Sri Lanka to receive USD 905.11 mn from China

The ties between China, one of the world’s fastest growing economies and the leading Asian exporter of textiles and garments to the US and EU, and Sri Lanka have always been strong, even prior to the bilateral agreements that started off in 1952.

But while China has boomed up the ladder, Sri Lanka is lagging behind; mainly due to the internal conflict which existed for a number of years and due to the political undercurrents of the country. Finally out of the black period, Sri Lanka is now ready to lunge forward and seize the missed opportunities, and would do well to learn from our ally, China.

“China modified its strategies from time to time, keeping in tune with the ever changing patterns and trends of the world. These policies have helped us to keep abreast, and to modulate new policies and planning methods,” Ambassador for China in Sri Lanka, Yang Xiuping, asserted at the ‘Sri Lanka-China Business Forum’ organised by the Ceylon Chamber of Commerce, the Sri Lanka - China Business Council and the Sri Lanka China Friendship Foundation, held yesterday.

“With a nominal GDP of USD 4.4 trillion when measured in exchange rate terms. China is now positioned as the third largest economy in the world, after US and Japan. We also contribute 19% to the world’s economic growth,” Ms. Xiuping said.

“During the last 30 years, China’s economy has changed from a centrally planned system to a more market-oriented economy - one that practises two economic systems - with a rapidly growing private sector. China became a major player in the global economy and is now called the factory of the world. In 2009, even amidst the global financial credit crunch, China’s growth rate is expected to be 8.2 per cent (source: ADB) and is expected to go even higher in 2010 to 8.9 per cent,” added Guest Speaker, Secretary General, Colombo Plan Secretariat, Dato’ Patricia Yoon.

“In restructuring its economy, China executed gradual price liberalisation, fiscal decentralization and increased autonomy for state enterprises. It laid the foundation of a diversified banking system, developed the stock markets, promoted rapid growth of the non-state sector and opened the economy to foreign trade and investment. These reforms led to huge efficiency gains. China’s GDP has increased tenfold since 1978,” said Ms. Yoon.

Sri Lanka too needs proper planning and well placed strategies to overcome the economical challenges in the future.

Giving an overview of the China - Sri Lanka economic relationship, Executive Director of the Institute of Policy Studies, Saman Kelegama stated that the total trade between the two countries has grown steadily and has almost doubled since2005. Trade between the two countries was recorded at USD 660 in 2005, which increased to USD 1138.3 in 2008. “Sri Lankan exports to China have grown over the last 5 years, while imports from China have grown at a faster pace than the exports. This has resulted in an expanding trade deficit of USD 1044.7,” Mr., Kelegama said. China and Hong Kong provides Sri Lanka’s largest source of imports, a recorded USD 1786.1, exceeded only by India with USD 3443.

Raw coconut coir, apparel items, flavoured and non flavoured tea, natural rubber, diamonds and other precious stones, titanium ore and concentrates and bicycles and other cycles were identified as Sri Lanka’s major exports to China. Sri Lanka’s major imports from China include electrical machinery, fertilizers, railway locomotives, inorganic herbals and many more.

China is also one of Sri Lanka’s major investors. In 2008, the total Chinese Foreign Direct Investment (FDI) to Sri Lanka was an approximate Rs. 1.9 billion. “When investment by Hong Kong is also added, the total FDI into Sri Lanka in 2008 has been recorded to be Rs.11.69 billion,” Mr. Kelegama said.

“Presently 16 Chinese businesses have invested in garment, leather, telecom and electronics manufacturing. Entrepreneurs from China have been provided with an exclusive EPZ at Mirigama, and depending on its progress, additional space will be provided at Godagama, Matara and the Eastern Province.”

The projects funded by China currently are many. USD 27.2 Mn was spent in 2008 for the procurement of 100 railway carriages for Sri Lanka. The Puttlam Coal Power Project (USD455 Mn), Supply of 15 Nos. Diesel Multiple Units (USD38.68 Mn), National Performance Art Theatre (USD10.86Mn) and Maintenance of BMICH (USD 7.20 Mn) are also being implemented as at date.

“On August 13 this year, the two countries signed two key development projects, the Colombo- Katunayake expressway and the Hambantota bunkering project. This would pave the way for infrastructure requirements which will have an immense impact on the future socio-economic development of Sri Lanka,” assessed Mr. Kelegama.


Key projects to be initiated include the Colombo-Katunayake expressway for USD 248 Mn, Phase 2 of Hambantota Port Development Project for USD 100 Mn, Hambantota Bunkering Facility and Development Project for USD 75 Mn; along with Phase 2 of Puttlam Coal Power Project worth USD 373 Mn, USD 81.14 Mn worth of Commercial aircrafts to SL, housing projects for public servants for USD 22,50Mn, repairing and refurbishing the Supreme Courts complex for USD 0.36 Mn. These are all set to take place in the near future.

This is on top of the USD 1 Mn humanitarian aid promised for civilians affected by the conflict and other related aid and educational links that have been given to Sri Lanka.

“Prospects for the future seem to be good and after many years, China has opened its borders for SL tea imports. The Sri Lankan tea company ‘Heladiv’ opened three exclusive tea boutiques in the Fujian province and Beijing in August this year and aims at opening 100 in China by 2011 with 20 by the end of this year,” he further said.

“China has also been recognized as an important potential source for tourism and steps have already been implemented to improve the air connectivity between the two countries,” he said.

Moreover, he stated, that while many see China as a threat, Sri Lanka should embrace the opportunities created by the socio-economical ties between the two nations.

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DFCC Vardhana Bank Rated at 'AA-(lka)

Fitch Ratings Lanka has today affirmed DFCC Vardhana Bank Limited's (DVB) National Long-term rating at 'AA-(lka)'. The Outlook remains Stable.

The rating is driven primarily by the implied support assumed to be available from its parent, DFCC Bank (DFCC; 'AA(lka)'/Stable). DVB currently accounts for 29% of DFCC group's assets, and is expected to play an important strategic role in DFCC's plans in enabling it to diversify its product and funding base. In addition to the common franchise shared by the banks, operations are closely linked with an integration of treasury and back office functions, as well as shared personnel and input on key decision making committees.

Asset quality deteriorated sharply (along with the sector) in the 18 months to end-H109 given the effects of falling domestic and global demand on DVB's customer base. However the bank has stepped up recovery and monitoring, resulting in a lower rate of NPL accretion in Q209. Furthermore it has also curtailed loan growth from June 2009 in view of the weak credit environment. Fitch notes that DVB follows a more stringent policy on classification of non performing advances and reclassification of non-performing overdrafts than current regulatory guidelines. Fitch expects asset quality to remain stressed over the next six to twelve months as borrowers take time to recover from strained cash-flows, before improving in the medium term.

Profitability was lower in FY08 despite an improvement in margins, on account of higher provisioning costs (40% of pre-provision income in FY09 versus 23% in FY07) and higher effective tax rates incurred during the year. The provisioning policy of DVB is more stringent than what is required by the regulator, with the bank providing over and above statutory provisions based on its own estimate of recoverability of each loan. However, Fitch notes that as provisioning costs increase, DVB's effective tax rate will increase as provisions of only a maximum of 1% of loans are tax deductible. Falling profits have also affected the bank's ability to grow its equity buffer. Net NPLs/equity rose to 42.6% at H109 (FYE08: 29.2%). Equity to assets, though still comparing well with the sector has been on a decreasing trend since 2007.

DVB's deposit base grew at a CAGR of 63% in the period FYE04-FYE08 leveraging on DFCC's brand name and by offering competitive rates. The bank is partnering with an established local licensed commercial bank (LCB) to expand its ATM network which will enable it to mobilise a greater volume of retail deposits and increase the proportion of low cost demand and savings deposits.

