Growth continues

The All Share Price Index (ASPI) gained 33.9 points during the week to close at 2,525.7 points (+1.4%), whilst the Millanka Price Index was also increased by 45.3 points to close at 2,838.4 points (+1.6%).

Indices gained mainly on the back of gains made in Sampath Bank (+8.7% WoW), Dialog Telekom (+4.3%WoW), National Development Bank (+4.3% WoW) and second liners led by; Lanka Hospitals (+11.8% WoW), Walker &Greg (+7.1%WoW) and Lanka Ventures (+6.5%WoW).

The All Share Price Index pitched over 2,500 points after a lag time of 13 months; showing positive signals on future activity. Average daily turnover surged to LKR 522.3 mn mainly on account of the predominant foreign, local high networth and retail buying interest on Dialog Telekom, John Keels Holdings, Janashakthi Insurance and Ceylon Glass.

Institutional investor interest was enticed on banking sector counters throughout the week based on the positive sentiment on falling interest rates. Dialog Telekom’s share price, which had a strong support at LKR 5, was lifted-up to LKR 6 during the week after a long lag time.

The week’s activity propelled at a slower pace compared to the previous week, which was energized by the confirmation of the USD2.6 bn IMF loan disbursement. However, buying interest was witnessed across the board during the week.

Foreign purchases for the week stood at LKR 710 mn, whilst foreign sales amounted to LKR 700.2 mn resulting a net foreign inflow of a marginal LKR 9.8mn.





Source : Asia Securities Research - Weekly Report

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Dialog Telekom - Is it the end of dark days?

• Dialog Telekom (DIAL) has driven down its reported net loss by 52% QoQ during 1Q2009 and we believe the losses could further reduce and revert back to positive earnings during 2H2009 on the back of a near LKR400 mn International telecommunication Operator Levy (ITO Levy) refund, a cost cutting exercise, which is projected to save around LKR300 mn and an incremental revenue increase of approximately LKR 2 bn materializing from the Northern Province.

• Growing revenue would continue to be a challenge given the aggressive tariff reduction (initiated by DIAL which controls 50% of the mobile market with 6mn subscribers) and revenue management, which would have to be supported by fresh subscriber additions (presently adding around 115k subscribers per month) and higher income from fresh businesses such as satellite TV, CDMA fixed line and broadband services.

• Having begun cost rationalization processes, the company is yet to counter significant headwind in rebalancing its cost structures, though a return to profitability could be around the corner.

• Whilst the recent most flip side on the company has been parent Axiata’s interest in buying over Tigo (the Sri Lankan subsidiary of Milliocom International SA which has announced its wiliness to divest the Asian operations) which approximately controls around 18% of the local mobile
market.

• The share having tanked during 1H2009 has attracted strong support at around LKR5.00 – LKR5.50 levels mainly due to foreign investor interest. Therefore on the back of a turnaround scenario and strong support base down side risk is expected to be limited creating the opportunity for adventurous entrants to add the stock given the broad market support and technical trend. However on a fundamental viewpoint trading on 15.7x forecast 2010E net profit we believe the share to be still relatively expensivegiven that the cost savings are not yet sufficiently tangible. Thus we maintain our recommendation - HOLD



Dialog Telekom (DIAL), Sri Lanka’s leader in mobile telephony, with a subscriber base of over 6 mn, controlling 50% of the mobile telephony market, whilst also recently expanding operations in to CDMA services, Broadband (DBN) and Satellite Television (DTV); Dialog has already captured a material market share of 175K subscribers in the CDMA market and over 150K subscribers in the broadband market amounting to a near 6% of the total market share.

During 2008 DIAL recorded negative earnings due to significant increases in administration costs rising by 65% YoY to LKR 10,468mn and direct costs increasing by 52% YoY to LKR 19,989mn, whilst negative PAT contributions from Broadband and Satellite TV have further affected the consolidated bottom line. Despite missing in terms of profitability in 2008 DIAL has managed to sustain their market dominance during the period controlling half of the mobile market.

However we believe DIAL is at a point of turnaround largely due to revenue growth coming from the recently liberated Northern Province (DIAL was/is the strongest mobile service provider in the Northern Province and was significantly affected due to serious disruptions occurred till May ’09 due to military operations).

Further it’s noteworthy that the company has been aggressive in subscriber addition, adding around 115k subscribers per month during the year 2009. However we believe cost rationalization still has ample space for improvement. Though the company has undergone marginal cost cutting exercises, a real tangible saving has not yet materialized.

Revenue growth under challenge - DIAL is the market leader in Mobile telephone segment with a market share of 50%, and 6%of the Dialog Broad Band fixed line service. DIAL’s market share in the CDMA market is at minimal as it entered the market recently.

DIAL is organized mainly in to two main business segments as Cellular mobile telephone network operations and External gateway operations (Global operations). The former generated 77% of the consolidated revenue, whilst the latter claims for 14%. Other operations comprising of Internet services, telecommunication infrastructure provision facilitating switch/ non switch data communication, television broadcasting and media related business generated 9% of the consolidated revenues.

Though DIAL is successful in adding up fresh subscribers aggressively, the revenue growth is threatened by the sharp decline in the ARPU. For instance we believe the ARPU has decreased by 9.5% QoQ to a near LKR 490 in 1Q2009. Further with industry-wide tariff cuts (Initiated by DIAL), we believe the rates have lowered with the minimal possibility of price penetration strategies as an industry option. Therefore revenue growth could only be generated by subscriber addition (comprising the ARPUs due to bottom of the pyramid addition). This we believe that cost rationalization is still of utmost importance in improving overall profitability.


Further Dialog’s revenue from cellular mobile operations mainly consists of prepaid and postpaid segments, which claims 48.2% and 29.9% respectively from the total revenue generated from the cellular mobile network operations.

DIAL, in terms of subscribers, gained 337k new mobile subscribers in 1Q2009, whilst we expect them to have added 310k more subscribers in 2Q2009 boosting the subscriber base to 6mn. Although, the overall group revenue in the three months dropped 5% to LKR8.4 billion (USD73 million) from a year ago, attributed to sharp tariff cuts.

Increased costs related to new business areas and a LKR286 million foreign exchange deficit resulted in a net consolidated loss of LKR1.86 billion during the first quarter. DIAL has invested USD 30mn in the North and East up to date to expand its whole spectrum of services in the cleared areas steadfastly via establishing 100 base stations in the same region.

It is also noteworthy that the main rival of DIAL’s SLT- Mobitel intends to invest USD 100mn over the next three years and have already deployed 25 base stations in the North and the East. But Dialog is still better-off as they were the strongest mobile service provider operating in these regions prior to the commencement of military operations.

The importance of investing in the Northern region in particular is intensified by the high ARPU the region generates, which amounts to around USD12/month, whilst the rest of the country generates a comparatively low ARPU of USD4/month.

DIAL uses GSM technology in transmitting voice and data and is deemed as the technology initiator in the telecom industry in Sri Lanka. They have established 1,360 base stations in operation including the cleared areas of North and the East. It is learnt that Dialog covers circa 90% of the population and circa 80% of the geographical expanse of the country.

