SRI LANKA: VALUE IS BACK IN EQUITIES
JULY 2012
150, St. Joseph’s Street, Colombo 14, Sri Lanka. Tel: +94 112490900, Email:
[email protected], www.jbs.lk
PRIVATE & CONFIDENTIAL
Contents
The party – end of the 30 year conflict
The inevitable after party – exuberance led to irrationality
Sobering reality – some concerns remain
The lion is not beaten – And… the good news…
JB Securities Research July 2012
Page 2
Country Snapshot Market Snapshot
Name
Capital Commercial Capital Time zone Nationality Population Total Area Density Currency Exchange rates GDP (Nominal) Economic size (2011) GDP (PPP) GDP per capita (Nominal) GDP per capita (PPP) Sovereign rating Official languages Business language Literacy rate
*As at 06/07/2012
Democratic Socialist Republic of Sri Lanka
Sri Jayewardenepura Colombo Standard time zone UTC +5.30 Sri Lankan 20.9 Million 65,610 Sq.km 333/Sq.km Sri Lankan Rupee (LKR) LKR 135.38/US$| LKR 168.20/€ | LKR 210.53/£ USD 59.2 Billion Int’l D 115.2 Billion USD 2,836 Int’l D 5,609 S&P: (B+) ‘Stable’ Fitch: (BB-) ‘Stable’ Sinhala, Tamil English 91.9%
Colombo Sri Jayawaredenepura
6°54′N 79°54′E
Moody’s: (B1) ‘Positive’
JB Securities Research July 2012
Page 3
Equity Market Snapshot
Valuations
Market Capitalisation Market P/E* Market P/B Dividend Yield LKR 1,881.7Bn USD 13.89Bn 10.18x 1.76x 2.55% Other 19% Diversified 23%
Indices
Current All Share Price Index Milanka Price Index S&P Sri Lanka 20 Index 4,986.7 4,439.3 2,797.4 Change MTD 1.0% -0.1% 0.8% Change YTD -27.7% -31.0% -22.4% Oil Palms 6% Telecoms 6% Hotels & Travels 7% LKR 1,397.4Mn 17.9% 40.9%
Market Index Decomposition*
Banks & Finance 22%
Liquidity
Average daily Turnover** Annualised share volume velocity*** Free Float****
F&B, Tobacco 17%
* P/E data is as per Bloomberg L.P. ** and *** Figures are based on data from June 2011 to June 2012. Year-to-date figures are as follows: Average Daily Turnover – 796.12Mn, Velocity – 4.9% ****Free Float reflects the public shareholding of the companies that comprise the top 50% of CSE market capitalisation
JB Securities Research July 2012
*As at 05/07/2012
Page 4
May 2009 Jul 2009 Sep 2009 Nov 2009 Jan 2010 Mar 2010 May 2010 Jul 2010 Sep 2010 Nov 2010 Jan 2011 Mar 2011 May 2011 Jul 2011 Sep 2011 Nov 2011 Jan 2012 Mar 2012 May 2012
JB Securities Research July 2012
The party – end of the 30 year conflict
Page 5
The news buzz set the tone …
Foreign ministers of UK and France, visit Sri Lanka in a bid to set up a temporary cease fire. UNHCR holds a special day session on SL and under the backing of India, China and Russia, commends the government humanitarian effort. EU suspends Sri Lanka's preferential trade status (GSP +) over allegations of human rights violations. China lends USD 1.2 billion out of USD 2.2 billion, emerging as the largest lender surpassing ADB & World Bank in 2009.
January 2009 – June 2011
UN panel led by Maruzuki Darusman publishes its report on war Accountability in Sri Lanka
INTERNATIONAL
President Rajapakse opens the 1st phase of Hambanthota port, funded by China.
Sri Lanka announces bid for Commonwealth Games 2018 in Hambanthota
180 High point = 173
2009
Latter stages of the war
2010
2011
End Value = 141
160
140
120
DOMESTIC
100
Start Value = 96
Low point = 87
80
The UPFA capitalizes on the war victory and gets fresh mandates with prescheduled elections, gets parliament supermajority. Incumbent M. Rajapakse wins the presidential election with a clear majority against challenger Gen Sarath Fonseka, who led the SL Forces to victory in the recently concluded war. (6m votes to 4m). The Defeated candidate of the election Gen Sarath Fonseka arrested for allegedly violating rules preventing the discussion of political matters while being a member of the military.
With the 2/3rd Majority in the parliament government sweeps through major legislative reforms AG Mohan Pieris withdraws murder charges against former government MP. Former CJ questions legality. The President appoints an 8 member Lessons Learnt and Reconciliation commission, headed by former Attorney General C. R. De Silva The parliament passes 18th amendment to the constitution. Removes presidential term limits and increases presidential power over the Judiciary, police and civil service. Clashes over proposed new private sector pension bill intensifies. 1 worker killed and 60 seriously injured. Government temporarily suspends the bill.
War Ends with the killing of LTTE leader V. Prabhakaran. 60,000-100,000 total civilian casualties estimated in the 30 year old conflict.
The ruling United Peoples Freedom Alliance wins the parliamentary election with a large majority of seats (64%). The election saw the lowest ever voter turnout (62.26%).
Sources: Newspaper articles, Central Bank of Sri Lanka, LMD, The Nielson Company, JBS Research
JB Securities Research July 2012
Page 6
LMD Nielsons Business Confidence Index
International intervention fails to pause the war
The Government distances itself more from Western powers and inclines towards China and India
The incumbent government consolidated power …
• UPFA won the Parliamentary election with 63% of the votes in April 2010 • UPFA is led by the President Mahinda Rajapakse who won the recent Presidential Election(Jan 2010) with 58% of the votes. • In Q3 2010 17MP’s crossed over from the UNF to support the 18th amendment. • UNP, JVP(DNA) and TNA contested separately for the parliamentary election after their common candidate was defeated at the presidential election in Jan 2010 • UNP is the main opposition party
JB Securities Research July 2012
Composition of the 7th parliament-(2010-2016)
UPFA UNP-D SLMC UNP DNA TNA
144 (64%) 9 (4%) 8 (4%) 43 (19%) 7 (3%) 14 (6%)
Government (72%)
Opposition (28%)
17 MP’s crossed over to the government to support the 18th Amendment
Source: Parliament of Sri Lanka, JBS Research Analysis
Page 7
Easing inflation drove real interest rates back up…
Real Interest Rates
25%
T-bill rate Inflation*
14.0%
12.0%
20%
10.0%
8.0% 15% 6.0%
4.0% 10% 2.0%
5%
0.0%
-2.0%
0%
Oct-07 Jan-07 Jul-07 Apr-07
Conflict
Oct-08 Oct-09 Jan-08 Jan-09 Jul-08 Jul-09 Apr-08 Apr-09
Post-conflict
Oct-10 Jan-10 Apr-10 Jan-11 Jul-10 Apr-11
-4.0%
Jan-07 Jul-07 Apr-07
Conflict
Oct-07 Oct-08 Jan-08 Jan-09 Jul-08 Jul-09 Apr-08 Apr-09
Post-conflict
Oct-09 Oct-10 Jan-10 Apr-10 Jan-11 Jul-10 Apr-11
* CCPI 2002 – Core Inflation 12 month MA, 1 year treasury bill yield
JB Securities Research July 2012
Source : Central Bank of Sri Lanka, JBS Research Analysis
Page 8
Investment, private consumption and exports drove GDP growth
Expenditure on GDP
Private consumption Investment Net exports Government consumption
Growth in expenditure
190%
Private consumption
CAGR
35.3% Government consumption Investment Exports of goods and services Total consumption (Private + Govt') Imports of goods and services
180%
17.6%
15.6%
14.8%
170% 160%
28.6%
24.5%
27.8%
29.9%
150% 140%
18.3% 21.3% 21.3%
64.3%
130%
65.8%
69.8%
120%
6.6%
110%
-6.5%
2009
-9.1%
2010
-14.6%
2011
100% 2009
2010
2011
Source: CBSL annual report 2011, JBS Research Analysis
JB Securities Research July 2012
Page 9
Conflict affected areas rebounded from a low base …
Provincial contribution to GDP
YOY GDP growth 3.53% 8.01% 5.95%
3.2% 4.7% 4.5% 5.6% 6.4% 9.9% 9.8% 10.5% 3.2% 4.6% 4.5% 5.8% 6.1% 9.6% 9.8% 10.5% 3.4% 4.8% 4.5% 5.9% 6.3% 9.4% 10.0% 10.7% 125%
Provincial growth
CAGR % 2008/10 Northern
120%
Northern
North Central Uva
115%
10.13 8.83 6.84 6.63 6.45 5.34 5.27 4.78 2.90
Eastern Central Southern
Eastern
Sabara-gamuwa North Western
105% 110%
North Central Western Uva Sabaragamuwa North Western
100%
Central Southern
45.4% 45.8% 45.1%
Western
95%
90%
2008 100%= LKR4.4Bn
2009 LKR4.8Bn
2010 LKR5.6Bn
2008
2009
2010
Conflict affected areas Page 10
Source: Census and Statistics Sri Lanka, JBS Research Analysis
JB Securities Research July 2012
Tourist arrivals increased
Record number of tourist arrivals…
900
900,000
Earnings grew…
Tourist Receipts (USD millions)
50.0%
64.9%
839
70%
Other Pleasure
Business Growth
800
60%
46.1%
855,975
119,535
40.0%
700
Growth 576 410 13.2% 384 320 -6.3% -16.9% 45.7%
50%
40%
600
800,000
30% 500
20%
400
700,000
68,097
349
10%
654,476 54,668
600,000
300
30.0%
200
9.3%
0%
-10%
30.8% 83,270
100
-20%
-
-30%
500,000
494,008
110,654
20.0%
2006
2007
2008
2009
2010
2011
438,475
80,135
400,000
52,116
300,000
447,890 51,229 38,473
668,343 2.1% 516,538
Tourist nights increased…
10.0%
37,261
9,000
Tourist Nights('000)* Growth 5,793
8,560 60.7% 6,548
1
8,000
1
0.0%
7,000
1
200,000
6,000
0
331,238
100,000
321,079 -11.2%
358,188
5,000
4,940 21.9%
-10.0%
30.7% 4,166 4,075
0 0
4,000
-11.7%
-
3,000
0
2,000
-
-20.0%
2007
2008
2009
2010
2011
1,000
-14.7%
-15.7%
-2.2%
(0)
-
(0)
2006
* Tourist nights spent in both graded and ungraded establishments JB Securities Research July 2012
2007
2008
2009
2010
2011
Page 11
Source : Sri Lanka Tourism
GDP growth accelerated
18.52% 16.37% 15.19% 16.62% 14.59% 17.04% 16.64% 17.00% 15.58% Avg. Nominal Growth 12.08% 15.28%
Avg. Real Growth 4.76% 5.27% 7.52%
6.12% 4.22% 1.63%
Q1
7.06%
8.47%
7.95%
8.57%
7.91%
8.16%
8.44%
8.32%
2.14%
Q2 2009 Q3 Q4 Q1 Q2 2010 Q3 Q4 Q1 Q2 2011
Source: Census and Statistics Sri Lanka, JBS Research Analysis
Q3
Q4
JB Securities Research July 2012
Page 12
Strong economic growth led to fiscal consolidation…
Government Revenue
3yr CAGR 12.3 %
Government Expenditure
3yr CAGR 12.0 %
Fiscal Deficit
LKR Bn
(310) (476) 726 834 950 996 1,202 1,280 1,400 (446) (450)
686
2008
2009
2010
2011
2008
2009
2010
2011
2008
2009
2010
2011
Revenue as a % of GDP
Expenditure as a % of GDP
Deficit as a % of GDP
-7.0% 15.6% 15.0% 14.9% 14.5%
2008 2009 2010 2011
-9.9% 24.9% 22.6% 22.8% 21.4%
2008 2009 2010 2011
-8.0%
-6.9%
2008
2009
2010
2011
Source : Central Bank of Sri Lanka
JB Securities Research July 2012
Page 13
Primary balance improved…
Deficit as a % of GDP
Primary* deficit as a % of GDP
9.9% 6.9% 7.0% 8.0% 6.9% -1.8%
2007 2008 2009 2010 2011
-1.7% -2.2% -3.4%
-1.4%
Interest cost as a % of GDP
2007 2008
2009
2010
2011
6.4% 5.1% 4.8%
6.3%
5.5% * 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.
