DNH Sri Lanka Weekly 24 Oct - 28 Oct

8/3/2019 DNH Sri Lanka Weekly 24 Oct - 28 Oct

1/11

28-Oct

Prime Lending Rate (Avg. Weighted) 9.21%

Deposit Rate (Avg. Weighted) 6.48%

Treasury Bill Rate (360 Days) 7.34%

Dollar Denominated Bond Rate 6.25%

LKR/US$ (Selling Rate) 111.05

LKR/EURO (Selling Rate) 156.01

21-Oct 28-Oct WoW%

Sri Lanka - ASPI 6357 6348 -0.14

India - Sensex 16785 17805 6.08

Pakistan - KSE 100 11525 11562 0.32

Taiwan Weighted 7255 7616 4.98

Singapore - Straits Times 2712 2906 7.15

Hong Kong - Hang Seng 18444 20019 8.54

DNH

MARK

ETW

ATCH

Sri Lanka Weekly

Market Indices

Time to start bottomfishing?

The Colombo bourse ended the week on a

relatively quiet note with the ASPI

declining by just 0.14%WoW to close at

6348 while the MPI also ended the week a

tad lower at 5662 (-0.23% WoW). Notwithstanding the release of several

strong 3Q2011 results, investors opted to

remain on the sidelines waiting for market

valuations to decline even further before

stepping in. Reflecting the inertia in the

market, weekly turnover declined to

LKR2.7bn. Losers outpaced gainers with

SMB Leasing(X), Peoples Finance(W) and

AMF Co Ltd declining by 12.5%, 11.6%

Global Markets

24-28 October 2011

Market Performance

Interest Rates & Currencies

171.8

20.9

20.5

20.2

-12.5

-11.6

-10.7

-10.3

Infrastructure

Citizens Development

Agalawatte Plantation

Gestetner

SMB Leasing (X)

People's Finance (W)

AMF Co Ltd

Ceylon Hospitals

Gainers & Losers (%)

10.7% and offsetting gains in

Infrastructure Developers, Citizens

Development and Agalawatte Plantation

which rose by 171.8%, 20.9% and 20.5%

respectively.

DNH Financial (Pvt) Ltd.

www.dnhfinancial.com

+94-11-5700777

ThisWeek

Prv. Week WoW%

ASPI 6,348 6,357 -0.14

MPI 5,662 5,675 -0.23

Turnover (bn) 2.7 4.4 -38.27

Foreign Purchases (mn) 362.17 425 -14.78

Foreign Sales (mn) 274.19 755 -63.68

Traded Companies 256 253 1.19

Market PER (X) 16.33 16.35 -0.12

Market Cap (LKR bn) 2,281 2,283 -0.07

Market Cap (US$ bn) 20.5 20.6 -0.49

Dividend Yield (%) 1.66 1.66 0.00

Price to Book (X) 2.06 2.07 -0.48


2/11

Page 2Sri Lanka Weekly 24-28 October 2011

Market Performance

Global markets meanwhile traded in

positive territory after Europe announced its

latest plans to rein in the regions credit

crisis which included a 50% write down on

Greek government debt held by private

bondholders and a boost to the EU bailout

fund.

What is remarkable to note is that even

though the earnings story appears to be

getting brighter and brighter, market

activity remains relatively constrained. The

dichotomy has resulted in a decline in

valuations for several fundamentally strong

companies. However, the critical question

remains as to what level valuations may

need to fall in order to trigger buying

interest? We believe that current multiples

provide the ideal opportunity for investors

to generate above average returns in the

medium to longer term taking into

consideration our firm belief that the market

PE of16.5X does not fully reflect the

valuations of a number of fundamentally

strong stocks which are now trading at

multiples well below 10X.

With the price of relatively lower quality

companies having risen to considerably high

levels during the 2009/2010bull run, an

opportunity to invest in companies of

superior fundamental value now exists with

significant upside potential of reversingrelative underperformance. As we move

deeper into the third quarter, valuations

should continue to decline for such

companies thereby justifying our bull case

for equities even further.