DFCC Vardhana Bank is a LCB and is a 95.58%-owned subsidiary of DFCC , a licensed specialised bank and Sri Lanka's only development finance institution.

A detailed credit analysis will be made available shortly on Fitch's websites, www.fitchratings.com and www.fitchratings.lk.

DFCC has a 1.78% shareholding in Fitch Ratings Lanka but is not involved in either the day-to-day operations or credit rating reviews undertaken by Fitch Ratings Lanka.

Fitch Ratings-Colombo/Mumbai/Singapore-24 September 2009:

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Global downturn hampers Sri Lanka's peace dividend

The end to Sri Lanka's quarter century civil war brought hope that prosperity might soon take root on this nearly bankrupt island nation.

Now the global economic downturn is threatening Sri Lanka's recovery, which analysts say is a crucial part of securing a lasting peace.

While investor interest has grown since May, when government troops quashed the Tamil Tigers' separatist rebellion, actual investment has not. Last year, Sri Lanka got $889 million in foreign direct investment, according to official figures. So far this year, the country has only gotten $400 million - well off pace of the government target of $2 billion by the end of 2010.

The pillars of Sri Lanka's $40 billion economy - garments, remittances from the Middle East, and tourism - have all been hit by the global downturn. Real estate has also faltered. Sri Lanka's Minister of Investment Promotion, Navin Dissanayake, says Hyatt halted construction on a luxury hotel project in Colombo late last year. The hotel chain declined to comment.

"Economic investments that we thought would come are not, for the moment, coming because of the global financial crisis," Dissanayake told The Associated Press during a recent trip to Mumbai to rally investor interest.

"Our bounce will come next year, around May, June, July," he said. "That's when I think the peace dividend will come to us."

But the government might also be paying a price for the brutal manner in which the war ended. At least 7,000 civilians were killed in the final months of fighting, according to the U.N., after the government brushed off appeals from aid groups, human rights workers and diplomats to slow down its offensive.

Meanwhile, the government continues to hold nearly 300,000 minority Tamil civilians in detention camps.

Human rights concerns could spell the end of Sri Lanka's duty free access to Europe under the so-called GSP Plus program, which exempts key industries like garments from a 7 percent duty.

Dissanayake said garment exports could drop 10 to 15 percent if the program is not renewed next month.

Eurasia Group analyst Maria Kuusisto said the downturn in textiles, rubber and tea could lead to social unrest and hamper efforts by Sri Lanka's ruling United People's Freedom Alliance to consolidate its political position.

"Sri Lanka's tea workers are already protesting over low wages," she wrote in a report this month. Cancellation of the EU preferential tariff regime "could heighten tensions," she said.

Sri Lanka has other problems as well. Its government is hopelessly bloated, with 107 ministers and deputy ministers. It also struggles with corruption, ranking 92nd on Transparency International's corruption perception index.

And while the war is over, promises of political compromise between the Sinhalese majority and the Tamils - considered crucial for future stability - have yet to bear fruit.

The government is increasingly looking to Asia to underwrite an economic recovery.

"We feel as a small developing country that our investment will be more heavily coming from China and India. Their companies are aggressive and bullish on outbound investment. And we have good political relations," Dissanayake said.

He said he's gotten a "very positive" reception in Asia, but so far just one big project has kicked off since May: a $75 million luxury beach resort near the northwestern town of Kalpitiya, to be managed by Thailand's Six Senses hotel group.

Economic growth has slowly picked up since the end of the military conflict, which cut off about a third of the nation's landmass in the north and east. Growth in the second quarter was 2.1 percent, up from 1.5 percent in the first quarter, an 8-year low.

Mohan Weragoda, chief executive of Inventures Pvt Ltd., an investment advisory firm based in Colombo, said he's working on foreign investment deals worth $250 million with several Asian companies he declined to name because negotiations are ongoing.

Last year his firm brought $40 million in foreign investment into Sri Lanka, he said.

"The country needs large projects and they wouldn't have come when the war was going on," he said.

Insurance premiums and port surcharges, elevated because of the fighting, have already been reduced, he said. Standard & Poor's raised its ratings outlook for Sri Lanka, potentially reducing borrowing costs, after the International Monetary Fund's July approval of a $2.6 billion loan for the island, which narrowly averted a balance of payments crisis.

Milan Zatakia, chief executive of Millennium AeroDynamics Pvt. Ltd., an airport design, operations and logistics firm based in Mumbai, said he hopes to help upgrade and expand Sri Lanka's airports, some of which are in former conflict areas.

Zatakia said he's been approached by a half dozen hedge funds, which he declined to name citing confidentiality agreements, who are interested in funding his expansion into Sri Lanka.

"There's a crying need for infrastructure in our part of the world and there's money available for it," he said.

Despite the hopeful signs, most investors still seem to be watching and waiting - no longer for peace, but for the global economy to turn around.

Construction of the "Diamond Tower," a 51-storey, $155 million tower in Colombo being developed by Indian construction giant Larsen & Toubro, won't begin until Sri Lanka's real estate market recovers, said K Venkatesh, executive vice president for construction project development.

"When we come to good times, the world comes to a bad time," said C. Ignatius, director of promotion at Sri Lanka's Board of Investment.

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History revised

The All Share Price Index (ASPI) gained 99.1 points to close the week at 2,939.4 points (+3.5%), whilst the Milanka Price Index also gained by 122.9 points to close at 3,293.5 points (+3.9%). Indices gained mainly on the back of gains made by heavyweights; Commercial Bank (+7.8% WoW), Distilleries (+7.3% WoW), Asian Hotels & Properties (+5.3% WoW), John Keells Holdings (+5.1% WoW) and second liners led by; Brown & Company (+22.7% WoW), Keells Hotels (+18.4% WoW), Fortress Hotel (12.2% WoW) and Nations Trust Bank (8.8% WoW).

Average daily turnover increased by 4.6% WoW to LKR1,172.1 mn on the back of healthy trading throughout the week. The week’s turnover was shouldered by healthy activities throughout the week driven mainly by diversified, hotels and banking sector counters. There has been two Initial Public Offerings (IPO) namely the Namal Acquity Value Fund and Hemas Power) during the week whilst the two IPOs were over subscribed within the first day it self. The Colombo bourse marked a milestone on 17th of September 2009 by recording the highest ever market capitalization of LKR942.6 bn surpassing the previous record of LKR938.6 bn recorded on 13th Feb 2007.

Heavyweight John Keells Holdings witnessed strong foreign and high net worth interest contributing for +25% of week’s turnover. Furthermore strong buying was evident on hotel sector counters such as Fortress Hotel and Eden Hotel on the back of a sector with a high growth potential backed by continuously increasing tourist arrivals since last May. Commercial Bank and Nations Trust Bank also witnessed strong institutional and high net worth buying throughout the week.

The week saw a net foreign inflow of LKR386.8 mn, where foreign purchases for the week amounted to LKR1,780.7 mn, whilst foreign sales amounted to LKR1,393.9 mn.


Sri Lanka’s GDP grew 2.1% in 2Q2009
Sri Lanka’s economy grew by 2.1% in 2Q2009 (vs 7.0% in 2Q2008) and the cumulative GDP grew 1.8% in 1H09 compared with 6.6% achieved in 1H08. However, with the economic activity in the country picking up, the GDP grew QoQ where only a 1.5% growth was seen in 1Q09. We believe the growth momentum would improve in the second half
of the year with increased economic activity in the previously war torn North and East drumming up the over all economic growth and hence we maintain our 4.9% GDP growth forecast for 2009.

During the quarter the agriculture sector grew by 4.4%, despite 11.7% dip in tea production. With the opening up of the Eastern province the paddy production from the province increased by 37.4% whilst the country production increased by 12.2%.