2007
2008
2009
2010
2011
Source : JBS Research Analysis, Central Bank of Sri Lanka
JB Securities Research July 2012
Page 14
Country Credit Standing improved…
IMF Stand-by Agreement
Jul ‘09 USD 329.1 Mn IMF approves 20 month Stand-By Arrangement of USD 2.6bn equal to 400% of the country’s quota
Sovereign ratings
Aug ‘09 • S&P: Outlook lifted to B 'stable‘ • Fitch: Outlook lifted to B+ 'stable‘
Jun ’10 Central Bank appoints top committee to boost sovereign rating
Review 1
Nov ‘09
USD 329.4 Mn
Jun ’10 S&P: Outlook lifted to B ‘positive‘
Feb ‘10
IMF holds back third tranche after Q409 budget goes off track USD 407.8 Mn
Dec ’08 S&P: Downgraded to B ‘Stable’”
Jul ‘11 • Moody's: B1 Outlook lifted to ‘Positive’ • Fitch: BB- ‘Stable’ • S&P: B+ ‘Positive’
Review 2+3
Jun ‘10
Dec ’08
Review 4
Jun ’10 May ‘09 S&P: Cut outlook to B ‘Negative’ Sep ’10 • Moody's initiating coverage with B1 ‘Stable’ • S&P: Rating raised to B+ ‘Stable’ • Fitch: B+ Outlook lifted to ‘Positive’
Jul ‘11
Sep ‘10 Oct ‘10
USD 212.5 Mn
Minister Sarath Amunugama highlights the importance of the IMF program for Sri Lanka
Review 5
Feb ‘11
USD 216.6 Mn
Feb ‘09 Fitch: Lowered to B+ ‘Negative’
Review 6
Apr ‘11
USD 218.3 Mn Sri Lanka may not take last IMF loan tranche: Fitch analyst
Jul ‘11
Conflict
Post-conflict
Positive
Source: Lanka Business Online, IMF
*
JB Securities Research July 2012
Negative
Page 15
Foreign appetite for sovereign paper increased
Sovereign bond issue Foreign holding of government securities
LKR Bn
3X
13 X
6X
7.5 X
Treasury bills
Templeton fund invests USD 875 mn (approx. LKR 100 Bn)
57 40
64
Oct ‘07
Oct‘09
Sep ‘10
Jul ‘11
Treasury bonds
$500mn 5yr 8.25%
$500mn 5.25yr 7.40%
$1billion 10yr 6.25%
$1billion 10yr 6.25%
184 145 6 50
2007
187
397 bp
499 bp
373 bp
332 bp
18
2008 2009 2010 Jun 11
Conflict
Number of times oversubscribed Spread over US treasury
Post-conflict
Conflict
Post-conflict
Source : Central Bank of Sri Lanka
JB Securities Research July 2012
Page 16
Foreign sources funded the fiscal deficit easing pressure on domestic sources Budget deficit
Domestic non bank Domestic bank Foreign borrowing
Financing of budget deficit
476 446 197
450 39 38.5% 52.6%
8.8%
Domestic non bank
97% with CBSL
LKR Bn
41.2%
45.8% 42.6%
310 246 129 16 101 (5) 2007 2008 2009 195 231 119 49
204
192 10.3%
6.4% 63.0% 244 219 41.0% -1.5% 2011 2007 2008 2009 48.4% 54.7%
Domestic bank
48.6%
Foreign borrowing
(2) 2010
-0.4% 2010 2011
* Foreign borrowings include the non resident holding of government treasuries
Source : JBS Research Analysis, Central Bank of Sri Lanka
JB Securities Research July 2012
Page 17
Reserves increased due to borrowed funds
Reserves built-up
USD Mn
Months of Imports
9.00
Gross official reserves Total reserves
10,000 9,000 8,000 7,000 6,000
8.00 7.00 6.00 5.00
5,000 4.00 4,000 3,000 2,000 1,000
Nov-09 Nov-10 Sep-09 Sep-10 Jan-09 Jan-10 Jan-11 Jul-09 Jul-10 Mar-09 Mar-10 May-09 May-10 Mar-11 Mar-09 Mar-10 Mar-11 May-09 May-10 May-11 May-11 Nov-09 Nov-10 Sep-09 Sep-10 Jan-09 Jan-10 Jan-11 Jul-09 Jul-10 Jul-11 Jul-11
3.00 2.00 1.00 -
-
Source : Central Bank of Sri Lanka
JB Securities Research July 2012
Page 18
Crowding out effect decreased enabling private sector credit expansion Credit, Monthly Change
Private Corps. Govt. 150 100 50 0 -50 -100 -150
Credit to Private Sector
Credit to the Private Sector Annual Change (%)
1,800 1,600 1,400 1,200 1,000 800 600 400 200 0
40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10%
Jan-09
May-09
Jan-10
May-10
Jan-11
May-11
Sep-09
Sep-10
Jul-09
Jul-10
Mar-09
Mar-10
Mar-11
Nov-09
Nov-10
Jul-11
Jul-09
Jan-09
May-09
Jan-10
May-10
Jul-10
Jan-11
Net Credit to Govt.
