Sri Lanka Weekly

First Capital Equities (Private) Limited

26-30 Aug 2013

Market Performance
This Week ASPI S&P SL 20 Turnover (bn) Foreign Purchases (mn) Foreign Sales (mn) Traded Companies Market PER (X) Market Cap (LKR bn) Market Cap (US$ bn) Dividend Yield (%) Price to Book (X) Prv. Week WoW%

Market Indices

MARKET WATCH

5,834 3,261 2.4 775 589 277 16.59 2,403 17.80 2.67 2.22

5,952 3,343 3.7 2398 1377 275 16.86 2,451 18.34 2.62 2.26

-2.0 -2.4 -34.7 -67.7 -57.2 0.7 -1.6 -2.0 -3.0 1.9 -1.8

Ending the sideways movement of the previous week, the ASPI lost 2.0%WoW to close Fridays session at 5834. Dragging the market down was bellwether John Keells Holdings which dropped 10.5% during the week on the announcement of a 2 for 13 rights issue @ LKR175/- to raise funds for an integrated resort project. Each subscribed rights will also carry two warrants; a warrant will be given for every 3 subscribed rights, allowing the holder to buy an ordinary share at LKR185/-, two years after its issue while the second warrant will allow the rights holder to buy an ordinary share at LKR195/-, three years after the issue date. Meanwhile, losers outpaced winners with Touchwood, Shalimar and Mercantile Shipping

Turnover & Net Foreign Flows flows

20,000

68 % Foreign Domestic

LKR Mn

32 %

15,000 10,000 5,000 0 -5,000

Gainers & Losers (%)

Kelsey Merc. Shipping Shalimar Touchwood PC House Anilana Hotels PC Pharma PCH Holdings
-17.1 -17.6 -17.9 -36.1 14.3 14.7 36.4 37.5

Global Markets
30-Aug 23-Aug

Interest Rates & Currencies

WoW% -2.0 0.5 -3.2 1.9 -1.9 -0.6 -1.8 -3.7 -0.9 30.08.2013 Prime Lending Rate (Avg. Weighted) Deposit Rate (Avg. Weighted) Treasury Bill Rate (360 Days) Dollar Denominated Bond Rate Inflation Rate (Annual Average) LKR/US$ (Selling Rate) LKR/EURO (Selling Rate) Gold (USD/oz) Oil (Brent) (USD/barrel) 11.8% 10.4% 10.6% 5.9% 6.3% 135.0 179.5 1407.2 115.1 5,834 18,620 21,994 8,022 3,029 21,731 1,632 2,742 130 5,952 18,519 22,718 7,873 3,089 21,864 1,664 2,805 129

Sri Lanka ASPI India Sensex Pakistan - KSE 100 Taiwan Weighted Singapore - Straits Times Hong Kong - Hang Seng S&P 500 Euro Stoxx 50 MSCI Asia Pacific

Market Performance (Cont.)

shedding 36.1%, 17.9% and 17.6% and offsetting advances in PCH Holding, PC Pharma and Anilana Hotels which gained 37.5%, 36.4% and 14.7% respectively. Global markets meanwhile fell extending a sell-off sparked by growing fears of a military strike against Syria. Oil Price Impact on CSE Sectors With oil prices having spiraled upwards over the week as a result of the threat of military action over Syria, different sectors of the Sri Lanka bourse could suffer an erosion in margins. However, not all companies will be equally affected, but companies belonging to the Manufacturing Sector are expected to bear the brunt of any further rise in oil prices. With energy accounting for the majority of their operating costs, we expect operating margins to decline by at least 1-2% for the sector, should oil remain at current price levels, while margins could fall further in the event of any further spikes in oil prices. As such, we expect any spike in oil prices to have a HIGH IMPACT on the manufacturing sector. Even though we are Overweight on the food and beverages sector, rising oil prices could exact pressure on margins despite our expectation of robust volume growth. We expect the impact on the food and beverages sector to consequently be HIGH. Similarly, companies operating in the Motor sector could experience a notable decline in the demand for motor vehicles and motor accessories should oil prices continue to trend upwards and view the impact of a surge in oil prices to be HIGH on the sector.