3Q2011/2Q2012earnings growth exceeds

102%

Even though it has been only a limited

number of companies that have released

their 3Q2011/2Q2012earnings, the majority

of the results have been exceptionally strong

led by the Auto sector. Both DIMO andUnited Motors have recorded a 175% and

318% jump in earnings during the quarter

in turn driving down their valuations

significantly lower.

Economic growth in the country appears to

be benefiting not just from heightened

consumption by the middle class but also by

luxury consumers who remain undeterredin their spending patterns despite global

recessionary woes. A quick glance at the

2Q2012 corporate results of DIMO (which

has the distributorship for Mercedez cars in

Sri Lanka) indicates that luxury car sales in

Sri Lanka has completely bucked global

recessionary woes achieving triple digit

revenue growth during 3Q2011 and crossing

the LKR10.0 bn mark (+102%YoY).

While we do contend that global luxury car

sales have also been on an upward

trajectory spearheaded by growth in Asia,

luxury car sales in Sri Lanka has however

significantly outperformed.


3/11


The story so far is highly encouraging,

Top line revenues have grown by

50% during 3Q2011/2Q2012

confirming the robustness of the

domestic economy and the

consumption cycle notwithstanding

headwinds in the global markets.

Overall earnings are up 102% so far

for 3Q2011/2Q2012

Consolidated operating margins have

improved by 10% during the quarter

on the back of improved operating

efficiencies, reduction in financing

costs and tax reductions

On a sector basis, in addition to Autos weare buyers of other sectors which have a

strong domestic theme such as Industrials,

Diversified and Banking that will benefit

from firm volume growth, pricing power

and lower gearing levels enabling the

majority of the companies in these sectors to

beef up margins, achieve solid earnings

growth while generating sustained

cashflow.

0

5,000

10,000

15,000

20,000

25,000

30,000

Revenue Operating Profits Net Profits

LK

RMn

Consolidated 3Q2011/2Q2011 Corporate

Results so far

3Q2010/2Q2011 3Q2011/2Q2012

Source: CSE/DNH Research

Market Performance (Cont...) While we continue to favour leisure stocks onthe grounds that the sector now appears to be

deriving a considerable portion of its

revenues (F&B for instance) from relatively

sustainable local guests in addition to strong

foreign tourists, we remain underweight on

the Telcos which may report only mediocretop line growth owing to likely downward

pressure on margins as a result of intense

price competition

Tourist arrivals compete head to head with

Maldives

While reputed international hotel chains suchas Sheraton, Raffles of Singapore and Double

Tree (of the Hilton group) have shown

interest in setting up hotels in the country

signaling the strong confidence in Sri Lankas

leisure sector, tourist arrivals to the country

appear to be on track to hit record levels this

year. Arrivals during the first nine months of

the year recorded 598,006 (+34%YTD) and

growing at current rates the number couldexceed that of the Maldives which has

recorded arrivals of 669,172 during the same

period.

0

10,000

20,000

30,000

40,00050,000

60,000

70,000

80,000

90,000

Tourist Arrivals

2010 2011

Source:www.sltda.gov.lk/DNH Research


4/11


With traffic expected to continue to surge

during the current quarter, we expect tourist

numbers to meet (perhaps even exceed) the

governments full year target of 800,000.

3Q2011/2Q2012 bluechip results will

determine market trajectory

While we do agree that the bourse has not

performed when compared to its strong

earnings generation, the good news is

however that the relative fall from grace

could be red meat for hungry bottom fisherslooking to ride the next rebound. Declining

market turnover levels clearly indicate that

investors are likely to have depleted their

selling spree giving the opportunity for

bottom fishers to step forward.

With the majority of the 3Q2011 results yet to

be released, we expect the market to trade

largely sideways in the immediate term. An

upward movement is however expected once

the larger bluechips announce strong

quarterly results which should exert solid

upward pressure on market trajectory.