Net Credit to Government Annual Change (%)
Credit to SOEs
Credit to SOEs
May-11
160 140 120 100 150% 100% 50% 0% -50%
Sep-09
Mar-09
Mar-10
Sep-10
Mar-11
Nov-09
Nov-10
900 800 700 600 500 400 300 200 100 -
120% 100% 80% 60% 40% 20% 0% -20%
250% 200%
Annual Change (%)
80 60 40 20 -
Jul-09
Jan-09
May-09
Jan-10
May-10
Jul-10
Jan-11
May-09
May-10
*All amounts in LKR Bn
JB Securities Research July 2012
May-11
Mar-09
Mar-10
Mar-11
Source : Central Bank of Sri Lanka
May-11
Sep-09
Mar-09
Mar-10
Sep-10
Nov-09
Nov-10
Mar-11
Nov-09
Nov-10
Jul-09
Jan-09
Jan-10
Jul-10
Sep-09
Sep-10
Jan-11
Page 19
Monetary conditions eased
Monetary policy instruments
LKR Bn
160 140 120 100 80 60 40 20 7% 0 -20 -40 Jan-09 Feb-09 Mar-09 Apr-09 Jun-09 Jul-09 Aug-09 Sep-09 Nov-09 Dec-09 Jan-10 Feb-10 Apr-10 May-10 Jun-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Feb-11 Mar-11 May-11 Jun-11 6% 500 0% -5% Sep-09 Mar-09 Mar-10 Sep-10 May-09 May-10 Mar-11 Nov-09 Nov-10 Jan-09 Jan-10 Jan-11 Jul-09 Jul-10 May-11 -10% 10% 1,500 20% 15% 9% 1,000 8% 5% 10%
Growth in monetary aggregates
LKR Bn
Consolidated Broad Money(M2b) Unsterilized absorption of the USD 1 billion sovereign bond
2,500
40% 35%
Liquidity Repo Reverse Repo SRR*
13%
Reserve Money M2b growth Credit to the Private Sector
12%
Reserve Money growth
2,000
30% 25%
11%
5%
* SRR – Statutory Reserve Requirement
JB Securities Research July 2012
Page 20
Improved liquidity kept interest rates in check…
Policy Rate Pass-through to Market Interest Rates
21% Repo Reverse Repo AWPLR AWDR Call Money Rate 3 month t-bill 15% 17% 19%
13%
11%
9%
7%
5% Nov-09 Nov-10 Feb-09 Feb-10 Aug-09 May-09 May-10 Aug-10 Dec-09 Feb-11 Oct-09 Oct-10 Jan-09 Jan-11 Jul-09 Jul-10 May-11 Page 21 Apr-09 Apr-10 Apr-11
Source : Central Bank of Sri Lanka, JBS Research Analysis
JB Securities Research July 2012
Earnings rapidly picked up…
LKR Bn
CSE Quarterly Earnings March 2009 – June 2011
50
270%
40.7
46.7
45.7
43.3
Other Hotels & Travels Investment Trusts Oil Palms Telecommunications Manufacturing Food, Bev and Tobacco
40
30
25.7
29.0
30.0
20
11.7
10
6.3
14.5
Banking & Finance
Diversified
0
-10 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11
*Earnings figures have not been adjusted for the effect of Cross Holdings
Source : JBS Research Analysis, Colombo Stock Exchange
JB Securities Research July 2012
Page 22
Employee Provident Fund* increased their asset allocation into equities Equity asset allocation Overall equity exposure
LKR Bn
EPF is the largest investor in the CSE
8.0%
79.0
4.0% 1.1%
Sep. 2008
33.3 6.7 7.4
Sep. 2009 Sep. 2010 Dec. 2011
1.0%
Sep. 2009 Sep. 2010 Dec. 2011
Sep. 2008
*The Employee Provident Fund (EPF) is the largest superannuation fund in the country. As at September 2011, the EPF accounted for close to 13.25% of financial sector assets of the country, with over 2.3 million active accounts. It is administered by the Commissioner of Labour, while the management of the fund is undertaken by the Monetary Board of the Central Bank of Sri Lanka
Source : CBSL Financial System Stability Reviews and Annual Reports
JB Securities Research July 2012
Page 23
Massive bull market ensued…
8,000
377%
7,000
All Share Price Index
6,000 CBSL reaffirms its commitment to equity investment with a “long term” outlook
5,000
4,000
Galleon Fund begins exiting the market
Share Volume increased rapidly during the boom Janus Fund enters the market
3,000
2,000
1,000 Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Source : Central Bank of Sri Lanka, JBS Research Analysis
JB Securities Research July 2012
Page 24
Excess liquidity chased a limited number of shares… Company wise contribution to market cap growth March 2009 – June 2011
2.4% 2.5% Contribution to Growth Free Float* 3.1% 3.9% 6.5% 70.3% 7.1% 28.0% 7.3% 78.5% 31.0% BUKI JKH CARS COMB HNB 60.0% 53.9% 3.1% 15.6% 2.8% 3.0% 14.7% 15.8% 5.5% 18.5% 2.0% 84.5% 49.0%
1.8%
18.7%
2.0% 2.3%
50%
More than 50% of the Market Cap growth during the period can be attributed to growth in 14 companies, most of which have relatively small free floats*
.
SPEN LOLC DIAL CTC SLTL CARG DFCC SAMP AHPL
*Free float has been calculated as the average of period beginning and period end public holding percentage ** The ASI started from a low of 1639 to peak at 7811 within the period.
JB Securities Research July 2012
Source : JBS Research Analysis
Page 25
New capital raisings exploded …….Money like jam
CSE - Primary and secondary offerings January 2009 to December 2011
LKR Mn
Average degree of oversubscription at IPOs* January 2009 to December 2011
141.0
Secondary offerings 20,000
Primary offerings
15,000
Secondary offerings accounted for approx. 75%
10,000 15.9 5,000 11.9
21.2 21.8
1.1 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4
1.7
2.9
4.4 1.4
09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4
Source: JBS Research Analysis, CSE Data
Total amount of capital attracted by IPOs Quarterly degree of = oversubscription Total amount of capital offered in IPOs
Page 26
JB Securities Research July 2012
and penny stocks became the new craze…
Penny stocks - Share volume velocity* Volatility of returns*
59%
44% 37% 35% 36% 30% 25% 26% 20% 21%
135%
94% 71% 53% 19%
09Q2 15% 10% 6% 6% 5% 6% 8% 4%
9% 5%
9%
09Q1
20%
09Q3
17%
09Q4
27%
31%
10Q1
10Q2
10Q3
10Q4
11Q1
11Q2
09Q1
09Q2
09Q3
09Q4
10Q1
10Q2
10Q3
10Q4
11Q1
11Q2
*Figures have been annualized Penny stocks – stocks whose prices were less than LKR 10 at either the beginning or end of a given quarter.
Source: JBS Research Analysis, CSE Data
Penny Stocks
Overall Market
JB Securities Research July 2012
Page 27
Bullish expectations drove the market … Contribution to Market Cap growth Disaggregation of Market Cap growth 42%
20.3%
305%
32% 132%
15.4% 64.3%
100%
P/E Growth
Earnings Growth
Combined Effect
Jun-09
P/E Growth
Earnings Growth
Combined Effect
Jun-11
Source: JBS Research Analysis
JB Securities Research July 2012
Page 28
The future looked increasingly rosy….
Decomposition of market value June 2009 Decomposition of market value June 2011
43.9%
49.5%
54.1%
Franchise Value
68.7%
72.6%
75.6%
56.1%
50.5%
45.9%
Tangible Value
31.3%
27.4% 16% Cost of Equity
24.4% 18%
18%
20% Cost of Equity
22%
14%
Source: JBS Research Analysis
JB Securities Research July 2012
Page 29
May 2009 Jul 2009 Sep 2009 Nov 2009 Jan 2010 Mar 2010 May 2010 Jul 2010 Sep 2010 Nov 2010 Jan 2011 Mar 2011 May 2011 Jul 2011 Sep 2011 Nov 2011 Jan 2012 Mar 2012 May 2012
JB Securities Research July 2012
The inevitable after party – exuberance turned to irrationality
Page 30
Hubris displaced humility and benevolence …. INTERNATIONAL
Sri Lanka announces bid for Commonwealth Games 2018 in Hambanthota Natural gas deposits discovered for the first time in Sri Lanka by Cairn India. EU expresses concerns over censorship of dissident websites in Sri Lanka. Sri Lanka loses bid to host the 2018 Commonwe alth games. US issues sanctions on Iranian oil. SL currently imports 93% of all its crude oil from Iran. British Television station Channel 4 airs video footage of claimed atrocities against civilians in the latter stage of the war News report appears stating India may not support Sri Lanka at the UN HR vote due to increased political pressure from parties in Tamil Nadu. SL loses key UNHRC vote on war crimes. The council urges Sri Lanka to “credibly investigate” allegations of war crimes during the end of the conflict.
High point = 173
2011
Q3 Q4
2012
Q2 Q1 Q2
160
140 Start Value = 150
120
Low point = 105
End Value = 107
100
80
With the 2/3rd Majority in the parliament government sweeps through major legislative reforms Abductees found left near a police station. Activist Gunarathna deported from country citing visa irregularities
Clashes over proposed new private sector pension bill intensifies. 1 worker killed and 60 seriously injured. Government temporary suspends the bill.
Nearly 20,000 metric tonnes of tainted petrol released to the public causing close to a thousand vehicles to suffer engine failure.
Parliament scraps emergency laws for the first time in 6 years. Strengthens Prevention of Terrorism Act temporarily.
Controversial expropriation bill nationalizing 37 businesses deemed to be “underperforming or underutilized”
Former parliamentari an Bharatha Laksman and others killed in a post election interparty shoot-out. Dozens more injured.
President appointed commission on Lessons Learnt and Reconciliati publishes its report. Makes key recommend ations.
Sarath Fonseka, ex-army chief jailed for three years over charges of making false statements about the president’s brother, who is also the secretary of defense.
Left wing political activists Kumar Gunarathnam and Dimuthu Atygala abducted by unknown gunmen.
DOMESTIC
Presidential pardon given to Sarath Fonseka. Civic rights abolished.
Sources: Newspaper articles, Central Bank of Sri Lanka, LMD, The Nielson Company, JBS Research
JB Securities Research July 2012
Page 31
LMD Nielsons Business Confidence Index
Intense diplomatic pressure exercised by Western nations over SL Government
180
Credit growth persisted…
Credit to Private Sector
Credit to the Private Sector Annual Change (%) 2,500 2,000 1,500 34.0% 1,000 33.5% 500 0 33.0% 32.5% 80 100 120 35.5% 35.0%
*All amounts in LKR Bn
Credit, Monthly Change
160
Private
34.5%
Corps.
Govt.
