Sri Lanka Outlook for Equities - 2013-14

150, St. Joseph’s Street, Colombo 01400, Sri Lanka.Tel: +94 112490900, Email: [email protected], www.jbs.lk

31st July 2013

Sri Lanka: Outlook for Equities - 2013/14Searching for value…

Gold Winner - Equity Research Report 2013

Page 2JB Securities Research July 2013

Market SnapshotCountry Snapshot

Name Democratic Socialist Republic of Sri Lanka

Capital Sri Jayewardenepura

Commercial Capital Colombo

Time zone Standard time zone UTC +5.30

Nationality Sri Lankan

Population 20.3 Million

Total Area 65,610 Sq.km

Density 324/Sq.km

Currency Sri Lankan Rupee (LKR)

Exchange rates* LKR 131.62/US$| LKR 174.68/€ | LKR 201.96/£

Economic size (2012 )

GDP (Market) USD 59.4 Billion

GDP (PPP) Int’l D 126.9 Billion

GDP per capita (Market) USD 2,923

GDP per capita (PPP ) Int’l D 6,136

Sovereign rating Moody’s: (B1) ‘Positive’ S&P: (B+) ‘Stable’ Fitch: (BB-) ‘Stable’

Official languages Sinhala, Tamil

Business language English

Literacy rate 91.9%

6°54′N79°54′E

*As at 1300h - 30/07/2013, Sources: Bloomberg L.P., Annual Report 2012 – CBSL 2013, IMF

Sri Jayawaredenepura

Colombo


Financials, 29.3%

Consumer Staples, 28.1%

Industrials, 20.0%

Consumer Discretionary, 9.5%

Telecom, 6.2%

Energy, 2.6%

Healthcare, 1.9%Materials,

1.8%Utilities,

0.5% IT, 0.0%

Colombo Stock Exchange Market Decomposition - GICS

Retailing, 2.2%Textiles,

Apparel & Luxury Goods,

0.6%

Auto Components,

0.2%

Household Durables, 0.1%

Consumer Discretionary

Hotels, Rest. & Leisure,

6.5%

Construction &

Engineering, 1.0%

Machinery, 1.0%

Building Products,

0.9%

Other, 0.9%

Industrials

Industrial Conglomerates,

16.2%Food, 12.3%

Tobacco,8.0%

Beverages, 4.9%

Food & Drug Retailing,

2.7%

H.H & Personal Products, 0.1%

ConsumerStaples

Insurance, 2.5%

Real Estate, 2.1%

Financials

Div. Financials

, 11.3%

Banks, 13.4%

Source: JBS Research, CSE, GICS

Market Cap – LKR 2.3 Trillion, USD 17.8 Billion (26 July 2013)


Recap of the last 12 months…

Potential risks exist…

Investment case remains…


80

100

120

140

160

180

Start Value = 105

End Value = 125

Low Point = 90

News flow was mixed…

Amended Divineguma bill passed. The bill would create a new department by amalgamating 3 authorities which will come under the purview of Economic Development Minister, Basil Rajapakse.

Riot breaks out in main prison facility in Welikada, a ward of Colombo City. The riot left 27 people dead and 40 injured.

2012

Q1

INTE

RNAT

ION

ALDO

MES

TIC

Sources: Newspaper articles, Central Bank of Sri Lanka, LMD, The Nielsen Company, JBS Research

High Point = 158

Government denies UN report that it intimidated UN staff investigating abuses at the end of the war. The report also said UN human rights agencies had failed to fulfill their responsibility to protect civilians in the final months of the conflict.

178 Sri Lankan visitors to a Christian shrine in Velankanni TN were stopped by protestors, and in another instance five buses of pilgrims stoned.

Canadian PM to boycott the CHOGM to be held in SL end of this year, unless the HR & accountability issues are resolved.

Protests intensify in Tamil Nadu ahead of UN vote on SL HR record. SL government warns its nationals against traveling to TN India.

UN Human Rights Council passes highly-critical resolution urging Sri Lanka to conduct "independent and credible investigation" into alleged war crimes during Tamil Tiger insurgency.

Parliament passes impeachment motion against Chief Justice Shirani Bandaranayake. Opposition says move politically motivated.

Two Sri Lankan Buddhist monks attacked in Tamil Nadu by small mobs.

Australia rejects calls to boycott CHOGM in Sri Lanka over alleged human rights violations.

Parliament passes legislation that increase police power. Under the new bill police may detain and question a person for up to 48 hours.

President reshuffles cabinet portfolios. Increases the number of ministers to 102, including 67 cabinet ministers, out of 225 MP’s.

Intense diplomatic pressure exercised by Western nations & India over SL Government HR issues and Judicial Independency, throughout the year

Duminda Silva returns from Singapore after being treated for injuries sustained in a gun battle which lead to 3 deaths. He is incarcerated on arrival but allowed to take medical treatment in a Private hospital.

Mattala Rajapakse int'l Airport ceremonially opened by the President.

Racially incited mob attacks “Fashion bug” clothing retailer owned by Muslims in a suburb of Colombo.

Mass pubic protest against the 50% -127% rise in electricity prices.

Azad Sally , ex deputy mayor arrested & subsequently released for alleging that the gov’t was behind the racially charged attacks against Muslims.

The Queen to miss CHOGM to be held later this year in SL, Prince Charles to take her place.

4 yr low = 87

4 yr high = 173

Communal unrest increases

Political Human R.Infrastructure UnrestLEGEND

Q4 Q2Q3Q2

2013

SL extends power cuts (3 ½ h per day) due to downtime at the Chinese built power plant & drought affecting hydro power production.

Government sweeps through major reforms to strengthen its hand

LMD

-Nie

lsen

Bus

ines

s Co

nfid

ence

Inde

x


8.25% 8.00%6.44%

4.77%6.31% 6.41% 5.95%

Q1 Q2 Q3 Q4 Q1

2011 Annual 2012 Quarterly 2012 Annual 2013

16.77%

13.15%

15.10%

13.36%

20.67%

15.87%15.16%

Economic growth slowed...

NominalGrowth

RealGrowth

Source: Census and Statistics Sri Lanka, JBS Research Analysis


Investments leading growth…

Source: CBSL annual report 2012, JBS Research Analysis

24.90% 21.36% 21.69%

69.69%

64.33%65.77%

16.18%

17.65%

15.58%

21.07%

17.90%

21.43%

6.48%

6.64%

6.35%

-38.32%-27.87% -30.82%

2010 2011 2012

Imports of goods and services

Exports of goods and services

Private consumption

Government consumption

Investment-Private

Nominal (Real) GDP growth

Investment-Public

15.89% (6.41%)16.78% (8.25%)

100%=GDP in LKR Bn. (Nominal)

12.37%42.51%

24.16% 14.61%

15.47%23.98%

14.66%

28.54%5,062

6,542

7,582

GDP Decomposition and sector growth


Contribution to Growth %, YE2009-12 (3yrs)

External flows fuelling growth…

Source: Central Bank of Sri Lanka, JBS Research Analysis

2,927

3,608

4,583

5,339

3,330

4,116

5,145

5,985

4,732

5,715

7,5337,809

2009 2010 2011 2012

11.27% 11.53% 12.73% 13.14% % of GDP

41.19%

100.00%

45.90%

12.90%

Leaders Steady Laggards Total,2009/12

12.46%

7.26%

3.57%

Note: Includes net remittances, grants, net borrowings (govt. + commercial bank net ), capital transfers and net income outflows

Net External Flows (USD/Mn) CAGR%

7.55%

100% = LKR.598Bn

Net Private Remittances

Gross Remittances Inflows

Leaders - Hotels, mining & quarrying, construction, fishing, post & telecommunication, cargo-ports & civil aviation, passenger goods & railway transport.Steady - Import trade, banking, insurance & real estate, domestic trade, electricity, gas & water, manufacturing.Laggards - Private services, export trade, agriculture, livestock & forestry, Ownership of dwellings, government services.


6,619,958

6,751,793 6,839,087

7,261,077

2009 2010 2011 2012

1.99%

1.29%

6.17%

369,974

391,828

418,728 419,673

2009 2010 2011 2012

5.91%

6.78%

0.23%

Growth is generating new jobs…Employed Population

Labour Productivity (LKR)GDP/Employed Population

GDP Growth Decomposition

Source: CBSL annual report 2012, JBS Research Analysis

5.91%6.87%

0.23%

1.99%

1.29%

6.17%

2010 2011 2012

8.02% 8.25%

6.41%Employmentgrowth

Productivitygrowth

All in LKR constant 2002

XX% Growth

Note: Growth in GDP = [(1+Growth in Productivity)*(1+Growth in Employment)]-1


1.13

1.14

1.13

1.10

2009 2010 2011 2012

0.89%

-3.04%

-0.98%

Capital ProductivityGDP/Capital stock

327,034

343,298

370,497

382,958

2009 2010 2011 2012

4.97%

7.92%

3.36%

Capital Intensity (LKR)Capital stock/Employed population

Capital intensity driving labour productivity…

XX% Growth

All in LKR constant 2002

Source: CBSL annual report 2012, JBS Research AnalysisNote: Growth in Productivity = [(1+Growth in Capital Intensity)*(1+Growth in Capital Productivity)]-1

Capital stock is calculated using perpetual inventory method.

