Stock Exchange EU European Union FDI Foreign Direct Investments FX Foreign Exchange GCC Gulf Cooperation Council GDP Gross Domestic Product GNI Gross National Income IPP Independent Power Producers JICA Japan International Cooperation

Agnecy kWh Kilo Watt-Hour

mmcfd Million Cubic Feet per Day MSCI Morgan Stanley Capital International MT Million Tons MW Mega Watt MWh Mega Watt-Hour NAFTA North American Free Trade

Agreement NBR National Board of Revenue OIC Organisation of Islamic Cooperation OPEC Organization of the Petroleum

Exporting Countries PPP Purchase Power Parity RMG Ready Made Garments S&P Standard & Poor's SAARC South Asian Association for Regional

Cooperation SIPP Small Independent Power Producers USD United States Dollar YTD Year till Date

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Note to Investors

Greetings!

It is with great pleasure that we share with you our inaugural Bangladesh Growth Report.

Bangladesh’s sustained ~6.0% growth since 2004 appeared to have caught worldwide media attention not too long ago. Of course, if you are reading this, you are likely to have been ahead of the curve.

Growth, while not being an end in itself, has certainly transformed the lives of tens of millions, lifting them out of poverty, inspiring ambitions, empowering the middle-class, and setting the stage for what appears to be even higher growth. Growth, we believe, is a necessary condition for over-arching development, if not sufficient.

The story of ready-made garments is rather unique and deserves the attention it has attracted. However, a less-told story that is increasingly significant is that of the Bangladeshi consumer. As per latest income per capita estimates, Bangladeshis earn US$1,940 per year.

Now, according to the S-curve of consumption (or product adoption), that is not an arbitrary number, but one that indicates an inflexion point after which, consumption increases at an increasing rate.

Considering a middle-class base of ~60 million, a working-age population of ~100 million, and 30 million more below the age of 14, the growth dynamism that awaits us may catch a few by surprise. Of course, demographic dividend in Bangladesh’s case is one of many growth engines.

We believe, therefore, this is an opportune time to collate data, analysis and estimates on economic growth, monetary-fiscal-FX policies, trade, migration, demography, consumption, manufacturing, and equity market trends while acknowledging the challenges that lie ahead and opportunities lurking underneath. Infrastructural development or lack thereof constitutes a significant challenge to and an opportunity for higher growth. Effective planning to orchestrate investment decisions and operations is essential. In lieu of it, the country’s economic potential will be unrealized.

We hope that you will find this report useful and even insightful, and welcome you to share any feedback or question, in relation to or independent of your investment priorities.

Thanking you,

Sajid Huq Amit Feb 27, 2013

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Meet Bangladesh

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Growth Dimensions

3.4 x

29.9 x

83.7 x

5.1 x

33.5 x

22 x

6.4 x

DSE MCAP Growth in ‘02-’12

DSE Turnover Growth in ’02-’12

Bangladesh GDP Growth in ’02-’12

Mobile Subscribers Growth in ‘02-’12 Motorcycle Sales Growth in ‘00-’10

Remittances Growth in ’02-’12

Garments Exports Growth in ’02-’12

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Bangladesh : A Blurb

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Bangladesh is the eight largest country in the world population-wise: 150.49 million as of 2011. At 130,170 sq. km., it is about the size of Iowa. Despite a low GNI/capita (PPP, current) of $1,940 the growth fundamentals of the economy has received widespread international attention, e.g., Goldman Sachs’ inclusion in “the next eleven” or N-11 economies as well as JP Morgan’s “Frontier Five.” Guardian has enlisted Bangladesh among the economies that have the potential of overtaking the west by 2050. Located between China and India, two of the largest and fastest engines of global growth, not to mention nearness to South-east Asia, Bangladesh offers unique diplomatic and commercial opportunities. The Bay of Bengal and the planned deep sea port in the south-east; the extensive riverine network; a large and youthful population, fertile land, and a 99% mobile network coverage have set the stage for speedier flows of capital, people, tradable products and services, and ideas.

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Growth Path : Beginnings

Bangladesh’s steady and in fact rising growth rate over a 25-year horizon surpasses in various country clusters (as defined by the World Bank). Despite concerns regarding connectedness to US and Eurozone markets via trade – the BD economy was resilient through the 2008-09 financial crisis and 2011 Eurozone debt crisis. In 2010, GDP GR peaked at 6.7%, and in 2011, it was at 6.5%.

8

-3.0

-1.0

1.0

3.0

5.0

7.0

9.0

1985 1988 1991 1994 1997 2000 2003 2006 2009

Real GDP Growth (%) Low income Middle income World Bangladesh

For 2012, provisional estimates are in the 5.5-6.0% range, notwithstanding a methodological revision expected to indicate ~6.0% GR. While exports have sustained, other pillars of growth have been inward remittances, consumption, SME growth and development, and agricultural self-sufficiency. The outlook indicates more of the same plus increasing manufacturing output, export diversification, and increased connectivity internally and regionally via air, road, rail, and maritime links.

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Comparative : Frontier Markets

9

3.2 4.2 3.7

2.2

5.9

3.3 4.6

4.9 5.4 5.9

5.3 4.4

6.3 6.6

6.2 5.7 6.7

-5

0

5

10

15

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Bangladesh Kenya Lao PDR Nigeria Pakistan

-15

-10

-5

0

5

10

15

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Bangladesh Indonesia

Malaysia Thailand

Vietnam

Looking at specific high-growth economies in Africa, South Asia and South East Asia that are grouped with Bangladesh on account of similar investment risk profiles and comparable income levels - Bangladesh’s economic output has enjoyed a steadier and more resilient trajectory. Certain high-growth countries have had higher “high’s” but also 300-500 bp variations in two years or less. Bangladesh’s economic stability fares well even in comparison with the “Emerging Asia,” i.e., more mature high-growth South East Asian countries such as Thailand, Malaysia, and Indonesia, whose growth rates plunged 500-1000 bp in two years.

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Monetary & Fiscal Performance

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Growth, Inflation & Monetary Aggregates

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12.1 13.7

15.5

12.6 12.9

14.8

19.3

17.1 17.6 19.2

22.4

21.3

7.2 7.2

9.9

6.7 7.3 8.8

2006 2007 2008 2009 2010 2011

Broad Money Growth

Nominal GDP Growth

Average Annual Inflation

3.8X 4.7X 5.9X 7.7X 8.4X 9.6X 12.4X 13.0X

39.8X

61.9X

109.0X

Tha

iland

Mal

aysi

a

Phi

lippi

nes

Ken

ya

Pak

ista

n

Sri

Lank

a

Ban

glad

esh

Indo

nesi

a

Nig

eria

Vie

tnam

Gha

na

M2 Growth 1995-2011

Central banks around the world try to keep M2 GR in line with nominal GDP GR and an optimal inflation level. In Bangladesh, Broad Money grew 12.4X in 1995-2011. In the same time period, GDP on PPP basis grew ~3X from US$90.7bn to US$267.4bn. The above growth multiples are line with other economies’ that have enjoyed sustained growth and those in which the banking sector growth had internal liquidity generation had a relatively slower start. In 2006-2012, bank deposits (excluding inter-bank) grew at an average 19.4% per year. During the same period, total advances (excluding inter-bank) grew by 20.0% on an average.