140
Apr-12
Jun-11
Jul-11
Jan-12
Net Credit to Govt. and SOEs
Credit to SOEs Net Credit to Government Credit to Govt. growth Credit to SOEs growth 1,200 1,000 800 60% 600 400 200 40% 100% 80% 1,400 120%
May-12
Sep-11
Dec-11
Feb-12
Oct-11
Mar-12
Aug-11
Nov-11
60
40
20
0
-20
Apr-12
Jun-11
Jul-11
Jan-12
20% 0%
Feb-12
Apr-12
Oct-11
Jun-11
Jul-11
Jan-12
May-12
Sep-11
Dec-11
Mar-12
Aug-11
Nov-11
Source : Central Bank of Sri Lanka
JB Securities Research July 2012
May-12
Sep-11
Dec-11
Feb-12
Oct-11
Mar-12
Aug-11
Nov-11
Page 32
CBSL attempted the impossible trinity – fixed exchange rate …
CBSL sold USD to hold the peg
USD Mn
200 100 (100) (200) (300) (400) (500) (600) (700)
Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 100
INR devaluation
Currency mispriced…
104 LKR/USD(RHS) 103 NEER(LHS) REER(LHS) 102
CBSL says intervention will be limited to settlement of oil bills
LKR
140
135
130
101
125
120
99
115
Reserves drained out
-28%
USD Mn
9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 95 May 11 Jun 11 Jul 11 Jan 12 May 12 Sep 11 Feb 12 Apr 11 Dec 11 Mar 12 Aug 11 Nov 11 Apr 12 Oct 11 95 96 97
Peg maintained
98
President in his capacity as Finance Minister depreciates the rupee by 3%
110
105
100
Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12
*NEER is the weighted average of nominal exchange rates of the 24 trading partner and competitor countries including USD, GBP, JPY, INR and SDR
Source : Central Bank of Sri Lanka, JBS Research Analysis
JB Securities Research July 2012
Page 33
Impossible trinity …and an accommodative monetary policy…
Policy instruments accommodative
LKR Bn
120
Monetary aggregates expanded
LKR Bn
10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 1,500 20% 7.0% 1,000 6.5% 6.0% 15% 30% 2,000 25%
Consolidated Broad Money(M2b:) Reserve Money M2b growth Credit to the Private Sector Reserve Money growth
3,000
40%
Money market liquidity Repo
100
Reverse Repo SRR*
2,500
35%
80
60
40
20
0 5.5% -20 Apr-11 Apr-11 May-11 Jun-11 Jul-11 Jul-11 Aug-11 Sep-11 Sep-11 Oct-11 Nov-11 Dec-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 Apr-12 May-12 Jun-12 5.0% Aug-11 Sep-11 Jun-11 Mar-12 Nov-11 Dec-11 Feb-12 Oct-11 Apr-11 Jan-12 Jul-11 May-11 Apr-12
500
10%
-
5%
* SRR – Statutory Reserve Requirement
Source: Central Bank of Sri Lanka, JBS Research Analysis
JB Securities Research July 2012
Page 34
Imports exploded leading to a doubling of the trade deficit in 2011…
USD Mn 2.01 X
Increase in Imports
245 426 472 506 509 698 802 1,078 254
182 835 327 321
Increase in Exports
1,933 = 1.22 X 2010
289
123
100
71
50
9
85
16.4%
1,754
9.7%
6,926 = 1.52 X 2010
9,706
4,821
2010
Petroleum
Other Building Diamonds Intermediate Materials and Precious Goods Metals
Textiles
Other Transport Consumer Equipment & Goods Other
Vehicles
Machinery and Equipment
Food and Beverages
Ceramic Products
Textiles and Garments
Rubber Products
Other Industrial Exports
Petroleum Products
Gems, Diamonds and Jewellery
Coconut
Other Agricultural Products
Tea
Mineral
Unclassified*
2011
As a % of GDP *Change in unclassified imports of USD 108mn and unclassified exports of USD 193mn have been netted off
Source: Central Bank of Sri Lanka, JBS Research Analysis
JB Securities Research July 2012
Page 35
…and built pressure on the Current Account…
USD Mn
Services Account
507
51% 22%
Income Account
10 531 709 1,098 19 8 448 385 647
954 1,392
830
501
355
Inflows
Outflows
Inflows
Outflows
Inflows BPO, ITES
Inflows
Outflows Total
Outflows
Inflows
Outflows
Inflows
Outflows
Inflows Income account balance
10,559
Transportation
Travel
Other
Interest and Other Charges
Direct Investment
Compensation of Employees
20,269
101% 16.4%
25% 12%
45%
19%
96%
25%
467
3,084
1,114
15.6%
Private remittances easing the pressure
11% 15%
1,985 5,145 9,258
9,710
562
Services and Income Accounts almost offsetting each other
60
329%
7.8%
4,615
Imports
Exports
Trade deficit
Receipts
Payments
Receipts
Payments Goods, Services and Income(net)
Private receipts
Private Official payments transfers(net) Current transfers Current account deficit
Merchandise trade
As a % of GDP
Percentage increase over 2010
Services
Income
Source: Central Bank of Sri Lanka, JBS Research Analysis
JB Securities Research July 2012
Page 36
…resulting in a depletion of reserves
Reserves fell by USD 2.2 Bn in 8 months
USD Mn
Gross official reserves Total reserves
Months of Imports
10,000 9,000 8,000
8.00
-23%
7.00 6.00
7,000 6,000 5,000 4,000 3,000 2.00 2,000 1,000
Aug-11 Aug-11 Sep-11 Mar-12 Nov-11 Feb-12 Dec-11 Dec-11 Feb-12 Oct-11 Oct-11 Jan-12 Jul-11 Mar-12 Nov-11 Sep-11 Aug-11 Dec-11 Feb-12 Apr-12 Apr-12 Oct-11 Jan-12 Jul-11
5.00 4.00 3.00
1.00 -
-
Source: Central Bank of Sri Lanka
JB Securities Research July 2012
Page 37
Liquidity rapidly dried up… Interest rates shot up…
Money market net liquidity
LKR Bn
160 Money market liquidity Reverse Repo AWDR 3 month t-bill Repo AWPLR Call Money Rate 15% 14% 13% 12% 100 11% 80 10% 60 9% 40 8% 20 7% 6% 5% Jun-11 Mar-11 May-11 Mar-12 Nov-10 Nov-11 Sep-11 Aug-11 Dec-10 Dec-11 May-12 Jun-12 Jan-11 Jan-12 2007 2008 2009 2010 2011
Loan to deposit ratio of banks
140
120
85% 70% 70% 61% 76%
0
-20
Source: Central Bank of Sri Lanka, JBS Research Analysis
JB Securities Research July 2012
Page 38
The MPI was an early precursor of the impending collapse… The ASI and MPI
8,000 7,500 7,000 6,500 6,000 5,500 5,000
≈ 4½ months
4,500 4,000 3,500
MPI peaks in early October 2010
ASI peaks in mid February 2011
MPI
3,000 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11
ASI
Dec-11 Mar-12 Jun-12
The All Share Price Index (ASI) and the Milanka Price Index (MPI) are market capitalization weighted indices. Whereas the ASI includes every company listed in the CSE, the MPI only contains 25 companies. Criteria for inclusion in the MPI are as set out in http://cse.lk/mpi.do
Source : JBS Research Analysis
JB Securities Research July 2012
Page 39
The regulator tried in vain…
8,000
The regulator became regulated…
7,000
6,000
SEC mandates the force sale of securities by T+5 SEC relaxes rules on debt settlement SEC mandates stock broker companies to refrain from extending credits to any investor beyond T+3 days SEC suspends trading of heavily manipulated shares and imposes a 10% price band on all securities SEC relaxes rules on price bands SEC Director General leaves office SEC Chairperson resigns
5,000
4,000
3,000
2,000
1,000
SEC introduces new rules on share allotment to retail investors, while Central Bank places a cap on total number of bank guarantees to be issued for IPO subscriptions
SEC further relaxes rules on debt settlement
SEC directive permits brokers to extend credit to investors up to three times net adjusted capital SEC revokes directive on price bands all together
0
Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12
MPI
ASI
Source : Securities and Exchange Commission of Sri Lanka
JB Securities Research July 2012
Page 40
Earnings plateaued out…
LKR Bn
50
46.6 40.7
45.7
46.3
43.3
47.3
Other Hotels & Travels Investment Trusts Oil Palms Telecommunications Manufacturing Food, Bev and Tobacco
40
30
30.0
20
Banking & Finance
10
Diversified
0 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11
Source : JBS Research Analysis, Colombo Stock Exchange
*Earnings figures have not been adjusted for the effect of Cross Holdings
JB Securities Research July 2012
Page 41
Even the penny stocks began to lose their luster….
Penny Stocks - Share volume velocity* Volatility of returns*
59%
36%
37%
135% 94% 71% 53% 31%
126%
20%
26% 21% 17% 5% 1% 3%
45%
6%
8% 4%
9%
10Q2
10Q3
10Q4
11Q1
11Q2
11Q3
11Q4
10Q2
10Q3
10Q4
11Q1
11Q2
11Q3
11Q4
*Figures have been annualized
Penny Stocks
Overall Market
Source : JBS Research Analysis,
JB Securities Research July 2012
Page 42
The market lost more than 40% of its value during the bust…
8,000
ASI -38.6%
7,500
7,000
6,500
6,000
5,500
5,000
4,500
4,000
3,500
MPI -45.8%
3,000 Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
MPI
JB Securities Research July 2012
ASI
Page 43
May 2009 Jul 2009 Sep 2009 Nov 2009 Jan 2010 Mar 2010 May 2010 Jul 2010 Sep 2010 Nov 2010 Jan 2011 Mar 2011 May 2011 Jul 2011 Sep 2011 Nov 2011 Jan 2012 Mar 2012 May 2012
JB Securities Research July 2012
Sobering reality – some concerns remain
Page 44
Governance is slipping…
Concentration of power leading to a weakening of state and civil institutions…
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.*
51.7
56.9 52.6**
42.8
40.7**
31.8**
2004
2006
2008
2010
2004
2006
2008
2010
2004
2006
2008
2010
Control over corruption and unfair dealing is slipping
“ the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as "capture" of the state by elites and private interests. “
The perception of the rule of law has deteriorated
“ the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts… “
Social freedoms and rights of franchise are under friction
“the extent to which a country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media. “
*Three of the six major dimensions of governance that are included in the World Banks’s indicative framework for governance as they apply to Sri Lanka are highlighted above. **The ranking is based on a percentile; Higher values imply a better score. *** The rankings provide a directional indication and not an absolute measure of governance. Therefore they should not be construed an absolute quantification of the country’s level of governance, and at higher confidence levels the directional weakening suggested by the indicators may become statistically insignificant.
Source: World Bank, http://info.worldbank.org/governance/wgi/index.asp
JB Securities Research July 2012
Page 45
Devolution of Power – 25 years and still a work-in-progress
The 13th Amendment is a product of the Indo-Sri Lanka Accord of 1987. Drawing closely on the Indian federal system, it proposes a framework for devolution of power which constitutes of the following: Establishment of a Provincial Council (PC) along with a High Court for each province. Making Tamil an official language while setting English as the link language. Delegation of certain legal and executive powers into the hands of the PCs as stipulated under three lists; the Reserved List, Provincial Council List and the Concurrent List. Limited executive and legislative powers are delegated to PCs under the Provincial Council and Concurrent Lists. These powers cover issues related to law and order, land and land settlement, provincial finances and education. However, despite the 13th amendment being cited as one of the major stepping stones in achieving reconciliation, full implementation of the provisions enshrined in the amendment has remained elusive under various governments over the past quarter of a century.