USD/barrel 125 120 115 110 105 100 95 90

17-Jan-13

Brent Crude Oil Price

16-Jul-13

16-Feb-13

17-May-13

2-Apr-13

3-Mar-13

17-Apr-13

2-May-13

18-Mar-13

16-Jun-13

31-Jul-13

2-Jan-13

1-Feb-13

1-Jun-13

Source-Bloomberg/First Capital Equities Research

While tourist arrivals are expected to grow in double digit terms over the next few years (which in turn should have a strong positive impact on hotels), operators in the industry may need to be cautious with regard to the prospect of any further hikes in international oil prices as margins could be affected. As indicated in our Sector Grid below however, we expect the impact to be Moderate. Despite the threat of a rise in oil prices, we expect companies in the Banking, Plantations and Telecommunications sectors to experience only a LOW impact while the Healthcare and Pharmaceutical sectors are likely to be only MODERATELY affected. Given the wideranging nature of companies operating in the DIVERSIFIED sector, we expect a MODERATE impact. Sectors Banking and Finance, Insurance Diversified Health, Pharmaceutical & Chemical Plantations F&B and Hotels Manufacturing Motor Telecommunication Oil Price Impact Low Moderate Moderate Low High High High Low Page 2

Sri Lanka Weekly

26-30 Aug 2013

15-Aug-13

1-Jul-13

Market Performance (Cont.)

In economic news, Sri Lankas tourist arrivals rose for the 51st straight month since May 2009 to record an increase of 9.5%YOY to 98,944 during the month of July 2013. The highest number of arrivals were recorded from Eastern Europe which grew by 36.6% to 4,433. In cumulative terms, for the first 7 months of 2013, the largest increase was recorded by Eastern Europe again which rose by 22.4 % to 42,130 while arrivals from East Asia grew by 21.9 % to 81,817. Total cumulative arrivals for the period Jan-July 2013 rose by 12.5%YoY to 611,222. Despite the rising trend in August, arrivals from the Middle East declined by 7.9% YOY on a cumulative basis. Meanwhile, Sri Lanka aims to attract 1.25 million tourists and earn revenues of $1.5 billion in 2013 and indications are that these figures are likely to be comfortably achieved.
140,000 120,000 100,000 80,000 60,000 40,000 20,000 0

have the capacity to fuel growth not only by strong domestic consumption on an individual level but also at a corporate and state level thereby creating multiple, interrelated drivers for economic expansion. Consequently, we advise investors to target sectors, sub sectors and accordingly companies that will benefit from the strong macro-economics and buying on price weakness with a medium to longer term investment horizon. In balancing what we consider the compelling opportunities provided by the Sri Lanka bourse in selected counters, we see particular value in domestically focused companies which should experience less earnings volatility against an uncertain global backdrop and exchange rate volatility. Among domestically oriented stocks, we advise investors to avoid companies that possess high energy requirements as the current upward movement in oil prices is expected to continue given the on-going tension in the Middle East. We view the current market environment as an opportunity for investors to clean their books, re-align their portfolios and reposition themselves with a flight to quality. As we head towards the 3Q2013 corporate results, we advise investors to break away from the herd, maintain a healthy investment horizon and focus on companies that are likely to deliver quality earnings.

Tourist Arrivals

2012

2013

Source- First Capital Equities Research /sltda.gov.lk

Market Trajectory Despite todays decline, we view market opportunities in the bourse mainly from a bottom-up perspective as at a macro level, economic growth is likely to continue unabated. We believe that the economy will

Sri Lanka Weekly

26-30 Aug 2013

Page 3

Global Outlook
US Equities continued to decline with the S&P500 losing 1.8% for the week while the Nasdaq and Dow Jones also lost 2.0% and 1.4% respectively. Investors appeared to be more focused on the tense situation in Syria as signs of a US led military strike seemed imminent. However, Investors' fears eased after US President Barack Obama on Saturday opted to seek congressional authorization for military action, a move that was likely to delay any strike for at least nine days. Meanwhile, Wall Street is bracing for a wave of economic reports this week, including the August jobs report, which might prove decisive in determining whether the economy is strong enough for the Federal Reserve to dial back its bond purchases in mid-September. Anxiety about the Fed possibly reducing its $85 bn monthly stimulus, also known as QE3, has hurt the equity markets, which recorded its steepest monthly fall since May 2012. But the market's greater anxiety, which has developed in recent weeks, is that the Fed will press ahead with a reduction in support even as the economy remains fragile. Recent data has failed to provide evidence of the convincing growth the Fed says it wants to see. Until then, stocks will benefit from the cheap money resulting from the Fed's bond purchases.