After a slowdown in 2007-08 on political impasse, M2 growth rate picked up in 2009. There was excess liquidity in the money market, which eventually entered the stock market, leading to 2010’s rally. In 2011, the Bangladesh Bank (BB) turned a corner and put in place a contractionary monetary policy. Since 2011, repo and reverse repo rates have been hiked by 225bp. Meanwhile, M2 GR which had peaked at 21.7% in Dec’10 fell to 13.7% in May’12, in line contractionary targets. Other than mopping up the excess liquidity and correction of asset prices consequently raised – BB’s monetary policy has also aligned closely with stipulations of a US$1.0bn Extended Credit Facility (ECF) loan that the IMF approved for BoP support.

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Stipulations for disbursements of successive tranches of the loan, included sustaining single-digit inflation and re-classification of asset quality measurement guidelines as per best practices. In line with inflation control, the ECF also stipulated curbing public sector borrowing from banks to finance subsidies. The prevalent fiscal policy of financing subsidies via bank borrowing was discouraged, and rightly so, given it’s crowding out effect on private sector credit was quite evident.

Subsidizing energy costs enabled lower pricing of electricity. However, given limited revenue and absence of a secondary market for treasuries – subsidy financing via treasury sales to primary-dealer banks and NBFI’s had the unintended consequence of raising bank rates. Increased lending rates i.e., higher cost of capital economy-wide naturally pushed up consumer prices. In 2012, lending and deposit rates were higher than five-year averages – peaking at 13.8% and 8.2%, respectively. On time deposits, leading private commercial banks (PCB’s) double-digit rates.

-10%

10%

30%

50%

70%

Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12

Total Domestic Credit Growth (YoY) Pvt. Sector Credit Growth (YoY) Public Sector Credit Growth (YoY)

Fiscal-Monetary Nexus

12.8 12.3 11.9

11.3 12.4

13.8

6.9 7.0 7.0 6.0

7.3

8.2

0

5

10

15

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Commercial Lending Rate

Bank Deposit Rate

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External Sector Performance

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Trade & Exports

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65.0%! 64.2%! 67.3%! 68.1%! 66.1%! 71.1%! 67.6%!

27.2%! 28.4%! 25.4%! 25.1%! 27.8%! 24.4%! 27.7%!

0%

25%

50%

75%

100%

2005 2006 2007 2008 2009 2010 2011

Breakdown of Export by Commodity

RMG! Fish! Leather! Jute! Others!

In 2012, and 1H in particular. the ready-made garments (RMG) “export power-house,” as Bangladesh was referred to by a recent New York Times article, experienced a lagged slowdown on reduced demand from the US and the EU. However, trade deficits were lowered from 2011-levels thanks in part to the monetary austerity program in place, one of the consequences of which was a curbing of non-essential imports. Exports grew 8.0% in 2012, which is respectable and also higher than in countries with comparable export industries, e.g., Pakistan and Vietnam. In fact, in 2012, Bangladesh became the second-largest exporter of garments and textiles products after China. Diversification of export destinations sustained growth rates in 2012, especially in 2H, during which which the newer destinations contributed ~US$1.0bn of US$9.94bn exports. The US is, however, likely to remain an attractive destination for Bangladesh exports. India is also expected to become a larger export destination.

To be sure, Singapore, Malaysia, South Korea, Japan, China, Turkey, Australia, Mexico, Russia as well as several countries in the MENA region are expected to become larger export markets for Bangladesh. Another trend worth a mention is the steady growth of high-value products (HVPs). Their share in the garments export basket rose from 7-8% to 15-16% in 2012.

-1750

-750

250

1250

2250

3250

Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12

Trade Balance in USD mn Export in USD mn (fob)

Import in USD mn (foB)

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Imports & Outlook

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11.5% 12.8% 12.2% 12.0% 10.9% 10.2% 11.9%

68.1% 66.6% 65.6% 65.6% 70.0% 71.0% 64.5%

0%

20%

40%

60%

80%

100% 2005 2006 2007 2008 2009 2010 2011

Breakdown of Import by Commodity

Textile and Articles Capital Machinery Petroleum and Products Food Grains Others

The largest category in imports comprises miscellaneous products including dairy, spices, oil and oil seeds, pulses, sugar, clinker, chemical and pharmaceutical products, fertilizers, dying and tanning materials, cotton, yarn, staple fibers, and iron and steel. As for import markets - India, China, Vietnam, Turkey, Poland and Egypt are expected to contribute significantly in the future., This is in addition to the traditional raw material suppliers in the OIC (Singapore, Malaysia and Kuwait for minerals, fuels, and oils; Indonesia for animal and vegetable fat oils; Pakistan, India, China and Uzbekistan for cotton (India also for vehicle and China for machinery); Saudi Arabia for plastic articles and Korea for iron, steel, and floating structures.

2,894.5

1,975.4

1,270.4 1,250.8

1,384.3

748.2

533.7

299.3 182.3

Regional Import 2012 Q2 (USD)

Other Asian Countries

OIC

Asian Clearing Union (ACU)

SAARC

ASEAN

OPEC

EU

NAFTA

Other European Countries

In FY 2012, Bangladesh spent US$6.17 billion on import of liquid fuels, more than twice FY 2011 levels, primarily to run quick-rental power plants set up to address interim electricity generation gaps. However, monetary austerity, weak demand for exports in the EU and US, not to mention bumper harvest of food grains, saw liquid fuel imports decline in 2H 2012. New L/C opening for petroleum imports fell 22.4% in July-October 2012. Monetary tightening also led to a decline in import of consumer goods, industrial raw materials and capital machinery. In July-November 2012, import GR was -6.9% compared to 21.6% in the same period in 2011.

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Remittance & Other inflows

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The Bangladeshi expatriate population estimated at around eight million remitted back US$14.2bn in 2012, marking a 16.5% YoY GR. This was noteworthy given the high base remittance dollar volumes had achieved in 2011, and surpassed man-power exporting countries that had higher volumes until 2011. Estimated at ~US$405.0bn in 2012, remittance to developing countries are expected to grow ~7.9%, 10.1% and 10.7% in 2013, ‘14, and ‘15, respectively, reaching US$534.0bn. Even if Bangladesh maintains average growth rates for developing countries, it could reach US$19.6bn in 2015.