Signing of Indo-Lanka Peace Accord
13th Amendment debated and certified
President Jayawardena authorises the merger of North & East provincial councils
IPKF withdrawal completed
Supreme Court orders demerger of North and East
President Rajapakse pledges 13+ solution to India
President announces that a 13+ solution should be sought through a Parliamentary Select Committee (PSC)
1987
1988
1989
1st ever PC election takes place in 4 provinces
1990
1991
1992
2006
2009
2010
2011
2012
Indian Peace Keeping Force (IPKF) arrives in Sri Lanka
Sri Lanka & India agree on terms of withdrawal for IPKF
President discusses 13+ solution with Indian FM and Congress Party delegation
President reaffirms his confidence in a PSC in reaching a lasting solution
Further to the 13th amendment, several committees have been appointed by various government to explore the issue of devolution of power and other matters relating to the 13th Amendment. These include the Mangala Moonesinghe PSC of 1992, the Gunewardena Committee of 1995, the All Party Representative Committee (APRC) of 2006.
JB Securities Research July 2012 Page 46
Food Inflation
Non Food Inflation
JB Securities Research July 2012
Inflation is on the increase…
11.2%
7.1%
Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% -5% Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12
Source : Ministry of Finance and Planning
-4% 3% 4%
-3%
-2%
-1%
10%
11%
12%
13%
14%
9.3%
15% Headline - YoY Core - YoY Headline - 12m MA Core - 12m MA
2%
5%
6%
5.8%
7%
8%
9%
10%
Page 47
Government revenue low compared to peers…
Revenue as a % of GDP
27.6% 24.7% 21.4%
15.8% 14.9% 14.5% 14.2% 13.3%
Sources of revenue
16.6% 15.6% 15.0% Tax Tax + Non tax Tax + Non tax + Grants 14.9% 14.6% 15.0% 14.5% 14.7% 14.3% 13.3% 12.9% 12.8% 12.4%
18.5%
14.5% 12.0%
5.1% 9.4% 4.5% 10.1% 3.6% 11.1%
2007
2008
2009
2010
2.0% 11.1%
2011
2012 F
1.6% 12.9%
Grants 85.5% 85.3% 85.3% 86.9% 85.5% Non tax Tax
Vietnam
Malaysia
Thailand
India
Sri Lanka Bangladesh
2007 2008 2009 2010 2011
Page 48
Source : IMF, Central Bank of Sri Lanka
JB Securities Research July 2012
The SOE monsters keep bleeding …
Combined operating losses of main State Owned Enterprises
2.0 7.1 (11.1) (22.3) (6.1)
19.3 0.17
Combined operating loss as a % of GDP
-0.5% -1.5% -0.5% -0.3%
5.0 (7.7) (7.4) (6.6) (4.6)
26.4 0.23
(20.3) (0.3) (0.8)
16.4 0.15
(33.9)
5 year average of -0.9%
(85.2) (11.0) (8.0) 2007 2008 2009 2010
-1.8%
2011
LKR Bn
64.0 0.59 Sri Lanka Transport Board Airlines Ceylon Electricity Board Ceylon Petroleum Corporation
Combined earnings of the market
Combined earnings (USD Bn) 1.65 1.29
LKR Bn (19.3) (13.5) (2.0)
0.68 0.51
182.7 146.3
Combined loss (LKR Bn) Combined loss (USD Bn) 120.0 1.08
73.8
58.2
2008
2009
2010
2011
2007
2008
2009
2010
2011
* Cross holdings have not been eliminated Source: Ministry of Finance and Planning, CSE, JBS Research Analysis
JB Securities Research July 2012
Page 49
Shift in reliance to non-concessional and commercial loans…
Foreign borrowings of the government (%GDP)
37.1% 1.3% 5.1% 32.8% 1.3% 3.7% 36.4% 1.6% 8.5% 10.9% 11.7% 36.1% 2.6% 35.6% 3.6% 3.4% 13.7% 4.0% 11.3% 23.3% 30.2% 4.5% 7.3% 10.1%
NonConcessional Loans
Loan mix
32.8%
Commercial Loans
30.7%
27.8%
26.3% 22.6% 20.3%
82.9%
84.7% 72.2%
62.6% 57.0%
Concessional Loans
2007
2008
2009
2010
2011
2007
2008
2009
2010
2011
Source : Central Bank of Sri Lanka
* Sovereign bonds and foreign holding of treasuries are classified as commercial loans
JB Securities Research July 2012
Page 50
Investment - savings gap has widened
Investment/GDP
6.2%
Government
6.3%
6.6% 23.7%
Investment savings gap/GDP
21.6%
2009 2010 2011
Private
17.9%
-0.7%
2010 2011
2009
National Savings/GDP
Net private transfers
-
-3.1%
5.8%
6.0% 6.7%
-7.8%
Private
21.7%
20.8%
16.5% -1.1%
2011
Source: Central Bank of Sri Lanka , JBS Research
Government
-3.7%
2009
-2.1%
2010
JB Securities Research July 2012
Page 51
Mostly financed by govt. borrowings
Investment savings gap/GDP
2009 2010 2011 0.7% 1.6%
Financing the resource gap/GDP
-0.7%
-3.1%
5.3% 4.7%
4.2%
Government borrowing
0.7%
0.4% 0.4% 0.9% -0.5% -1.8% 1.5% -0.3% -0.1% -1.1% -1.8%
Grants and transfers FDI FPI Trade liabilities Reserve movement Other – Commercial bank net assets & errors
-7.8%
0.0%
0.9%
-6.5%
-2.2%
-0.4%
Source: Central Bank of Sri Lanka, JBS Research Analysis
JB Securities Research July 2012
Page 52
FDI yet low…
Foreign Direct Investment FDI as a % of GDP
956 USD Mn 752 603 159 131 221 231 411 223 44 19 154 2008 2009 195 2010 218 Reinvested earnings 33 Equity capital 404 239
Includes land purchases
1.86%
1.85% 0.96% 0.96%
1.62%
210 478
705
Other capital
2007
2008
2009
2010
2011
Low compared to peers…
* All data for 2010 except for Sri Lanka(2011)
7.5% 3.9% 3.0% 1.6%
Sri Lanka Vietnam Thailand Malaysia
1.4%
India
0.9%
Bangladesh Page 53
2007
2011
* FDIs excludes loans as per the UNCTAD presentation
JB Securities Research July 2012
Source : Central Bank of Sri Lanka, World Bank
Capital intensity driving growth NOT total factor productivity (TFP)
113,439
22%
2,863,854
396,853
-11,938
80%
-2%
2,365,501
Contribution to GDP
LKR Mn
GDP-2008
Capital intensity
CAGR
Capital productivity
CAGR
Labour force growth
CAGR
GDP-2011
CAGR
CAGR
2008/11
5.31%
X
-0.14%
X
1.33%
=
6.58%
Labour productivity
5.19%
Note CAGR of GDP = [(1+CAGR of Capital Intensity)*(1+CAGR of Capital Productivity)*(1+CAGR of Labour Force)]-1 JB Securities Research July 2012
Source: Census and Statistics Sri Lanka, JBS Research Analysis
Page 54
The lion is not beaten – And… the good news…
JB Securities Research July 2012
Page 55
Competitiveness is improving relative to peers…
High Competitiveness Low
Thailand Sri Lanka
2001 2002 2003 2004 2005 2006 2007 2008 2009
End of war
India
57/75 54/80 56/102 55/104 45/117 43/125 48/131 50/133 49/133 51/139 56/142
Vietnam
60/75 65/80 60/102 77/104 81/117 77/125 68/131 70/133 75/133 59/139 65/142
33/75 35/80 32/102 34/104 36/117 35/125 28/131 34/133 36/133 38/139
61/75 59/80 68/102 73/104 98/117 79/125 70/131 77/133 79/133 62/139 52/142
2010 2011
Competitiveness ranking has increased by 38% after the war
39/142
Ranking/No of countries ranked
Source: World Economic Forum, World investment report 2011 UNCTD, Central Bank of Sri Lanka, JBS Research Analysis
JB Securities Research July 2012
Page 56
Key contributor being the greater stability from the end of the conflict…
High
Overall Ranking Overall BasicRequirements requirements Basic Institutions Infrastructure Macroeconomic environment health & primary education Efficiency Enhancements Efficiency enhancers Higher education & training Goods market efficiency Labour market efficiency Fin. market development Technological readiness Market size Innovation & sophistication Innovation Sophistication Business sophistication Innovation
Current Rank - 2012 Improving competitiveness will depend on improving these key problem areas 2012 Ranking out of 142 Countries 2009 Ranking out of 134 Countries
Competitiveness
Low
Improvement
Improvement over 2009 Deterioration over 2009
0%
JB Securities Research July 2012
25%
37%
50%
57%
75%
100%
Page 57
Source: World Economic Forum, World Investment Report 2012 UNCTD, JBS Research Analysis
Ease of doing business rank has improved
The World Bank Doing Business Ranking out of 183 countries Thailand Sri Lanka Vietnam India Philippines
134 132
17 89 98 132 136
Sri Lanka
2011 2012
Vietnam
2011 2012 2011
India
2012
Overall
Starting a business Construction permits Getting electricity
102 34 169 n/a 155 72 74 166 72 137 43
89 38 111 95 161 78 46 173 53 136 42
78 100 62 n/a 43 15 173 124 63 31 124
98 103 67 135 47 24 166 151 68 30 142
134 165 177 n/a 94 32 44 164 100 182 134
132 166 181 98 97 40 46 147 109 182 128
102 78
98
89
Registering property Getting credit Protecting investors Paying taxes Trading across borders Enforcing contracts Resolving insolvency
2011 India
Vietnam
2012 Sri Lanka
Source: Doing Business, The World Bank, 2012
JB Securities Research July 2012
Page 58
Country is experiencing a demographic dividend…
% of population in productive age Dependency Ratio
69.5% 56.0% 51.5% 64.1% 43.9%
66.7%
66.0%
60.0%
Sri Lanka
Vietnam
2010
India
Pakistan
Sri Lanka
Vietnam
2010
India
Pakistan
Population between the age of 15-64 years
Population aged 0-14 and above 64, divided by 15-64 age
Source : Key Indicators for Asia and the Pacific 2011 - ADB
JB Securities Research July 2012