DIAL provides fully-fledged 2.5G EDGE/GPRS enabled GSM network designed to operate on dual band. The GSM technology in terms of 2G and 3G are currently operational at 900-1800MHz and 2100MHz frequencies respectively.

On 10th of April 2009, Sri Lanka's Dialog Telekom the largest HSPA provider in the country is reported to have started a pilot launch of a HSPA+ (HSPA Evolution) upgrade on its network, which will boost download speeds to a peak rate of 21Mbps. The typical download speeds are closer to 8Mbps in real life tests carried out by Australia's Telstra network. Upon the successful completion of the proposed trial phase, Dialog will progressively expand its HSPA+ coverage across its 3.5G network spanning Colombo, Kandy, Galle, Kurunegala, Anuradhapura, Nuwara Eliya, Trincomalee and other major towns in Sri Lanka.

HSPA+ doubles the data capacity over HSPA and more than doubles voice capacity over WCDMA, reducing the cost of delivering voice or data services (more efficient voice over HSPA+ can also be used to free up data capacity), thus it eases the operating costs of the service providers and allows them to provide services at a lower rate, which inturn will expand the subscriber base. So Dialog is seeing light at the end of the tunnel after all.

DIAL TV (DTV) is the single largest direct-to-home digital television service provider in the country. With all the domestic disruptions and economic downturns DTV has increased its revenue by 91%YoY to LKR 1,285 mn, whilst adding 80k fresh subscribers during 2008. However the phase of subscriber addition is drastically lowered during the 1H2009, which amounts to an increase of 2% to 137k from 2008.

DIAL intends introducing a new set of South Indian channels particularly aiming the Northern province, we believe the strategy would give utmost benefits to DTV. However introduction of the package system (Lite500, Super 700, Big Deal and Value Plus 1949) would increase the subscriber base, but the revenue would increase at a slower pace, which would lead to a negative bottom line.

Cost base growth in check - The direct costs, administration costs and distribution costs have dipped in 1Q2009 by 11%QoQ, 33%QoQ and 17%QoQ respectively, but DIAL will have to cut down the costs further as the aforesaid costs are still high by 32%YoY, 4%YoY and 13%YoY respectively compared to the corresponding period of 2008.

However the cumulative effect of reduced costs have spiraled down the loss by 52% to LKR 1,868.5 mn during the 1Q2009 compared to 4Q2008, however we believe that the costs will be reduced during the year 2009 and will remain static afterwards, (since a huge portion of administration costs are tied up in depreciation and asset impairment). But the introduction of HSPA+ and establishing low cost base stations in the North and East will reduce the direct costs up to a certain extent. DIAL has also implemented a VRS intending to save LKR500 mn .p.a, however the scheme will cost approximately LKR250 mn resulting in a net saving of LKR250 mn in 2009.

With the low cost IMF funding the country’s interest rates will be further eased and DIAL will reap this benefit through their floating rate loans and re-negotiating the fixed rate loans. Thus the possibility of revenue boosts, especially in the North and East will absorb the costs, resulting in a turn-a-round in DIAL’s profits, which we deem as a signal of DIAL recovering from the flop experienced last year.


ITO levy rebate - DIAL is expected to recover around LKR 300-400mn refund from the ITO levy they had paid since 2003 in lieu of infrastructure development in the rural areas since; the ITO levy/Telecom Development Fund has been used to encourage telecom operators to venture into unconnected areas in the country.

DIAL launched 1000 “Nanasa Centers” (ICT resource centers) in selected rural schools in collaboration with the Government paving the way for more ITO levy refunds in the future.

Inorganic expansion on the card - Axiata the parent company of DIAL may offer USD 200mn for Millicom International (Parent company of Tigo), to buy over Tigo operations in Sri Lanka, which is a divestment target of Millicom International. This is a lucrative inorganic growth opportunity to DIAL as Tigo possesses an 18% share in the mobile market in Sri Lanka, which amounts to over 2mn subscribers.

Further via this potential acquisition DIAL can expand their coverage both geographically and demographically, whilst Tigo is presently strong in the Eastern region of the country in which DIAL’s coverage has been rather moderate. However telecommunication companies of Middle East are also keen on spreading their operations to South and East Asian countries via acquiring Millicom’s Asian operations, which spans in Sri Lanka, Cambodia and Laos.


End of the share price lull!!! The share having tanked during 1H2009 has attracted strong support at around LKR5.00 – LKR5.50 levels mainly due to foreign investor interest. Therefore on the back of a turnaround scenario and strong support base down side price risk is expected to be limited creating the opportunity for adventurous entrants to add the stock given the broad market support and technical mismatch.

However on a fundamental viewpoint trading on 15.7x forecast 2010E net profit we believe the cost savings are not yet sufficiently tangible. Thus we maintain our recommendation - HOLD

Source - Asia Securities Research

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Market Highlights - 30th July 2009

• The All Share Price Index marginally gained by 1.8 points to close at 2,511.9 points (+0.1%) whilst the Milanka Price Index dipped by 20.3 points to close at 2,823.0 points (-0.7%)

• The total turnover was LKR510.8 mn (USD4,445.2 k) vs. 12-months average daily turnover of LKR352.9 mn (USD3,071.1 k) whilst the volume traded was 22,817k against the 12-months average daily volume of 12,020k

• Top traded counters were John Keells Holdings LKR74.8 mn (USD650.9 k, -0.4%), Sampath Bank LKR21.1 mn (USD183.6 k, +2.6%), Nations Trust Bank LKR21.1 mn (USD183.6k, -1.6%), National Development Bank LKR20.7 mn (USD180.1 k, +2.9%) and Hotel Developers LKR19.8 mn (USD172.3 k, +1.7%)

• Strong buying interest was witnessed in heavyweight John Keells Holdings and banking sector whilst turnover was supported by Hayleys – MGT changing hands. Institutional activity was evident in banking sector counters such as Sampath Bank, National Development Bank based on the positive sentiment on falling interest rates.
Retail interest was seen in Lanka Cement, Dialog Telekom and Sierra Cables.

• Foreign purchases amounted to LKR91.9mn (USD800 k) whilst foreign sales amounted to LKR82.9mn (USD721 k).

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Market Highlights - 29th July 2009

• The All Share Price Index dipped by 10.1 points to close at 2,510.0 points (-0.4%) whilst the Milanka Price Index also dipped by 14.1 points to close at 2,843.3 points (-0.5%)

• The total turnover was LKR361.5 mn (USD3,144.8 k) vs. 12-months average daily turnover of LKR352.3 mn (USD3,064.8 k) whilst the volume traded was 20,808k against the 12-months average daily volume of 11,980k

• Top traded counters were John Keells Holdings LKR72.3 mn (USD629 k, -1.6%), Dialog Telekom LKR61 mn (USD530.7 k, 0%), Lanka Cement LKR35.9 mn (USD312.3k, -4.4%), Kelani Valley Plantations LKR20 mn (USD174 k, -1%) and National Development Bank LKR16.4 mn (USD142.7 k, +1.2%)

• The market ended in the red today as a result of retail profit taking. Foreign activity was witnessed in John Keells Holdings whilst buying interest was evident on the two Telco’s. Further, stock picking continued on the banking sector stocks and local institutions were seen active on National Development Bank.