The industrial sector grew 3.0% on the back of the manufacturing subsector growing by 1.1% despite the key textile sector which was depressed due to global economic downturn shrinking 8.9%. The services sector grew 1.1% backed by 6.3% growth in the transportation and communication subsectors and 5.4% growth in the financial services sector.

Travel advisory relaxed on Sri Lanka
The travel advisory issued on Sri Lanka by the UK has been relaxed from a high threat to general today which depicts the growing positive outlook of the country. With the complete end to the three decade old separatist conflicts several travel advisories have been loosened in the past few months and already we are experiencing significant tourist influx to the previously war torn Eastern province. The tourist arrivals to the country are up for the third consecutive month in August with a near 34% increase.

Seylan Bank – Public Offer (Price : LKR35.00) - SUBSCRIBE
Seylan Bank PLC (SEYB) has announced a public offer to subscribe for fresh 54,290,000 ordinary voting shares at LKR35.00 per share. Concurrently to the public offer the bank will place an additional 32,150,000 ordinary voting shares at LKR35.00 per share with Bank of Ceylon (BOC) and Sri Lanka Insurance Corporation (SLIC).

The fresh issue is expected to reduce Ceylinco Group’s present 24% ownership in SEYB to 14% following the private placement and to 8% subsequent to the public issue. The issue would net SEYB a total of LKR3,025.4 mn (in the event of full subscription) which would increase its capital base and improve its Core CAR to 8.89% from the current 6.09% and also notch up its Total CAR to 11.89% from the present 9.1%.

With the new Board of Directors taking control from Nov. 2008, legacy issues such as sponsor (Ceylinco Group) influence on the operations is no longer continues to be an obstacle for the bank. Further the bank’s operations have already rebound with increased emphasis on controlling NPL’s, increasing recoveries, growing the deposit base and strengthened risk profiling.

SEYB, the third largest listed private sector bank, with a 94 strong branch network and 117 real time ATM network is planning to expand its branch coverage to the Northern and Eastern provinces on the back of the increased capital base.

Outlook for the banking sector remains buoyant with interest rates on the slide (leading to sharper loan book expansion), interest spreads intact (at around 5%) and industry NPL’s also peaking. Thus SEYB is projected to benefit from these positive macro changes whilst we expect the bank’s net profit to grow by 61.8% YoY to LKR269.3 mn in 2009E and grow by a sharp two fold to LKR831.8 mn in 2010E.

On a pure valuation basis the fresh issue is fairly priced at a 22% discount to post issue net asset value. Whilst the bank is currently in a phase of consolidation and projected to recover strongly in 2010E, the issue is priced at 10.7x 2010E net profit and 7.7x 2011E net earnings. It is also noteworthy that strategic shareholding blocks in banks seldom become available and hence this fresh public issue creates the opportunity for strategic investors to subscribe for a near 42% of the increased voting stock of the bank.

However with the share currently trading at a near 4% discount to the issue price attractiveness of the issue is questionable apart for fresh investors seeking to gain strategic hold of control blocks. In general strategic control blocks in banks could demand a premium of around 10% - 15%, and taking this fact into consideration the fresh issue is attractive for strategic investors seeking swift ownership of control blocks. STRATEGIC INVESTORS REQUIRING BLOCKS OF 1% OWNERSHIP OR MORE – SUBSCRIBE.


The Colombo bourse has gained plus 80% since Jan 2009 on the back of favourable macro scenario resulted by the end of three decade long war, easing inflation, falling interest rates, the recently granted USD2.6 bn IMF loan coupled with other capital inflows. With the complete end of the conflicts on 18th May 2009, the island's outlook turned positive and the Colombo Stock Exchange has led the way, with investor sentiment preceding fundamentals and recording a growth of 82.7% in 2009. The ASPI is edging closer to the all time high levels of 3,017 points (Feb 2007), whilst at present trading on 1.3X PBV vs 2.2X PBV recorded in Feb 2007.

Further, with the positive macro developments and opening up of one third of the land mass and two third of the total resource rich coastal belt for economic integration coupled with the gradual recovery of global economy trickling down to the corporate sector, we believe the corporate sector earnings would rise by circa 30% YoY from 2010 onwards (During the ceasefire period [2002-2004] the corporate earnings grew by a staggering 52%).

We believe that the anticipated higher corporate earnings from 2010 onwards are not yet fully factored into the market valuations. Therefore, although the market is edging towards the all time high levels further upside is inevitable with micro and macro changes taking place in the environment The ASPI has posted a growth of 82.7% from the beginning of the year to date and a 42% growth from the day the victory of the war was announced (18th May 2009). Meanwhile the more liquid MPI gained 93.9% YTD and 47.5% from 18th May 2009 todate. Just with in four months after the end of war there has been two Initial Public Offerings (IPO) (namely the Namal Acquity Value Fund and Hemas Power) and a Public Offering to raise circa LKR3 bn (by Seylan Bank-opening next week) whilst the two IPOs being over subscribed within the first day it self. Hence we believe there would be more listings coming to the market in the future, leading for market expansion.

However, due to the high level of activity during the past few weeks we may witness a marginal profit taking during the coming week.

We believe the banking, hotels and consumer sectors to be the key favourites, whilst diversified and manufacturing sectors could become secondary market movers. The market is currently trading on 4 quarter trailing earnings multiple of 17.3X due to the sluggish earnings reported during the past quarter. However the market is attractive based on the strong earning results expected 4Q2009 onwards on the back of favourable macro economic outlook. We see pockets of strong growth in key sectors such as Banking (Hatton National Bank, Commercial Bank, National Development Bank), Hotels (Asian Hotels & Properties, Aitken Spence Hotels, Keells Hotels, Stafford, Eden), Consumer (Hemas, Ceylon Tobacco), Manufacturing sector (Lanka Tiles, Royal Ceramics, Chevron Lubricants) and Diversified Sector (John Keells Holdings, Aitken Spence).

Courtesy : Asia Securities Research

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Seylan Bank - Pubilc Offering

Investment Synopsis

Seylan Bank PLC (SEYB) has announced a public offer to subscribe for fresh 54,290,000 ordinary voting shares at LKR35.00 per share. Concurrently to the public offer the bank will place an additional 32,150,000 ordinary voting shares at LKR35.00 per share with Bank of Ceylon (BOC) and Sri Lanka Insurance Corporation (SLIC).

The fresh issue is expected to reduce Ceylinco Group’s present 24% ownership in SEYB to 14% following the private placement and to 8% subsequent to the public issue. The issue would net SEYB a total of LKR3,025.4 mn (in the event of full subscription) which would increase its capital base and improve its Core CAR to 8.89% from the current 6.09% and also notch up its Total CAR to 11.89% from the present 9.1%.

With the new Board of Directors taking control from Nov. 2008, legacy issues such as sponsor (Ceylinco Group) influence on the operations is no longer continues to be an obstacle for the bank. Further the bank’s operations have already rebound with increased emphasis on controlling NPL’s, increasing recoveries, growing the deposit base and strengthened risk profiling. SEYB, the third largest listed private sector bank, with a 94 strong branch network and 117 real time ATM network is planning to expand its branch coverage to the Northern and Eastern provinces on the back of the increased capital base.

Outlook for the banking sector remains buoyant with interest rates on the slide (lead ing to sharper loan book expansion), interest spreads intact (at around 5%) and industry NPL’s also peaking. Thus SEYB is projected to benefit from these positive macro changes whilst we expect the bank’s net profit to grow by 61.8% YoY to LKR269.3 mn in 2009E and grow by a sharp two fold to LKR831.8 mn in 2010E.