369,974

391,828

418,728 419,673

2009 2010 2011 2012

5.91%

6.78%

0.23%

Labour Productivity (LKR)GDP/Employed Population


Erratic rainfall affected agricultural output…

2,125 2,384 2,6301,996

2,717

1,750 1,268

1,671

1,8981,129

2008 2009 2010 2011 2012

Paddy Production

-

500

1,000

1,500

2,000

2,500

3,000

3,500

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

mm

Monthly Rainfall

MT ‘000

Yala

Maha

* Average rainfall in 6 paddy growing districts (60% of output) -Ampara, Anuradhapura, Batticaloa, HambantotaKurunegala and Polonnaruwa

2011

2012

Avg. *

Source: Department of Meteorology, Department of Census and Statistics


Fewer rains… less hydro in generation mix… more expensive thermal

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jan-

11

Feb-

11

Mar

-11

Apr-

11

May

-11

Jun-

11

Jul-1

1

Aug-

11

Sep-

11

Oct

-11

Nov

-11

Dec-

11

Jan-

12

Feb-

12

Mar

-12

Apr-

12

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov

-12

Dec-

12

Hydro contribution

Reservoir storage

45%

20%

61%

53%

77%

38%

2% 3% 1%

Jun-11 Jun-12 Dec-12

Hydro

Thermal

Other

+ 75MW + 75MWUpper Kotmale

Source: PUCSL, Ceylon Electricity Board, Central Bank of Sri Lanka

Reservoir Storage & Hydro Contribution Generation Mix


Foreign arrivals continued to grow…

2010 2011 2012

1,005.6

2010 2011 20122010 2011 2012

Foreign Arrivals 1 (‘000s)

Source SLTDA

Foreign Guest Nights (‘000s)

1 Foreign arrivals – Total of tourist arrivals and VFR (Visiting Friends and Relations)

5,375.7 7,410.07,258.9

Tourism Earnings (US$ Mn)

575.9 830.3 1,038.7

619.1

785.4

888.135.4

70.5

117.5

VFRTourist arrivals

10 10 10 Avg. length of stay

855.9

654.5

30.8%

17.5%

35.0%

2.1%

44.2%

25.1%


High room tariffs + Inadequate promotion… less demand for the formal sector

2010 2011 2012 2010 2011 2012

Formal sector 1 Room Inventory

70.2%

Foreign Guest Nights in Graded establishments

1 Graded accommodation establishments Source SLTDA

occupiedavailable

77.1% 71.1%

25214,653

26915,510

4,126,544

5,011,480 5,038,000

25314,714

Establishments

Room inventory


Cheaper tariffs… more demand for the informal sectorSupplementary Establishments Room

Inventory

1 Informal sector - supplementary accommodation establishments and other unregistered establishments Source SLTDA

2,418,216

3,548,270

5,018,050

2010 2011 2012

Foreign Guest Nights in Informal Sector 1

2010 2011 2012

6546,141

6256,632

5305,895

Establishments

Room inventory

1,303 2

2 Total accommodation listings on www.agoda.com


2,4743,030

3,358

901

1,117

1,346

449

658

862

175

195

222

2010 2011 2012

5,144

5,986

56.1% 16.5%

22.5% 22.2%

14.4% 38.6%

3.7% 12.6%2.2% 26.9%1.1% 37.3%

2012 2012

Middle East

Europe

Americas

OtherAustralia and NZ

Asia

Share % CAGRAll amounts in USD millions

4,116

Source : Central Bank of Sri Lanka

Remittance growth continued to be strong…


14.6% 14.3%13.0%

9.0%

12.5%14.0%

17.9%

21.0%

26.4%

2010

2011

2012

Indi

a

Bang

lade

sh

Phill

ippi

nes

Thai

land

Mal

aysi

a

Viet

nam

725813 845

93

122143

17

1516

2010 2011 2012

Tax Non tax Grants

Government revenue growth slowed… lower than peers

13.9%

5.7%834

9501,004

*Excludes grants **Peer data as of 2011

Government Revenue Government Revenue* to GDP

LKR Bn.

Source: Central Bank of Sri Lanka, Asian Development Bank

Sri Lanka


22.8%21.4%

19.7%

14.9% 15.2% 15.8%

19.8%

25.9%28.0%

2010

2011

2012

Indi

a

Bang

lade

sh

Phill

ippi

nes

Thai

land

Mal

aysi

a

Viet

nam

1,280 1,400 1,493

937 1,007

1,094

41

30

25

2010 2011 2012

Lending minus Repayments

Recurrent

Expenditure and Lending minus Repayments

Government expenditure growth slowed… higher than peers

9.4%

6.6%1,280

1,4001,493

Government Expenditure to GDPGovernment Expenditure


LKR Bn.

*Peer data as of 2011

Sri Lanka


-8.0%

-6.9%-6.4%

-5.9%

-4.8%

-2.9%-2.5%

-2.0% -1.8%

2010

2011

2012

Indi

a

Mal

aysi

a

Bang

lade

sh

Viet

nam

Phill

ipin

es

Thai

land

(446)(450)

(489)

2010 2011 2012

0.9%

8.6%

Deficit increased… higher GDP growth reducing ratio… high relative to peers


Fiscal Balance to GDPFiscal Balance

LKR Bn.


Sri Lanka


Primary balance is a deficit…

* Primary balance is government revenue minus all expenses excluding interest. Assuming nominal interest rates equal nominal GDP growth a primary surplus reduces debt to GDP.

Deficit as a % of GDP

Interest Cost as a % of GDP

Primary* Deficit as a % of GDP

Source : JBS Research Analysis, Central Bank of Sri Lanka

8.0%6.9% 6.4%

2010 2011 2012

6.3%

5.5% 5.4%

2010 2011 2012

1.7%

1.4%

1.1%

2010 2011 2012


244 219 286

(2)

192 132 204

39 71

2010 2011 2012

Financing of Budget Deficit

Foreign borrowing

Domestic bank

Domestic non bank

LKR Bn.

446 450489

Foreign borrowing

Domestic bank

Domestic non bank

Financing of Budget Deficit (% mix of funding)

Source: Central Bank of Sri Lanka

Foreign sources funded the fiscal deficit easing pressure on domestic sources

62.6%57.0%

49.5%

30.2%32.8%

34.1%

7.3% 10.1%16.4%

2010 2011 2012


Concessional Loans

Non-Concessional Loans

Commercial Loans

* Sovereign bonds and foreign holding of treasuries are classified as commercial loans

Foreign Borrowings of the Government(%GDP)

Foreign Borrowings of the Government(% composition)


Shift in reliance to non-concessional and commercial loans…

22.6%20.3%

18.1%

10.9%11.7%

12.4%

2.6%3.6% 6.0%

2010 2011 2012

36.1% 35.6% 36.5%

Concessional Loans

Non-Concessional Loans

Commercial Loans

62.6%57.0%

49.5%

30.2%32.8%

34.1%

7.3% 10.1%16.4%

2010 2011 2012


Real Interest Rates

Source : Central Bank of Sri Lanka, JBS Research Analysis* CCPI 2002 – Core Inflation 12 month MA, 1 year treasury bill yield

Inflation trended up … nominal rates adjusted up … real rates +

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep-

10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep-

11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep-

12

Nov

-12

Jan-

13

Mar

-13

May

-13

0%

2%

4%

6%

8%

10%

12%

14%

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep-

10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep-

11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep-

12

Nov

-12

Jan-

13

Mar

-13

May

-13

T-bill rate

Inflation*


Domestic credit growth retarded… credit to gov’t increased…


All amounts in LKR Bn.

In 2013, credit to govt. was 3.8X

private sector credit

36.7

9.1

7.6

-150

-100

-50

0

50

100

150

200

Jan-

10Fe

b-10

Mar

-10

Apr-

10M

ay-1

0Ju

n-10

Jul-1

0Au

g-10

Sep-

10O

ct-1

0N

ov-1

0De

c-10

Jan-

11Fe

b-11

Mar

-11

Apr-

11M

ay-1

1Ju

n-11

Jul-1

1Au

g-11

Sep-

11O

ct-1

1N

ov-1

1De

c-11

Jan-

12Fe

b-12

Mar

-12

Apr-

12M

ay-1

2Ju

n-12

Jul-1

2Au

g-12

Sep-

12O

ct-1

2N

ov-1

2De

c-12

Jan-

13Fe

b-13

Mar

-13

Apr-

13

Credit, Monthly Change

PrivateCorps.Govt.

1,217

18.3%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

-

200

400

600

800

1,000

1,200

1,400

Jan-

10Fe

b-10

Mar

-10

Apr-

10M

ay-1

0Ju

n-10

Jul-1

0Au

g-10

Sep-

10O

ct-1

0N

ov-1

0De

c-10

Jan-

11Fe

b-11

Mar

-11

Apr-

11M

ay-1

1Ju

n-11

Jul-1

1Au

g-11

Sep-

11O

ct-1

1N

ov-1

1De

c-11

Jan-

12Fe

b-12

Mar

-12

Apr-

12M

ay-1

2Ju

n-12

Jul-1

2Au

g-12

Sep-

12O

ct-1

2N

ov-1

2De

c-12

Jan-

13Fe

b-13

Mar

-13

Apr-

13

Net Credit to Govt.

Net Credit to Government

Annual Change (%)

345

34.0%

0%

50%

100%

150%

200%

250%

-

50

100

150

200

250

300

350

400

Jan-

10Fe

b-10

Mar

-10

Apr-

10M

ay-1

0Ju

n-10

Jul-1

0Au

g-10

Sep-

10O

ct-1

0N

ov-1

0De

c-10

Jan-

11Fe

b-11

Mar

-11

Apr-

11M

ay-1

1Ju

n-11

Jul-1

1Au

g-11

Sep-

11O

ct-1

1N

ov-1

1De

c-11

Jan-

12Fe

b-12

Mar

-12

Apr-

12M

ay-1

2Ju

n-12

Jul-1

2Au

g-12

Sep-

12O

ct-1

2N

ov-1

2De

c-12

Jan-

13Fe

b-13

Mar

-13

Apr-

13

Credit to Corporations

Credit to SOEs

Annual Change (%)

2,403

10.2%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

500

1,000

1,500

2,000

2,500

3,000

Jan-

10Fe

b-10

Mar

-10

Apr-

10M

ay-1

0Ju

n-10

Jul-1

0Au

g-10

Sep-

10O

ct-1

0N

ov-1

0De

c-10

Jan-

11Fe

b-11

Mar

-11

Apr-

11M

ay-1

1Ju

n-11

Jul-1

1Au

g-11

Sep-

11O

ct-1

1N

ov-1

1De

c-11

Jan-

12Fe

b-12

Mar

-12

Apr-

12M

ay-1

2Ju

n-12

Jul-1

2Au

g-12

Sep-

12O

ct-1

2N

ov-1

2De

c-12

Jan-

13Fe

b-13

Mar

-13

Apr-

13

Credit to Private SectorCredit to the Private Sector

Annual Change (%)


Credit growth funded via external borrowings…All amounts in LKR Bn.