Market Performance (Cont...)

Chevron Lubricants released 3Q2011 results

reporting a 23% rise in revenues to LKR3.0bn

while net profits were up 53% to LKR603 mn

as a result of significantly higher margins.

Meanwhile Watawala Plantations returned to

profitability during the 3Q2011 reporting a

profit of LKR28 mn as against a loss of LKR41

mn during 2Q2011 on the back of higher

contribution from rubber and palm oil

offsetting losses in the tea segment. The

average cost of production of tea increased by

LKR41 a kilo owing to higher wage costs and

gratuity provisions.

Both DIMO and United Motors posted

significantly higher 2Q2011 revenue and

earnings growth clearly indicating the

strength of the domestic economy and

heightened consumption levels. Recording a

revenue growth of 102%, DIMO has crossed

the LKR10.0 bn turnover mark during the

quarter allowing it to achieve a net profit

growth of 175% to LKR921 mn. United Motors

meanwhile has reported a 316% rise in its net

profits to LKR555 mn on the back of a 148%

rise in revenues and operating efficiencies. In

the banking sector, Pan Asia Banks net profits

rose by 62% to LKR209 mn during 3Q2011 on

the back of a 38% rise in interest income to

LKR1176 bn while a 52% increase in fee

income also significantly supported thebottomline. The banks loan book grew by

35% to LKR29 bn while deposits grew faster

by 54% to LKR33 bn resulting in the

loan/deposit ratio declining to 91% in 3Q2011.

Corporate News


5/11


The government has raised the excise tax on

alcohol with effect from 25.10.2011 with the

tax on wine, arrack and locally made foreign

spirits raised by LKR60/litre while that on

beer was increased by LKR5/litre. Thisfollows a recent increase in the price of

cigarettes. The hikes are unlikely to

negatively affect the revenues of either

Distilleries or Ceylon Tobacco given the

relatively inelastic demand for both liquor

and cigarettes.

Signaling the strong confidence in Sri

Lankas tourism sector, reputed international

hotel chains such as Sheraton, Raffles of

Singapore and Double Tree (of the Hilton

group) have shown interest in setting up

hotels in the country following buoyant

industry growth. Tourist Arrivals to Sri

Lanka increased to 598,006 for the first nine

months of the year and looks increasingly

likely to match or (perhaps exceed) theMaldives which has recorded arrivals of

669,172 during the period.

United States

US equities closed the week on an optimistic

note with the S&P 500 gaining 3.7% to end at

1285 piggy backing on positiveannouncements from the EU summit and

improved optimism regarding the Eurozones

economic trajectory. Investor confidence

appeared to be unaffected by mixed economic

data on the domestic front with jobless claims

remaining above the 400,000-mark and

September pending home sales declining by

4.6% during the month (in stark contrast to

market expectations of +0.2% growth).3Q2011 GDP growth of 2.5% however was

ahead of market forecasts and significantly

higher than the 1.3% recorded for 2Q2011.

While EU policymakers have agreed that 106

billion should be raised to recapitalise the

regions banks, market operators such as

Goldman Sachs have stated that a much

larger figure of close to 1 trillion may be

needed raising questions as to the quantum of

funds actually required and most importantly

how these funds are going to be generated.

Eurozone

European markets rallied during the week as

EU policymakers unveiled the latest plans to

rein in the credit crisis. Highlights of the

discussions included a 50% write down onGreek government debt held by private

bondholders and a decision to boost the EU

bailout fund from 440 billion to 1 trillion

with banks forced to raise an additional 106

billion to boost their Tier 1 capital.

Economic News Global Outlook


6/11


Global Outlook cont

The Eurostoxx 50 consequently gained 4.9%

to close the week at 2462 spearheaded by

gains in FTSE 100 and the DAX which rose by

3.9% and 5.5% respectively. Notwithstanding

the optimism in the markets, the proposedEU solutions are still very much at its early

stages with details yet to be announced.