On a pure valuation basis the fresh issue is fairly priced at a 22% discount to post issue net asset value. Whilst the bank is currently in a phase of consolidation and projected to recover strongly in 2010E, the issue is priced at 10.7x 2010E net profit and 7.7x 2011E net earnings. It is also noteworthy that strategic shareholding blocks in banks seldom become available and hence this fresh public issue creates the opportunity for strategic investors to subscribe for a near 42% of the increased voting stock of the bank. However with the share currently trading at a near 4% discount to the issue price attractiveness of the issue is questionable apart for fresh investors seeking to gain strategic hold of control blocks. In general strategic control blocks in banks could demand a premium of around 10% - 15%, and taking this fact into consideration the fresh issue is attractive for strategic investors seeking swift ownership of control blocks.

Issue Details

Objectives of the issue
Seylan Bank PLC (SEYB) has announced a public offer to subscribe for fresh 54,290,000 ordinary voting shares at LKR35.00 per share. Concurrent to the public offer the bank would also place an additional 32,150,000 ordinary voting shares at LKR35.00 per share with two government institutions, namely Bank of Ceylon (BOC) and Sri Lanka Insurance Corporation (SLIC). Subsequently the public issue and the private placement of fresh shares would increase the number of ordinary voting shares by a near two fold to 130,000,000 shares. However SEYB has not announced any addition to its non-voting ordinary share base and thus would remain unchanged at 123,560,000 shares.

The issue would open for subscription on 22nd of September 2009 and will be kept open till 9th of October 2009, unless the issue is fully subscribed ahead of the closing date. Further the public offer would provide preference to existing ordinary voting shareholders (as at 2nd September 2009) by allotting 1 new share for every 2 shares held, whilst fresh applicants would be allotted a proportional number of shares in the event of over subscription.

The issue would net SEYB a total of LKR3,025.4 mn (in the event of full subscription) which would increase its capital base.

Preview to the issue
Capital infusion from the private placement would increase SEYB’s Core Capital Adequacy Ratio (CAR) from the present 6.09% to 7.13% (vs. the 5% minimum requirement specified by the regulator) and would subsequently drive up the Total CAR to 10.14% (vs. the minimum requirement of 10%), from the present 9.10%. Whilst capital collection from the public would further strengthen the banks position by driving up the Core CAR to 8.89% and Total CAR to 11.89%.

With the added comfort of a larger capital base SEYB’s risk profile would improve whilst the bank could continue to increase its lending portfolio and also expand branch operations in the recently liberated North and East provinces.

Currently 22 commercial banking operators are active in Sri Lanka, whilst a near 55% of the total banking assets are controlled by the state owned (unlisted) banks. Global banks such as HSBC, Standard Chartered Bank, Duetsche Bank, Citi Bank etc. have also been operational for many years whilst some of the international banks have over a century of history in Sri Lanka. Further there are 8 listed private sector com mercial banks which have spearheaded the banking sector growth in recent times with increased technology adoption, innovative products and services and regional branch expansion strategies.

The international banks have concentrated their operations in the capital city whilst suburban, regional and rural banking operations are dominated by the local banks. Despite the two largest state banks (i.e. Bank of Ceylon and Peoples Bank)controlling over 63% of the bank branches the local private sector banks (in which SEYB is a strong participant) also have secured around a 35% market share mainly building on efficiency gains and service orientation.



The Central Bank of Sri Lanka serves as the banking regulator in addition to its primary responsibility as banker to the government. With heightened focus on banking sector stability the regulators’ efforts are laudable whilst imposing minimum CAR’s and monitoring them continuously, assessing the risk profile of the industry and individual banks,ensuring provisioning requirements are met etc. Furthermore in addition to the specific loan provisions (in relation to Non Performing Loans) the regulator has also imposed a general provisioning requirement (which requires all banks to maintain a general provision equivalent to 1% of its all performing loans) thereby strengthening sector stability. In recent times the regulator has become extra vigilant and has quickly intervened to maintain banking sector health, whilst the recent most move by the Central Bank was to assist SEYB in Nov. 2008. (i.e. with a chain of unfortunate events unravelling, the depositors made a run on SEYBs’ deposit base, pushing the bank into a liquidity crisis)

With the capital account been closed and with a near zilch exposure to complex/toxic assets, Sri Lanka’s banking sector follows a rather conventional banking model. Furthermore approx. 80% of the total loan book is secured by collateral which has a disposable value of around 110%-115% of the loan amount.

With Sri Lanka’s GDP growing on average 6% p.a. (during the past two decades) demand for credit has increased by approx. 10% p.a. which has lead to the industry enjoying wider spreads. Net Interest Margins (NIM’s) in the local banking sector has averaged around 4.5%, whilst in periods of buoyant economic activity loan growth has surpassed 30%. More recently, i.e. in 2006 and 2007, private sector banks recorded loan growth of over 20% despite relatively high interest rates.



Presently with inflation having eased and touching an all time low, Government demand for credit from the local market also edging lower (due to increased availability of foreign funding) and a build up of liquidity in the system is pushing down the interest rates. With lending rates presently hovering around 18% (down from mid 20%levels) is projected to dip further creating a more conducive environment for investments. Supported by falling interest rates and gradual recovery in the broad economy(which grew 1.5% in 1Q2009 and 2.1% in 2Q2009) the industry NPL’s which notched up to around 9% has peaked and recoveries are increasing. Further with the liberation of both North and Eastern provinces, an untapped market has opened up which would drive up credit demand from both corporate and retail segments, 2010E onwards.



Despite the key sectoral strengths the main lag on the Sri Lankan banking industry is the 55% effective tax burden. The industry in general has to pay 35% as corporate tax and 20% Value Added Tax (VAT) on total banking profit. Nevertheless the additional 20% VAT was introduced few years back (as a short-termist stop gap measure to increase tax revenue for the government) and could be scaled down or removed end 2011E.

SEYB was listed on the Main Board of the Colombo Stock Exchange in 1989 following its incorporation as a Public Limited Liability company in 1987. The bank has since then evolved to become the third largest private sector bank with 94 branches and a 117 real time ATM network. Since inception SEYB has cemented its position as a key private sector bank with a strong focus on corporate banking, SME and retail (mainly regional) segments.

The promoters of SEYB (i.e. Ceylinco Group) currently holds around 24% of the voting shares whilst we expect that Ceylinco Group’s combined holding to fall to 8% following the fresh issue of shares. Furthermore with the agreed private placement, the Government of Sri Lanka (through BOC and SLIC) would become the single largest shareholder owning 25% of the post issue voting stock.

During the past we believe SEYB management was influenced to provide preferential services to the Ceylinco Group and their related parties which was an additional drag on profitability of the bank. Nevertheless despite this undue influence, the operational management of SEYB supported by a vigilant regulator ensured that the bank continued to grow amidst a challenging environment. However with a private credit card company owned by the Ceylinco group going bankrupt, late 2008, a chain of unfortunate events unravelled creating much stress on Sri Lanka’s secondary financial intermediaries. With the calamity surrounding a few Ceylinco group companies, panic stricken depositors made a run on SEYB’s deposit base which led to the bank loosing around 9% of the deposits in a short span of time. Subsequently the Central Bank moved in swiftly and appointed BOC as the main caretaker/supervisor and took over board control on 30th Nov. 2008. With this quick transition SEYB immediately regained stability and is presently consolidating its operations and clearing its loan book with added focus on credit risk evaluation and risk profiling.



With high NPL’s (which is nearly double the industry average) being the main legacy issue obstructing growth, we believe SEYB would be extra cautious in expanding their loan book in 2009 whilst placing more emphasis on augmenting its deposit base. There fore with guidance from the fresh Director Board and the expected entry of strategic shareholders, we believe the asset quality would gradually improve and with GDP growth also projected to gather momentum SEYB’s NPL’s are expected to notch down towards industry average in the next 12-15 months. Further with the added emphasis on growing its low cost deposit (CASA deposits) base we project the Loan to Deposit ratio (which is the highest in the industry) also to fall moderately to around 95% levels.