Net Foreign Assets of the Banking System

420

(143)

(372)

(95)

Jan-

10

Apr-

10

Jul-1

0

Oct

-10

Jan-

11

Apr-

11

Jul-1

1

Oct

-11

Jan-

12

Apr-

12

Jul-1

2

Oct

-12

Jan-

13

Apr-

13

Foreign currency Banking UnitsDomestic Banking UnitsMonetary AuthoritiesNet Foreign Assets of the Banking System

Consolidated Broad Money (M2b)

3,133

Jan-

10

Apr-

10

Jul-1

0

Oct

-10

Jan-

11

Apr-

11

Jul-1

1

Oct

-11

Jan-

12

Apr-

12

Jul-1

2

Oct

-12

Jan-

13

Apr-

13

Net Domestic Assets of the Banking System

2,403

1,217

345

(737)

3,228

Jan-

10

Apr-

10

Jul-1

0

Oct

-10

Jan-

11

Apr-

11

Jul-1

1

Oct

-11

Jan-

12

Apr-

12

Jul-1

2

Oct

-12

Jan-

13

Apr-

13

Other ItemsCredit to CorporationsNet Credit to GovernmentCredit to the Private SectorNet Domestic Assets of the Banking System

Foreign borrowings funding domestic credit


457406

222

12

-4

6

116173

121

30119

6

2011 2012 Apr-13

LKR Deposits

LKR Borrowings

FCY Borrowings

FCY Deposits

515434

60-36

2

111

108

42

3 142

221

8

-4

4

2011 2012 Apr-13

LKR LoansDebt securities and othersFCY LoansGovernment SecuritiesShares and Unit trusts

Change in Key Liabilities Change in Key Assets

Commercial banks leaned towards foreign borrowings...All amounts in LKR Bn.



5%

7%

9%

11%

13%

15%

17%

30-D

ec-1

109

-Jan-

1218

-Jan-

1226

-Jan-

1203

-Feb

-12

15-F

eb-1

224

-Feb

-12

05-M

ar-1

215

-Mar

-12

23-M

ar-1

202

-Apr

-12

11-A

pr-1

223

-Apr

-12

02-M

ay-1

211

-May

-12

21-M

ay-1

229

-May

-12

07-Ju

n-12

15-Ju

n-12

25-Ju

n-12

04-Ju

l-12

12-Ju

l-12

20-Ju

l-12

30-Ju

l-12

08-A

ug-1

216

-Aug

-12

24-A

ug-1

204

-Sep

-12

12-S

ep-1

220

-Sep

-12

01-O

ct-1

209

-Oct

-12

17-O

ct-1

225

-Oct

-12

05-N

ov-1

214

-Nov

-12

22-N

ov-1

203

-Dec

-12

11-D

ec-1

219

-Dec

-12

31-D

ec-1

208

-Jan-

1317

-Jan-

1328

-Jan-

1307

-Feb

-13

15-F

eb-1

326

-Feb

-13

07-M

ar-1

315

-Mar

-13

25-M

ar-1

304

-Apr

-13

12-A

pr-1

323

-Apr

-13

03-M

ay-1

313

-May

-13

21-M

ay-1

330

-May

-13

07-Ju

n-13

17-Ju

n-13

25-Ju

n-13

03-Ju

l-13

11-Ju

l-13

19-Ju

l-13

Repo Reverse Repo AWPLR AWDR Call Money Rate

SLIBOR(1 month) T bill(3month) gross T bill(3month) AWFDR AWLR

Policy Rate Pass-through to Market Interest Rates

Monetary policy was loosened…


7.00%

9.00%

10.07%

11.79%

10.56%

8.72%

9.59%

8.63%

13.61%

16.25%

* Latest figures as at 24th July 2013


10%

11%

12%

13%

14%

15%

16%

17%

30-D

ec-1

109

-Jan-

1218

-Jan-

1226

-Jan-

1203

-Feb

-12

15-F

eb-1

224

-Feb

-12

05-M

ar-1

215

-Mar

-12

23-M

ar-1

202

-Apr

-12

11-A

pr-1

223

-Apr

-12

02-M

ay-1

211

-May

-12

21-M

ay-1

229

-May

-12

07-Ju

n-12

15-Ju

n-12

25-Ju

n-12

04-Ju

l-12

12-Ju

l-12

20-Ju

l-12

30-Ju

l-12

08-A

ug-1

216

-Aug

-12

24-A

ug-1

204

-Sep

-12

12-S

ep-1

220

-Sep

-12

01-O

ct-1

209

-Oct

-12

17-O

ct-1

225

-Oct

-12

05-N

ov-1

214

-Nov

-12

22-N

ov-1

203

-Dec

-12

11-D

ec-1

219

-Dec

-12

31-D

ec-1

208

-Jan-

1317

-Jan-

1328

-Jan-

1307

-Feb

-13

15-F

eb-1

326

-Feb

-13

07-M

ar-1

315

-Mar

-13

25-M

ar-1

304

-Apr

-13

12-A

pr-1

323

-Apr

-13

03-M

ay-1

313

-May

-13

21-M

ay-1

330

-May

-13

07-Ju

n-13

17-Ju

n-13

25-Ju

n-13

03-Ju

l-13

11-Ju

l-13

19-Ju

l-13

AWPLR

AWLR

3.54%1.58%

2.67%

Credit Quality Spread

Transmission mechanism delayed pass through…



SRR* cut created greater liquidity...

8.42%

Money Market Net Liquidity & Overnight Interest Rate



*Statutory Reserve Ratio

1.86

0%

2%

4%

6%

8%

10%

12%

-20

-10

0

10

20

30

40

50

60

70

02-Ja

n-12

10-Ja

n-12

19-Ja

n-12

27-Ja

n-12

06-F

eb-1

216

-Feb

-12

27-F

eb-1

206

-Mar

-12

16-M

ar-1

226

-Mar

-12

03-A

pr-1

216

-Apr

-12

24-A

pr-1

203

-May

-12

14-M

ay-1

222

-May

-12

30-M

ay-1

208

-Jun-

1218

-Jun-

1226

-Jun-

1205

-Jul-1

213

-Jul-1

223

-Jul-1

231

-Jul-1

209

-Aug

-12

17-A

ug-1

227

-Aug

-12

05-S

ep-1

213

-Sep

-12

21-S

ep-1

202

-Oct

-12

10-O

ct-1

218

-Oct

-12

26-O

ct-1

206

-Nov

-12

15-N

ov-1

223

-Nov

-12

04-D

ec-1

212

-Dec

-12

20-D

ec-1

201

-Jan-

1309

-Jan-

1318

-Jan-

1329

-Jan-

1308

-Feb

-13

18-F

eb-1

327

-Feb

-13

08-M

ar-1

318

-Mar

-13

27-M

ar-1

305

-Apr

-13

16-A

pr-1

324

-Apr

-13

06-M

ay-1

314

-May

-13

22-M

ay-1

331

-May

-13

10-Ju

n-13

18-Ju

n-13

26-Ju

n-13

04-Ju

l-13

12-Ju

l-13

23-Ju

l-13

Net Liquidity Repo rate

CBSL cuts SRR from 8% to 6%


Change in Imports Change in Exports

9,710

9,326

244

117

161 10 73 54

263

386

405

488 331

200

117 79

64 25 28 29

2011 Petroleum Machineryand

equipment

Buildingmaterial

Otherconsumer

goods

Transportequipment

Textiles andtextilearticles

Food andbeverages

Vehicles OtherIntermediate

Diamondand Precious

Metals

OtherIndustrial

Textiles andgarments

Other Agri Tea Food,beverages

and tobacco

Rubberproducts

Mineralproducts

Undisclosed 2012

% Increase 5.1% 10.0% 15.0% -6.8% -2.3% -16.8% -19.0% -43.8% -9.9% -45.4% -12.9% -4.8% -11.3% -5.3% -18.4% -2.9% 86.3% - -

Trade Deficit

Trade Deficit

Lower imports and exports… trade deficit reduced marginally…USD millions

As a % of GDP

16.4%

15.8%

Gold imports drop from 604mn in 2011

to 170mn in 2012

Vehicle imports drop from 881mn. in 2011 to 495mn. in 2012 following duty hike



Service account is a surplus… income account is a deficit


1,634

1,251

1,172 1,039

710

436

680 656

Inflows Outflows Inflows Outflows Inflows Inflows Outflows

Transportation Travel BPO, ITES Other Surplus

991

1,149

292 445

15 34 14

Outflows Inflows Outflows Inflows Outflows Inflows

Interest and OtherCharges

Direct Investment Compensation ofEmployees

Deficit

Income AccountService Account

USD millions

23.0%17.4%

41.7%

34.1% 23.5%

78.9% 75.0% 77.4%

25.2%

22.8% 50.0%15.6%

-34.8%39.8%

13.7%

Tourism flows

External debt service

As a % of GDP

2.10% 1.93%

1.7%

Percentage increase over 2011


19,183

9,409 9,307

3,915

9,774

3,788 2,538 321

1,469

5,985

646 53

Imports Exports Trade deficit Receipts Payments Receipts Payments Privatereceipts

Privatepayments

Officaltransfers

(net)

32.3% 16.5% 15.8% 6.4% 4.3% 0.5% 2.5% 15.7% 10.1% 1.1% 0.1% 6.6%

Merchandise trade Services Income Goods,Services andIncome (net)