Page 59
Labour force is literate…
Primary school completion rate *
97.5% 102.3% 94.8%
Literacy rate
61.1%
91.9%
92.8%
62.8%
Sri Lanka Vietnam India Pakistan
55.5%
Average years of schooling**
8.4 6.4 5.1 5.6 Sri Lanka
*
Vietnam
India
Pakistan
The primary completion rate =(No. of primary school graduates/No. of children in primary school age). The ratio can go above 100 percent, which can be a symptom of late entry, grade repetition, or of an enrollment push at some point in the past, perhaps as a consequence of a school enrollment campaign
Sri Lanka
Vietnam
India
Pakistan
** The years of formal schooling received, on average, by adults over age 15
Source: Key Indicators for Asia and the Pacific 2011 – ADB, Annual Report 2011
*Latest data available
JB Securities Research July 2012
Page 60
Socio Economic indicators are healthy… Total Healthcare Expense*
(% of GDP | 2010)
8% 72 7% 6% 5% 4% 3% 2% 1% 0% Sri Lanka Vientnam Thailand India Bangladesh 2.90%
S. Asia Avg. 3.8%
Life Expectancy (Years | 2010)
76 74
Global Avg. 70
75
75 74
6.80%
70 68 66 64 3.90% 4.10% 3.50% 62 60 Sri Lanka 60 50 40 30 Vientnam Thailand India
S. Asia Avg. 65
69
65
Bangladesh
Infant Mortality Rate (Per 1,000 live births | 2010)
51 48 38
S. Asia Avg. 52
*Total Healthcare expenditure includes private and government expenditure on healthcare
20 10 0
14
11
Global Avg. 41
Source :World Development Indicators 2012 – World Bank 2012
Sri Lanka
Vientnam
Thailand
India
Bangladesh Page 61
JB Securities Research July 2012
Labour supply conditions are favourable…
Current labour supply, YE2011
In 000’ Total Population 20,869 10% 16% Older (55+)
Composition of Working age population (aged 15 to 64 years)
Population < 15 Years Working Age Population, 15+ Years Not Participating
5,410
15,459
61%
63%
26% 74%
Prime (25-54)
8,446
Total Labor Force
7,013
34%
66%
Unemployed Labor Force
322
28%
21%
Young (15-24)
Employed Labor
6,691
Male Female
2010
E2017
100% (000’) = 13,921
14,402
Source: United Nations ,Population Division (2011). World Population Prospects: The 2010 Revision/ Sri Lanka Labour Force Survey 2011
JB Securities Research July 2012
Page 62
Relatively higher tertiary educated labour force.…quality concerns exist
Educational attainments of the workforce, 2010
(% of working age population)
No of graduates from the government universities
13,952
Sri Lanka
12,958 30% 53% 16% 11,713
730 327 809
1388 425 1,157 943
13,042
1,382 392 1,307 797
12,005
1067 208 894 901 1,492
1372 345 1,114 1294
other Law L.L.B. Engineering B.Sc. (Eng.) Medicine M.B.B.S.
Malaysia
25%
61%
13%
896
2,504 2,348 2,028 2,274 2,301 2,705 2,547
India
70%
23%
7%
2,198
2,704
Science B.Sc. Commerce & Mgt. Studies
4,432
4,405
5,142 4,012
4,830
Indonesia
46%
46%
8%
Arts & Oriental Studies 2009 2010
Primary or lower
Secondary
Tertiary
2006
2007
2008
Source: McKinsey Global Institute -The world at work – Jobs, pay, and skills for 3.5billion people, June 2012/CBSL annual report 2012
JB Securities Research July 2012
Page 63
Urbanization will be a growth enabler…
Urbanization* forecasted to increase
30% 25% 20% 15% 10% 5% 0% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Urbanization* is officially defined as people belonging to the smallest administrative division (i.e. Municipal Council or village council). Other methodologies place Sri Lanka’s real urbanization rate as high as 40%. Bangkok = $88Mn/km2
Economic Density* low compared to the region
Population Density (ppl per Km2)
1,750 1,500 1,250 1,000 750
Potential for bridging the gap
Western
Colombo = $15Mn/km2 Singapore= $269Mn/km2 Ho Chi Minh city = $73Mn/km2
Central
500
Sab.
250 50 100 150 200
Southern North. W. North. C
250 300 350 400
Nothern
R2 =0.89
450 500
Gross Regional Product Per Capita (LKR 000’s)
World Urbanization Prospects: The 2011 Revision – UNDESA 2011, Annual Report 2011 – CBSL 2012
Economic Density = GDP per unit Area Sri Lanka: Reshaping Economic Geography – WB 2011 Page 64
JB Securities Research July 2012
Diaspora opportunity…
Regions with significant populations of Sri Lankans*
Denmark 13,000 Canada 300,000 U.S.A. 35,000 U.K. 200,000 Italy 60,000 India 200,000 Norway 14,000 Sweden 8,000 S. Korea 20,000 Japan 20,000
Aggregate (000's)
Mid. East Europe N. America S. & East Asia Australasia 1,408 560 335 240 107 2,650
W. Europe (000's)
France Germany Switzerland Netherlands 150 60 55 10 275
Mid. East (000's)
Saudi Arabia U.A.E. Kuwait Qatar Lebanon Israel 600 300 300 100 100 8 1,408
Australia 100,000
New Zealand 7,000
*Currently living or working on a temporary or permanent basis outside of SL *Not official estimates of the Government of Sri Lanka
JB Securities Research July 2012 Page 65
Ongoing infrastructure development plans – Power and Highways
Major Power Projects underway and planned
Project Investment
USD 335Mn USD 891Mn USD 526Mn USD 500Mn
Completion
June 2012 2013 2015 2017
1 2 4 3 4 2
Upper Kotmale Hydro Power Plant (150MW) Norochcholai Coal Fired Power Plant – Phase II (600MW) Uma Oya Development Project (120MW) Trincomalee Coal Power Plant (500MW)
Major Road Development projects underway and planned
Project Investment
USD 168Mn* USD 292Mn USD 935Mn USD 1,231Mn (Feasibility Stage)
Completion
2013 2012/13 2015 n/a
8 6 7
5 1 3 6 7 8 5
Southern Expressway Extension (35km) Colombo-Katunayake Expressway (25km) Colombo Outer Circular Highway (29.1km) Colombo-Kandy Expressway (98km)
*Estimated figure
Source: Ministry of Ports and Highways, Ministry of Power and Energy, Department of External Resources, Treasury Annual Reports, Central Bank of Sri Lanka, RDA
JB Securities Research July 2012
Page 66
Ongoing infrastructure development plans – Ports and Telecommunications
Major Port and Airport Projects undergoing and planned
Project Investment
USD 1,075Mn USD 1,037Mn JPY 14.5Bn + LKR 525Mn EUR 46.1Mn USD 209Mn USD 425Mn
Completion
2013&14 2011,12&15 n/a n/a 2012 2015
1 2 3 4 5 4 6 1 5 3 2
JB Securities Research July 2012
Colombo – South Harbour Development Project – 9.6mn TEU of transshipments Hambantota – Commercial operations & Bunkering tank farm (80,000MT) Galle – Yacht marina and general infrastructure development Oluvil – Fisheries port development Mattala International Airport (1 million passengers p/a) Bandaranaike International Airport Expansion – (6 million passengers p/a)
6
Major Telecommunications projects currently undergoing
Telecommunications – National Backbone (NBN)
• •
• •
Telecommunication Regulatory Commission of Sri Lanka (TRCSL) has initiated an island-wide fibre backbone network The key goal is to provide all-island broadband connectivity through 5 fibre optical cable rings Completion by 2014 This will provide high speed internet connectivity to all regions of the country
Source : Sri Lanka Ports Authority, Ministry of Ports and Highways, TRCSL
Page 67
Internet and Broadband usage expanding but trailing peers
6%
Internet and Email Subscribers
(As a percentage of tot. population |Dec 2011)
Broadband connections
(Per 100 people| 2012)
5%
4.13
4.61
4%
• 2.3 Mn Internet users as of Dec/11 • Mid-year population 20.9 Mn in 2011
3%
2.32
2%
Wireless
1.23
1%
0.79
0.90
1.09
Fixed
0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 March
Indonisia
India
Sri Lanka
Vietnam
Thailand
Source: TRC Sri Lanka
Source: www.internetworldstats.com, TRCSL
JB Securities Research July 2012
Page 68
Primary balance improvements not at the expense of capital exp...
Revenue as a % of GDP
15.6% 15.0% 14.9% 14.5% 15.0%
Primary deficit as a % of GDP
2008
2009
2010
2011
2012 F
-1.7%
-1.4%
-1.3%
Primary Expenditure as a % of GDP
17.8% 18.5% 16.6% 5.3% 5.7% 5.4% 5.5% 6.0% 15.9% 16.3%
Capital Expenditure Primary Recurrent Expenditure + Net Lending
-2.2%
-3.4%
12.5%
12.7%
11.2%
10.4%
10.3%
2008
2009
2010
2011
2012 F
2008
2009
2010
2011
2012 F
Source: Central Bank of Sri Lanka, JBS Research Analysis
JB Securities Research July 2012
Page 69
Large economic opportunity at the country’s door step…
Four southern states of India - 7x Sri Lanka’s GDP
(2011, Nominal GDP $Mn)
Sri Lanka
GDP CAGR* Contribution to national economy In 2011 8.68% 7.82%
59,183
7x
GDP of Southern states of India
407,702
GDP CAGR* Contribution to national economy In 2011 GDP CAGR* Contribution to national economy In 2011 CAGR 2007/11*
8.41% 5.73%
GDP CAGR* Contribution to national economy In 2011
8.01%
Kerala
8.01%
62,107
8.09% 3.96%
Karnataka
90,835
Andhra Pr.