Meanwhile, the leveraging of the 1 trillion

bail out could prove more difficult than

initially planned with China been

increasingly perceived as being the likely

funding arm. Although supporting the EU

could undoubtedly be in Chinas best interest,

they may however likely to do so at only a

relatively high price.

Asia

Reacting to the positive EU announcements,

Asian markets rose sharply with the Asia

Pacific Index jumping 7.6% to close at 125, its

highest weekly rise in 2.5 years supported by

gains in Nikkei, Hang Seng and the TOPIXwhich rose by 3.3%, 8.5% and 3.0%

respectively. Risk appetite for equities

appears to have increased considerably

supported by strong 3Q2011 corporate

earnings coupled with generally positive

macro-economic data in the region.

Consequently, funds investing in emerging

market stocks absorbed approximately $1

billion during the week with Asia being the

prime beneficiary.


7/11


CompanyCSECODE

SharePrice

Net Profit (LKR mn)

(LKR) 2008 2009 2010

Sri Lanka Telecom SLTL 49.60 7,367 778 3,943

Lanka ORIX Leasing LOLC 89.00 1055 2,385 7,367

AHOT Properties AHPL 86.40 623 689 2148

Dialog Axiata DIAL 8.00 -2879 -12208 5047

Softlogic Holdings SHL 19.10 3 -38 N/A

Colombo Fort Land & Buildings CFLB 51.40 717 50 556

Aitken Spence SPEN 127.50 3069 2987 3428 John Keells Holdings JKH 190.50 4965 5552 9063

Commercial Bank COMB 108.10 4268 4304 5524

Hemas Holdings HHL 35.00 719 935 1355

Hayleys HAYL 371.00 803 2609 1216

Hatton National Bank HNB 189.00 3219 4352 4464

Distilleries DIST 166.90 3430 2136 8308

Richard Pieris RICH 9.90 -305 712 2141

Eden Hotel Lanka EDEN 40.80 311 498 101

Nawaloka Hospitals NHL 4.00 -109 97 1071

Kotagala Plantations KOTA 92.50 171 323 668

Asiri Hospitals ASIR 9.00 198 318 262

DIMO DIMO 1318.10 103 278 2122

Kegalle Plantations KGAL 115.20 177 376 883

Royal Ceramics RCL 136.10 206 711 1374

Lanka WallTile LWL 105.00 437 766 909

Ceylon Glass GLAS 7.80 -261 -61 579

Laugfs Gas LGL 39.20 229 528 1003

VallibelOne VONE 25.00 N/A N/A N/A

National Development Bank NDB 128.00 1605 2085 2150

DFCC Bank DFCC 117.00 1360 1713 7137

Sampath Bank SAMP 204.10 1414 2098 3303

Ceylon Leather CLPL 76.70 -24 36 107

Ceylon Grain Elevators GRAN 100.40 -53 134 475

Expolanka Holdings EXPO 10.80 N/A 518 1547

DNH TOP 30 Valuation Guide


8/11


EPS (LKR mn) EPS Growth (%) PE (X)Price toGrowth

(X)

DividendYield (%)

Sharesin

issue(mn)

MarketCap (LKR

bn)