Current transfers Currentaccountdeficit

Increasing remittances reduced the current account balance…


-7.4%-5.4%

27.9%16.3%22.8%-3.1%

14.9% -11.7% -15.2%

-31.3%

31.9% 0.5%

USD millions

Remittance flows

Percentage increase over 2011

Percentage of GDP


7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

50

60

70

80

90

100

110

5-Ja

n-11

5-M

ar-1

1

5-M

ay-1

1

5-Ju

l-11

5-Se

p-11

5-N

ov-1

1

5-Ja

n-12

5-M

ar-1

2

5-M

ay-1

2

5-Ju

l-12

5-Se

p-12

5-N

ov-1

2

5-Ja

n-13

5-M

ar-1

3

5-M

ay-1

3

Foreign holdings

As a % of total T-bills

Foreign Limit

Switch from bills to bonds

9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

15.5%

16.0%

150

200

250

300

350

400

450

5-Ja

n-11

5-M

ar-1

1

5-M

ay-1

1

5-Ju

l-11

5-Se

p-11

5-N

ov-1

1

5-Ja

n-12

5-M

ar-1

2

5-M

ay-1

2

5-Ju

l-12

5-Se

p-12

5-N

ov-1

2

5-Ja

n-13

5-M

ar-1

3

5-M

ay-1

3

Foreign holdings

As a % of total T-bills

Foreign Limit

Positive investor sentiment flows on to

treasuries following the sovereign bond being oversubscribed 10.5X

…rule relaxation…

Jan ’13: Foreigners allowed to subscribe upfront the entire allocation

for the year – this was previously capped at 12.5% of outstanding stock

Foreign Holding of Treasury BondsForeign Holding of Treasury Bills

Foreign limit of 12.5% not imposed… yield seeking investors flowed in



(4)

* Latest figures as at 26th June 2013

101


75

80

85

90

95

100

105

95

100

105

110

115

120

125

130

135

140

Jan

11Fe

b 11

Mar

11

Apr 1

1M

ay 1

1Ju

n 11

Jul 1

1Au

g 11

Sep

11O

ct 1

1N

ov 1

1De

c 11

Jan

12Fe

b 12

Mar

12

Apr 1

2M

ay 1

2Ju

n 12

Jul 1

2Au

g 12

Sep

12O

ct 1

2N

ov 1

2De

c 12

Jan

13Fe

b 13

Mar

13

Apr 1

3M

ay 1

3Ju

n 13

Jul 1

3

REER

NEER

LKR

Appreciation of the USD Against Regional Currencies

LKR range bound… REER appreciating due to higher relative inflation

Source: forexpros.com, Central Bank of Sri Lanka, JBS Research

REER > NEER due to higher domestic

inflation

Readjustment after

depreciation

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Jan

11

Mar

11

May

11

Jul 1

1

Sep

11

Nov

11

Jan

12

Mar

12

May

12

Jul 1

2

Sep

12

Nov

12

Jan

13

Mar

13

May

13

Jul 1

3

Sri Lankan rupee (LKR)

Bangladeshi taka (BDT)

Vietnamese dong (VND)

Indian rupee (INR)

Chinese yuan (CNY)

* Latest figures as at 23rd July 2013


Frontier markets equity inflows increased including into Sri Lanka

67.62

55.03

40.56

75.41

July - Sep Oct - Dec Jan - Mar April - June

2012 2013

Net Inflows of Foreign Companies (July 2012 – June 2013)

Major FII Inflows ( July 2012 – March 2013 )

Source : JBS Research estimates base on top 20 shareholders list, CSE

Aberdeen Group

12.84

9.92

5.06

JKH

SPEN

LLUB

COMBOTHER

81.29

49.21JKH

SAMP

LOLC

16.33

5.87

4.42

BBH –Matthews Asia Fund

26.63

JPLMU Franklin TempletonInvestment Fund

31.90

COMB

Wasatch fund

7.96

All amounts in USD Millions


Large liquid caps attracted most of the flows…

Source : CSE , JBS research estimates

Foreign Net Equity Portfolio Investment1 July 2012 – 30 June 2013 (Total for the period = 240.98 )

185.57

124.15

18.36

16.9011.73

8.098.01 4.00 1.06 0.16 -5.35

- 1.55

JKH DIST SAMP CARG LION NEST CTC DFCC COMB HNB SPEN51.52% 7.62% 7.01% 4.87% 3.36% 3.32% 1.66% 0.44% 0.07% - 2.22% - 0.64%

Net inflow into the stock in comparison to the market

Foreign net equity portfolio investment

TOTAL77.00%



5.0%

2.4%

2.7%

2.2%

2.0%

1.7%

1.3%

1.2%

1.0%0.9% -1.0%

2.8%

22.1%

JKH CTC COMB NDB SAMP LLUB DIST DFCC HNB NEST BUKI Other Total

Attribution of S&PSL20 Growth June 2012 – June 2013

Which in turn drove up the index…

Source: CSE, S&P, JBS Research


Indices recorded healthy gains…

Source: CSE, S&P, JBS Research

2,500

3,100

3,700

4,500

5,500

6,500

Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13

Movement in ASI & S&PSL20

Series1 Series2ASI S&PSL20

ASI S&PSL20

22.3%*

30.5%*

*Returns are shown for ASI only.


-10%

0%

10%

20%

30%

40%

50%

60%

Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13

Beverage, Food and Tobacco sector outperformed…

Source: CSE, JBS Research

*See glossary for acronyms

BFT*

BFI

ASI

S&P

DIV

H&T


Foreign holding as a %of public holding*

18.32

22.74

30.0110.46

8.20

7.9910.46

15.65

15.37

64.37

30.52

3.08

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

JKH CTC NEST COMB DIAL HNB DIST SPEN LLUB CARG LION NDB

Large cap stocks are well owned by FIIs….

Source : CSE , Bloomberg market data , JBS research estimates

64.23 %

77.01 %

43.87 %

40.10 %

51.66 %

29.12 %

24.49 %

67.82 %

61.78 %

39.45 %

59.21 %

41.22 %

* Public Holding : The total number of shares publicly owned and available for trading

88.36% 15.87% 9.18% 85.00% 14.73% 69.81% 29.53% 40.07% 49.00% 18.35% 15.15% 95.54%

JKH CTC NEST COMB DIAL HNB DIST SPEN LLUB CARG LION NDB

7 93 421 10 11 12 13 17 18

P/E Ratio

Public holding %

Rank based on market capitalization


11.0%

Domestic institutions recorded outflows …

-13.73

47.29

15.90

2012 (DEC)2011 (Dec)2010 (Dec)

5.4% 0.81

2.35

-0.60

201220112010

Employee Trust Fund

-2.35

10.27

-10.62

201220112010

Insurance Companies

-0.03

-1.20

-0.09

201220112010

Unit Trusts

Equity net cash flows (LKR Bn) Equity allocation % of total portfolio

Source : SEC Sri Lanka , JBS research estimates

4.0%

8.0%

16.0%

15.0%

53.0%

42.0%

29.0%

4.0%

5.0%

4.7%

Assumption: Annual return of institutional funds equal to ASI index return

2010 2011 2010 2011 20122012

Employee Provident Fund


168.43

91.31

115.45

154.37

203.67

97.85

133.79

211.80

July - Sep Oct - Dec Jan - Mar April - June

2012 2013

Retail investors were net sellers…

Purchases and Sales of Local Individuals(July 2012 – June 2013)

Local individuals purchases Local individuals sales

Source : CSE



Credit extended by margin providers remained stable…

Source : Securities and Exchange Commission of Sri Lanka

* Loan-to-Value ratio is calculated considering only the loans extended by margin providers

10.60

11.67 11.63

Aug-12 Dec-12 May-13

Loans Outstanding from Margin Providers (LKR Billions)

27.98%

31.50%29.87%

Aug-12 Dec-12 May-13

Loan-to-Value Ratio *


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13

Regulation became more “market friendly”…

ASI

Source : Securities and Exchange Commission of Sri Lanka

SEC relaxes rules on

price bands SEC further relaxes rules on debt

settlement

SEC Director General leaves office

SEC Chairperson resigns

SEC directive permits brokers to extend credit to investors

up to three times net adjusted capital

SEC revokes directive on price bands all

together

SEC Chairman resigns with an additional

commissioner following suite

SEC Director General resigns

SEC Director of Surveillance resigns


Equity issuances were low… take off in debt issuances…In LKR Mn

Source: CSE, SEC, WFE, JBS Research

-

5,000

10,000

15,000

20,000

25,000

11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2

Secondary issuances

Primary issuances

Debt issuances


M&A activity was subdued…

2,770

1,811

949

2,928

4,200

328

7,000

130

843

-

350

- -

3,400

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2010 2011 2012 2013

Quarterly Volume of Mergers & Acquisitions

In LKR Mn

Source: JBS Research


90.2%

8.1%1.8%

Contribution to Growth

P/E Growth Earnings Growth Combined Effect

100%

21.7%1.9% 0.4%

124%

Jun-12 P/E Growth EarningsGrowth

CombinedEffect

Jun-13

Disaggregation of Market Cap Growth

Expectations have driven the market…

Source: CSE, JBS Research


0

5

10

15

20

25

0

5

10

15

20

25

TRD

P&E

Sample PER

Sample PER Ex BFI

Bifurcated market…

23.7% 4.5% 25.3% 4.7% 7.3% 22.6%

1.3%

3.4%1.9% 1.3% 1.3%

1.2%0.4%

Market PER 29 July 2013

Sample: 60 Largest Companies, represents 80% total Market Cap

12.1

14.7

P/E

(Sample Sector capitalization)/(Total sample capitalization)Data: Bloomberg L.P. , JBS Research.

BFT OIL DIV H&T TLE BFI

MFG

HLT

C&E

INVL&P MRT

1.0%*See glossary for acronyms


Equity Risk Premium has fallen… risk is being under priced

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13

Source: JBS Research

In calculating the implied equity risk premium the following assumptions have been made:

Nominal Earnings GrowthYears 1-5: 20%Years 6-15: 16%Perpetual : 14%

10 Year T-bond (09.00%2023A): 11.59%


Relative valuations high compared to peers …

6.3%

5.0%

7.3%

6.1% 5.9%

8.2%

4.1%3.7% 3.9% 3.9%

8.1%

11.6%

Malaysia Phillipines Vietnam Thailand India Sri Lanka

Earnings Yield 10Y Bond Yield

as at 30/07/2013

Source: Bloomberg LP, CBSL, AsianBondsOnline.org

BEER Ratio*

0.65

0.74

0.53

0.63

1.37

1.41

Interpretation of BEER* (Bond Equity Earnings Yield) Ratio, calculated as (Bond Yield/Earnings Yield): This is best used as a measure of exclusion, i.e. when BEER ratio > 1, the market can be interpreted as being overvalued. However, a BEER < 1 does not imply that equities are undervalued; it simply indicates that valuations merit further investigation.