Europe European shares hit a six-week closing low on Friday as reduced chances of an immediate military strike on Syria weighed on energy equities due to weakened oil prices, although longer-term market outlook stayed bright. National benchmark indices dropped in all of the 18 Western European markets. The Eurostoxx50 fell by 3.7% to end at 2721, Germanys DAX declined by 3.8% while UKs FTSE 100 slipped 1.2% and Frances CAC 40 lost 3.3%. This was the biggest loss since June, amid concern any military action by the US against Syria may escalate into a larger conflict in the Middle East and push up oil prices. Syria was a key factor in driving markets lower this week as the threat of a military intervention and the threat of a spike in oil prices tend to be a derogatory combination for equity investors Meanwhile, the upbeat data from the euro zone weren't enough to lift the indexes. The Economic Sentiment Indicator rose sharply by 2.7 points in August to 95.2, beating expectations of a 93.7 reading, according to a poll by FactSet. Additionally, data showed the number of unemployed people in the euro zone fell in July for the second straight month, although the improvement wasn't enough to bring down the unemployment rate from its all-time high of 12.1%.

Sri Lanka Weekly

26-30 Aug 2013

Page 4

Global Outlook (Cont..)

Asia Asian stocks fell for a second week for the first time since June, over concerns that the US will attack Syria in response to the alleged use of chemical weapons by President Bashar AlAssad. The MSCI Asia Pacific Index slipped 0.9% to 130, the first back-to-back weekly loss since the first week of June, widening its August retreat to 1.6%. Chinas economy meanwhile is strengthening after a two-quarter slowdown, with a manufacturing gauge rising to a 16-month high in August while Indias slowest economic expansion since 2009 adds pressure on Prime Minister Manmohan Singh to stem a slide in the rupee. Meanwhile, Oil and gold prices fell again on Friday after Britain refused to back a US led military strike on Syria, but both markets ended August sharply higher after rallying with other commodities in recent weeks. Platinum, natural gas and cocoa had some of the biggest monthly gains among raw materials, due to encouraging US economic data and supply concerns.

Sri Lanka Weekly

26-30 Aug 2013

Page 5

First Capital Equities TOP 30

Company CSE CODE Share Price

Valuation Guide
Net Profit (LKR mn)

(LKR)
Sri Lanka Telecom Lanka ORIX Leasing AHOT Properties Dialog Axiata Softlogic Holdings Colombo Fort Land & Buildings Aitken Spence John Keells Holdings Commercial Bank Hemas Holdings Hayleys Hatton National Bank Distilleries Richard Pieris Eden Hotel Lanka Nawaloka Hospitals Kotagala Plantations Asiri Hospitals DIMO Kegalle Plantations Royal Ceramics Lanka WallTile Ceylon Glass Laugfs Gas VallibelOne National Development Bank DFCC Bank Sampath Bank Ceylon Leather Ceylon Grain Elevators Expolanka Holdings SLTL LOLC AHPL DIAL SHL CFLB SPEN JKH COMB HHL HAYL HNB DIST RICH EDEN NHL KOTA ASIR DIMO KGAL RCL LWL GLAS LGL VONE NDB DFCC SAMP CLPL GRAN EXPO 40.10 50.10 69.00 8.20 8.90 29.00 116.90 214.80 115.40 30.00 293.00 152.30 185.50 6.40 36.00 2.90 40.50 13.90 478.00 96.00 86.40 59.50 5.50 26.00 15.60 149.90 122.40 187.60 72.00 35.60 7.10

2010
3,943 7,023 2,148 4,755 971 2,139 3,428 9,063 5,524 1,355 1,128 4,464 8,308 2,141 101 1,071 668 262 2,122 883 1,374 766 579 853 N/A 2,176 7,137 3,520 107 475 1,768

2011
4,505 8,937 2,502 4,870 1,022 2,087 4,437 10,978 7,932 1,261 1,646 6,265 6,138 2,870 146 271 439 842 2,702 769 1,243 990 685 822 3,645 2,763 3,038 3,705 41 419 1,210

2012
4,036 3,097 6,030 4,254 13,591 10,081 1,934 3,619 7,703 2285
-

454 517 462 542 1,727 1,135 724 1,061

-

8,932 3,538 5,346 97 150 1,279

Sri Lanka Weekly

26-30 Aug 2013

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First Capital Equities TOP 30

PE (X)

Valuation Guide
Price to Growth (X) 2012 2012 Dividend Yield (%) Shares in issue (mn) Market Cap (LKR bn)

EPS

EPS Growth (%)