2008 2009 2010 2009 2010 2008 2009 2010 2010

SLTL 4.08 0.43 2.18 -89% 407% 12.2 115.1 22.7 0.06 1.2% 1,805 89.5

LOLC 2.22 5.02 15.50 126% 209% 40.1 17.7 5.7 0.03 N/A 475 42.3

AHPL 1.41 1.56 4.85 11% 212% 61.4 55.5 17.8 0.08 1.2% 443 38.3

DIAL -0.35 -1.50 0.62 324% -141% N/A N/A 12.9 -0.09 2.5% 8,144 65.2

SHL 0.00 -0.05 N/A N/A N/A N/A N/A N/A N/A 0.0% 779 14.9

CFLB 3.98 0.28 3.09 -93% 1012% 12.9 185.0 16.6 0.02 0.2% 180 9.3

SPEN 7.56 7.36 8.44 -3% 15% 16.9 17.3 15.1 1.02 0.8% 406 51.8

JKH 5.91 6.61 10.79 12% 63% 32.2 28.8 17.7 0.28 1.2% 840 160.1

COMB 11.19 11.28 14.48 1% 28% 9.7 9.6 7.5 0.26 2.7% 765 82.7

HHL 1.40 1.83 2.65 30% 45% 24.9 19.2 13.2 0.29 2.1% 512 17.9

HAYL 10.71 34.79 16.21 225% -53% 34.7 10.7 22.9 -0.43 1.1% 75 27.8

HNB 9.00 12.17 12.49 35% 3% 21.0 15.5 15.1 5.88 2.5% 358 67.6

DIST 11.43 7.12 27.69 -38% 289% 14.6 23.4 6.0 0.02 0.3% 300 50.1

RICH -0.16 0.37 1.11 -333% 201% N/A 26.9 9.0 0.04 2.7% 1,937 19.2

EDEN 5.89 9.43 1.91 60% -80% 6.9 4.3 21.3 -0.27 N/A 53 2.2

NHL -0.08 0.07 0.76 -189% 1004% N/A 58.1 5.3 0.01 0.8% 1,410 5.6

KOTA 5.34 10.09 20.88 89% 107% 17.3 9.2 4.4 0.04 10.8% 32 3.0

ASIR 0.22 0.36 0.29 61% -18% 40.4 25.2 30.5 -1.73 1.1% 889 8.0

DIMO 11.60 31.32 239.06 170% 663% 113.6 42.1 5.5 0.01 4.6% 9 11.7

KGAL 7.08 15.04 35.32 112% 135% 16.3 7.7 3.3 0.02 3.0% 25 2.9

RCL 1.86 6.42 12.40 245% 93% 73.2 21.2 11.0 0.12 1.8% 111 15.1

LWL 8.00 14.03 16.65 75% 19% 13.1 7.5 6.3 0.34 2.0% 55 5.7

GLAS -0.27 -0.06 0.61 -77% -1049% N/A N/A 12.8 -0.01 3.8% 950 7.4

LGL 0.59 1.36 2.59 131% 90% 66.2 28.7 15.1 0.17 0.0% 387 15.2

VONE N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 1,087 27.2

NDB 9.77 12.70 13.09 30% 3% 13.1 10.1 9.8 3.14 5.1% 164 21.0

DFCC 5.13 6.46 26.92 26% 317% 22.8 18.1 4.3 0.01 8.5% 265 31.0

SAMP 9.05 13.42 21.13 48% 57% 22.6 15.2 9.7 0.17 2.2% 156 31.9

CLPL -0.96 1.44 4.28 -250% 197% N/A 53.3 17.9 0.09 N/A 25 1.9

GRAN -0.88 2.23 7.92 355% 255% N/A 45.0 12.7 0.05 1.0% 60 6.0

EXPO N/A 0.26 0.87 N/A 228% N/A 40.8 12 0.05 1.1% 1,955 21.1

DNH TOP 30 Valuation Guide


9/11


2003 2004 2005 2006 2007 2008 2009 2010

Nominal GDP (LKR bn) 1,822 2,091 2,453 2,939 3,579 4,411 4,835 5,602

% YoY 15 15 17 20 22 23 10 16

Nominal GDP (US$ bn) 19 21 24 28 32 41 42 50

% YoY 14 18 16 14 26 3 18

Real GDP Growth (%) 5.9 5.4 6.2 7.7 6.8 6.0 3.5 8.0

GDP per Capita (US$) 981 1,062 1,241 1,421 1,617 2,014 2,057 2,399

% YoY 13 8 17 15 14 25 2 17

Population (mn) 19.3 19.5 19.7 19.9 20.0 20.2 20.5 20.7

% YoY 2 1 1 1 1 1 1 1

Inflation (%) 6.3 9 11 10 15.8 22.6 3.4 5.9

M2 (LKR BN) 581 688 823 993 1,148 1,282 1,537 1,813

% YoY 14 18 20 21 16 12 20 18

Average Oil Prices (US$ / barrel) 28.1 36.1 50.6 61.1 69.1 94.5 61.1 77.5

% YoY 15 28 40 21 13 37 (35) 27

Exports (US$ bn) 5.1 5.8 6.3 6.9 7.6 8.1 7.1 8.3

% YoY 9 14 9 10 10 7 -12 17

Imports (US$ bn) 6.7 8.0 8.9 10.2 11.3 14.1 10.2 13.5