With the bank currently on the rebound we project net profit to grow by 61.8% YoY to LKR269.3 mn in 2009E and grow by a sharp two fold to LKR831.8 mn in 2010E.





Source : Asia Research

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Sri Lanka Telecom - Tough Going......

Sri Lanka Telecom (SLTL), the island’s leading integrated telecommunication service provider has recorded revenue (contributed primarily by the voice and data communication segments) of LKR11.7 bn, which remained flat YoY, in 2Q2009.

The revenue growth has been restrained by the high price sensitiveness of the subscribers following the economic downturn, price competition and the Telecommunication Regulatory Commission’s (TRC) decision to lift interconnection charges, which resulted in SLTL foregoing 95% of its domestic interconnection charge revenue. However during the quarter SLTL’s performance has been laudable with rising usage levels and subscriber additions compensating for the intensified tariff cuts and the price sensitiveness. Further SLTL’s operating costs have risen 26% YoY, owing to increased operations in the mobile telephony segment. Subsequently EBITDA margins (excluding ITO Levy) have contracted from 50% in 2Q2008 to 37% in 2Q2009 and thereby SLTL’s consolidated net profit has spiraled down by 75% YoY to LKR375 mn in 2Q2009, whilst cumulative earnings has also dipped 57% YoY to LKR1.3bn in 1H2009.

Income Statement

Revenue has remained flat YoY at LKR11, 748 mn in 2Q2009. SLTL’s revenue has remained flat YoY at LKR11, 748 mn in 2Q2009 despite further tariff reductions, foregone domestic interconnection charges and high price sensitiveness in the market following the economic downturn. Consequently cumulative revenue has also remained flat YoY at LKR23, 585 mn during 1H2009. The quarterly revenue has been supported by higher income from the mobile operations, international gateway operations and the strong subscriber additions in the CDMA segment. SLTL has added nearly 60k mobile subscribers per month during 2Q2009.

Mobitel has added subscribers at a faster pace than the market leader Dialog Telekom (DIAL) and CDMA subscriber additions have remained moderate, adding over 15k fresh connections per month during 1H2009. SLTL controls circa 40-45% of the fixed telephony market, where SLT City Link SLTL’s CDMA wing possesses a subscriber base of +590K and the wired line segment maintains a subscriber base of +871K. SLTL has also managed to improve its ADSL broadband subscriber base to 123K.

Revenue distribution

EBITDA down by 26% YoY to LKR4, 351 mn in 2Q2009. With revenue remaining flat, whilst operating costs have risen by 26% YoY to LKR7, 397 mn in 2Q2009 (mainly on account of the increased operations in the mobile telephony segment)SLTL’s EBITDA has decreased by 26% YoY to LKR4,351 mn with margins contracting to 37% (vs. 50% in 2Q2008). Cumulative EBITDA (excluding the ITO Levy) has also dropped by 22% YoY to LKR9, 294 mn in 1H2009.

Operating profit has fallen by a sharp 73% YoY to LKR744 mn in 2Q2009. With depreciation cost having risen 15% YoY to LKR2, 743 mn, amortization charges rising by 47% to LKR110 mn and ITO Levy by only 5% YoY to LKR754 mn the operating profit has dipped by a sharp 73% YoY to LKR744 mn in 2Q2009, whilst cumulative operating profit has also contracted by 59% YoY to LKR2, 130 mn in 1H2009.

The increase in depreciation and amortisation is mainly on account of equipment and software used in transmission of voice and data.

Profit before tax has decreased by 76% YoY to LKR523mn. Following the sharp decline in EBITDA and the 16% YoY increase in interest costs to LKR574 mn, PBT has dropped by 76% YoY to LKR523 mn in 2Q2009, whilst cumulative 1H2009 PBT has also fallen 60% YoY to LKR1,817 mn. Interest costs have increased on the back of a 25% increase in borrowings during the first half of the year. However SLTL stands a better chance of renegotiating the interest rates and thereby decreasing the finance costs. We believe that borrowings are mainly to finance capex as the three yearly capex cycle of the company has fallen due this year. SLTL intends to invest around +LKR20 bn as capex mainly to upgrade the existing network, strengthen the fiber optic backbone and to upgrade and establish base stations for Mobitel.

Also the company would have to gear more as there is a possibility of SLTL converting a major portion of their technology to Next Generation Network -NGN ( to date they have converted +15% of their existing technology infrastructure to NGN. However the investments on NGN will not take place this year as SLTL has drawn plans to deploy the investments in 2010 and 2011.

Net profit has plunged 75% YoY to LKR375 mn in 2Q2009. Despite benefitting from a 79% YoY decrease in the tax bill, net profit still marked a sharp decline of 75% YoY to LKR375 mn in 2Q2009, whilst cumulative 1H2009 net earnings also have plummeted by 57% YoY to LKR1, 346 mn.

A militant outlook
SLTL Mobitel has notched up 3.1 mn subscribers. SLTL Mobitel, Sri Lanka’s 2nd largest mobile telephony provider possessing circa 24% of the mobile telephony market has widened its subscriber base at a faster pace than the market leader DIAL adding +60K subscribers per month during 2Q2009. Also Mobitel has notched up to 3.1 mn subscribers at the end of July up from 2.99 mn in June. Though the company has been successful during the quarter under review in terms of subscriber addition; the revenues has been under pressure on the back of the intensified price competition, whilst costs of adding subscribers have taken a high toll,which has resulted in a net loss of LKR36mn in 2Q2009.

Subscriber base vs Revenue

Mobitel is keen on embracing a larger portion of the newly realized market in the former war torn areas of North and the East and has already drawn plans to invest around +USD30mn in the next 2 to 3 years in providing high speed voice and data access through NGN. Mobitel has already deployed a short term project to invest +USD5 mn to provide mobile coverage on the A-9 highway, which gives access to the Jaffna peninsula. Mobitel’s main competitor DIAL is already operational in North and the East and is working on establishing 25 more base stations in the aforesaid areas. However Mobitel with its powerful brand name could entice a substantial portion of the market share once they deploy operations in North and the East in the months to come.

SLTL to boost revenues through an unsullied strategy. SLTL’s unsullied strategy of providing integrated private network services over a public infrastructure has enticed the attention of many companies within a short period of time mainly due to private network constructed over a shared IP-based backbone that utilises technologies to ensure privacy of data. Upon successful introduction in Brown & Company, SLTL has continued exploiting the niche by introducing this integrated communication service package to NSB and Ministry of Science and Technology.It was learnt that SLTL is to carry out a VRS during the year, which will reduce the employee cadre by 3%. SLTL will be able to save bulk of its operational costs after they convert a major portion of their network to NGN probably during 2010-11 and the outlook will prone to be optimistic from the beginning of the year 2010.

The TRC determination to cease the interconnection charge in November 2008 was not healthy mainly to the two leading players in the mobile telephony industry. The determination allowed mobile telephony service providers to use the infrastructure and network facilities of each other, when it comes to interconnection between networks without paying a fee; through which the second liners in the industry gained, while the two leading players, SLTL and DIAL lost a substantial proportion of their domestic interconnection charge revenues. It was learnt that upon the appeals of the affected parties TRC is evaluating the feasibility of re-introducing the interconnect charge from November 2009.

It should be noted that SLTL revenue is under heavy pressure with the intensified tariff cuts, which is evident by the static revenues that prevailed during the last 4 to 5 quarters withstanding the aggressive subscriber addition. SLTL will also tail off its USD100 mn notes towards the latter part of the year, which would ably console SLTL’s gearing conditions by reducing the gearing ratio by 22% to 28% from 50%.