2010

2011

2012

2010

2011

2012

2010

2011

SLTL LOLC AHPL DIAL SHL CFLB SPEN JKH COMB HHL HAYL HNB DIST RICH EDEN NHL KOTA ASIR DIMO KGAL RCL LWL GLAS LGL VONE NDB DFCC SAMP CLPL GRAN EXPO

2.18 8.08 4.01 0.62 1.06 6.37 8.44 9.62 7.06 2.35 9.03 11.24 27.08 0.87 1.92 0.76 20.88 0.21 239.06 35.32 12.40 8.75 0.61 2.20 N/A 12.81 19.20 21.40 3.12 7.92 0.79

2.50 13.17 4.86 0.64 0.62 7.15 8.59 11.30 10.17 2.26 13.84 15.77 18.92 1.33 2.76 0.19 11.80 0.67 304.36 30.77 11.22 8.87 0.72 2.13 3.35 15.39 11.19 22.62 2.80 5.77 0.53

2.24

407% 94% -17% -139% 438% 1653% 66% 59% 31% 34% -61% 3% 280% 190% 3261% 1004% 107% 3% 663% 135% 93% 43% -1049% 61% N/A 1% 97% 68% 197% 255% 199%

14% 63% 21% 3% -42% 12% 2% 17% 44% -3.8% 53% 40.3% -30% 53% 44% -74.7% -43% 214.6% 27% -12.9% -10% 1% 18% -4% N/A 20% -42% 6% -10% -27% -33%

-10%

18.4 6.2 17.2 13.2 8.4 4.6 13.8 22.3 16.3 12.8 32.5 13.6 6.9 7.4 18.7 3.8 1.9 64.8 2.0 2.7 7.0 6.8 9.0 11.8 N/A 11.7 6.4 8.8 23.0 4.5 9

16.1 3.8 14.2 12.8 14.3 4.1 13.6 19.0 11.3 13.3 21.2 9.7 9.8 4.8 13.0 15.1 3.4 20.6 1.6 3.1 7.7 6.7 7.6 12.2 4.7 9.7 10.9 8.3 25.7 6.2 13

17.9

-1.72 0.77 0.70 -2.29 0.58 0.33 0.22 0.15 0.34 -0.25 0.05 0.07

2.1%

1,805 475 443 8,144 779 180 406 857 780 515 75 397 300 1,939 53 1,410 32 889 9 25 111 55 950 387 1,087 164 265 163 34 60 1,955

72.4 23.8 30.6 66.8 6.9 5.2 47.5 184.1 90.0 15.5 22.0 60.5 55.7 12.4 1.9 4.1 1.3 12.4 4.2 2.4 9.6 3.2 5.2 10.1 17.0 24.6 32.4 30.5 2.5 2.1 13.9