132,054
Tamil Nadu
GDP CAGR* 6.42%
122,706
Source: Directorate of Economics Statistics of respective State Governments, and for All-India — Central Statistical Organization / CBSL Annual report 2011
JB Securities Research July 2012
Page 70
Progressing towards a ports and maritime hub
Sri Lanka’s Competitiveness as a Maritime Hub Major Trade Route Regional Growth Poor Regional Infrastructure
Sri Lanka is ideally located along the major East-West trade route. Trade growth in the Indian Subcontinent (ISC) Congestion within Indian ports and strict cabotage laws make transshipments at Sri Lankan ports a more viable option for ship owners
Regional trade routes with Sri Lanka as a Hub
Sri Lanka
World’s top 10 liner routes (TEU Mn)*
China - US China - EU Other Asia - Other Asia China - Other Asia Other Asia - EU US - China EU -ME & Africa EU - Other Asia EU - China China - ME & Africa Trade routes that pass by Sri Lanka 3.2 3.2 3.0 2.9 2.7 3.6 4.6 5.2 5.8 7.1
Colombo’s reckoning as a maritime hub
2010 Ranked 29th among the world’s major ports
Sri Lanka’s strategic location places it on 6 of the 10 largest trade routes in the world and within reach of over 26% of all the world’s container traffic
2005 Ranked 35th among the world’s major ports
2.4 Mn TEU
2005
4.1 Mn TEU
* Liner Volumes are for 2009
JB Securities Research July 2012
Source : IHS Fairplay, World Trade Service, World Shipping Council.
2010
Page 71
Ports and maritime hub cont... Major Ports of Sri Lanka Bunkering Services
Colombo & Hambantota
Trincomalee
Current Sri Lankan bunkering capacity: ≈ 35,000 MT Capacity after completion of proposed expansions: > 115,000 MT
Colombo Galle Hambantota
524 168
2007
253
2008
133
2009
259
2010 2011
Bunkers and Aviation fuel sales in Sri Lanka (USD Mn)
Commercial Ship repair
Colombo, Galle & Hambantota
Current maximum commercial dry docking capacity : 125,000dwt (at Colombo) Capacity for afloat repairs should increase at Colombo once port expansion concludes.
Ship repair volumes - Colombo
101 82 82 75 91 Dry dockings Afloat repairs
Transshipment Services
Colombo & Hambantota
Current Sri Lankan transshipment capacity: ≈ 4.5mn TEU Capacity after completion of proposed expansion: > 14mn TEU
TEU Millions 20 15 10 5 -
Transshipment Activity in the Indian Subcontinent
Total container volume handled at ports within the Indian Subcontinent
Total transshipment activity related to the ISC Container volume transshipped from Colombo 2000 2003 2006 2009
89
78 2008
66 2009
74 2010
74 2011
2007
Source : Colombo Dockyard PLC annual reports, Drewry Maritime Research, Treasury Annual Reports
JB Securities Research July 2012
Page 72
Tourism – “One Island, A Thousand Treasures”
Tourist arrivals (adjusted for VFF)
2,500,000
Total tourist arrivals including VFF (SLTDA) Tourists Visiting Friends and Family (VFF) VFF=SLTDA arrivals –(Foreign guest nights /10) Scenario 1: Tourist arrivals estimated by SLTDA(2.5Mn) Scenario 2: Tourist arrivals increase by 2x 200,000
1,651,777 3x
200,000
2,300,000
855,975 654,476
116,907 130,086
1,451,777
2x
327,902
725,889 537,569
52,464.32
387,622
58,143
275,438
329,479
2010
2011
Jan-May Jan-May 2011 2012
F2016 F2016 Scenario Scenario 1 2
Source : SLTDA
Note: 2011/12 VFF figures are based on 14-16% of total arrivals, this category is forecasted to grow at 10% till 2016
JB Securities Research July 2012
Page 73
Tourism – Room inventory projected to increase …
Required room stock
Current room inventory (YE2011)
Un-graded
Approved new hotel projects Expected investment
6,141 20,794
209 $2,046Mn
14,653
Graded
Expected room inventory based on approved projects
13,967
Incentives on offer for selected hotel projects: • Tax holidays for 1st 10 yrs. • Reduced tax rate of 6% or half the applicable rate (currently 12%) • Payee tax exemptions on expatriate workers • Withholding tax exemptions (i.e. interest on deposits, management fees, royalty & marketing fees) • Exemptions on VAT, PAL & Customs duty on imported or locally purchased project related goods
Inventory mismatch
6,350 7,313
+ -
Major hotel brands entering Sri Lanka
Projected room inventory to meet demand in YE2016
Scenario 1
42,074
Scenario 2
28,411
Forecast assumptions Avg. occupancy 70% Avg. stay 8days Avg. room sharing 1.6persons
Scenario 1: Tourist arrivals estimated by SLTDA (2.5Mn) Scenario 2: Tourist arrivals increase by 2x of YE2011 Note: Major portion of room inventory expected in 2016
Source : SLTDA ,JBS Research Analysis
JB Securities Research July 2012
Page 74
Potential for bridging the fossil fuel deficit…
Reserve Guestimate for the Mannar basin
TOE Mn C4 C3 C5 C2 C1 4.4 Furnace Oil M1 M2 M3 M4 M5 M8
Operated by Cairn Lanka Pvt. Ltd Appraisal of commercial viability
Confirmed existence of Working Hydrocarbon systems Other 139.5
5% 4% 6%
Kerosene LPG
32 X
Energy 47% decomposition 17% (TOE basis) 21% Petrol
Diesel
Expectedenergy energyyeild yield Expected from exploration from exploration
Energy demand (YE2011)
2010 2011 2012
TOE-Ton of oil equivalent : Energy released by burning 1 MT of crude oil
Time line
2013 2014 2015 2016 2017 2018
Seismic Surveys Exploratory Drilling
100 1,500 500 1,000
Cost ($Mn) incurred by Cairn Lanka Open to investors
M6 M9 M10 M7 S1 Exploration Blocks : Mannar basin Cauvery basin M1 Southern
Setting up sub- sea completion (Upstream) Setting up transport infrastructure (midstream) Downstream activities
Source : PRDS Sri Lanka, CBSL annual report 2011,JBS Research
JB Securities Research July 2012
Page 75
$ 2,250 Mn
150
Apparel – largest industry…moving up the value chain
Drivers of competitiveness
Sri Lanka is an experienced player with a comparatively long involvement in the global apparel industry Highly skilled labor force combined with closely involved local entrepreneurship Broader skill set that transcends the ability to simply cut-make and trim, extending into greater value added portions of the supply chain Increasing tendency of exporters to extend product lines into the greater value added segments and develop strategic relationships with buyers Solid CSR track record , close compliance with labour laws and reputation for being the source of “clothing with a conscience”
Apparel Exports - Composition
USD Mn
Presence
1,816
1,898
1,764
1,842
1,892
Labour
1,786
2007
1,921
2008 Knit
1,774
2009 Woven
1,887
2010
2,068
Capabilities
2011
Apparel Exports – Value added*
LKR Bn
Value Addition
84.6
87.2
87.8
92.3
102.3
Reputation
2007
Source: World Bank, Central Bank of Sri Lanka
2008
2009
2010
2011
Page 76
* 2002 Constant Factor Prices
JB Securities Research July 2012
Ceylon tea … the connoisseur’s choice
Commanding a price premium..
Annual average tea prices (USD/kg)*
Higher value addition
Composition of Black tea Exports (MT)
22 3.28 3.14 2.99 2.87
Colombo
21 85 20 79
31 148
28 155
3.26
74
211
208
185
142
133
2.71 2.49 2.31
2.73 2.47
Mombasa
2007
World
2008
Bulk
2009
Packets
2010
Bags
2011
Greater diversification of markets
Export destinations – USD Mn
Kolkata Chittagong Cochin 155 89 121 185 475 623 598 695 667
Middle East
271 209 102 136 202 196 95 117 179 120 135 220
302 126 145 251
Other Other OECD EU Russia
2008
2009
2010
2011
Mar 2012 2012
2007 2008 2009 2010 2011
Page 77
Source: World Bank, Central Bank of Sri Lanka, Sri Lanka Tea Board
*World price is as at 31st March of every year. March 2012 prices are spot prices and have not been averaged over a given period.