564

391 376 276

800 743

793

650

961 913

768

995

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Foreign direct investment (FDI) picked up 2009-onwards and in 2012, reached US$909mn. In 2005-08 and 2001-04, average FDI-levels were US$747.0mn and US$402.0mn, respectively. Attracting FDI is particularly important for a growing economy like Bangladesh as it involves transfer of technical and managerial knowledge. However, other frontier economies like Vietnam and Cambodia have still higher average FDI levels both in absolute dollar volume as well as share of GDP (~5% for the two countries). The year 2012 also saw foreign-currency term loans of US$1.49bn, about 82% higher YoY and 393% higher than in 2010.

1,089 1,475 1,706 1,882

3,062 3,848

4,802

5,978

7,915

9,689 10,987

11,650

12,843

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1993-94 1996-97 1999-00 2002-03 2005-06 2008-09 2011-12

No. of persons left for abroad

Remittances (Million US. $)

FDI (US$mn)

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FX Reserves & Exchange Rate

17

0

15

30

45

60

75

90

0

5

10

15

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13

Reserve (USD bn) BDT-USD (End of Period) In January 2013, the Bangladesh Bank’s foreign exchange reserve surpassed the US$13bn threshold for the first time. Strong remittance inflow, negative import growth, quicker collection of export proceeds, FDI growth, and other foreign currency inflows were the primary drivers. As of January 08, foreign exchange reserves stood at US$13.1bn, up from US$9.6bn in December 2011. Current reserves are equivalent tofour-month import bill coverage. On escalating FX reserves, the dollar rate, which had been stable in March-November 2012 around the BDT 81.0-82.0 range, dropped below the BDT 80.0 level in December. BDT appreciated thereafter. After the free fall of 2011, when BDT depreciated 12.8% against the dollar, the 2.6% appreciation since December is commendable, and is presently at a level where it retains export competitiveness without importing inflation into the economy.

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Consumerism & Manufacturing

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Bangladesh : The Next Emerging Consumer Market

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15,650

8,360

5,520

4,500

4,140

3,250

2,870

2,580

2,290

1,940

1,810

1,710

Malaysia

Thailand

Sri Lanka

Indonesia

Philippines

Vietnam

Pakistan

Lao PDR

Nigeria

Bangladesh

Ghana

Kenya

GN

I per Capita in 2011

(PP

P C

urrent US

D)

Bangladesh’s per capita income, although higher than Kenya’s and closer to Nigeria’s, is still much lower than in Lao PDR, Thailand and less than 20% of Malaysia’s per capita income. However, at US$1,940, Bangladesh’s per capita on the verge of the US$2,000-2,500 inflexion range on the S-curve of consumption. Experience from South Asian, South East Asian and African countries with similar economic fundamentals indicates that GDP/GNI per capita accelerate around the time it reaches US$2,000.

0

4,000

8,000

12,000

16,000

1980 1985 1990 1995 2000 2005 2010

Bangladesh Ghana

Indonesia Kenya

Lao P.D.R. Malaysia

Nigeria Pakistan

Philippines Sri Lanka

Thailand Vietnam

US$2,000 income/capita line

Even modest assumptions on GR indicate Bangladesh is about the enter a high-growth threshold for consumption. The consumer market in the offing is significant when one realizes that 57% if the population or about 92.0 million are under 25 years.

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Discretionary Spend : Mobile Phones & Durables

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Mobile subscription doubled in the past five years. Drivers for subscription growth have been increasing per capita income, migration to cities and overseas, delays in availing land line connections, and so on. Bangladesh at present has ~62% mobile penetration, which is certainly a larger market than its frontier market peers such as Ghana, Kenya, Lao PDR, Nigeria, Pakistan, Sri Lanka and Vietnam. However, penetration is higher for the other frontier markets, especially for Ghana at 85%, Sri Lanka 87%, Lao PDR at 87% and Vietnam XYZ%. Only Nigeria and Pakistan have similar levels of penetration. 798,571

1,000,000

100,000

55,000

- 400,000 800,000 1,200,000

Electronic Goods Sales (Units) 2009

2010

2011

Microwaves

Air Conditioners

Televisions

Refrigerators

45

24

90

62

0

10

20

30

40

50

60

70

80

90

100

���Mobile Phone Subscribers (mn) Mobile Penetration (%)

Mobile Phones, 2008-12 The market for discretionary consumer products in Bangladesh is approximately ~95.000 for air conditioners, 50,000 for microwaves, about 900,000-1.0mn for televisions, and ~800,000 for refrigerators. Refrigerator sales are increasing at ~25% a year, television sales at 10-12% a year, while air conditioners and microwave consumption growth rates are still in high single-digits. Growth rates for refrigerators and televisions for India and China were similar in the 1990s, ie the first decade of high discretionary spending, following which consumer spend increased further. The case for Bangladesh ought to be similar in the coming decade.

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Bikes, Cars, and Internet Penetration

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To continue on consumer discretionary spend, there is a 136 percent duty on refrigerators and 189 percent on imported air-conditioners. It makes sense therefore to buy locally-manufactured refrigerators. This is borne out by growing sales of refrigerators assembled or manufactured by local names.

199,000

303,000

2000

2010

Number of Tourists

The travel and tourism sector raked in BDT182.5 billion, about 2.2. percent of the gross domestic product (GDP) in 2011. The sectors contribution to overall GDP is forecasted to rise by 7.3% in 2012 and on an average 6.1% annually until 2022, according to the WTCC study. The Lonely Planet ranked Bangladesh number one in 2011 in its value-for-money tourist destination rankings.

Data: World Travel Tourism Council (WTTC)

Meanwhile, motor cycle sales increased ~8x in 2000-2013. As of 2012, motor cycle sales reached 290,000. Local manufacturers are increasingly competitive and gaining market share on their importer counterparts. Their quality continues to improve as well as their capacity and are eventually expected to produce sufficient surplus to enable export. Growth of the consumer sector is also evident from the rise in internet users and penetration of the internet especially, recent growth rates. Between 2010 and 2011, internet penetration grew 8.7X, albeit from a low base, according to the International Telecommunication Union (ITU).

13,176

290,000

2006

2012

Motorcycle Sales

0%

4%

8%

0

2,000,000

4,000,000

6,000,000

2000 2011

Internet Users and Penetration

Internet Users

Internet Penetration (% of Population)

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Manufacturing Pathways

At current prices, Bangladesh’s annual imported car market is around 30,000 units. Imported cars constitute ~80% of the small and medium motor vehicle market of which Toyota has 69% share.