• Foreign purchases amounted to LKR97.7 mn (USD850k) whilst foreign sales amounted to LKR146.6 mn (USD1,275k).

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SRI LANKA TOURISM : MARKET OUTLOOK

In the sixtees, other than the Rest Houses in Hikkaduwa and Bentota there were no Hotels of any standard in Sri Lanka. The Confifi Beach Hotel was the first Star Resort Hotel that was started in the West Coast in Beruwala followed in 1972 by the Bentota Beach Hotel in Bentota and the Coral Garden Hotel in Hikkaduwa. From about 1970 when tourism started upto 1982, the industry flourished as there was an enormous demand from overseas Tour Operators to send tourists to Sri Lanka. The war with the LTTE ended on the 19th May 2009, and now hopefully a new era for tourism is about to begin.

In the history of Sri Lanka, more appropriately in the history of the world, the names of our President Hon. Mahinda Rajapaksa, the Defense Secretary and the Heads of the Army, Navy, Air Force and Police will be carved in golden letters for all time for the world class unprecedented record of achievement in completely annihilating the most dangerous terrorist group that ever existed in recent history. While envy and political jealousy may render some people unable to admit facts, both the Sri Lankan sceptics and the International community should not deny the heroes their dues. There is no doubt, for Sri Lanka a new era is about to begin.

Arrivals

The ethnic conflict started in July 1983, and from then on the tourism sector’s fortunes fluctuated according to the level of violence in the country.

The Sri Lanka Tourist Board statistics show that the total tourist arrivals to Sri Lanka in 1982 amounted to 407,230 and it remained on the average around 500,000 p.a. mark for 25 years upto 2008, in which year the figure went down to 438,475.

Given below is a graphic illustration of the tourist arrivals from the inception in 1966.





The figures clearly show that the drop in arrivals from Western Europe was partly compensated by the increase in East European arrivals. Another significant feature is the sizable traffic from North America, East and South Asia and Australia where the majority were non tourists – namely Sri Lankan expatriates returning home.

On the 26th July 1983, the Sinhala Tamil riots began in Sri Lanka and from that day onwards tourist arrivals have been very erratic dependent on the ground situation. In the period 1970 to 1983 tourists arrivals to Sri Lanka increased by about 20% per year, and from the time of the beginning of the Northern conflict the arrival figures per year hardly changed. Whereas competing destinations have gained from the unfortunate situation in Sri Lanka and enriched their tourism prospects by leaps and bounds, Sri Lanka continued to suffer with fluctuating arrival figures. There is no doubt that in the intervening 25 years, the tourist traffic to other competing destinations increased by massive proportions.

Competing Destinations

The Sri Lankan tourism offer which has the multi-faceted features of Sandy Beaches, Ancient Cities, Wild Life Parks, highly desirable climatic conditions, both upcountry and low country and a friendly population is a hard to match tourist product. Only a few countries in the world such as Thailand or Cambodia could offer similar products. As things stand at present, competing destinations enjoy higher tourist arrivals, e.g. Thailand (12 million), Malaysia (10 million), Bali (2 million), Caribbean Countries (5 million). And even the new destinations that started only about a decade ago such as Vietnam (2 million), Cambodia (over 1 million) and Laos (1 million) have had tremendous growth, and Sri Lanka is still receiving only around 500,000 “Foreigners”. Amongst these foreigners are about 100,000 Sri Lankan expatriates living abroad returning home for a visit and about 50,000 Indians and Business people who are strictly not tourists. Therefore, if the 150,000 non tourists are deducted from the “foreigners” who enter Sri Lanka each year, the genuine tourists are only about 350,000 per year – a paltry figure in comparison to other competing destinations.

It is estimated that if in the next 12 months the number of genuine tourists who come to Sri Lanka increase by 100,000 the current supply of registered rooms, both in the cities and in the Resorts would be hardly adequate to accommodate the surge. In effect therefore there is a tremendous potential to increase prices and the room capacity which gives the existing hotels an edge in the interim period, as hotel construction in Sri Lanka normally takes about 3 years or more from the point of BOI approval.

Room Capacity

The figures in table below clearly reveal that after forty years of tourism in an exotic, unmatchable destination like Sri Lanka, the room capacity has been no more than about 14,700 (estimated) at end 2008.



In the last four to five years hardly any new Hotels of distinction have been built in the South West Coast of Sri Lanka other than the Fortress Hotel in Koggala and the Amanwella Hotel in Tangalla.
Tourism Industry in Sri Lanka has not really taken off in 25 years mainly on account of the war in the North and East of the country. The Tsunami in December 2004 did not help the situation either.

Travel Advisories

Its common knowledge that the overseas media, for one reason or another have overplayed the violence scenes and as a result underplayed the actual ground situation. Whereas the war was confined to the North and East it hardly affected the South where the tourist hotels are located. But the impression created was that the war was all over the island. The city of Colombo was no more unsafe than the city of London in the last decades or so, but media reporting carried its bias. Consequently tourist arrivals were kept artificially low.

In this scenario, in the midst of the media’s appetite for displaying the carnage (with old footage) the western countries indirectly exerted a form of trade sanctions by introducing Travel Advisories which virtually discouraged tourists from travelling to Sri Lanka. That was the scenario before the L.T.T.E. was completely routed on the 19th May 2009. Now that the war which was the excuse for the Travel Advisories is over, the hotel trade is anxiously awaiting the Travel Advisories to be lifted, at which point tourist arrivals to Sri Lanka are expected to increase by leaps and bounds.

Prices

It is well known that the price of the Sri Lankan tourism products have been kept very low, as the Tour Operators found it increasingly difficult, during the period of war, to attract tourists to Sri Lanka. Both City hotels in Colombo and the Resort hotels in the coast and in the ancient cities have been keeping their fires burning with unreasonably low prices. The trade reckons that in comparison to competing destination norms, the current Sri Lankan Hotel prices are only about one third of what any comparative foreign product fetches at the present time.

There is no doubt that when the demand for the Sri Lankan products increase in the next six months, the current prices would certainly see significant upward revisions to fall in line with industry norms overseas. In such a situation the profitability of the existing hotels which were built at yester year costs are expected to boom.

Outlook

There is no doubt that in the Post Prabakaran period, one of the sectors of business in Sri Lanka that is waiting to take off in a significant way is Tourism. Sri Lanka has something like 1600 Kms of excellent coastline with warm waters (22 – 26 °C) and sunshine round the year. It also has luscious greenery, especially in the hill country which is easily reachable within about four hours. It has beautiful beaches, wild life parks, ancient ruins, hill country hotels, golf courses and a friendly nation of people who are capable of adequately communicating in at least one international language – English.