Three-speed post conflict economy …

Leaders > CAGR 8.70% Steady CAGR 6.40% - 8.70% Laggards < CAGR 6.40%

Hotels and Restaurants

Construction

Mining and Quarrying

Post and TelecommunicationCargo-Ports and Civil Aviation

Import Trade Domestic Trade

Electricity, Gas and Water

0123456789

1011121314151617181920212223242526272829

- 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 2,200 2,400

Private Services

Export Trade

Agriculture, Livestock and Forestry

Government Services

Ownership of Dwellings

% CAGR, YE2009-12

GDP real sector size, YE2009: LKR2,449Bn

Growth,YE2009/12: 7.55%


Passenger, Goods and Railway TransportBanking, Insurance and Real Estate etc.

Fishing

Manufacturing


ConstructionManufacturing

Domestic Trade

Bank’,Insur’ & Real Est’ etc.Import Trade

Mining & Quarrying Agri’, Livestock & Forestry

Export TradeElectricity, Gas and WaterFishing Private Services

Hotels and Restaurants

Government Services

Cargo and Civil Aviation Ownership of Dwellings0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

16%

17%

18%

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18%

% Contribution to growth, YE2009-12

Leaders > 8.70%Steady 6.40% - 8.70%Laggards < 6.40%All in CAGR 2009-12 Passenger, Goods &

Railway Transport

Post & Telecommunication

% GDP Sector share, YE2009Source: Central Bank of Sri Lanka, JBS Research Analysis

Non-tradable sectors driving growth…


Concerns about estimates used in compiling National Accounts…

Note1. 75% of mining & quarrying (excluding gem mining) is estimated through growth in cement demand.2. Cement is a key proxy in estimating residential construction which is a large component of the construction industry.

13%

28%

22% 21%

Industry estimate CBSL estimate Construction industrygrowth

Mining & Quarryingindustry Growth

excluding Gem MiningCement

5.2 Mn/MT 5.8 Mn/MT

Real Growth, YE2012


Contribution to growth 2011/12

24% 7%


937 1,025 1,131

343

408

426

2010 2011 2012

Limited fiscal space due to high committed spending…

32.1% 31.2%

Personnel

37.6% 34.8% Interest

20.9% 21.1% Subsidies and Transfers

9.4% 12.9% Other Goods and Services

2010 2011 2012

20.0%

4.4%

1,280

30.7%

36.1%

20.8%

12.4%

46.4% 45.0%Transport and Communication

18.7% 19.7%

Energy and Water Supply

7.0% 6.8%Agriculture and Irrigation

5.3% 5.3%Education

5.7% 6.8% Civil Administration5.1% 4.5% Community Services 3.7% 3.5%

Health8.0% 8.4%

Other

2010 2011 2012

19.3%

46.1%

6.5%6.0%

7.6%

6.8%

3.9%3.9%

Current Expenditure

Capital Expenditure and Net Lending

Committed Spending


LKR Bn.

Gov’t Expenditure

9.4%10.3%

1,5571,433

11.9%

8.6%


(20.3)

(94.5) (89.7)

5.0

(19.3)

(61.2)

(0.3)

(21.6)

(28.8)

(0.8)

(7.4)

(10.0)

2010 2011 2012

Sri Lanka Transport Board

Airlines

Ceylon Electricity Board

Ceylon Petroleum Corporation

Combined Operating Losses of Main State Owned Enterprises

Combined Earnings of the Market

Combined Operating Loss as a % of GDP

LKR Bn

LKR Bn

Combined earnings (USD Bn)

Source: Ministry of Finance and Planning, CSE, JBS Research Analysis* Cross holdings have not been eliminated

The SOE monsters keep bleeding…

(189.6)(1.5)

(142.8)(1.3)

(16.4)(0.1)

Combined loss (LKR Bn.)Combined loss (USD Bn.)

-0.3%

-2.2%

-2.5%

2010 2011 2012

146.3 182.7

214.7

2010 2011 2012

1.651.68

1.29


96

114

134

2009 2010 2011

12.9% 12.4%11.1%

1.7%1.9%

1.9%

0.3% 0.2%

0.2%

2010 2011 2012

Tax buoyancy low…needs further broad basing and rebalancing

14.6%14.3%

13.0%

30.7%

Revenue to GDP Tax revenue LKR Bn.

Grants

Non-tax

Tax

725

846909

CBSL profit transfers were 30% of non-tax revenue

Estimated Sin Taxes*

Source: Central Bank of Sri Lanka, Ministry of Finance and Planning JBS Research Analysis

LKR Bn.

18.7% 18.6% 19.0%

30.4%26.7% 25.3%

17.9%

24.2%24.6%8.9%

9.4%8.8%

6.8%

7.8%7.7%

9.6%

7.2%6.6%

6.4%

4.2%4.3%

1.4%

1.8%3.7%

2010 2011 2012

1

Special Commodity Levy

Other

Excise Tax

Ports & Airports Development Levy

Import Duties

VAT

Income Tax

Nation Building Tax

Direct

Indirect Percentage of total taxes

16.5%

15.7%

15.6%

* Taxes collected from tobacco and liquor industries

16.7%

7.4%

16.7%

16.7%18.8%

17.5%


Government indebtedness is increasing…

Better Indicator?Is this the Best Indicator?

81.9%78.5% 79.1%

66.8%

52.1%

44.3% 41.9%

2010 2011 2012 India Vietnam Thailand Philippines

550% 541%

600%

348%

234%206% 198%

2010 2011 2012 India Philippines Vietnam Thailand

Total Debt to Government RevenueGovernment Debt / GDP


Peer data as of 2011Peer data as of 2011

Sri Lanka Sri Lanka


78%82% 79%

22%

18% 21%

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2006 2011 2012 Philippines India Thailand Vietnam

Decline in spending on social infrastructure…

Recurrent

Capital

Public Expenditure on Education(% of GDP)

Public Expenditure on Healthcare(% of GDP)

76%

83% 83%

24%

17%17%

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2006 2011 2012 India Philippines Vietnam Thailand

Recurrent

Capital

Sri Lanka Sri Lanka

World Bank Metadata, Annual Report 2012 – CBSL 2013

Peer nations - 2010 Peer nations - 2011


Inadequate public expenditure on Tertiary Education…

6.4

2.4

1.1

0.3

1.0

Sri Lanka Vietnam Thailand Philippines India

Outbound Mobility RatioStudents studying abroad as a percentage of tertiary enrolment

32

43

22

10

70


Public Expenditure Spent on Pupil, TertiaryPercentage of Per Capita GDP | 2010

14

24

48

30

10


Tertiary Gross Enrolment RatioPercentage of population of tertiary age in tertiary education

Source: World Bank, AT Kearney, Key Indicators for Asia and the Pacific 2011 – ADB, Annual Report 2012


USD/Oz

Banks heavily exposed to pawning*… Asset Quality will suffer

-30%

-20%

-10%

0%

10%

20%

30%

40%

Jan

12

Feb

12M

ar 1

2

Apr 1

2M

ay 1

2

Jun

12Ju

l 12

Aug

12

Sep

12O

ct 1

2

Nov

12

Dec

12

Jan

13

Feb

13M

ar 1

3

Apr 1

3M

ay 1

3

Jun

13

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

1,800

1,900

Gold

Annual Change

Gold Price Crashed…

454

196

124

41

34

12

12

585

251

147

55

48

17

11

Industry

PB

BoC

SAMP

HNB

SEYB

COMB

2011

2012

Banks’ Exposure

10.7%

17.5%

38.5%

22.0%

13.0%

23.0%

3.6%

13.1%

18.6%

38.0%

20.5%

15.6%

25.4%

2.8%

Pawning as a % of total gross loans

Source: Central Bank of Sri Lanka, kitco.com, JBS Research Analysis

LKR Bn.

*Pawning – gold back loan where interest and principle is paid at the end, maturity is 12 months


Lower gold prices + lower LTV… pawning advances will contract

Growth in Total LKR LendingLower Pawning Advances…

Falling LTV ratios combined with lower gold prices will reduce

pawning advances

515

434

60


277

454

585 593

475

2010 2011 2012 Apr-13 2013E

16.9% 21.1% 22.6% 22.8% -

-

100

200

300

400

500

600

700

64.1%

28.7%

1.5%

-20.0%

Pawning as a % of total LKR lending

338 304

51

177

130

9

2011 2012 Apr-13

64.1% 28.7% 1.5%

31.5% 20.2% 2.3%

Pawning advances

Other advances

Pawning growth

LKR lending growth



0

5

10

15

20

25

0

5

10

15

20

25

BFT OIL DIV H&T TLE BFI

HLT

TRD

MFG

INVL&P

P&EMRT

P/E

Sample P/E Ex BFI

Sample P/E

P/E

12.1

14.7

14.4% 3.0% 18.3% 4.1% 8.3% 36.4%0.8% 0.8%

3.9% 2.5%

1.9%1.8%2.6%

1.3%

Data: Bloomberg L.P. , JBS Research. (Sample sector earnings)/(Total sample earnings)

Market PER29 July 2013

Sample: 60 Largest Companies, represents 83% total Market Earnings

C&E

Financial sector represents 37% of market earnings ….

*See glossary for acronyms


Exports’ share has declined … Competitiveness is eroding …

-1.0

-0.5

0.0

0.5

1.0

-1.0

-0.5

0.0

0.5

1.0

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07

Economic Complexity Score²

Sri Lanka India Thailand Philippines

LKA

PHL

IND

THA

Source: The Atlas of Economic Complexity, Mapping paths to prosperity, Hausmann, Hidalgo et al. (2008). Observatory of Economic Complexity :http://atlas.media.mit.edu Retrieved: 30th June 2013,World Bank Economic Database, Annual Report 2012: CBSL 2013.