5.63 0.74 8.05 14.23 12.92 3.22 24.72 19.39 0.98 0.43 16.15

16% 16% -6% 26% 27% 42.3% 79% 23.0% -26% 123.3% 37%

12.2 11.1 14.5 15.1 8.9 9.3 11.9 7.9 6.5 6.8 2.5

5.8% 4.0% 1.5% 1.0% 1.3% 1.6% 6.0% 1.8% 1.5% 5.6% 1.6% 3.1% 0.6% 1.7% 6.2%

52.06 21.70 15.08 13.77 0.76 2.74 53.92 13.04 32.81 2.75 2.24 0.54

-83% -29.5% 34% 55% 6% 29% 250% 17% 45% -2% -61% 3%

9.2 4.4 5.7 4.3 7.2 9.5 2.8 9.4 5.7 26.2 15.9 13

-0.11 -0.15 0.17 0.08 1.27 0.33 0.01 0.57 0.13 -13.25 -0.26 4.95

2.1% 2.3% 4.2% 6.5% 5.8% 3.3% 4.1% 6.4% 0.4% 1.7%

Sri Lanka Weekly

26-30 Aug 2013

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Key Economic Indicators

2005 Nominal GDP (LKR bn) % YoY Nominal GDP (US$ bn) % YoY Real GDP Growth (%) GDP per Capita (US$) % YoY Population (mn) % YoY Inflation (%) M2 (LKR bn) % YoY Average Oil Prices (US$ / barrel) % YoY Exports (US$ bn) % YoY Imports (US$ bn) % YoY Trade Balance (US$ bn) % YoY Current Account Balance (US$ bn) % YoY Balance of Payments (US$ bn) % YoY Budget Deficit (US$ bn) % YoY Budget Deficit as % of GDP Exchange Rate (LKR/US$) 2,453 17 24 18 6.2 1,241 17 19.7 1 11 823 20 51 40 6.3 9 8.9 11 -2.5 14 -0.7 0 0.5 -350 -1.7 11 -7 100.5 2006 2,939 20 28 16 7.7 1,421 15 19.9 1 10 993 21 61 21 6.9 10 10.2 15 -3.4 36 -1.5 130 0.2 -60 -2 15 -7 104 2007 3,579 22 32 14 6.8 1,617 14 20 1 15.8 1,148 16 69 13 7.6 10 11.3 11 -3.7 9 -1.4 -6 0.5 150 -2.2 12 -6.9 110.6 2008 4,411 23 41 26 6 2,014 25 20.2 1 22.6 1,282 12 95 37 8.1 7 14.1 25 -6 62 -3.9 177 -1.4 -380 -2.9 29 -7 108.3 2009 4,835 10 42 3 3.5 2,057 2 20.5 1 3.4 1,537 20 61 -35 7.1 -12 10.2 -28 -3.1 -48 -0.2 -94 2.7 -293 -4.1 45 -9.9 114.9 2010 5,604 16 50 18 8 2,400 17 2011 6,544 17 59 18 8.3 2,836 18 2012 7,582 16 59 1 6.4 2,923 3 20.3 -3 7.6 2,593 18 114 5 9.8 -8 19.2 -5 -9.4 -3 -3.9 -15 0.2 114 -3.7 10 -6.4 127.6

20.7 20.869 1 5.9 1,813 18 78 27 8.6 17 13.5 32 -4.8 67 -1.1 563 0.9 -67 -3.9 -5 -8 113.1 1 6.7 2,193 21 109 41 10.6 23 20.3 50 -9.7 -102 -4.6 318 -1.1 -222 -4.1 -4 -6.9 110.6

Sri Lanka Weekly

26-30 Aug 2013

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Key Economic Charts

Nominal GDP
8,000 6,000 4,000 Nominal GDP 2,000 Real GDP 0 2005 2006 2007 2008 2009 2010 2011 2012 3500 3000 2500 2000 1500 1000 500 0 2005 2006 2007 2008 2009 2010 2011 2012 GDP Per Capita

GDP per Capita

10 8 6

GDP Growth
GDP Growth

21 20.5 20

Population (mn)
Population

4 2 0 2005 2006 2007 2008 2009 2010 2011 2012 19.5 19 2005 2006 2007 2008 2009 2010 2011 2012

Exports (US$ bn)

11 10 9 8 7 6 5 4 2005 2006 2007 2008 2009 2010 2011 2012 Exports (US$ bn) 19 14 9 24

Imports (US$ bn)

Imports (US$ bn) 4 2005 2006 2007 2008 2009 2010 2011 2012

BOP(US$ bn)
3 2 1 0 2005 2006 2007 2008 2009 2010 2011 2012 -1 -2 Balance of payment 130 125 120 115 110 105 100 95 90

Exchange Rate (LKR/USD)

LKR/US$

2005 2006 2007 2008 2009 2010 2011 2012

Sri Lanka Weekly

26-30 Aug 2013

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Disclaimer
This Review is prepared and issued by First Capital Equities (Pvt) Ltd. based on information in the public domain, internally developed and other sources, believed to be correct. Although all reasonable care has been taken to ensure the contents of the Review are accurate, First Capital Equities (Pvt) Ltd and/or its Directors, employees, are not responsible for the correctness, usefulness, reliability of same. First Capital Equities (Pvt) Ltd may act as a Broker in the investments which are the subject of this document or related investments and may have acted on or used the information contained in this document, or the research or analysis on which it is based, before its publication. First Capital Equities (Pvt) Ltd and/or its principal, their respective Directors, or Employees may also have a position or be otherwise interested in the investments referred to in this document. This is not an offer to sell or buy the investments referred to in this document. This Review may contain data which are inaccurate and unreliable. You hereby waive irrevocably any rights or remedies in law or equity you have or may have against First Capital Equities (Pvt) Ltd with respect to the Review and agree to indemnify and hold First Capital Equities (Pvt) Ltd and/or its principal, their respective directors and employees harmless to the fullest extent allowed by law regarding all matters related to your use of this Review. No part of this document may be reproduced, distributed or published in whole or in part by any means to any other person for any purpose without prior permission.

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Sri Lanka Weekly

26-30 Aug 2013

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