The imported car market has altered however as duties have escalated to 250% for 1600-2000 cc vehicles, 350% for 2750-4000 cc, and 821% for 4000 cc or larger. Meanwhile, equity-loan ratio on car loans have risen ~6-8 times. With a shrinking of the imported car market, opportunity is rife for low- and medium-priced car manufacturers.

Automobile manufacturers entering the Bangladesh market estimate an annual demand six to seven times larger for locally manufactured cars. South Korean Tagaz and Indian TATA are the other significant foreign players looking to enter the lower-priced automobile segment.

Clearly, as borne by price differentials in refrigerator, television, motor cycle and automobile markets between imports and local manufactured products - consumerism is driving an expansion of the manufacturing industry.

In fact, in the previous 50 years, countries that have sustained periods of consistent 7 percent or higher growth over a horizon of 25 years or longer, manufacturing and services were dominant contributors. Of course, the agriculture sector does not diminish in absolute policy importance given the scope for increasing yields and high global food prices.

Agricultural yield will grow with dissemination among poor farmers without access to information knowledge on optimal crop rotation, usage of higher-yield varieties and hybrids, limited experimentation with pesticides, increased urea-usage, and education on weather and soil-quality-dependent farming. Increasing agricultural yield will accelerate the growth of the country’s industrial sector by freeing up workers for the factories.

Bangladesh has the sixth largest work force in the world after Brazil, Indonesia, US, India and China. On top of gains in employment generation for an estimated workforce of around ~80.0mn – Bangladesh also enjoys one of the most favorable demographic dividends globally (Vietnam comes close) with 65.3% population bin the 15-64 age group and another 30.0% below.

22

30.0 65.3 Bangladesh

Ghana

Kenya

Lao PDR

Least developed

Low income

Middle income

Nigeria

Pakistan

Sri Lanka

Vietnam

World

Population ages 0-14 (% of total)

Population ages 15-64 (% of total)

Population ages above 64 (% of total)

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Emerging Manufacturing Sectors

Bangladesh minimum wages are the lowest in Asia, 30-100% lower than in Vietnam, Sri Lanka and India, according to the ILO. While wages have recently and justifiably increased, the existing (and significant) comparative differential has enabled development of labor-intensive sectors, e.g., apparel, textiles, leather, footwear, and up-and-coming ones such as furniture, toys, bi-cycles, sports equipment, and ship building.

An example of how domestic manufacturing to meet a growing consumer segment − has begun to make small inroads in exports − is the furniture segment. The local market is ~US$1.38bn with around 19% sales growth. Meanwhile, export volume, albeit from a low base, has picked up from US$27mn in FY 2012 to around US$40.0 in FY 2013.

In addition to demand from overseas buyers, significant market growth is expected on forward-linkage potential with the domestic ship-building industry. A small ocean-going vessel made in Bangladesh typically requires furniture of ~US$100,000, which are presently imported. Since Bangladeshi ship-builders are increasingly competitive in the global market for small- and medium-sized vessels, labor-cost arbitrage is expected to benefit both ship building and the furniture manufacture industries.

23

10

40

2010

2011

Shipbuilding Industry Sales (US$ million)

Labor-cost competitiveness is rather high for Bangladesh even in comparison other low-cost manufacturers, e.g., Pakistan. As of 2011, according to the World Bank, Bangladesh industry-wide net profit margins averaged ~16% compared to 3% in Pakistan. Since this sector is likely to incur future costs from environmental regulations, taxation, etc., Bangladesh’s cost-advantage is expected to enable market share growth in the ~US$200bn global industry. Single-digit percentage share of the global industry entails sizeable economic benefits. In the coming years and decades, other sectors are likely to catch pol icy-makers’ attent ion for their labor-cost competitiveness. It is important, however, that sectors are not identified only using a basic model of labor-cost arbitrage, but determined in consideration of other factors as well, e.g., access to raw materials, leadership talent, low-cost energy, reliable infrastructure, favorable regulation, trade policies, and of course diplomatic imperatives.

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Infrastructure Gaps & Opportunities

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Energy & Power

In 2012, peak electricity demand was 7,518MW/day, up from 6,500MW/day in 2011, up by 16%. Meanwhile, peak supply was 6,350MW/day and total electricity generation grew by 12% to stand at ~35,000GWh (CAGR ~9.0% in 2001-2011). The demand-supply gap came down to ~2,000MW to ~1,2000MW in 2012, reflecting reduced load-shedding.

25

0

500

1000

1500

2000

1980 1985 1990 1995 2000 2005 2010

Per Capita Electricity Consumption (kWh)

Low income Middle income Bangladesh Ghana

Electricity consumption in Bangladesh is one of the lowest regionally and globally, as evident from the accompanying line chart. Scarcity of power is possibly the most significant infrastructural constraint inhibiting growth and development, and unlocking possible double-digit growth. However electricity prices are among the least expensive regionally at US¢ 4.16-14.75/kWh for retail and US¢ 5.88/kWh for bulk users as of Sep ’12 (Sri Lanka has highest retail tariff at US¢ 28.35/kWh). These are prices post-adjustment to lower subsidies on energy. The Bangladeshi Energy Regulatory Commission (BERC) raised tariffs by 38.24% and 63.77% between 4Q 2011 and 3Q 2012. Further upward price revisions are expected: by 9% in 2013 and 30% in 2014.

8.6

12.2

18.6

12.4 11.5 12.1

11.1 9.5 9.4

12.7

0.2 0.1 0.9

5.4 6.9

11.2 12

6.6

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb

-12

Mar

-12

Apr

-12

May

-12

Jun-

12

Load-shedding (as % of peak generation)

However, the reduction in power generation has been driven by quick-rental power plants which require expensive liquid fuels. A more cost-optimized energy mix, to take the example of JICA’s proposed roadmap for 2030, “The Power System Master Plan (2010).” recommends that 50% generation be coal-based. As of 2012, coal-generated power contributed ~2% of total power generated.

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Sea Ports & Maritime Transportation

26

With regard to maritime transport, Bangladesh’s sea ports are perhaps the most crucial to growth-impact. The main Chittagong port in the south handles about 80% of the country’s imports and exports. It’s situated on the Karnaphuli, is close to the Bay of Bengal, and last year, handled more than US$47mn tons of cargo and containers of 1.4 million TEU’s and given growth outlook, requires urgent capacity expansion.

The Chittagong port is particular commercial significance to the garments industry. Positive changes thus far include allowing private berth operators to handle containers and cargo. Turn-around-time for ships has lessened to two-and-a-half days but still short of global benchmarks.