Economic Complexity² refers to the “amount of productive knowledge that each country holds” Is measured by the complexity of exported goods

Exports¹ – Exports of Goods and Services

0

5

10

15

20

25

30

35

40

45

50

0

5

10

15

20

25

30

35

40

45

50

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11

Exports¹ and Remittances as % of GDP

Average exports Average (Exports + Remitances)% of GDP

% of GDP

Exports (G&S)

Remittances

Remittances have Cushioned the Impact of Declining Exports

Complexity of Exported Goods have not Kept Pace with Peers


Sri Lanka - Composition of exports have remained stagnantNet Goods Exports Tree Map - 2010Net Goods Exports Tree Map - 1995

$2,847Mn $7,363Mn

0

10

20

30

40

50

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11

Exports (G&S)

“Sri Lanka’s export share of GDP has been

declining”

% of GDP

19%

2.6X

Source: Observatory of Economic Complexity :http://atlas.media.mit.eduRetrieved: 30th June 2013 , World Bank Economic Database, Annual Report 2012: CBSL 2013


In comparison Thailand - Composition of exports have diversifiedNet Goods Exports Tree Map - 2010Net Goods Exports Tree Map - 1995

$36,244Mn $118,715Mn

0

20

40

60

80

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11

“Thailand’s export share % of GDP has

been steadily increasing”

Exports (G&S)

% of GDP 79%

3.3X

Source: Observatory of Economic Complexity :http://atlas.media.mit.edu.,Retrieved: 30th June 2013World Bank Economic Database.



Foreign Direct Investment FDI as a % of GDP

* FDIs excludes loans as per the UNCTAD presentation* Peer data as of 2011 except Thailand (2010)

FDIs* remain low ….

Reinvested earnings

Other capital

Equity capital

USD millions

195 218 246

44 33 71

239

705 582

2010 2011 2012

956

1.0%

1.6% 1.5%

0.6% 0.7%1.2%

2.8%3.7%

6.0%

2010

2011

2012

Phill

ippi

nes

Bang

lade

sh

Indi

a

Thai

land

Mal

aysi

a

Viet

nam

478

899

100.0%

-6.0%

Sri Lanka


-2.2%

-7.8%-6.6%

-4.0%

0.2%0.9%

3.1% 3.2%

11.1%

2010

2011

2012

Indi

a

Viet

nam

Bang

lade

sh

Phill

ipin

es

Thai

land

Mal

aysi

a

(1,075)

(4,615)

(3,915)

2010 2011 2012

Current account deficit remains high… funding it may be a challenge

Current Account Deficit to GDPCurrent Account Deficit

USD millions



329.3%

-15.2%

Sri Lanka


4,150 5,072

4,011 4,162

2,880

3,549

3,979 4,423

8.3

7.7

4.7

5.4

0

1

2

3

4

5

6

7

8

9

-

1,00 0

2,00 0

3,00 0

4,00 0

5,00 0

6,00 0

7,00 0

8,00 0

9,00 0

10,0 00

2009 2010 2011 2012

Reserve Adequacy*Gross Reserves

Reserve adequacy – depends on what you look at…USD millions

Net reserves

7,030

8,621

7,9908,585

77.5%84.4%

48.2%41.3%

131.3%

143.5%

96.1%

85.3%

2009 2010 2011 2012

Net foreign reserves/short-term debt

Gross foreign reserves/short term debt

Source: Athukorala, P (2013), “Sri Lanka’s Post-conflict Development Challenge: Learning from the Past“

* Net reserves as estimated by the IMF after netting out short-term borrowings from gross reserves

Import Cover


• Third Amendment 27th August 1982 President was given power to seek re-election after 4 years of a term of office.

• Seventh Amendment 4th October1983 President was given power to appoint Commissioners of the High Court temporarily when requested by the Minister in charge of the subject of justice.

• Eighth Amendment 6th March 1984 President was given power to appoint President’s Counsel. By this President can influence the judiciary.

• Thirteenth Amendment 14th November 1987 President was given power to appoint the Governor for a Provincial Council.

• Seventeenth Amendment 3rd October 2001 Setting up Constitutional Council and Independent Commissions.

• Eighteenth Amendment 8th September 2010 Two term limit on the tenure of the Executive has been removed, there are currently no term limits.

President was given power to appoint members to the Independent Commissions.

The current constitution was introduced in 1978, provides for a unicameral parliament and an Executive President. Up to date it has been formally amended 18 times. Constitutional amendments have strengthened the executive at the expense of other branches of government. This relative weakening of parliamentary and judicial powers along with other civil institutions has contributed to greater concerns regarding the quality of governance in the country.

Constitution has weak checks and balances…






Favorable rains… more hydro in generation mix … less thermal

Total hydrocapacity (MW)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov

-12

Dec-

12

Jan-

13

Feb-

13

Mar

-13

Apr-

13

May

-13

Jun-

13Hydro contribution

Reservoir storage

20%

61%68%

77%

38% 27%

3% 1% 5%

Jun-12 Dec-12 Jun-13

Hydro

Thermal

Other

Source: Ceylon Electricity Board, Central Bank of Sri Lanka,Ministry of Finance and Planning, JBS Research

1,574 1,596 1,601

Reservoir Storage & Hydro Contribution Electricity Generation Mix


20.1% 21.0% 21.3% 21.4%

No. of Persons ‘000

114 113 108 119

83 94 92 100

50 60 63

63

2009 2010 2011 2012

Housemaid

Unskilled

Skilled1

247

267262

282

SLBFE

JBS Estimate

% of LabourForce21 Skilled Category includes skilled, semiskilled, professional, clerical and middle level categories

2 JBS Estimates are used to calculate the % of Labour Force Source : Sri Lanka Bureau of Foreign Employment, JBS Research Analysis

1,831 1,932

1,680 1,762

1,820 1,862

2009 2010 2011 2012

Departure for foreign employment continues …

Stock of Migrant EmployeesAnnual Registrations for Departures


Qatar

Kuwait

UAELibya

Saudi Arabia Algeria Iraq

AngolaNigeria

Ecuador

Iran

0

20

40

60

80

100

120

0 5 10 15 20 25 30 35

Dolla

rs p

er b

arre

l

Oil Production (mb/d)

OPEC has High Budget Breakeven Costs

Breakeven Cost Budget Breakeven

Oil prices expected to remain at current levels …

60

80

100

120

2010 2011 2012 2013 2014 2015 2016

Oil Price Forecast

IMF Forecast World Bank Forecast EIA Forecast (Brent)

10.0%

15.0%

20.0%

25.0%

30.0%

-

500

1,000

1,500

2,000

2,500

3,000

2008 2009 2010 2011 2012

Oil Imports

Oil imports (% of total) (RHS) Total Imports (LHS) Oil Imports (LHS)

Source: IEA, EIA, CBSL, IMF, World Bank, JBS Research

In LKR Bn

Forecast figures In constant USD


377 473 524

393470 490

503

550546

415

475549

415

507

541

2011 2012 2013

Amounts in USD millions

2,103

2,476

2,649

Annual Departures in Skilled Categories (No. of Persons ‘000)

Annual Departures to non Middle Eastern Destinations (No. of Persons ‘000)

Source : Sri Lanka Bureau of Foreign Employment, Central Bank of Sri Lanka1 Skilled category includes skilled, semiskilled and middle level categories

1616

15

3 3 31 1

1

2010 2011 2012

Europe

Asia

Other

20 2119

7.3% 7.9% 6.6%

83 78 80

8 10 163 4 4

2010 2011 2012

Professional

Skilled1

Clerical and related

94

35.2%

92100

34.8% 35.5%

Total

% of Total

Total

% of Total

January

February

March

April

May

Remittances will continue to grow … albeit at a slower pace


Tourism arrivals continue to grow … albeit at a slower pace

397.1

484.3

2012 2013

172,602 196,355

173,214

194,924

31,167

37,697

2012 2013

Source SLTDA, CBSL

Middle East

Eastern Europe

Australasia

Asia

Western Europe

Other

North America

Tourist Arrivals by Major Region

Jan - June

Conferences and Meetings

• SEARCC International conference, August 2013• International Conference On Hospitality & Tourism management(ICOHT), October 2013• Commonwealth Heads of Government Meeting(CHOGM) , 15 to 17 November 2013

Beach Festivals

• Hikka Fest, July 2013• EDM festival Mirissa , July 2013• Vibes of Una, August 2013

Kandy Esala Perahera, 5 to 21 August 2013

Kataragama festival, July to August 2013

20132012

Upcoming Demand DriversTourism Earnings (US$ Mn)

Jan- May

13.1%22.0%


Two large Integrated Resort Developments in the offing …

Sources : Colombo Stock Exchange - Corporate Announcements, Newspaper Articles

Waterfront Properties (Pvt) Ltd

• Promoted by the largest listed company, conglomerate JKH.

• Proposed investment - US $ 650Mn

• Location - 17 acre land located at Glennie Street and Justice Akbar Mawatha, Colombo 2.

• Scope - Luxury hotel, convention center, entertainment facilities, shopping complex, luxury condominiums and office units.

• Expected employment generation – 3,000

Lake Leisure Holdings (Pvt) Ltd

• Joint venture between Rank Holdings and Australia’s Crown Group.

• Proposed investment - US $ 350Mn

• Location - 500 perch block at D. R. Wijewardena Mawatha.

• Scope - 36-floor casino complex and a super luxury resort coupled with a mega hotel with 400 rooms.

• Expected employment generation – 2,600


Source: Treasury Report 2012, Ministry of Finance & Planning, SLASSCOM, ATKEARNEY, Newspaper Articles

Industry Revenues Growing at a Healthy Pace

Nom

inal

USD

Mn.