Forecast 2009 net profits revised down by 38% to LKR5, 406 mn. Upon the diminished upshot we have revised down the bottom line forecast by 38% YoY to LKR5,406 mn. Fresh borrowings to finance the capex costs and NGN upgrades would purge out a substantive portion of the bottom line, if the interest rates are not renegotiated. We believe the impact would be neutralized with the voice/data volumes rising faster than expected as the unrelenting thorn veils of the North and East has been unveiled. SLTL covering 92% of the geographical expanse of the country in terms of CDMA; uses the aforesaid lead to connect rural areas, where provision of wired line is technically or economically not feasible.

Share is fairly valued at 15X forecast 2009 earnings. The counter is fairly valued at 15X forecast 2009 net profit, 13.7X projected 2010 earnings. The ITO Levy refund for the period from 2005 to 2008 is due; we believe an amount equivalent to the previous year’s refund would realize during the year. However on the back of reduced profits and fairly high capex costs, which would lower the profits further in the short run; we revise our recommendation from BUY to HOLD

Source : Asia Securities Research

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Reaching new heights

Major gauges were poised for a higher open Monday as the All Share Price Index (ASI) once again took aim at reaching new heights. The ASPI dramatically gained 209.5 points to close week at 2,840.3 points (+8.0%), whilst the Milanka Price Index also gained 187.0 points to close at 3,170.6 points (+6.3%). Indices gained mainly on the back of gains made by; John Keells Holdings (+9.4% WoW), Commercial Bank (+9.6% WoW), CIC (+13.9% WoW), Sampath Bank (+16.4% WoW), Colombo Dockyard (+20.1% WoW), Keells Hotels (+26.7% WoW) and ACL Cables (+26.9% WoW).

Average daily turnover increased by a staggering 46.3% WoW to LKR1,124.2 mn mainly on the back of strong retail interest through out the week. Turnover was shouldered by high level of retail interest across the board. Further, strong foreign and local buying was seen in John Keells Holdings whilst interest was seen on CIC, Colombo Dockyard and banking and hotel sector counters.

Heavyweight John Keells Holdings drew strong foreign, local institutional and high networth interest whilst it touched the intra day high of LKR149 on Friday. Furthermore, banking sector stocks such as Commercial Bank, Sampath Bank and DFCC attracted institutional and retail interest. In addition, whilst high networth and retail buying was seen in both voting and non-voting shares of Chemical Industries Colombo. Colombo Dockyard attracted interest due to the news on the company obtaining a LKR7 bn order to build two vessels for a Singapore based firm.

The week saw a net foreign inflow of LKR108.7 mn, where foreign purchases for the week amounted to LKR931.3 mn, whilst foreign sales amounted to LKR822.6 mn.



Sri Lanka Tourist arrivals up for the third consecutive month

Tourist arrivals to Sri Lanka is on an upward trend for the third consecutive month with the arrivals in August rising by 34.3% to 41,207 persons comparing with the corresponding previous month. This is mainly driven by visitors from the UK, Germany and India. Arrivals from Germany rose 71%, the UK arrivals went up by 17% and those who from India rose by 52%.

The obnoxious 30 year old internal terrorist conflict ended in May 2009 and the Sri Lankan hotel and tourism industry is finally set for buoyant growth. Thus we believe arrivals could easily double within the next two years to around 1 mn tourist arrivals p.a. However our estimates could be rather conservative in contrast to the Cambodian tourist industry which grew to around 1.5 mn arrivals p.a. soon after the end of conflicts and insurgencies. Further, with much diversity within a strategically positioned, relatively small island in the Indian Ocean, Sri Lanka has strong unparallel upside for its hotel industry.




Sri Lanka Telecom : Tough Going......

Sri Lanka Telecom (SLTL), the island’s leading integrated telecommunication service provider has recorded revenue (contributed primarily by the voice and data communication segments) of LKR11.7 bn, which remained flat YoY, in 2Q2009. The revenue growth has been restrained by the high price sensitiveness of the subscribers following the economic downturn, price competition and the Telecommunication Regulatory Commission’s (TRC) decision to lift interconnection charges, which resulted in SLTL foregoing 95% of its domestic interconnection charge revenue.

However during the quarter SLTL’s performance has been laudable with rising usage levels and subscriber additions compensating for the intensified tariff cuts and the price sensitiveness. Further SLTL’s operating costs have risen 26% YoY, owing to increased operations in the mobile telephony segment. Subsequently EBITDA margins (excluding ITO Levy) have contracted from 50% in 2Q2008 to 37% in 2Q2009 and thereby SLTL’s consolidated net profit has spiraled down by 75% YoY to LKR375 mn in 2Q2009, whilst cumulative earnings has also dipped 57% YoY to LKR1.3bn in 1H2009.

SLTL Mobitel has notched up 3.1 mn subscribers. SLTL Mobitel, Sri Lanka’s 2nd largest mobile telephony provider possessing circa 24% of the mobile telephony market has widened its subscriber base at a faster pace than the market leader DIAL adding +60K subscribers per month during 2Q2009. Also Mobitel has notched up to 3.1 mn subscribers at the end of July up from 2.99 mn in June. Though the company has been successful during the quarter under review in terms of subscriber addition; the revenues has been under pressure on the back of the intensified price competition, whilst costs of adding subscribers have taken a high toll , which has resulted in a net loss of LKR36mn in 2Q2009.

Mobitel is keen on embracing a larger portion of the newly realized market in the former war torn areas of North and the East and has already drawn plans to invest around +USD30mn in the next 2 to 3 years in providing high speed voice and data access through NGN. Mobitel has already deployed a short term project to invest +USD5 mn to provide mobile coverage on the A-9 highway, which gives access to the Jaffna peninsula. Mobitel’s main competitor DIAL is already operational in North and the East and is working on establishing 25 more base stations in the aforesaid areas. However Mobitel with its powerful brand name could entice a substantial portion of the market share once they deploy operations in North and the East in the months to come.

Forecast 2009 net profits revised down by 38% to LKR5, 406 mn. With revenue being under pressure, the cost base having increased and an intensive capital expenditure (capex) cycle being in progress, we revised down our forecast 2009 net profit by 38% to LKR5, 406 mn, though we believe revenue growth to be buoyant in 2H2009 supported by increased usage/volume withstanding the impact of lower tariffs. An International Telecommunication Operator Levy (ITO Levy) refund equivalent to the last years gain is expected to materialise and is incorporated into forecast earnings. Further if Telecommunications Regulatory Commission (TRC) confirms to re-introduce the interconnect charge SLTL will gain 95% of its foregone interconnect charge revenue from November 2009 onwards Testing 3,000 levels

The Colombo bourse has gained plus 50% since Jan 2009 on the back of favourable macro scenario resulted by the end of 3 decade long war, easing inflation, falling interest rates and the recently granted USD2.6 bn IMF loan coupled with other capital inflows. However, the Colombo bourse has only yet reached near 94% of the all time high All Share Price Index value and we believe the growth is sustainable with macro factors moving favourably.

The significant fall in inflation from July 2008 demonstrates that inflationary pressures in the economy have dissipated significantly. The point to point inflation recorded 0.9% in August from 1.1% in July, 2009. The annual average inflation rate continued to decelerate further and recorded 8.5% in August. We believe inflation is bottoming out and would pick up in future driven by a gradual rise in demand stemming from the North and East region. As a result of easing inflation, interest rates would also fall further in the coming months. Treasury bill rates are now stabilized at 10.5% levels where it was around 15% -19% levels few months back, though the market lending rates are still high at around 19% levels.

Thus, we expect the overall market momentum to be positive with renewed investor confidence on the back of country’s favourable macro outlook backed by infrastructure development primarily in northern and eastern parts which were once laid back due to the ethnic conflict.

Throughout the past few weeks predominant retail activity was witnessed. However, during the coming week we could expect a marginal profit taking.