Some of the best tourist development sites such as in Arugam Bay, Passikudah, Trincomalee, Nilaveli, etc., in the Eastern Province have been hardly touched by tourism. Equally new sites such as in Kalpitiya are yet to be developed.

Considering the fact that Sri Lanka is a country with scarce natural resources it will have to increasingly rely on the Service Sector in the future, and in that scenario, Tourism which is number four in the order of importance for economic development is bound to be given heavy emphasis as the potential for quick profitable development is extremely high.

The advantage of Sri Lanka from the point of view of its location in the Indian Ocean to offer itself as a South Asian hub is by itself a tremendous potential from a market outlook.

Now that the Northern war is over, Sri Lanka is indeed a big “miracle” waiting to happen – in every sense.


Desamanya M.T.A. Furkhan
Chairman
Confifi Group

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India encircled by China’s string of pearls?

Many in India believe that Beijing is building special relationships with India’s old foe Pakistan and Sri Lanka and is extending its reach down the Indian Ocean.

China’s ‘String of Pearls’ strategy seems to be surrounding India and has given food for thought to many in New Delhi for quite some time now.

At the G8 summit in L’Aquila recently, Indian Prime Minister Manmohan Singh made a bid in front of the international community to include India in the United Nations Security Council, which would put it on par with China, which is one of the five permanent members.

Christopher J. Pehrson, author of the book “String of Pearls: Meeting the challenge of china’s rising power across the Asian littoral”, says the ‘String of Pearls’ describes the manifestation of China’s rising geopolitical influence through efforts to increase access to ports and airfields, develop special diplomatic relationships and modernize military forces that extend from the South China Sea through the Strait of Malacca, across the Indian Ocean, and on to the Arabian Gulf.

Though India is trying to make a stronghold in South Asia, China seems to have been working consistently over the last four decades to strengthen its south Asian presence and fulfil its ‘String of Pearls’ policy, and that has many in India worried.

Alka Acharya, head of East Asian studies at Jawaharlal Nehru University, says that China’s ‘string of pearls’ policy started in the 1980s and its basic aim was to give China increased energy security with refueling stations throughout the world.

But it has helped China project its political and military influence further. Some in India think China’s latest addition to its string of pearls is the Hambantota port in southern Sri Lanka.

Construction on the first phase began last year with Chinese funding, and the whole $1 billion project is expected to finish by 2023.

B. Raman, a retired senior government official, has written a paper on the project of Hambantota port in which he mentions that “the Chinese interest is more strategic than purely commercial. It is very unlikely that Sri Lanka would allow the Chinese Navy to use Hambantota against India. But a Chinese naval presence in Hambantota would add to the concerns of the Indian Navy by increasing the vulnerability of the South to pressures from the Chinese Navy.”

Raman also mentions in his paper that China had helped Pakistan with a similar project in Gwadar on the Mekran coast in Balochistan.

The first phase of construction has already been completed and the port was given a nod when Pervez Musharraf was the president.

When it is done, Hambantota is likely to have an aviation fuel storage facility and a liquefied natural gas refinery. The first phase will have bunkering facilities to refuel ships that pass the nearby shipping lanes, among the world’s busiest.

Sri Lankan President Mahinda Rajapaksa says India has nothing to worry about because the project is strictly a commercial venture.

India though is taking no chances and is increasing its troops along the northeastern border so as to prevent any further infiltration of Chinese soldiers, who had illegally entered Indian territory last year.

A retired intelligence officer who spoke to Reuters on condition of anonymity said China had begun building a road in Pakistan-occupied Kashmir in the early 1970s.

“We had got hold of a source who told us that China was building a road from China- Gilgit- Neelam Valley, they had also planned a number of tunnels and bridges in places where roads couldn’t be constructed,” the officer said.

The status of the road is not known, some say it is still under construction.

The Karakoram Highway, which connects China’s Xinjiang region with Pakistan’s north, can also be seen as one of China’s pearls. The highway, called the ninth wonder of the world by some because of its altitude, was completed in 1986 after 20 years of construction.

The road opened up China-Pakistan trade and gave both of India’s rivals a fast route through the mountains, not far from the Line of Control in Kashmir.

Should India be worried about China’s String of Pearls, and will the Chinese strategy dampen India’s plans to be the dominant power in South Asia?

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Market Highlights - 28th July 2009

• The All Share Price Index marginally dipped to close at 2,520.1 points (-0%) whilst the Milanka Price Index gained by 22.7 points to close at 2,857.3 points (+0.8%)

• The total turnover was LKR611.3 mn (USD5,319.4k) vs. 12-months average daily turnover of LKR352.2 mn (USD3,064.7k) whilst the volume traded was 14,542k against the 12-months average daily volume of 11,940k

• Top traded counters were John Keells Holdings LKR318.9 mn (USD2,775k, +0.4%), Nuwara Eliya Hotels LKR30.1 mn (USD261.9k, -15.3%), Sampath Bank LKR18.9 mn (USD164.5k, 0%), Hayleys LKR15.7 mn (USD136.7k, -0.2%) and National Development Bank LKR15.5 mn (USD134.9k, +0.5%)

• Heavyweight John Keells Holdings continued to attract foreign buying interest and contributed to more than 50% of the day’s turnover whilst Dialog Telekom continued to generate buying interest gaining around 9% during the day. Further institutional and high net worth interest was evident in conglomerates such as Distilleries, Aitken Spence whilst banking sector counters Sampath Bank, National Development Bank and Commercial Bank.

• Foreign purchases amounted to LKR285.6mn (USD2,485k) whilst foreign sales amounted to LKR287.4mn (USD2,501k).

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Energized by IMF

The All Share Price Index (ASPI) gained 96.8 points to close at 2,491.8 points (+4.0% WoW) whilst the Milanka Price Index also gained 121.8 points to close at 2,793.1 points (+4.6% WoW). Indices gained mainly on the back of gains made in heavyweight John Keells Holdings (+7.0% WoW), Commercial Bank (+8.9% WoW), Ceylon Tobacco Company (+4.3% WoW) and second liners led by; Lanka Cement (+33.6% WoW), Overseas Reality (+13.5% WoW), Sampath Bank (+7.6% WoW), Keells Hotels (+6.0% WoW) and Ceylinco Insurance (+5.3% WoW).

Average daily turnover surged to LKR725.5 mn (vs LKR316.2 mn) mainly on account of the predominant foreign, local high networth and retail buying interest on John Keells Holdings and Dialog Telekom.

Turnover was also supported by buying interest in Overseas Realty on the back of expecting the company to mark a turnaround with improved demand for office space in the heart of Colombo. Further, buying interest was witnessed in banking sector counters whilst speculative buying continued on Lanka Cement throughout the week.
The week started on a strong note with the announcement of the International Monetary Fund firming up the USD2.6 bn loan disbursement agreement by 24th July 2009, upon which Sri Lanka could get USD322 mn with immediate effect and the balance in multiple tranches within a 20 month period. The market rallied on Tuesday and Friday where the turnover shot up to over a billion rupees with the positive sentiment towards an improved economy with the IMF loan being tabled at the board, where buying interest was witnessed across the board during the week.