JB Securities Research July 2012
IT/BPO industry – a rising star
Industry recovering after the global economic crisis
450 Nominal USD Mn. 400 350 300 250 200 150 100 50 0 2007 2008 2009 2010 2011 Year on Year Growth Series2 Series1 Export Revenue Industry 7% 8% 46% 79% 90% 80%
Sri Lanka Ranked 21st in the AT Kearney Global Services Location Index
India China Malaysia Egypt Indonesia Mexico Thailand Vietnam Philippines Chile Estonia Brazil Latvia Lithuania UAE UK Bulgaria USA Costa Rica Russia 0.91 2.82 0.45 2.84 2.48 3.20 2.97 3.05 2.14 2.54 0.76
2.17 1.27 1.03 2.27 0.69 1.16 0.78 1.58 1.28 0.76 1.11 1.09 0.77 0.81 2.88 0.94 1.79 0.95
3.11 2.62 2.78 3.10 3.24 2.68 3.05 3.27 3.18 2.44 2.31 2.02 2.56 2.48 2.41
2.26 0.88 1.27 0.95 2.07 0.93 0.93 0.94 1.60 1.38 1.19 1.31 1.38 1.36 1.53 2.55
2.76 1.31 1.83 1.35 1.01 1.44 1.29 1.24 1.16 1.82 2.24 1.38 1.96 2.02 2.05 2.23 1.67 2.01 1.56 1.07 1.11 1.49 1.37 1.81 1.65
1.14
387
70% 60% 50% 40% 30% 20% 10% 0%
265 230 245
175
31%
Moved up 4 places in 2011
Sri Lanka Jordan Tunisia Poland Romania Germany Ghana Pakistan Senegal Argentina 2.45
Financial attractiveness People skills and availability Business environment
6 8
3.21 3.23 3.23
Source: Treasury Report 2011, Ministry of Finance & Planning, AT Kearney Global Services Location Index – 2011, ATKEARNEY
0
2
4
JB Securities Research July 2012
Page 78
Remittances remain healthy…
Departures for Employment
No. of persons
Inward Remittances
8.7% 5,141
USD Mn
266,445 247,209 15,918 64,755 56,194 17,489
262,960 19,829
8.9%
239,021 18,707
Other
As a % of GDP
4,416 568
288 103 206 232 401 885
Other AUS & NZ SE Asia Non EU Far East
67,612
60,757
Semi and Unskilled
7.9% 7.2% 2,918 200 90 55 128 175 525 3,330 224 10057 148 203 603
82 144 177 247 724
EU
50,848
61,320
71,114
67,703
Skilled
House Maids
108,709 113,777 113,087 107,816 1,745 1,995
3,030 2,474 Middle East
2008
2009
2010
2011
2008
2009
2010
2011
Source: Central Bank of Sri Lanka
JB Securities Research July 2012
Page 79
Structural reforms easing pressure on the trade account…
Price subsidies being reduced…
Furnace Oil Rs. Per Ltr 90 32
181.3%
Merchandise trade
2012 106 2009 Imports Exports Balance of Trade
USD Mn
Kerosene
51
107.8%
2,500
1,986 1,876 1,915
1,837
1,770
1,763
1,683
1,634
1,669
1,568
Electricity tariff (Rs./KWh)
954
923
931
933
889
886
858
880
836
817
749
820
836
15%
918
10.50 7.50 10.50
40%
962
Industrial Domestic(> 60 units)
12.08
1,236
Petrol (90 Octane)
115
1,441
149
29.6%
1,490
1,581
1,697
57.5%
1,757
Auto Diesel
115 73
2,000
1,500
1,000
680
500
LKR. Per Ltr
150 130 110 90 70
Petrol (90 Octane) Auto Diesel Kerosene Furnace Oil
-419
0
-500
-703 -742 -701 -761
-645
-847
-848
-808
-883
-904
-868
-942
-1,101
-997
-861
-1,000
-1,500 May 11 Jan 11 Sep 11 Feb 11 Apr 11 Jan 12 Feb 12 Mar 11 Dec 11 Mar 12 Aug 11 Nov 11 Apr 12 Oct 11 Jun 11 Jul 11
50 30
2007
2008
2009
2010
2011
2012
* April 2011 – April 2012 figures are provisional
Source: Central Bank of Sri Lanka, Ceylon Petroleum Corporation
JB Securities Research July 2012
Page 80
LKR devaluation has kept up with peers…expected to stabilise…
USD against regional currencies
30%
Sri Lankan rupee (LKR) Bangladeshi taka (BDT) Vietnamese dong (VND) Indian rupee (INR) Chinese yuan (CNY) LKR
105 LKR/USD(RHS) 104 REER(LHS) 135 103 NEER(LHS) 140
25% 20%
102
130
15% 10% 5% 0%
101 125 100 120 99
98
115
97
-5%
96
110
-10%
Apr 11 Jun 11 Aug 11 May 11 Sep 11 Apr 12 Jan 11 Jan 12 May 12 Mar 11 Oct 11 Mar 12 Nov 11 Dec 11 Feb 11 Jul 11 Feb 12
95 Apr 11 May 11 Apr 12 Jun 11 Jan 11 Jul 11 Jan 12 May 12 Feb 11 Mar 11 Sep 11 Feb 12 Mar 12 Oct 11 Aug 11 Nov 11 Dec 11
105
Source: forexpros.com, Central Bank of Sri Lanka, JBS Research
JB Securities Research July 2012
Page 81
Sustainable GDP growth expected to average 6% in the medium term…
Medium term GDP growth projections (2012 – 2017)
8.0%
8.3%
7.8% 6.8% 6.0%
7.8% 5.9% 4.1%
2010
2011
CBSL Estimate*
IMF Estimate
JBS Estimate** Developing Asia
ASEAN-5
Newly industrialized Asian economies
* CBSL expects GDP growth of 7.2% in 2012 and 8% in the medium term ** JBS estimate = Investment rate (27%) / ICOR average (4.5)
JB Securities Research July 2012
Source : Central Bank of Sri Lanka, IMF, JBS Research
Page 82
Equity valuations have reversed to more reasonable levels…
Decomposition of market value June 2011 Decomposition of market value July 2012
34.5% 68.7% 72.6%
Franchise Value
42.2%
48.3%
75.6%
Tangible Value
65.5%
57.8%
51.7%
31.3%
27.4% 16% Cost of Equity
24.4% 18% 15% 17% Cost of Equity 19%
14%
*Current treasury rates: 1yr 12.99%, 5yr 14.15%, 10yr 14.75% (6th July 2012)
JB Securities Research July 2012
Source : JBS Research Analysis
Page 83
Sector Multiples – Banking…
Bank P/B Multiples – Sri Lanka*
Bank P/B Multiples – Peers**
3.42 1.71 1.28 1.37 1.32 1.75 1.12
2009
2010
2011
June 2012 March 2011
Thailand
Phillippines
India
*Peer comparisons are for March 2012 ** P/B Multiples are for “Systemically Important” banks. In cases where such classification was not available, the six largest listed banks by asset size were taken into consideration
Source: Various Stock Exchange Filings
JB Securities Research July 2012
Page 84
Sector Multiples – Diversified…
Major Conglomerates – P/E Multiples
Major Conglomerates – Returns on Equity
21.0 15.7 12.0
20.9
15.0%
15.8% 11.4%
16.9% 14.9% 12.2%
9.7
9.2
JKH
SPEN
CTHR
CARS
HAYL
HHL
JKH
SPEN
CTHR
CARS
HAYL
HHL
Source: Various Stock Exchange Filings
JB Securities Research July 2012
Page 85
Concluding remarks - Economy
Economy sailing through head winds in the short term due to weak global conditions and domestic structural imbalances. Next major elections are in 2015 thus fiscal consolidation can continue – this will mean more taxes and fewer subsidies. Ideally it should be done by casting the tax net wider and better targeting of subsidies. Inflation differentials accumulated over the last 5 years led to the large depreciation of the currency – the currency should stabilize going forward. Tight monetary conditions will have to continue for at least the next 12 months to keep inflation and the exchange rate in check. Absence of a conflict is a necessary condition but not a sufficient condition for high rates of economic growth. Sustainable medium term economic growth will be around 6% due to low domestic savings and low capital productivity. Higher economic growth is possible by focusing on improving total factor productivity – this will require economic restructuring (shift of resources to more productive activity - SOE privatization, a more liberal trade policy, controlling rent seeking behaviour, etc.), investments in human resources (education and skills upgrading) and technical progress (technological and organization advances). The best years for the country lie ahead – there lies a real possibility of Sri Lanka being a “Breakout Nation*”
* Cited in “Breakout Nations” by Ruchir Sharma, Head of Emerging Market Equities & Global Macro at Morgan Stanley Investment Management
JB Securities Research July 2012
Page 86
Concluding remarks - Equities
Bull markets are 7 year cycles (1993-4, 2002-3 and 2009-11) – next one is not due anytime soon. Thus there will be no rising tide to lift ALL boats. Equity market is in its consolidation phase – market will go sideways for the remainder of this year. Nevertheless, a sideways market offers many opportunities to invest in undervalued securities as the potential for mispricing is larger. The low free float large market cap stocks in the indices are masking the true extent of the fall in the market – many stocks have fallen 50-60% from their peak. Nominal GDP growth will be around 13-14% in the medium term – large firm revenues will grow at a CAGR of around 16-17%, EBITDA will grow 18-19%. Free float is further constrained since there will be reluctance to sell at a loss especially amongst state controlled institutions. Value is returning to the market – some stocks are now trading below their intrinsic values. Trying to time the market is futile – jumping on the band wagon when its moving is a losing proposition. Build a diversified portfolio by accumulating equities in stages – 10%:20%:30%:40%.
JB Securities Research July 2012
Page 87
About us
JB Securities Ltd is a full service brokerage firm that is licensed to operate on the Colombo Stock Exchange (CSE). The firm was a founding member of the Colombo Stock Exchange in 1985 and has extensive experience dealing with domestic and foreign institutional investors and high net worth individuals and family offices. In order to provide unique investment insights to our clients we conduct extensive deep-dive research in the industry verticals pertaining to the large listed companies to identify their industry and business dynamics. This process is aided by the largest team of equity analysts in the country, a majority of them either being CFA charter holders or CFA candidates who have undergone a 20 month intensive in-house training program based on international curricula. The firm continues to invest in the development of its analyst team to widen and deepen its research coverage. The firm is part of the family owned Jafferjee Brothers group based in Sri Lanka that was founded in 1944. The group’s business interest spans a wide array of activities in trading, manufacturing and services and has extensive experience dealing with global companies. The core ethical values of the family have been enshrined in all its businesses. All employees of JB Securities have signed off on a code of ethics and standards of professional conduct that is based on that of the CFA Institute.
JB Securities Research July 2012
Page 88
Legal disclosures
© Copyright 2012, JB Securities (Pvt) Ltd, All rights reserved.
This research is for our clients only. Other than disclosures relating to JB Securities, this research is based on current publicly available information that we consider reliable, but we do not represent it as accurate or complete, and it should not be construed as such. We seek to update our research as appropriate. JB Securities shall have no liability, contingent or otherwise, to the user or to third parties, for the quality, accuracy, timeliness, continued availability or completeness of the data or calculations in this document, nor for any special, indirect, incidental or consequential damages which may be incurred or experienced because of the use of the data or calculations made available herein. JB Securities does and seeks to do business with companies covered in its research reports. Investors should be aware that the firm may have a conflict of interest that could affect the objective of this report. Investors would consider this report as only a single aid in making their investment decision. No part of this material may be modified or altered without the prior consent of the firm.
JB Securities Research July 2012
Page 89
For further information contact: Murtaza Jafferjee CFA +94 11 2490900
[email protected]
150, St. Joseph’s Street, Colombo 14, Sri Lanka. Tel: +94 112490900, Email:
[email protected], www.jbs.lk
JB Securities Research July 2012 Page 90