We believe the banking, hotels and consumer sectors to be the key favourites, whilst diversified and manufacturing sectors could become secondary market movers. The market is currently trading on 4 quarter trailing earnings multiple of 16.8X due to the sluggish earnings reported during the past quarter. However the market is attractive based on the strong earning results expected 4Q2009 onwards on the back of favourable macro economic outlook. We see pockets of strong growth in key sectors such as Banking (Hatton National Bank, Commercial Bank, National Development Bank), Hotels (Asian Hotels & Properties, Aitken Spence Hotels, Keells Hotels, Stafford, Eden), Consumer (Hemas, Ceylon Tobacco) and Industrial sector (Lanka Tiles, Royal Ceramics, Chevron Lubricants).

Source - Asia Securities Research

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Aitken Spence Hotels - Outlook positive despite a net loss in 1QFY10

Aitken Spence Hotel Holdings’ (AHUN) has recorded a net loss of LKR114.4 mn in 1QFY10, up 137% YoY compared with LKR48.2 mn net loss in the corresponding period last year . The widened loss is a result of global tourism lull which affected the Maldivian resort earnings upon which the company was relying for many years.

AHUN, a 71.7% owned subsidiary of local conglomerate Aitken Spence PLC (SPEN,LKR665.00) currently operates 9 hotels in Sri Lanka, 7 in Maldives, 5 in Oman andanother 5 in India. The company operates its resort portfolio under three brands;namely “Heritance”, the premier brand with 5 star luxury properties, “Adaaran”, the Maldivian resorts and “Aitken Spence Hotels”, comprising of all managed properties. The company is continuously searching avenues to expand its presence regionally and globally using its expertise in hotel management with minimal capital participation as a part of their asset light strategy.

We forecast AHUN to reach a net profit of LKR712 mn in 2010E and LKR925 mn in 2011E.



Gross revenue has fallen 8% YoY to LKR1,252.7 mn in 1QFY10 mainly due to the weak performance in Maldivian resorts (down 9.4% YoY) which was a result of the global tourism lull (Off season in the Maldivian tourism industry coupled with global economic downturn). Sri Lankan resorts and hotels have marked a marginal improve-
ment of 2.8% YoY in revenue on the back of a reviving industry backed by growing domestic tourism since declaring the end of war in May 2009. Other revenue which comprises of management fee income from properties in Sri Lanka, Maldives, India and Oman has declined by 17.5% YoY to LKR26 mn.



Operating costs have increased slightly to LKR1,256.9 mn in 1QFY10. AHUN’s operating costs have increased by a minor 0.5% YoY to LKR1,256.9 mn in 1QFY10. Staff costs have risen 15% YoY whilst depreciation and amortization costs increased by 19% YoY on the back of the increased asset base, resulting from the acquisition of the Vadoo resort in Maldives in October 2007. Further , other operating expenses (direct and indirect) have decreased by 15% YoY driven by aggressive cost rationalization policies.

Operating loss of LKR65.7 mn in 1QFY10. On the back of weakened revenue base AHUN has recorded an operating loss when compared to the profit of LKR49.7 mn corresponding period last year.

Pre-tax losses have increased to LKR170.6 mn in 1QFY10, compared to a loss of LKR31.3 mn in the corresponding period last year . Losses have increased at a faster pace than the decrease in operating earnings, mainly on account of the 32% YoY increase in interest cost which is a result of the debt obtained to refurbish Vadoo resort in Maldives. Pre tax earnings from the South Asian region have declined by 284% YoY to a loss of LKR90.3 due to reduced average occupancy levels in line with the ending of the peak season in March, coupled with the global economic downturn which further deteriorated the occupancy during the quarter.

Pre tax losses of the Sri Lankan sector have declined by 2.1% YoY to LKR78.7 mn with a healthy contribution from the core resorts and hotels (loss declined by 12.5% (YoY) backed by growing domestic tourism. Associate companies; Hotel Hill top and Browns Beach hotel have also shown an improvement with its share of losses declining by 49% YoY to LKR1.3 mn.



Net losses have increased over five fold to LKR114.4 mn in 1QFY10 on account of the reduction in earnings of both the Sri Lankan and South Asian sector. This is a result of it being off-season in the tourist industry coupled with the downturn in arrivals worsened by global recession and the war which prevailed in the island.

Future outlook

Given the favourable macro economic outlook in Sri Lanka backed by growing tourist arrivals to the country since the completion of 3 decade long terrorist conflict (tourist arrivals up 8% and 28% in June and July respectively from a negative growth since Jan 2009) we believe the hotel sector to be one of the first sectors to rebound. Furthermore end of war unlocked access to previously war torn eastern coast which is rich of tourist hotspots such as Arugam bay and Nilaveli beach.

AHUN is confident on strong growth in the future and recently announced their plans to build up a new hotel in Ahungalla (down south) which would be a venture with world renowned Six Senses spa. In addition the company is refurbishing Neptune Hotel, one of its beach properties down south to be rebranded under its premier brand “Heritance”. Once refurbished, it will be a wellness resort and spa specialising in ayurvedic treatments which will also fill the long lasted need for a resort and spa property which all other hotel chains already have. Also the company has plans to expand its hotel presence in the previously war torn eastern coast of the island, by building on its property in Trincomalee.

We expect the Sri Lankan hotel sector to outperform during the second half of the year (which would be the winter season for the Western hemisphere) with the post war situation giving rise to softened travel advisories. This could be further supported by domestic tourism especially towards north and east. Revival of Maldivian tourism which is subject to the recovery of floundered global economy would be a bonus to the sector performance of the group. The company is well prepared for the boom and added the latest 5 star island resort “Adaaran Prestige Vadoo” to the Maldivian resort portfolio in last March.



Forecast FY10 earnings to rise 20.2% YoY to LKR712 mn. Having factored the strong earnings outlook of an industry poised for growth driven by Sri Lankan hotels and resorts, we forecast AHUN to reach a net profit of LKR712 mn (up by 20.2% YOY) in FY10E and a LKR925 mn (up by 29.8% YoY) in FY11E.

Share offers good value on 10.5X forecast FY10E earnings. The share has gained 63% since the end of war on 18th May 2009 whilst we believe further upside possible with growing earnings materialising in the coming quarters. AHUN offers good value on 10.5X forecast FY10E net profit and 8.1X projected FY11E earnings whilst it is trading on a PBV of 1.4X, we maintain - BUY

Source - Asia Securities Research

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Lively retailers

The All Share Price Index (ASPI) gained 29.3 points to close week at 2,630.8 points (+1.1%), whilst the Milanka Price Index also gained 19.1 points to close at 2,983.6 points (+0.6%). Indices gained mainly on the back of gains made by; Merchant Bank of Sri Lanka (+42.1% WoW), The Finance (+21.3% WoW), Ceylinco Seylan Developments (+15.8% WoW), Keells Hotels (+7.1% WoW) and Environmental Resources (+5.7% WoW), which were preferred mainly by retailers.

Average daily turnover increased by 10.7% WoW to LKR768.6 mn on the back of strong retail activity levels through out the shortened four day working week. Turnover was shouldered by high level of retail interest in Environmental Resources and Merchant Bank Sri Lanka, whilst institutional and high net worth buying interest was evident in John Keells Holdings and Commercial Bank.


Merchant Bank of Sri Lanka and The Finance traded in high volumes contributing for 13% of the week’s turnover. This was due to the market speculation on possible acquisition of a strategic stake in The Finance Company by Merchant Bank of Sri Lanka. Further retail activity continued in the two warrants and shares issued by Environmental Resources on the back of company’s acquisition of Environment Resources Limited during the week. Retail interest was also evident in Seylan Bank (Non voting) due to interest caused by the upcoming IPO.

In addition, interest was also seen in hotel sector stocks owing to the positive outlook on a rapidly reviving industry. The week saw a marginal net foreign inflow of LKR2.1 mn, where foreign purchases for the week amounted to LKR446.7 mn, whilst foreign sales amounted to LKR444.6 mn.