IT/BPO industry continues to grow…

Employment Increasing

34

39 43

50

63 67

-

10

20

30

40

50

60

70

80

2007 2008 2009 2010 2011 2012

000’

s

+15% CAGR

Industry Direct Employment (000’s)

175

230245

265

387

500

0

100

200

300

400

500

600

2007 2008 2009 2010 2011 2012

+23% CAGR

Industry Export Revenue (USD Mn)


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: www.internetworldstats.comSource: TRC Sri Lanka

Internet and Email Subscribers(As a percentage of tot. population |Dec 2012)

Internet and Broadband usage expanding rapidlyInternet Penetration Rate(Mid-2012)

11%15%

22%

30%34%

61%

India Sri Lanka Indonisia Thailand Viet Nam Malaysia


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2010 2011 2012 2013E

Main Commodities are ~35% of Total Imports

Milk & milk products

32.8% 33.3% 35.5% % of Total imports

> $400m

0

50

100

150

200

250

300

2010 2011 2012 2013F

Commodity Price Indices

2005 = 100

Source: International Monetary Fund

Oil

Base metals

Sugar

Milk and milk products

Wheat and Maize

Fertilizer

0.7%

-6.1%

53.3%

Oil

Base metalsWheat and MaizeSugar

Fertilizer

Source : Central Bank of Sri Lanka, JBS Research

USD Mn

Softer commodity prices will reduce import bill…


Rubber Tyres

Gloves

Other Rubber Products

Raw rubber

0

200

400

600

800

1,000

1,200

2010 2011 2012 2012Jan-Apr

2013Jan-Apr

Rubber Based Exports

3.203.803.34 4.84 3.35


Bulk

Packets

Bags

Instant Tea

0

200

400

600

800

1,000

1,200

1,400

1,600

2010 2011 2012 2012Jan-Apr

2013Jan-Apr

Tea Exports

4.30 4.90


4.39 4.62 4.41Average price(USD/kg)

* All amounts in USD Mn.

Falling prices… tea exports are holding up… but not rubber


1,6162,022

1,836

1,359 1,325

1,349

1,6471,589

214

317360

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2010 2011 2012 2012Jan-Apr

2013Jan-Apr

90% of Apparel Exports are to North America & EU

49%

109.8100.0 113.5Volume index


European Union

North America

Other3,179

3,9863,785

10%

42%

* All amounts in USD Mn.

Apparel exports are holding up …


Structural adjustments continue … Electricity tariff hike

8.2

11.8

15.4

6.9

12.1

27.6

Off peak Day Peak

Industrial*

PreviousRevised

10.5

29.4

33.6

50.4

13.2

37.1

42.7

58.8

61-90 91-120 121-180 >180

Consumption block (kWh/month)

Domestic

PreviousRevised

LKR/kWh

Source: PUCSL, LECO

*AssumptionsUser belongs to Industrial customer category 3, i.e. metered at 11,000 Volt.

79%

2%

-16% 26%

26%

27%

17%

LKR/kWh


Structural adjustments continue … Fertilizer subsidy being reduced

26,935 26,028

29,802

36,45637,800

2009 2010 2011 2012 2013E

Fertilizer Subsidy

0.05% 0.05% 0.05%0.05% 0.04%% of GDP

LKR million

Source: CBSL, Ministry of Finance & Planning

350 350 350 350

1,8452,245

2,913 2,996

2009 2010 2011 2012

Subsidy Subsidized price

Fertilizer Price

LKR/50Kg

Recent Developments…

• Government slashed subsidy by approximately 30%, citing health issues caused by chemical fertilizer.

• Issuance of fertilizer has been limited to 76 kg’s per acre while the recommendation was 90 kg’s.

• Government continues to delay the subsidy payments of Rs. 16 billion to fertilizer importers.

• Fertilizer companies have restricted imports due to liquidity problems.


LKR Debt Service Obligations External Debt Service Obligations

0

100

200

300

400

500

600

700

800

900

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Interest

Repayment

-

50

100

150

200

250

300

350

400

450

500

550

600

650

700

750

800

850

900

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

2043

2045

2047

2049

2051

InterestRepayment

Domestic liabilities are near term … External liabilities are longer term* All amounts in LKR Bn.


Long dated liabilities


Credit to GDP low… higher savings will be required to boost it

Credit to GDP

19.3%

15.3%17.0%

19.3%

28.3% 29.0%31.0%

39.5%

2010

2011

2012

Bang

lade

sh

Viet

nam

Indi

a

Thai

land

Mal

aysi

a

40.4%46.4% 48.8%

70.4% 74.1%

120.7%128.7%

159.2%

2010

2011

2012

Bang

lade

sh

Indi

a

Viet

nam

Mal

aysi

a

Thai

land

Gross Domestic Savings to GDP

*Peer data as of 2011 Source: World Bank, Central Bank of Sri Lanka, Asian Development Bank

Sri LankaSri Lanka


132 132

98 9989

2012 2013India Vietnam Sri Lanka

SL continues to gain further in the Doing Business ranking…

Sri Lanka Vietnam2012 2013 2012 2013

Overall 89 81 98 99

Starting a business 38 33 103 108

Construction permits 111 112 67 28

Getting electricity 95 103 135 155

Registering property 161 143 47 48

Getting credit 78 70 24 40

Protecting investors 46 49 166 169

Paying taxes 173 169 151 138

Trading across borders 53 56 68 74

Enforcing contracts 136 133 30 44

Resolving insolvency 42 51 142 149

81

The World Bank Doing Business Ranking out of 185 Countries

Source: Doing Business, The World Bank, 2013

Thailand 18 Sri Lanka 81 Vietnam 99India 132Philippines 138

India2012 2013

132 132

166 173

181 182

98 105

97 94

40 23

46 49

147 152

109 127

182 184

128 116


2010 2011 2012 2013 2014 2015 2016 2017

Colombo - Galle

Matara Extension

Hambatota Extension

Colombo - Katunayake

Kottawa - Kaduwela

Kaduwela - Kadawatha

Kadawatha - Kerawalapitiya

Enderamulla - Mirigama

Mirigama - Kurunegala

Mirigama - Kandy

Kurunegala - Dambulla

Sout

hern

Expr

essw

ay

Katu

nay

ake

Expr

ess

way

Out

er C

ircul

arEx

pres

sway

Nor

th-E

aste

rnEx

pres

sway

SouthernExpressway

Katunayake Expressway

USD1Bn Combined

Outer Circular Expressway

North East Expressway

Eastern Expressway

Northern Expressway

Outer Circular Expressway

Kandy Expressway

Katunayake Expressway

Southern ExpresswayCompleted orNear Completion

Contracted or ongoing

Feasibility Stage

Northern Expressway, Eastern Expressway and Extension of Southern Expressway to Mattala under consideration.

USD168Mn

USD330Mn

USD219Mn

USD400Mn

USD521Mn

Time Table for Major Expressway Development Projects

Source: Ministry of Ports and Highways, RDA, CBSL, Government Treasury, JBS Research

Major expressway network under construction…


USD475Mn

USD891Mn

USD500Mn

USD600Mn

USD529Mn

USD82Mn

USD90Mn

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Norochcholai I

Norochcholai II

Sampur

Hambantota

Upper Kotmale

Uma Oya

Broadlands

Moragolla

Victoria Expansion

Gin Ganga

Coal

Hydr

o

Power generation moving away from relying on petroleum fuels…

Sampur Coal

Time Table for Major Power Generation Projects

Hydro

CoalNorochcholai Coal

Victoria Expansion

Broadlands Hydro

Upr. Kotmale Hydro

Moragolla Hydro

Gin Ganga Hydro

Uma Oya Hydro

Completed orNear Completion

Contracted or ongoing

Feasibility Stage

1,920GWh

3,840GWh

3,480GWh

3,679GWh

409GWh

312GWh

126GWh

81GWh

600GWh

143GWh

Source: Ministry of Power and Energy, CEB, CBSL, Government Treasury, JBS Research


Ports and Aviation infrastructure being expanded…

Colombo PortSouth Harbour Development Project – USD875Mn (Incremental transshipment capacity of 7.2mn TEU)

4.5

2.4

4.8

11.7

2012 2013 2014 Completion

Transshipment capacity build-up at Colombo (millions)

Hambantota PortPhase I (Complete) – USD 306 Mn (Initial commercial operations commenced)Phase II (Ongoing) – USD 810 Mn (Expected to be operational in 2014)80,000 MT Bunkering Tank Farm – USD 130 Mn (operational end 2013)

Mahinda Rajapakse International AirportPhase I (Complete) – USD209Mn (Passenger capacity of 1 Mn p.a.)Phase II – Additional Passenger Capacity of 4 Mn p.a. (by 2015)

Bandaranaike International AirportExpansion to end by 2015 – USD 425Mn (Passenger capacity of 6Mn p.a.)

1.0

4.05.0

2013 2014 2015 Completion

Passenger capacity build-up at MRIA (millions)

Colombo Port

H’tota Port

MRI Airport

B’daranaike Airport

Source: Ministry of Ports and Highways, Sri Lanka Ports Authority, CBSL, Government Treasury, JBS Research


Labour supply conditions are favourable…

Source: United Nations ,Population Division. World Population Prospects: The 2010 Revision/ Department of Census and Statistics Sri Lanka (Alternative estimates)

28%21%

61%63%

10%16%

2010 E2017100% (000’) = 13,921 14,402

Older (55+)

Prime(25-54)

Young(15-24)

Composition of Working Age Population (aged 15 to 64 years)

Current Labour Supply 000’, Q4-2012

9,990

7,614

5,040

4,883

10,287

2,246

8,646

2,573

2,562

157

2,378

1,823

6,084

184

Total population

Population<15Yrs

Working agepopulation, 15+Yrs

Not participating

Total labour force

Unemployed

Employed

20,278

4,068

16,620

8,658

7,602

341

7,261

Male Female


Source: Department of Census and statistics, June 2013, JBS Research analysis

5,040 5,222

5,916

2,5622,686

4,532

2012 E2017 E2017

0.79%

6.57%

24%

66%

50%

75%

Female Male2012 F2017* 2012 F2017*

Participation Rates

Based on current participation rates

Assuming participation rates at peer average

Labour Force Prospects (000’) CAGRif participation rates increase up to average peer levels

Note: We have used alternative estimates of Sri Lanka Labor Force Survey. Alternative estimates define employed persons as follows:1. Minimum 20 hours of work a week rather that 1 hour a week used in the standard method.2. Working age > 15 years.3. Unpaid family workers are not counted.