% YoY 10 19 11 15 11 25 -28 32

Trade Balance (US$ bn) (1.5) (2.2) (2.5) (3.4) (3.7) (6.0) (3.1) (5.2)

% YoY 7 47 14 36 9 62 -48 67

Current Account Balance (US$ bn) (0.1) (0.6) (0.7) (1.5) (1.4) (3.9) (0.2) (1.4)

% YoY -65 813 0 130 -6 177 -94 563

Balance of Payments (US$ bn) 0.5 (0.2) 0.5 0.2 0.5 (1.4) 2.7 0.9

% YoY 67 -140 -350 -60 150 -380 -293 -67

Budget Deficit (US$ bn) (1.4) (1.5) (1.7) (2.0) (2.2) (2.9) (4.1) (3.9)

% YoY -1 12 11 15 12 29 45 -5

Budget Deficit as % of GDP (7.3) (7.5) (7.0) (7.0) (6.9) (7.0) (9.9) (7.9)

Exchange Rate (LKR/US$) 96.5 101.2 100.5 104.0 110.6 108.3 114.9 113.1

Ke Economic Indicators


10/11


0

1000

2000

3000

4000

5000

6000

2003 2004 2005 2006 2007 2008 2009 2010

Nominal GDP

Nominal GDP

Real GDP0

500

1000

1500

2000

2500

3000

2003 2004 2005 2006 2007 2008 2009 2010

GDP per Capita

GDP Per Capita

0

2

4

6

8

10

2003 2004 2005 2006 2007 2008 2009 2010

GDP Growth (%)

GDP Growth

18.5

19

19.5

20

20.5

21

2003 2004 2005 2006 2007 2008 2009 2010

Population (mn)

Population

4

5

6

7

8

9

2003 2004 2005 2006 2007 2008 2009 2010

Exports (US$ bn)

Exports (US$ bn)

4

6

8

10

12

14

16

2003 2004 2005 2006 2007 2008 2009 2010

Imports (US$ bn)

Imports (US$ bn)

-2

-1

0

1

2

3

2003 2004 2005 2006 2007 2008 2009 2010

BOP(US$ bn)

Balance of payment

90

95

100

105

110

115

120

2003 2004 2005 2006 2007 2008 2009 2010

Exchange Rate (LKR/USD)

LKR/US$

Ke Economic Charts


11/11


Disclaimer

This Review is prepared and issued by DNH Financial (Pvt.) Ltd. (DNH) based on information in thepublic 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, DNH and/or its Directors,employees, are not responsible for the correctness, usefulness, reliability of same. DNH may act as aBroker in the investments which are the subject of this document or related investments and may haveacted on or used the information contained in this document, or the research or analysis on which it isbased, before its publication. DNH and/or its principal, their respective Directors, or Employees may alsohave a position or be otherwise interested in the investments referred to in this document. This is not anoffer to sell or buy the investments referred to in this document. This Review may contain data which areinaccurate and unreliable. You hereby waive irrevocably any rights or remedies in law or equity you haveor may have against DNH with respect to the Review and agree to indemnify and hold DNH and/or itsprincipal, their respective directors and employees harmless to the fullest extent allowed by law regardingall 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.DNH Financial is a fully owned subsidiary of Environmental Resources Investment PLC(ERI).

Contacts

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Documents

DNH Sri Lanka Weekly 24 Oct - 28 Oct