The deep sea port in south Chittagong is however the biggest game-changer in the horizon which will enable manifold increase in connectivity between countries east and west of Bangladesh as well as trade routes to and from land-locked Nepal and Bhutan. China, India, Myanmar, the UAE, and of course, Nepal and Bhutan have shown interest in developing the Chittagong port. Down the road, there will be competition in the maritime transit business for Bangladesh; hence timely action is paramount.

The Bangladesh Power Development Board (BPDB) has begun coal and gas-fired base-load power plant projects, but risks of implementation time-overrun and bureaucratic delays are significant. Existing gas reserves (~2,250 mmcfd against demand of ~2,700mmcfd) are under pressure for lack of new discoveries. A possible silver lining may lie in gas exploration in the Bay of Bengal, which, following an ITLOS verdict, allowed Bangladesh access to four deep-water gas blocks and partial rights over three blocks. Bidding and subsequent exploration by international oil companies (IOC’s) are expected this year. Another positive development is the approval by ECNEC, Bangladesh’s highest policy-making institution, for a cross-border US$196.0mn power transmission project. A US$252.5mn power generation project dedicated for greater Chittagong is also approved, of which US$172.0mn will be provided by Saudi Arabia, Kuwait, the UAE, and OPEC. There are a few other power projects in the pipeline. Energy issues notwithstanding, there is also considerable investments to be made to develop Bangladesh’s roads, railways, bridge networks, airports, and waterways. The investment case for roads, railways and bridges is of course quite patent for a developing country, but in Bangladesh’s case, waterways and aviation present relatively compelling cases as well, especially the former and in the near-term.

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Aviation, Roads, Railways & Bridges

Mongla is the second sea port in Bangladesh. It has three container years of 35,752 sq. meters, and can accommodate 2,180 TUES containers in a single high; five transit sheds and two warehouses can store 33,258 m.t. cargo. To develop Mongla, projects worth US$70.0mn for equipment procurement and easier navigation of sea-going vessels are in the pipeline.

Dredging will need to take place at a reasonably large scale to deepen and widen riverine channels, which will significantly reduce transportation time of goods and services and reduce land traffic congestion. A developed riverine transportation system will also enable renewable energy generation from hydroelectricity. For purposes of policy formulation, sophisticated synergies are possible between policy programs aimed at sea port development and riverine transportation.

To continue on transportation modes relat ively unconventional to most frontier emerging economies at Bangladesh’s stage of growth – aviation also has considerable potential for growth and hence rationale for policy prioritization. The most obvious driver is transportation of RMG exports and the market, several large RMG manufacturers. Given the scale, growth rate, and ambitions of Bangladesh’s garments industry, international cargo flights ought to be a logical next step to lowering costs for the industry and enhancing its competitiveness.

.

Another substantial market for aviation’s growth is the large Bangladeshi expatriate population of mostly migrant workers, but several NRB’s naturalized in countries such as the UK, US, Italy, and so on, in total estimated at ~8.5 mn. Even by global standards, this implies a a fairly large market for international passenger flights. But the obvious bottle-necks to the sector’s growth are technological know-how at various parts of the sector value chain including policy design (e.g., pricing) as well as the scale of investments to generate meaningful returns. Aviation’s sustained growth may necessitate transfer of technical and operational knowledge at levels comparable to those witnessed in the early-stage Bangladesh telecommunications sector.

To return to most conventional infrastructure-growth priorities of developing nations, i.e., the building of roads, railways and bridges, the larger projects in the pipeline are as follows (dates of completion inexact): - ~US$3.75bn multi-purpose bridge about 6.15 km-long to connect the south and south-east with the impoverished south-west (lower initial estimates; may increase further with time) - US$2.75bn Dhaka Mass Rapid Transit Development (DMRTD) project for a 2.0 km-long metro-rail, of which JICA has pledged 85% funding

- US$2.0bn second Padma bridge to connect Dhaka with the west and south-west as well as the main land port with Mongla port - US$1.24bn elevated expressway about 26.0 km-long to connect the primary airport, Shah Jalal International Airport, to the Dhaka-Chittagong Highway - US$400mn four-lane highway for Dhaka-Chittagong traffic

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Regional Connectivity : Sharing Costs & Spoils

However, building ports, river networks, expressways, an widening roads into multiple-lanes are very expensive investments. The size of total investment capital required for the list of large projects is close to US$10.0bn, which does not include the many roads that need to be laid, unpaved paths paved, smaller bridges to be built – to say nothing of deep sea port development, investments in Chittagong and Mongla ports, riverine network development, and aviation industry development. The railway system also requires a sizeable overhaul. The size of total investments required may run into ~US$40-60.0 bn. This is clearly untenable without foreign direct investment and other shared financing programs with regional and distant sovereigns that have expressed interest. Since the commercial gains from greater connectivity are inevitably shared, investments ought to be. Large scale commercially-driven diplomacy is clearly the required ingredient to actualize Bangladesh’s requisite transportation network development. A discernable benefits of the above is an inevitable employment boom that results in construction and services sectors from investing in infrastructure. The second and more lasting benefit is increased connectivity between South Asian countries, since trade between the neighbors are on the rise and expected to accelerate. The travel time however between capital cities in South Asia are presently 100-200% higher. Optimizing travel time entails considerably higher trade volumes for Bangladesh and its neighbors.

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In fact, interest in developing Bangladesh’s transportation system and various modes thereof involve business cases for countries outside South Asia, and other than China, UAE, and Japan, all of whom have shown actionable interest. There is also the “Emerging Asia,” as represented by South East Asia, Indochina, Korea, and even the CIS. For instance, there is an organization known as BCIM (Bangladesh, China, India and Myanmar) that aims to increase connectivity across the four countries which constitutes around 40% of the world’s population. Very recently, they organized the first four-nation joint-road survey to accurately map road connectivity. There is yet another group called The Bay of Bengal Initiative for Multi-sectoral Technical and Economic Cooperation (BIMSTEC) formed in 1997 in Bangkok and includes Bangladesh, India, Myanmar, Sri Lanka, Thailand, Bhutan and Nepal. This consortium is intended to promote trade, investment and connectivity between South and South East Nations. Dhaka happens to be BIMSTEC’s head-quarters. The commercial and diplomatic opportunities for Bangladesh as a result of its advantageous geographic location can facilitate growth of various Bangladeshi service sectors. As demonstrated by Singapore, the growth-impact of investing in logistics and becoming a trading hub, can ensure continued prosperity, especially given Bangladesh’s other growth fundamentals.

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The Internet of Things

Internet penetration should also drive an increase in new business activity. Particularly in a country like Bangladesh, the Internet can help make up for shortages in other forms of infrastructure, such as roads, by enabling people to transact across large distances.