Foreign purchases for the week amounted to LKR1,230.7 mn whilst foreign sales amounted to LKR1,029.7 mn resulting in a net foreign inflow of LKR201 mn.



IMF US$2.6 bn financing lifts Sri Lanka's macro outlook to Strong Positive

With the complete end of Sri Lanka's 30 year old conflict with the LTTE terrorists (subsequent to the complete elimination of the entire leadership of the terrorist group) on 18th May 2009, the island's outlook turned positive opening up one third of the land mass and two third of the total resource rich coastal belt for economic integration and development. Despite shouldering the brunt of a high cost conflict Sri Lanka has grown its real GDP by an average 6% p.a. over the past two decades and has managed to narrow its fiscal deficit to around 7.5% of GDP (in 2008) from a near 13% of GDP few years ago.

The improvement in the fiscal front had been an outcome of the growing GDP and progressive steps by the government to reduce and/or to remove subsidies. The GDP growth has been predominantly driven by domestic consumption (supported by official migrant worker remittances amounting to a near 8% of GDP, whilst the unofficial remittance inflow also could be a near half of the official figure) and service sector development, whilst exports accounting for only 25% of GDP (and continuing to be stable in value despite the global slowdown) has managed to maintain Sri Lanka's growth rates. With the slump in oil prices (whilst oil accounts for a near 35% of the total import bill) trade deficit also has tapered by a circa 40% YoY and has eased the pressure on Sri Lanka's foreign reserve position.

Further we believe the future defence expenditure would be shaved off by a near 40% from the previous defence bill amounting to around 6% of GDP, and the saving to be channeled towards investments.

The US$2.6 bn IMF loan facility falling through could kick start the islands' economic revival with low cost funds been made available for infrastructure investments. The International Monetary Fund has approved a USD2.6 bn loan to Sri Lanka with USD322 mn tranche being immediately disbursed on a program and the balance in multiple tranches within a 20 month period.

The low cost debt inflow from the IMF would wane the reliance (of the Government of Sri Lanka) on domestic borrowings and create downward rate pressure on the money markets due to the excessive liquidity been created in the banking system. Prior to the positive response by the IMF with regard to the applied loan facility, domestic interest rates have been on the decline with the 3 month Treasury Bill rate having already fallen by 1025 bps (from 21.3% to 11.05%) and overnight money market rates also having fallen by a near 440 bps to 9.74% since Jan’ 08 to date.

Further subsequent to the complete end of the war, foreign fund inflows have increased and we have learnt through market sources that the Central Bank has been defending the US Dollar by buying around US$350 mn through open market operations, a practice which could be continued given the interest of the Monetary authorities to maintain export competitiveness vs. an appreciation of the SL Rupee. Therefore we believe the currency risk for investors is easing gradually and as an, when the IMF financing falls through foreign investors are poised to further benefit from stable exchange rates or even an appreciating SL Rupee.

After the military victory on the national conflict the market performed outstandingly during the past weeks, where the broader market gained more than 50%. Though the Colombo bourse has only yet reached near 82% of the all time high All Share Price Index value we believe the growth is sustainable with macro factors moving favourably.

The US$2.6 bn IMF loan facility falling through could kick start the islands' economic revival with low cost funds have been made available for infrastructure investments. The International Monetary Fund has approved a USD2.6 bn loan to Sri Lanka with USD322 mn tranche being immediately disbursed on a program and the balance in multiple tranches within a 20 month period. The low cost debt inflow from the IMF would wane the reliance (of the Government of Sri Lanka) on domestic borrowings and create downward rate pressure on the money markets due to the excessive liquidity been created in the banking system.

Prior to the positive response by the IMF with regard to the applied loan facility, domestic interest rates have been on the decline with the 3 month Treasury Bill rate having already fallen by 1025 bps (from 21.3% to 11.05%) and overnight money market rates also having fallen by a near 440 bps to 9.74% since Jan’ 08 to date.

With the build up of excessive liquidity within the banking system, the banks would be pushed towards lowering their lending rates which would revive both corporate and retail, debt backed investments. Given the falling cost of borrowing the corporate profit growth could bolster, the broad economy would grow faster with consumer, property and construction sectors spearheading the revival which could drive real economic growth by 4.9% (in 2009E), 8.9% (in 2010E) and 11.3% (in 2011E). Therefore with the positive outlook investors would shift from low yield (low risk) fixed income investments to high yield investments laying the foundation for a market rally.

We believe the banking, conglomerate and hotel sectors to be the key favourites, whilst telecom and manufacturing sectors would become the secondary market movers. Thus the market has become attractive (with the positive macro socio/economic shift) whilst trading on earnings multiples (12.1X) where foreign investors are re-entering in to fundamentally strong counters, we see pockets of strong growth in key sectors such as telecommunications (Sri Lanka Telecom), industrial sector (Tokyo Cement, Royal Ceramics, Chevron Lubricants), diversified (John Keells Holdings, Aitken Spence, Distilleries), Hotels (Asian Hotels & Properties, Aitken Spence Hotels)and banking (Commercial Bank, HNB Bank).

With the build up of excessive liquidity within the banking system, the banks would be pushed towards lowering their lending rates (though the banking sector would continue to enjoy laudable net interest spreads of around 5% by reducing the deposit rates at a faster pace than the lending rates) which would revive both corporate and retail, debt backed investments.

Given the falling cost of borrowing the corporate profit growth could bolster, the broad economy would grow faster with consumer, property and construction sectors spearheading the revival which could drive real economic growth by 4.9% (in 2009E), 8.9% (in 2010E) and11.3% (in 2011E). Therefore with the positive outlook investors would shift from low yield (low risk) fixed income investments to high yield investments laying the foundation for a market rally.

Reviving the Link

Strong inroads are made in linking the previously war torn North with the South of sri Lanka with the state controlled transport board recommencing its bus service between Colombo and Jaffna. The general public was deprived of enjoying the land link and uninterrupted public transport services between Colombo and Jaffna during the past two decades (apart from the brief ceasefire period in 2002-2004) and thus with the recommencement of the bus service which would soon to be followed by a rail link would integrate the once isolated regional economies in the North to the broad economy.

Further, with the low cost IMF lending amounting to LKR2.6 bn expected to fall through during the coming week, the funds could be directly utilized to finance the infrastructure development work in the Northern province which would net around USD 1 bn. With the roads/rail networks been built and the basic infrastructure developed would increase economic activity in the North & east. North and East in unison has the ability to produce 40% of the paddy production whilst the near 60% of the coast line boasts untapped opportunities for salt water fish production, tourism and quarrying of minerals. Hence the benefits of the integration would gradually trickle down to the mainstream economy.

IMF US$2.6 bn financing lifts Sri Lanka's macro outlook to Strong Positive

With the complete end of Sri Lanka's 30 year old conflict with the LTTE terrorists (subsequent to the complete elimination of the entire leadership of the terrorist group) on 18th May 2009, the island's outlook turned positive opening up one third of the land mass and two third of the total resource rich coastal belt for economic integration and development.