7,6027,908

10,449

Higher female labour participation can further expand the labour force …


Higher urbanisation will drive economic growth…Movement in Urbanization and Per Capita GDP from 1950 to 2005

Source: World Bank Economic Database, Historical Statistics of the World Economy: 1-2008 AD - Angus Maddison

0

5,000

10,000

15,000

20,000

25,000

0 10 20 30 40 50 60 70 80 90

% of Urban Pop.

With Official Urbanization Statistics With Consensus Estimates

0

1,000

2,000

3,000

4,000

5,000

10 15 20 25 30

2.5X

Per Capita GDP (Constant 1990 Int$)

Urbanization* is officially defined as people belonging to the smallest administrative division (i.e. Municipal Council or village council). Change of classification has made the official urbanization figure decrease from a high of 19% to about 15%. Other methodologies place Sri Lanka’s real urbanization rate as high as 35% - 45%. Dotted red line assumes a linear increase in urbanization to 35% in 2005.

JPN

KOR

MLS

CHN

IND

LKA

LKA

2X


Households Based on the Income Earning Category (SL)

Source: McKinsey Global Institute – Urban world v1.1 (App)

1,621

788

2,494

2,995

770

1,953

82

356

2010 2025 2010 2025 2010 2025 2010 2025

Poor <$7,500 Middle income$7,500-20,000

Affluent $20,000-70,000

Elite >$70,000

33%

13%

50%

49%

16%

32%

2% 6%

2010 2025

% of Households

2.54x

1.20x

4.34x

0.49x

100%=4,967 100%=6,092

In 000’/$PPP

Rapid growth in projected affluent & elite households


3%5%

8%

16%

25%

42%

Reserve Guestimate for the Mannar basinConfirmed existence of Working Hydrocarbon systems

Diesel

Furnace Oil

LPGKeroseneOther

139.5

5.1

Expected energy yeildfrom exploration

Energy demand(YE2011)

TOE

Mn

27X

Petrol

TOE-Ton of oil equivalent : Energy released by burning 1 MT of crude oil

Energy decomposition

(TOE basis)2012

Expected energy yield from

exploration

Energy demand(YE2012)

C1

C2

C3

C4

C5

M1

M2

M3

M4

M5

M8M6

M7M9

JS1 JS2

JS3

JS4

JS5

JS6

Blocks :Mannar basin

Cauvery basin

Available to joint studies

$ 2,

300M

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 2014 2015 2016 2017 2018

150

1,500

1,000

500

Time line

Cost ($Mn) incurred by Cairn Lanka Open to investors

Operated by Cairn Lanka Pvt. Ltd

13 blocks waiting forthe second round of bidding (30/09/2013)

Potential for bridging the fossil fuel deficit…

Source : PRDS Sri Lanka, CBSL annual report 2012,JBS Research

2013

150


Diaspora opportunity…

W. Europe (000's)

France 39Germany 41Switzerland 30Netherlands 10

120

Canada

106,000

Italy

60,000

Australia

94,000

New Zealand

7,000

Sweden

7,000

Norway

9,000

U.K.

131,000

S. Korea

20,000

Japan

9,000

Denmark

7,000

Aggregate (000's)Europe 337N. America 154Australasia 101Asia 29

621

U.S.A.

48,000

OECD Countries with Significant Populations of Sri Lankan Born Individuals

Source: OECD Migrant database http://stats.oecd.org/Index.aspx?DatasetCode=MIG


Total local individuals

Equities are under owned…

Source : CSE fact book*Active local individuals : Investors who executed at least one transaction at the Colombo Stock Exchange

35 79

114 62

336332

378 457

2009 2010 2011 20120.44 % 0.95 % 1.38 % 0.71 %

Inactive local individuals

Active local individuals*

Active local individuals as a % of economically active population

371

411

493519

All amounts in thousands


Outlook for the Economy

• Economic growth going forward will trend towards its potential rate of 6%.• Higher growth is possible if there is greater focus on improving productivity, greater fiscal consolidation and a

stronger policy bias towards export industries.• Interest rates will hover around current levels due to a loose monetary policy bias and lack of demand for

credit. Pawning that accounts for 22% of private sector credit will contract by 20% on the back of falling gold prices and lower LTVs.

• Exchange rate will be range bound around USD/LKR 132-134 for the rest of 2013. Higher import demand fuelled by credit growth can create pressure on the exchange rate.

• The start of a tapering program by the Federal Reserve of its quantitative easing program can have a fallout in the form of a partial pullback of the USD 3.8 billion invested in LKR GSECs by FIIs - this will impact both the exchange rate and interest rate.

• Absence of major electoral pressure over the next 12 months provides space for further fiscal consolidation. With tax revenue to GDP at 11% and below peer countries, it is likely that further tax raising measures may be implemented in the upcoming budget that will impact both consumption and earnings of firms.

• Remittances will continue to grow albeit at a slower pace - this will relieve pressure on unemployment and boost household income aiding consumption.

• Potential benefits from a Natural Gas discovery is 3-4 years away and its viability will depend on high global gas prices.

• Increasing foreign borrowings coupled with a slow down in economic growth can affect debt dynamics leading to a middle income debt trap.


Outlook for the Equity Market• The sideway market continues into its 3rd year after the unprecedented bull market that ended in mid 2011. A

sideway market is characterized by rising earnings but is negated by falling multiples thus prices remain range bound.

• Although the market has pulled back in the last month, valuations especially on the large cap counters remain very high. Adjusted for the risk free rate and the equity risk premium, market PE multiples excluding financials are at elevated levels.

• Financials account for 37% of total market earnings, outlook for the sector in 2013 is poor on the back of low credit growth, deteriorating asset quality, falling NIMs due to timing mismatches in repricing assets and liabilities and the absence of one off translation gains from a large depreciation of the currency. Lower earnings from financials in the absence of lower prices will increase the market PER going forward.

• It is unlikely that FIIs would pull out of the market if the Federal Reserve starts tapering its QE program BUT the level of inflows that were witnessed in the previous 12 months will not be maintained.

• Incremental demand for equities will have to come from domestic sources both institutional and retail - falling interest rates provide a favourable environment but concerns about lower earnings growth may negate this.

• New supply of equities from primary and secondary capital raisings will be subdued over the next 12 months. We do not foresee any large sell downs especially from government controlled financial institutions over this period.

• An investment strategy based on morphing the index or investing across the board will yield poor results due to potential gains being eroded by falling multiples. A more nuanced strategy based on hunting for value stocks has the potential to yield superior returns.


Glossary

BFI Banks, Finance & InsuranceBFT Beverage, Food & TobaccoC&E Construction & EngineeringDIV DiversifiedH&T Hotels & TourismINV InvestmentL&P Land & PropertyMFG ManufacturingOIL Oil PalmsP&E Power & EquipmentTLE TelecomTRD Trading

IndicesASI All Share IndexS&PSL20 S&P Sri Lanka 20

CountriesLKA Sri LankaCHN ChinaIND IndiaMLS MalaysiaKOR KoreaJPN JapanPHL PhilippinesTHA Thailand

Colombo Stock Exchange Sectors InstitutionsADB Asian Development BankCBSL Central Bank of Sri LankaCEB Ceylon Electricity BoardEIA Energy Information AdministrationIMF International Monetary FundOECD Organization for Economic Cooperation & DevelopmentOPEC Organization of the Petroleum Exporting CountriesPRDS Petroleum Resource Development Secretariat RDA Road Development AuthoritySEC Securities & Exchange CommissionSLASSCOM Sri Lanka Association of Software and Service CompaniesSLBFE Sri Lankan Bureau of Foreign Employment SLTDA Sri Lanka Tourism Development AuthorityTRC Telecom Regulatory CommissionPUCSL Public Utilities Commission of Sri Lanka

UnitsGWh Giga Watt HoursInt'l D International DollarsKWh Kilo Watt hourMT Metric TonMW Mega WattTEU Twenty-foot Equivalent UnitTOE Ton of Oil Equivalent

OtherCHOGM Commonwealth Heads of Government MeetingGICS Global Industry Classification StandardMRIA Mahinda Rajapkse International AirportPPP Purchasing Power ParitySOE State Owned Enterprises

Financial IndicatorsAWDR Average Weighted Deposit RateAWFDR Average Weighted Fixed Deposit RateAWLR Average Weighted Lending RateAWPLR Average Weighted Prime Lending RateCCPI Colombo Consumer Price IndexNEER Nominal Effective Exchange RateREER Real Effective Exchange RateSLIBOR Sri Lanka Interbank Offer RateSRR Statutory Reserve Ratio


About Us

JB Securities Ltd is a full service brokerage firm that is licensed to operate on the Colombo Stock Exchange (CSE). The firm was a founding member of the Colombo Stock Exchange in 1985 and has extensive experience dealing with domestic and foreign institutional investors and high net worth individuals and family offices.

In order to provide unique investment insights to our clients we conduct extensive deep-dive research in the industry verticals pertaining to the large listed companies to identify their industry and business dynamics. This process is aided by the largest team of equity analysts in the country, a majority of them either being CFA charter holders or CFA candidates who have undergone a 20 month intensive in-house training program based on international curricula. The firm continues to invest in the development of its analyst team to widen and deepen its research coverage.

The firm is part of the family owned Jafferjee Brothers group based in Sri Lanka that was founded in 1944. The group’s business interest spans a wide array of activities in trading, manufacturing and services and has extensive experience dealing with global companies.

Equity and Debt Brokerage Manager JB Unit Trust Margin Financing


For further information contact:Murtaza Jafferjee CFA

+94 11 [email protected]

150, St. Joseph’s Street, Colombo 01400, Sri Lanka.Tel: +94 112490900, Email: [email protected], www.jbs.lk

© Copyright 2013, JB Securities (Pvt) Ltd, All rights reserved.

This research is for our clients only. Other than disclosures relating to JB Securities, this research is based on current publicly available information that we consider reliable, but we do not represent it as accurate or complete, and it should not be construed as such. We seek to update our research as appropriate.

JB Securities shall have no liability, contingent or otherwise, to the user or to third parties, for the quality, accuracy, timeliness, continued availability or completeness of the data or calculations in this document, nor for any special, indirect, incidental or consequential damages which may be incurred or experienced because of the use of the data or calculations made available herein.

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Sri Lanka Outlook for Equities - 2013-14

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