For starters, internet-based business can contribute to agriculture. With small household farms in rural areas dominating production, there is great scope to increase value added using the internet. It can be a useful tool with which to disseminate information on planting times, methods, use of fertilizers, etc.

In Bangladesh, where urban centers are inhabited by 30% of the population - the bank sector’s physical penetration is limited by the country’s terrain, lack of road networks, energy supply gaps and infrastructure bottle-necks.

Despite such challenges, banks have built up impressive branch networks. The next mile for financial inclusion of the unbanked hinges on mobile banking, which in turn requires a cheapening of internet access as well as affordable 3G-enabled mobile devices. The auction for 3G licenses is expected to take place around mid-2013.

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However, 3G will not immediately translate to increased internet penetration because of licensing and CAPEX costs involved for mobile operators (latter due to significant network swap costs for 3G). In the longer run, internet-based business are expected to contribute significantly to the economy via sectors such as agriculture, health, education, commerce, retail and a variety of service-oriented sectors.

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Capital Markets

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DSE : Upside despite Macro-Financial Stability

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0

100,000

200,000

300,000

400,000

500,000

Jun-04 Jun-06 Jun-08 Jun-10 Jun-12

Dhaka Stock Exchange MCAP and Liquidity

Total Volume (thousands)

Total Turnover in USD (thousands)

Total Market Cap. in USD (mn)

0

5,000

10,000 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12

DSE General Index

After a brief impasse in economic and trading activities in 2007-8, pent-up liquidity entered the stock market via margin loans and re-purposed bank debt, fueling record retail and domestic institutional investor participation. In 2010 alone, DGEN appreciated ~94%. In a densely-inhabited capital city with scarce investible asset classes and rather early-stage financial-literacy levels (among investors as well as licensed intermediaries), speculation became rife which ultimately drove DGEN’s relentless rally. The bull market turned a corner in Dec 2010 as BB raised bank cash-reserve ratios. A multi-phase correction set in, initially quicker but slowing gradually, largely on investor panic, downsizing of bank portfolios and drying up of trade thereof. Retail investor confidence waned, as did dollar values of average daily turnover. Regulatory changes turned a corner for the better in 2012 after a phase of policy trial-and-error in 2011. A series of policy initiatives were put in place aimed at curbing manipulation and volatility risks; simultaneously strengthening market fundamentals; in part on prescriptions from International Financial Institutions.

The boldest policy initiative was setting in motion the de-mutualization of the bourse. So far we understand, this involves an overhaul of the bourses’ ownership structure – towards greater representation of independent owners than stock-brokers; revenue model changes; and overall, improved accountability and governance. Thereafter, surveillance software was launched to detect and deter fraud and manipulation. Regulators also pushed through a new free-float adjusted market-capitalization-weighted index. In sum, the country’s primary bourse, the DSE has become a safer market in which to invest. More importantly, it has become an attractively valued market uncorrelated to macroeconomic results or outlook; which is a good thing because the market would not be what it is to value investors now, had it priced in economic performance past or expected.

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Market Fundamentals: MCAP Growth

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24.2

18.4

1.4

4.8

22.5

2.0

32.8

30.3

21.0

16.1

15.6

7.9

Sri Lanka

Kenya

Bangladesh

Nigeria

Pakistan

Ghana

Total Market Capitalization (% of GDP)

2011

1993

In 19 years, DGEN’s Market Capitalization to GDP ratio increased 15x – surpassing MCAP growth rates of comparable frontier markets. Although it is true that DGEN MCAP probably had a far lower base in 1993 than its frontier market counterparts, its MCAP GR is still indicative of the underlying domestic investor interest in the stock market even at a relatively early stage of its history. In fact, the external drivers of the staggering rally of a hitherto little-known market in 2009-10 are also reasons for DSE’s double-digit multiple growth rate in market cap. First, for the median retail investor, there is a dearth of investable asset categories. Real estate is usually expensive. In the more upscale parts of the capital city, real estate prices are comparable to Mumbai, which is occasionally higher than those in developed market capital cities. Prohibitively expensive real estate, an under-developed fixed-income market, and until recently, single-digit returns on deposits – have fueled retail investor interest in the stock market through time. Dhaka’s high population density also lends to rapid information flows. The dynamics are just right for high multiplier effects of both positive and negative feedback on investable securities. Lastly, high M2 growth rate also Indicates high return-potential and high liquidity. Overall market size is positively correlated with the ability to mobilize capital and diversify risks across the economy.

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Market Fundamentals: Liquidity Ratios

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92.6

1993 2002 2011

Total Turnover to Market Cap Ratio (%) Least developed countries

Low income

Middle income

World

Bangladesh

Liquid markets are naturally preferred because they are likelier to have lower bid-ask spreads, enable more efficient price discovery and are less prone to long-term bubbles and corrections. Liquidity also significantly predicts future returns. Moreover, a lack of liquidity causes asset markets to dry up or render trades difficult to execute when prices are falling, particularly when an investor might want to exit.

1993 1999 2005 2011

Total Turnover to GDP Ratio (%)

Bangladesh Ghana

Kenya Nigeria

Sri Lanka Despite Bangladesh’s equity markets’ relatively early stage of development, dollar volume of turnover levels (as evident from the adjacent pictorial) are generally higher than dollar volume trends for the least developed, low-income and middle-income country groups. Turnover to Market Cap and Turnover to GDP are both useful indicators of liquidity as the first represents the liquidity of the market and the second of both the market and wider economy. When liquidity risks of investing in markets are dispersed systemically – it is easier to manage portfolio risks as long as an economy’s financial services sector is well-governed and regulated, as is turning out to be the case with Bangladesh’s banking sector in light of asset quality and risk capital adjustments underway.

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Indicators of an Under-valued Market?

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4 9

40 52 75

105 117

154 488

796

0 200 400 600 800 1,000

Laos Cambodia

Thailand Nigeria

Bangladesh Brazil

Indonesia United States

India China

Labor Force (million)

83

131

174

178

408

430

Bangladesh

Pakistan

India

Sri Lanka

Vietnam

Global Average

Cement Consumption per Capita in 2011 (Kg)

2.60% 3.40%

5.80% 6.50%

7.20% 12.20%

Pakistan Bangladesh

Cambodia Laos

Vietnam Kenya

Healthcare Expenditure in 2011 (% of GDP)

144 154

195 452 468

539 560

838 1085

Kenya

Sri Lanka

Pakistan

Thailand

Indonesia

Cigarette Consumption per Capita in 2011 (Sticks)

-

1,000

2,000

3,000

4,000

-

100

200

300

400

500

600

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

Monthly Imports and Stock Turnover

Stock Market Turnover (BDT bn) Import (USD mn)

17.8x

0x

5x

10x

15x

20x

25x

30x

35x

2003 2006 2009 2012

Market P/E

Market P/E Market P/E (Avg. 2003-2012)

Despite debates about its utility for valuation of an entire market – historical P/E is a more useful indicator of an undervalued market than an overvalued market. By this metric, DSE is under-valued given current single-digit P/E ratios. The next chart (top right-hand side) indicates the inverse relationship between a high bank deposit rate and lower fund flows to the stock market, which was clearly the case in 2011-12 as monetary tightening, and provision growth led to higher deposit rates for fund mobilization. Imports are a proxy for industrial production index. Clearly a leading indicator for turnover, the widened gap in 2011-12 indicates the growth in fuel imports viz-a-viz non-fuel imports, since the former’s effect on the market is not discernible yet. However, an uptick in overall imports in 2H 2012 bodes well for the market, as does the de-growth in deposits after June 2012.