Despite shouldering the brunt of a high cost conflict Sri Lanka has grown its real GDP by an average 6% p.a. over the past two decades and has managed to narrow its fiscal deficit to around 7.5% of GDP (in 2008) from a near 13% of GDP few years ago. The improvement in the fiscal front had been an outcome of the growing GDP and progressive steps by the government to reduce and/or to remove subsidies.

The GDP growth has been predominantly driven by domestic consumption
(supported by official migrant worker remittances amounting to a near 8% of GDP, whilst the unofficial remittance inflow also could be a near half of the official figure) and service sector development, whilst exports accounting for only 25% of GDP (and continuing to be stable in value despite the global slowdown) has managed to maintain Sri Lanka's growth rates. With the slump in oil prices (whilst oil accounts for a near 35% of the total import bill) trade deficit also has tapered by a circa 40% YoY and has eased the pressure on Sri Lanka's foreign reserve position. Further we believe the future defence expenditure would be shaved off by a near 40% from the previous defence bill amounting to around 6% of GDP, and the saving to be channeled towards investments.

The US$2.6 bn IMF loan facility falling through could kick start the islands' economic revival with low cost funds been made available for infrastructure investments. The International Monetary Fund has approved a USD2.6 bn loan to Sri Lanka with USD322 mn tranche being immediately disbursed on a program and the balance in multiple tranches within a 20 month period.

The low cost debt inflow from the IMF would wane the reliance (of the Government of Sri Lanka) on domestic borrowings and create downward rate pressure on the money markets due to the excessive liquidity been created in the banking system. Prior to the positive response by the IMF with regard to the applied loan facility, domestic interest rates have been on the decline with the 3 month Treasury Bill rate having already fallen by 1025 bps (from 21.3% to 11.05%) and overnight money market rates also having fallen by a near 440 bps to 9.74% since Jan’ 08 to date.

Further subsequent to the complete end of the war, foreign fund inflows have increased and we have learnt through market sources that the Central Bank has been defending the US Dollar by buying around US$350 mn through open market operations, a practice which could be continued given the interest of the Monetary authorities to maintain export competitiveness vs. an appreciation of the SL Rupee. Therefore we believe the currency risk for investors is easing gradually and as an, when the IMF financing falls through foreign investors are poised to further benefit from stable exchange rates or even an appreciating SL Rupee.

Source - Research Asia Securities

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Lube Luck in 2Q09 boost net earnings by 45%YoY

• Chevron Lubricants (LLUB) has posted a net profit of LKR399.3 mn (up 45%YoY) in 2Q09 due to high gross profit margin enjoyed on the back of low raw material cost whilst cumulative net earnings have increased marginally to LKR632.2 mn largely owing to the poor performance in the first quarter.

• The turnover grew by a marginal 1% YoY in 2009 whilst the sales volume has witnessed a circa 10% drop. However, the gross profit grew by a strong 53% YoY during 2Q09 mainly due to a near 40%-50% dip in base oil prices which reached US $ 1800 levels per MT in October 2008.

• The decline in new vehicle registrations and lower disposable income of consumers has adversely affected growth in the lubricant industry. However, with crude oil prices dipping base oil is expected to follow the same trend.

• The expired lease of the 2-acre land at Kollonnawa, where the blending plant of LLUB is situated is to be extended by a further 5 years from July 2009.

• We revise up the forecast net profit to LKR1,132 mn (up 19%YoY) in 2009E supported by the better performance in 2Q09 whilst expecting stable earnings in 2H09. Further, on the back of rising economic activity in the North & East we project 2010E net profit to grow by 33%YoY given the base oil prices remain stable.

• The share is attractive on 6.7X2009E forecast net profit and 5.0Xprojected 2010E net earnings. Maintain Long term BUY.



Chevron Lubricants’ 2Q09 net earnings shot up by 45%YoY

Chevron Lanka Lubricants (LLUB), the local arm of global energy giant Chevron, recorded a net profit of LKR399.3 mn, up by 45%YoY in 2Q09 whilst it posted LKR632.2 mn for the six months, up by 2% mainly on the back of dipped base oil cost which skyrocketed to USD 1,800/MT in October last year dropped by circa 40%-50%.

However, the turnover was virtually stagnant where the sales volumes dropped by circa 10% YoY during the period under review due to sluggish vehicle sales, lower consumer usage and lower usage of thermal power plants.



Turnover stagnant during 1H09. LLUB’s turnover has grown by a marginal 2%YoY to LKR2,124.5 mn in 2Q09 whilst cumulative turnover too edged up to LKR4,402.2 mn, up 1% YoY. The first half of FY09 saw a marked volume decline (approximately 10%) in comparison with the preceding period due to the impact of the economic downturn, where large proportion of the company’s industrial customer base relies on export-oriented production and the significant decline in export orders for these customers has constrained lubricant usage.

However, the dip in volumes was cushioned by price increases. Sri Lankan lubricant industry lost its growth momentum over the last three years due to economic issues of the country. The lubricant market dipped by circa 10% YoY during the first half of the year, as against an average growth of 5% p.a over the last 10 years due to sluggish vehicle sales, new automobile engines allowing longer service periods, changing consumption patterns on cost pressures and lower usage of thermal power plants. However, the cumulative turnover has remained flat mainly due to the price revisions.

Gross profit grew by 12% YoY in 1H09. The gross profit margin for the cumulative period grew by 3.3% to 32.3% and the quarterly GP margin grew by 13.7% to 41.4% compared to the corresponding previous period. Cost of sales dipped to LKR2,979.7 mn (down 4% YoY) and LKR1,244.6 mn (down 17% YoY) for the first six months and for the quarter respectively.

With the shortage in the world market created by the lower in gasoline production, base oil prices began to skyrocket in 2008. Base oil prices have surged up by almost 140% from US $ 750 per ton in December 2007 to US $ 1800 per MT in October 2008 and with the sharp dip in crude oil prices base oil prices too have dropped by around 40% to 50%.

As LLUB carry a near two months inventory the raw materials they bought at the highest levels last year fed through to the bottom line during 1Q09 however, during the first quarter of this year LLUB purchased base oil at rock bottom levels which helped to drive second quarter margins. With the slide in crude oil prices, base oil is expected to follow the same trend.

Operating profit up by 10% in 1H09. With tight cost regime in place administrative expenses experienced a marginal 3% increase to reach LKR164 mn in 1H09 and a 5% drop during the quarter to reach LKR78.9 mn partly due to savings on IT charges that came from the group.

However, distribution expenses soared to LKR275.3 mn (up 23%) and LKR179.1 mn (up 55%) during the first half and the quarter. Consequently, with the improved gross profits LLUB posted an operating profit of LKR983.2 mn in 1H09, up by 10% and LKR622.5 mn in 2Q09, up 64%.

Net profit has grown by 45% YoY in 2009. Net earnings during 2Q09 grew by an immense 45% to LKR399.3 mn whilst the cumulative net profits improved marginally to LKR632.2 mn. The quarterly boost in net earnings is mainly due to the 17% reduction in cost of sales and the 2Q09 net profit grew by an enormous 71.4% compared to the preceding quarter.