(100)

-

100

200

300

400

500

600

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

Monthly Deposits Flow and Stock Turnover

Change in Deposits (BDT bn)

Stock Market Turnover (BDT bn)

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Appendix: Sectors & Stock Picks

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Tobacco & Footwear

The Tobacco industry in Bangladesh has an annual market size of ~135 billion. Tobacco spend/capita is BDT844/US$10.55 and consumption 2.5 sticks/person per year. Market penetration in Bangladesh is around 40%. Tobacco sales consist of 52% filtered cigarettes and 48% unfiltered varieties (local term: bidi). Bidi costs 1/6 the price of a low-end cigarette.

British American Tobacco (BATBC) is the only listed tobacco manufacturer with about 99% market share in the high-end. BATBC’s shareholding structure is as follows: 73% by the BAT group; 11% by the Investment Corporation of Bangladesh (majority government-owned NBFI); and 16% free-float. Other players in the tobacco industry are domestic conglomerates of significant size: Dhaka Tobacco (under Akij Group) and Abul Khair Tobacco.

BATBC’s low-segment market share increased from 20% in 2006 to 60% in 2010. Net profits grew at double-digit rates in 2006-11. Excises are high and constitute 11% of the government’s tax revenue. Future profitability expected to be driven by consumers upgrading to higher segments. Segments are classified as follows: high-end; medium end; low-medium; and low-end. BATBC has significant cash balance with minimal leverage.

Footwear industry generates annual sales of BDT 18.0bn or US$225.0mn. Footwear consumption is 0.8 pairs per capita per year. Bata Shoe and Apex Adelchi are the only large players in an otherwise fragmented industry. Bata has the largest market share of ~20% and Apex ~5-7%. Bata has two manufacturing plants in Tongi and Dhamrai with production capacity of 110,000 pairs/day. Apex has a production capacity of 15,000 pairs/day for export and another 5000/day for domestic sales. In Bata’s case, domestic sales contribute ~91% to revenue. Meanwhile, Apex is export-oriented with ~80.0% revenue coming from exports. Apex, however, plans to generate 40.0% from domestic sales by 2015. The footwear market is poised to surpass historical growth rates as churn increases with higher disposable income of the population. This bodes well for Apex’s re-purposing of export-quality footwear for domestic consumption while Bata should continue to do well with sustained focus on design and brand building. New entrants are also establishing operations encouraged by industry’s growth prospects. Pou Hung Industrial (Bangladesh) Limited owned by Pou Chen Group has set up a US$62.0mn factory in the Karnaphuli Export Processing Zone (EPZ). Korea-based giant Youngone group has also set up a US$110mn shoe factory in the same EPZ with plans to increase their investment in the coming years.

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Personal Care & Pharmaceuticals

Marico Bangladesh Limited is the largest listed company in the consumer and household products space. They have a “basket of oils.” Parachute, their flagship hair oil brand, has 50% market share of a total annual sales of a 100 million. Per capita consumption of hair oil is 250 ml/year.

Marico has the ability to pass on a price increases, often by packing lower volumes per unit of product sold. They are efficient at building brands and developing distribution networks. Their niche is the grooming, health and wellness space within the consumer products space. Parachute, for example, is made of 100% herbal extracts whereas most of their competitors’ oils are blended. Parachute coconut oil is sold in India, Sri Lanka, and Indonesia.

Keya Cosmetics Limited is a key player in the cosmetics and consumer products space. Its products include soap, shaving cream, toothpaste, with their flagship brand, Keya Beauty Soap, is one of the market leaders domestically. Keya Beauty Soap is also exported to India, Bhutan and the Middle East. In 2007-2011, Keya’s sales doubled, reaching US$30.0mn with increasing operating margins (CAGR 28% in the said horizon).

Despite backward linkage via acquisition of Keya Soap Chemicals in 2010, raw materials account for 30% of costs, while exports are 7.0% of revenue. In April 2012, Keya raised US$18.5mn through a rights issue, to lower debt service obligations, which, until 2011, constituted 46% of assets. Keya is a relatively liquid stock, among the 20 most-traded of 2012 with an average daily turnover of US$0.78mn. Keya has a market cap of US$60.0mn and 66% free float.

Pharmaceuticals is one of the fastest growing and most technologically-developed sectors in Bangladesh. The retail market grew at 17.2% annually in 2007-11, reaching US$1.0bn in 2011. Of drugs sold, generic to branded ratio is 85 to 15. Increasing life expectancy, disposable income, information flow via mobile connectivity and hospital sector penetration are growth drivers for the pharmaceuticals industry. As of 2011, average pharmaceutical spend was about 3.4% of GDP/capita. Pharmaceutical exports constitute a small share of the sector’s business although it has increased from US$3.7mn in 2001 to US$50.4mn in 2011. Square Pharmaceuticals is the largest pharmaceuticals company with a total revenue of BDT17.0bn and market share of 19.2% in 2010-11. Their nearest competitors are Incepta Pharmaceuticals and Beximco Pharmaceuticals with market shares of 9.1% and 8.6% respectively. Leading players enjoy elastic demand and can pass through incremental costs on FX and inflation to consumers. Beximco Pharma sells its drugs to Southeast Asian and African countries and has recently entered the highly-regulated EU market to sell ophthalmic products. Renata, erstwhile Pfizer Bangladesh, and another leading pharmaceutical player, exports to Sri Lanka. The WTO’s agreement on trade-related aspects of intellectual property rights (TRIPS) expires in 2016. Consequently, the 150-odd drugs presently sold in the market without paying royalties may become expensive. The medical profession and health care industry is then likely to resort to a rationalizing of prescription trends. Older off-patent drugs may be brought back, and in rare cases, large players will sustain presence in export markets by sourcing domestically-produced API. There is however, a possibility of TRIPS being extended, so as to enable low-income countries like Bangladesh export of affordable drugs to other low-income destinations in Africa.

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Telecommunications

The Bangladesh telecom industry has six operators in a highly competitive environment. Mobile subscriber penetration is at present ~57-58%. Pre-paid customers are 90% of the market and sector ARPU is around US$2.0. New customers, outside of urban zones, generate lower ARPUs. Drivers of industry growth will be increasing dispensable income, spread of wealth, availability of inexpensive mobile phones, and so forth.

Grameenphone (GP) is the largest listed company on the Dhaka Stock Exchange and the only billion-dollar public company (Market Capitalization of ~US$2.3bn). It has ~45% of market share counting dual SIMs and 38% on single SIMs. Their network covers 99% of the country.

GP is also the largest internet service provider (ISP) in the country, owing to its “Edge” internet services on mobile phones. The next stage of growth for GP will come from 3G-based business. However, having paid market-share-determined 2G license renewal fees and undergone network swap for 3G, the business case for 3G is not imminent. It will depend on a cheapening of the internet, recouping licensing fees over time and availability of low-cost of 3G-enabled phones. GP has completed a year-long network swap to make it 3G-enabled.

It’s primary competitors are gaining market share of late through aggressive pricing, which is eroding the premium GP enjoyed on ARPU. GP is presently focused on operational efficiency and product diversification after the headwinds of 2012 in the form of 2G-license-related payments, SIM-registration and 10-second pulse.

Bangladesh Submarine Cable Company (BSCCL), incorporated in July 2008 and publicly listed in June 2012, operates the only international submarine cable connectivity in Bangladesh. BSCCL is 74% government-owned and has 26% free-float.

The cable is 20,000km-long and crosses 17 landing points in Singapore, Malaysia, Thailand, Bangladesh, India, Sri Lanka, Pakistan, UAE, Saudi Arabia, Egypt, Tunisia, Italy, Algeria and France. The Bangladesh landing station is at Cox’s Bazar. BSCCL is mandated to handle the submarine cable connectivity as a member of the SEA-ME-WE-4 (SMW-4) international submarine cable consortium. BSCCL has earned membership to the SEA-ME-WE-5 consortium as well which allow it to handle a second submarine cable connectivity through the country, scheduled to go live in 2014.

The company provides bandwidth access to all the telecom operators (e.g. IIG, IGW, mobile operators, ISP etc.) and with non-cash depreciation being the major expense item, it is able to generate significant margins. In 2011, BSCCL’s EBITDA Margin, Gross Margin, Operating Margin, and Profit Margin were 90%, 84%, 73%, and 36%, respectively. Their business will be volume driven and with internet penetration growth rate increasing exponentially, BSCCL is well poised to grow sustains high margins.

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Cement

Cement is a growth sector in Bangladesh growing at 88% in 2005-12 on low base of per capita consumption; multiplier effect of GDP growth; annual development program (ADP) spend. However, future growth rates ought to surpass historical averages given larger scale and count of infrastructure projects in the pipeline, as well as affordable housing projects. Double-digit annual growth rates are in the offing 2013-21. The sector’s current installed capacity is 22 mmt and actual capacity ~17 mmt. The industry uses a 95% to 5% mix of Portland Composite Cement (PCC) to Ordinary Portland Cement (OPC). Per capita cement consumption is 78kg per capita, compared with 150kg for India, world average of 260kg, and China’s 1000kg per capita (highest globally). As of 1H 2012, consumption breakdown by retail : real estate developers : public sector is 45% : 25% : 30%. The unit price is around US$5.5 per bag. Clinker, the primary raw material, is ~70% of production cost. Clinker imports exposes the sector to FX-volatility while lowering capacity utilization. CAPEX additions are anticipated 2014 onwards. The top five players and respective market share are Shah Cement (14%); Heidelberg (11%); Holcim (8%); Meghna (8%) and Lafarge (~7%). * *as of most recently available figure

Lafarge Surma Cement is the only exception to the sector in that they have backward-linkage. They have a limestone quarry in Meghalaya, India, from which they transfer limestone via a 17-km conveyor belt to their production plant in Bangladesh. However, following a legal petition filed on grounds of environmental concerns, Lafarge was unable to access its limestone until the Indian Supreme Court ruled in Lafarge’s favor, after 17 months. Lafarge regained access to its quarry in Aug 2011. Other than cost savings from in-house clinker production, backward-linkage hedges Lafarge against oil price increases, which increases import costs on depreciating BDT. Lafarge, prior to operational disruption in most of 2010-11, earned 39% gross margins.

Heidelberg Cement is our top pick in the cement sector. It had annual capacity of 2.1m tons as of 2011 with 30% additional capacity expected in 2012. It’s flagship cement brands are Ruby and ScanCem. In 9M 2011, due to dollar rate depreciation, raw material import costs (~48% of sales over the last five years), reduced gross margins by 7.2% YoY. However, Heidelberg was able to pass through ~100% of the cost increase in 2012, and prices have held even as taka has appreciated against the dollar – driving our estimates of ~20% gross margins.

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Building Materials

Linde Bangladesh, erstwhile Bangladesh Oxygen Company (BOC), is the leading industrial gas manufacturer in Bangladesh. Linde’s BD operations reports to Singapore. The company operates in three segments: are gases, wielding, and electrode manufacturing. Linde’s “basket of gases” contains bulk gas, processed gas, and medical gas. Despite exchange rate exposure translating to raw-material-import costs to sales ratio of 3:10, Linde’s gross margins grew 15% in 2011, reflecting their significant pricing power. Our estimates indicate higher growth rate for 2012, on BDT appreciation and sustained demand, and 190% growth by 2015. In the bulk, processed and medical gas segments, Linde is a clear market leader with 40%, 80% and 70% share, respectively. It’s competitors are local ship-breakers. Linde’s gas prices are 35% higher than in other markets

Berger Paints, a 275-year-old company operating in South Asia for 65 years, is considered the ‘pioneer of paint’ in Bangladesh. Berger has a relatively stable market share of 52% despite competition from Asian Paints and local manufacturers. Berger has a band of prices for products depending on quality. On this band, grade A contributes 70%; grade B 25%, and grades C and D ~5% to Berger’s revenue. Berger’s products are popular in the retail segment (residential use) and automobile workshops, although the industrial segment at large is expected to drive future growth. Berger also exports to the seven sister states in north-east India.

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Contact Us

Mohammed Rahmat Pasha Chief Executive Officer [email protected] +88 01755 540040

Sajid Huq Amit Director

Strategic Sales [email protected] +88 01730 727949

Saleh Chowdhury Assistant Manager

Strategic Sales [email protected] +88 01730 727946

BRAC EPL Strategic Sales 121/B Gulshan Avenue Gulshan-2, Dhaka Bangladesh