Renewal of the lease at Kollonnawa land. In 1994, LLUB entered in to a lease agreement with the Ceylon Petroleum Corporation (CPC) for a period of ten years with regard to the 2-acre land at Kollonnawa, where the blending plant of LLUB is situated.

Following the expiry of the lease in 2004, the company managed to extend the lease by a further five years whilst it would be up for renewal in July 2009. The cabinet granted approval to extend the lease agreement for the land for a further period of 5 years from July 2009.

Forecast FY10 net profit to reach LKR1,132 mn, up 19%YoY. We revise up the forecast net profit to LKR1,132 mn (up 19%YoY) in 2009E supported by the better performance in 2Q09 whilst expecting stable earnings in 2H09. Further on the back of rising economic activity in the North & East we project 2010E net profit to grow by 33%YoY given the base oil prices remain stable.

Still attractive on 6.7X forecasted FY09E net profit & 8.3% dividend yield. The complete end to the three decade old ethnic conflicts resulted in a market rally that boosted the share price by a near 32% to its current level.

The company has maintained a near 70% dividend payout historically whilst we estimate the dividends to be around LKR10.50 in FY09 (vs. LKR10.50 in FY08 & LKR12.50 in FY07). Despite marked decline in volumes the company is in the view that the profitability would not be significantly affected since LLUB is planning to maintain its positioning as a premium player in the industry with adjusted pricing.

We expect the anticipated drop in volumes to be cushioned by price revisions and with crude oil prices dipping base oil is expected to follow the same trend, which would support to maintain low cost of sales.

Thus, we expect earnings to improve for 2009 and share is attractive on earnings multiple of 6.7X forecast FY09E net profit. Meanwhile a significant improvement could be witnessed from early 2010 on the back of increased economic activity due to development of the previously war torn North & East where the counter trades at 5.0Xforecast FY10E net profit.

Even though LLUB is fairly valued and a high dividend yielding stock due to the prevailing uncertainties in demand and better prospects seen in the coming year, we recommend – Long term BUY.

Source: Asia Securities Research

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Market Highlights - 23rd July 2009

The All Share Price Index dipped 4.7 points to close at 2,480.6 points (-0.2%) whilst the Milanka Price Index also dipped 10.2 points to close at 2,763.4 points (-0.4%)

The total turnover was LKR557.8mn (USD4,854k) vs. 12-months average daily turnover of LKR347.2(USD3,021k) whilst the volume traded was 21,321k against the 12-months average daily volume of 11,740k

Top traded counters were Commercial Bank LKR99.4 mn (USD865k, +2.5%), Lanka Cement LKR88.0 mn (USD766k, +4.8%), Ceylinco Insurance LKR50.8 mn (USD442k, 0.0%), Overseas Reality LKR38.8 mn (USD338k, +1.7%) and Dialog Telekom LKR29.3 mn (USD255k, 0.0%)

The market continued to remain strong with buying interest on selected counters. Indices were volatile during the day but eventually the boarder market edged down marginally. Local institutional activity dominated the day’s trading with activity seen on Commercial Bank, John Keells Holdings, DFCC and Tokyo Cement (non-voting) whilst retail interest was evident on Lanka Cement and Overseas Reality.

Foreign purchases amounted to LKR76.9mn (USD669k) whilst foreign sales amounted to LKR76.0mn (USD661k).



Todays Special

Reviving the Link

Strong inroads are made in linking the previously war torn North with the South of Sri Lanka with the state controlled transport board recommencing its bus service between Colombo and Jaffna.

The general public was deprived of enjoying the land link and uninterrupted public transport services between Colombo and Jaffna during the past two decades (apart from the brief ceasefire period in 2002-2004) and thus with the recommencement of the bus service which would soon to be followed by a rail link would integrate the once isolated regional economies in the North to the broad economy.

Further, with the low cost IMF lending amounting to LKR2.5 bn expected to fall through during the coming week, the funds could be directly utilized to finance the infrastructure development work in the Northern province which would net around USD 1 bn. With the roads/rail networks been built and the basic infrastructure developed would increase economic activity in the North & east.

North and East in unison has the ability to produce 40% of the paddy production whilst the near 60% of the coast line boasts untapped opportunities for salt water fish production,tourism and quarrying of minerals. Hence the benefits of the integration would gradually trickle down to the mainstream economy.

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A Taste Test for Sri Lankan Debt

The Wall Street Journal
By DITAS LOPEZ

Sri Lanka's about to test just how far investors' risk appetite has come.

Early signs are positive. Yield-seeking investors say they're eager for Sri Lanka to issue a U.S. dollar bond – something the country is currently mulling.

Much has turned in Sri Lanka's favor recently: Its 26-year civil war ended in May and last week the country signed a tentative agreement with the International Monetary Fund for a $2.5-billion loan.

No formal deal is on the table, nor is one guaranteed, but Sri Lanka's central bank is on the road this week – in New York, Boston and London – testing the waters for an issue that some expect will be worth $500 million.

The bond would help Sri Lanka plug a widening budget deficit, and boost the country's depleted foreign currency reserves.

Fund managers who met the central bank's representatives in Hong Kong and Singapore last week say their interest in the potential issue stems from the high yield it could fetch, possibly 12% or more for a five-year bond. A 10-year bond sold by the Philippines two weeks ago, by comparison, was priced with a yield of 6.625%.

Investors snapped up the Philippines bond, and an earlier issuance by Indonesia. Both, like Sri Lanka, are rated at junk status.

But Sri Lanka is in another league thanks to its widening deficit, huge public debt and weak balance of payments. Standard & Poor's pegs the deficit at 12% of GDP this year, four times the projection for other countries in the same ratings category.

Unlike the other two countries, the paucity of past issuance means there's no liquid market for Sri Lanka's dollar bonds: Once in, investors may have a hard time getting out.

Others are watching. It's been more than a year since a high-yield corporate bond was issued in the region; Vietnam is said to be mulling a $1 billion issue before December.

Sri Lanka's bond could set a new measure of how much risk investors are willing to take

Write to Ditas Lopez at ditas.lopez@dowjones.com

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Sampath Bank -Buy or Sell??

SAMP the third largest private commercial bank is relatively superior in terms of ROR’s (above 15%), 124 strong branch network and strong deposit base.

The bank has been relatively aggressive in loan book growth and has been affected by higher NPLs (which has marginally notched above industry NPL levels)

Fairly capitalized with Tier I CAR of 8.7% and Total CAR of 12.8%.

Share value on 4.3X forecast 2010 net profit and trading on 0.7X current book value. Low PER & Questionable growth potentials- DON'T BUY

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Reaching new heights - Overseas Realty

Overseas Realty (OSEA) was incorporated in 1980 and primarily engages in the activities of property development and management. The long term business strategy of the company includes accumulation of land banks (for future developments), focus on facility management business and diversification in to mixed use developments (properties with residential, retail and commercial use).

OSEA’s current operations include the ownership and management of its investment property (World Trade Center) and the fresh property development project ‘Havelock City’ which is expected to generate a windfall of profits for the company in the coming years.

Shing Kwan Investments of China is the main shareholder of OSEA holding a stake of 65.74% of shares along with its Singapore operations. It is a group specializing in real estate and financial investments with a history of 40 years.

World Trade Center

The company’s single investment property includes the World Trade Center (WTC) complex in Colombo which it developed, owns and manages. The WTC comprises of two office towers of 39 floors each, which in total provide approximately 710,000 sq.ft of prime office and commercial space and remains the most sought after business location in Sri Lanka.

The WTC income recorded a growth of 12% in 2008 driven mainly by increase in average rental rates and occupancy level around 82%. However the lackluster economic conditions lead the country’s property market suffer severely, which resulted a fall in demand for WTC space. Therefore we expect the occupancy levels to be stabilized around 68% in 2009E and gain up to 77% in 2010E.

Rental rates have increased by 18% YOY over the past three years and are currently LKR135-150 per square foot on average. The cost base of WTC mainly consists of electricity and repairs & maintenance which is nearly 65% and 18%respectively. Given the recently witnessed electricity tariff hike and its impact on the cost base, coupled with the relatively low occupancy rates, it is believed that the WTC will maintain marginal levels of growth in the future years.



Fair value gain

Furthermore, it should be noted that company’s profits has been significantly boosted by the fair value gain over LKR1.3 bn for the past two years, which is a result of revaluation of the World Trade Centre premises. The fair value gain has increased by 9% YOY during 2007 and reduced by 24% YOY in 2008.

Therefore, we expect the gain to come down by an average of 7.7% YOY during the next two financial years considering past two year average and declining rental yield of local property market.

As a result of low rental yields in Sri Lanka, capital appreciation of properties outstrips the rental yields which lead to this kind of fair value gains. However the gain does not fully transfer in to monetary values as it is a notional adjustment, unless the property is sold generating an equal amount of capital gains.

However on the basis of a replacement cost based valuation, the share is trading at a 79% discount to its intrinsic value of LKR 23.68

Average construction cost per square foot (assumption) USD 100.00

Total area - WTC premises 1,158,271 square feet
Replacement cost USD 115.83mn/LKR 13.3bn
Replacement cost per share LKR 23.68

Havelock City

OSEA owns 60% of Mireka Capital Land (Private) Limited which was established to develop and manage the mega property development project “Havelock City.” The USD250 mn venture is the largest residential/commercial project located in a single site in Colombo and is spread on a land extent of 19 acres.

The complete project comprises of 8 towers located in a strategic location in the capital, with close proximity to modern day amenities and facilities, offices, schools, hospitals etc. The residential complex of the project consists of 1,080 apartments, whilst the commercial component of the project will include service apartments, department stores, Cineplex etc.

Construction will be undertaken in four phases of residential development and one phase of commercial development, each having an estimated construction time of 2 years. The first phase of the project was to construct two condominium housing towers, and it is currently fully completed and planned to be launched commercially in September 2009. It was planned to launch during last year but went behind the schedules due to worsened economic conditions in the country.

The first phase consists of 226 apartments, ranging from 1 to 4 bedrooms and penthouses, whilst prices range from LKR14 mn to LKR37 mn per unit. Initially, the majority of the apartments were expected to be sold by mid 2010 with 50% of the apartments having already been pre sold.

However, there has been a lag in sales in recent months, due to the decline in demand for apartment units on the back of slowing global and domestic economy; since beginning of 2009. Recognition of earnings arising from phase 1 commenced during 4Q2007, with around LKR50 mn of profits being recognized in the said period. It is estimated that total earnings from this development will reach approximately LKR1,500 mn during 2009E with 25% of revenue being recognized with the completion of 226 units and another 25% recognized on 108 units being sold already. And the majority of the remaining earnings are expected to be recognized during 2010.

The commercial component of Havelock city will consist of a shopping mall, hotel, cinema, supermarkets, department stores and service apartments. The LKR12 bn investment project is to commence construction during the latter part of 2009. The 300 room hotel and 200 service apartments will occupy a single tower whilst the proposed shopping mall will be spread over 4 floors covering a floor area of 511,640 sq.ft.



However, OSEA is vulnerable to risks that are macro economic in nature, as worsening global and local economic conditions will act to hamper demand for apartments through the reduction of disposable income.

Given the risks, in a worst case scenario the development of the commercial component of Havelock City may be delayed.

Company Outlook

We expect the company to mark a turnaround in the coming years with improved demand for office space in the heart of Colombo, given the WTC being the main and the largest of the two office complexes in the city. Furthermore, Havelock City located in Colombo, could become a substitute to city hotel rooms and gain from the dearth of city hotels. At present there are about 2000 city hotel rooms in Colombo which recorded 100% occupancy during the ceasefire period in 2002-2004.

We expect a similar scenario to take place in the near future with the ending of 3 decade old war and receiving the USD 2.5bn IMF loan, which will boost the economy. In such a scenario of a shortfall in city hotel rooms Havelock City could convert its unsold apartments of phase one to service apartments and commence constructions of the next phase.

In addition the company could renegotiate its loan terms which will reduce their borrowing costs significantly in 2010, on the back of sliding interest rates.

Considering the above conditions we expect the company to mark a turnaround in the coming years even though the historic numbers do not portray a lucrative picture. Based on a conservative approach we project OSEA to post a net profit of LKR1,527.6 in 2009E (Less than FY08 as a result of low occupancies in WTC coupled with high cost of borrowings) mainly driven by profits from the first phase of Havelock City whilst 2010E earnings are projected to be LKR2217.9 mn (up 45%YOY).

The share is attractive on PBV of 0.6X, 4.9X projected FY09 earnings and 3.4X forecast FY10 net profit. We believe the share has a strong upside; given the positive earnings outlook, on the back of rising demand for office space in Colombo and for apartments. – BUY



Source: Asia Securities Reserach

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Rising sea levels and sinking Islands

Rising sea levels and sinking Islands
By Dinesh Iriyagolle Weerakkody
Daily News - http://www.dailynews.lk/2009/07/16/wld28.asp

The Ocean is warming about 50 percent faster than reported two years ago, according to latest scientific findings.

* The first climate change refugees
* Eat less meat to curb global warming?
* Effects on Small Islands?

Sri Lanka
Sri Lanka’s coastal settlements are at risk of rising sea levels. Ocean floods will invade gardens and beaches. This may also have an impact on the tourist industry because of increased coastal erosion on sandy beaches; we’re going to see increased sea flooding in the island nation.

The Government and City/Town planners must encourage people to move away from coastal areas which are at risk of being flooded in the future.

The writer is of the opinion that the decisions taken soon after the December 2004 tsunami to have a ‘buffer zone’ be implemented with strict adherences with few practical exceptions for number of environmental, social and economic reasons. The tsunami devastated parts of the island’s coastline settlements must also be moved inland to avert any future danger.
More...Daily News - http://www.dailynews.lk/2009/07/16/wld28.asp

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