Ait. Spence Hotel Hold.s’ Outlook positive despite a net loss in 1QFY10

Aitken Spence Hotel Holdings’ (AHUN) has recorded a net loss of LKR114.4 mn in 1QFY10, up 137% YoY compared with KR48.2 mn net loss in the corresponding period last year. The widened loss is a result of global tourism lull, which affected the Maldivian resort earnings upon which the company was relying for many years.

AHUN, a 71.7% owned subsidiary of local conglomerate Aitken Spence PLC (SPEN, LKR665.00) currently operates 9 hotels in Sri Lanka, 7 in Maldives, 5 in Oman and another 5 in India operating under three brands; namely “Heritance”, “Adaaran”, and “Aitken Spence Hotels”,.

Gross revenue has fallen 8% YoY to LKR1,252.7 mn in 1QFY10 mainly due to the weak performance in Maldivian resorts (down 9.4% YoY), which was a result of the global tourism lull (Off season in the Maldivian tourism industry coupled with global economic downturn). Sri Lankan resorts and hotels have marked a marginal improvement of 2.8% YoY in revenue on the back of a reviving industry backed by growing domestic tourism since declaring the end of war in May 2009. Other revenue which comprises of
management fee income from properties in Sri Lanka, Maldives, India and Oman has declined by 17.5% YoY to LKR26 mn.

Operating costs have increased slightly to LKR1,256.9 mn in 1QFY10. AHUN’s operating costs has increased by a minor 0.5% YoY to LKR1,256.9 mn in 1QFY10. Staff costs have risen 15% YoY, whilst depreciation and amortization costs increased by 19% YoY on the back of the increased asset base, resulting from the acquisition of the Vadoo resort in October 2007. Further, other operating expenses (direct and indirect) have decreased by 15% YoY driven by aggressive cost rationalization policies.

Pre-tax losses have increased to LKR170.6 mn in 1QFY10, compared to a loss of LKR31.3 mn in the corresponding period last year. Losses have increased at a faster pace than the decrease in operating earnings, mainly on account of the 32% YoY increase in interest cost, which is a result of the debt obtained to refurbish Vadoo resort in Maldives. Pre tax earnings from the South Asian region have declined by 284% YoY to a loss of LKR90.3 due to reduced average occupancy levels in line with the ending of the peak season in March, coupled with floundered global economy, which further deteriorated the occupancy during the quarter.

Pre tax losses of the Sri Lankan sector have declined by 2.1% YoY to LKR78.7 mn with a healthy contribution from the core resorts and hotels (loss declined by 12.5% YoY) backed by growing domestic tourism. Associate companies; Hotel Hill top and Browns Beach hotel have also shown an improvement with its share of losses declining by 49% YoY to LKR1.3 mn.

Net losses have increased over five fold to LKR114.4 mn in 1QFY10 on account of the reduction in earnings of both the Sri Lankan and South Asian sector. This is a result of being off-season in the tourist industry coupled with the downturn in arrivals worsened by global recession and the war, which prevailed in the island.

Future outlook

Given the favourable macro economic outlook in Sri Lanka backed by growing tourist arrivals to the country since the completion of 3 decade long terrorist conflict (tourist arrivals up 8% and 28% in June and July respectively from a negative growth since Jan 2009) we believe the hotel sector to be one of the first sectors to rebound.

AHUN is confident on strong growth in the future and recently announced their plans to build up a new hotel in Ahungalla (down south) which would be a venture with world renowned Six Senses spa. In addition the company is refurbishing Neptune Hotel, one of its beach properties in down south to be rebranded under its premier brand “Heritance”. Once refurbished, it will be a wellness resort and a spa specialising in ayurvedic treatments. Also the company has plans to expand its hotel presence in the previously war torn eastern coast of the island, by building on its property in Trincomalee.

We expect the Sri Lankan hotel sector to outperform during the second half of the year (winter season for the Western hemisphere) with the post war situation giving rise to softened travel advisories. This could be further supported by domestic tourism especially towards north and east. Revival of Maldivian tourism which
is subject to the recovery of floundered global economy would be a bonus to the sector performance of the group.

Forecast FY10 earnings to rise 20.2% YoY to LKR712 mn. Having factored the strong earnings outlook of an industry poised for growth driven by Sri Lankan hotels and resorts, we forecast AHUN to reach a net profit of LKR712 mn (up by 20.2% YOY) in FY10E and a LKR925 mn (up by 29.8% YoY) in FY11E.

Share offers good value on 10.5X forecast FY10E earnings. The share has gained 63% since the end of war on 18th May 2009 whilst we believe further upside possible with growing earnings materialising in the coming quarters. AHUN offers good value on 10.5X forecast FY10E net profit and 8.1X projected FY11E earnings whilst it is trading on a PBV of 1.4X, we maintain - BUY

Sri Lanka Telecom :Tough Going.......

· Sri Lanka Telecom’s (SLTL) revenue remained flat YoY (contributed primarily by rising usage/volume and subscriber additions in Mobitel and CDMA segments, despite lower tariffs) at LKR11.7 bn in 2Q2009. Further if TRC confirm the determination to re-introduce the interconnect charge SLTL will gain 95% of its foregone interconnect charge revenue from November 2009 onwards.

· Operating costs have increased by 26% YoY, primarily owing to increased operations in the mobile telephony segment.

· Consolidated net profit has plunged by 75% YoY to LKR375 mn, mainly due to the increase in operating costs, depreciation and amortisation.

· With revenue being under pressure, the cost base having increased and an intensive Capex cycle being in progress, forecast 2009 net profit and our recommendation is under revision and will be communicated as soon as possible. The Interim results update would follow up.

Fresh shares on the go

The Colombo bourse has gained plus 50% since Jan 2009 on the back of favourable macro scenario resulted by the end of three decade long war, easing inflation, falling interest rates and the recently granted USD2.6 bn IMF loan coupled with other capital inflows. However, the ASPI has not yet reached all time high levels of 3,017 points (Feb 2007), whilst at present trading on 1.3X PBV vs 2.2X PBV recorded in Feb 2007. Further, with the positive macro developments trickling down to the corporate sector, we believe the next market rally would be driven by growing corporate profits in 4Q2009 onwards.

Point to point inflation has come down to 0.9% in August, whilst 12 month moving average inflation has also fallen to 8.5%. We believe inflation is bottoming out and would pick up in future driven by a gradual rise in demand stemming from the North and East region. As a result of easing inflation, interest rates would also fall further in the coming months. Treasury bill rate is now stabilized at 10.5% levels, which was around 15% -19% levels few months back, though the market lending rates are still high at around 19% levels.

Thus, we expect the overall market momentum to be positive with renewed investor confidence on the back of country’s favourable macro outlook backed by infrastructure development primarily in northern and eastern part, which were once laid back due to the ethnic conflict.

Furthermore with Hemas Power, a unit of local conglomerate Hemas Holdings announcing its 31.3 mn share IPO has broken the dead lock in fresh IPO’s (last IPO being issued in July 2008) would further boost investor interest.

We believe the banking, hotels and consumer sectors to be the key favourites, whilst diversified and manufacturing sectors could become secondary market movers. The market is currently trading on 4 quarter trailing earnings multiple of 15.7X due to the sluggish earnings reported during the past quarter. However the market is attractive based on the strong earning results expected 4Q2009 onwards on the back of favourable macro economic outlook. We see pockets of strong growth in key sectors such as Banking (Hatton National Bank, Commercial Bank, National Development Bank), Hotels (Asian Hotels & Properties, Aitken Spence Hotels, Keells Hotels, Stafford, Eden), Consumer (Hemas, Ceylon Tobacco) and Industrial sector (Lanka Tiles, Royal Ceramics, Chevron Lubricants).

Source: Asia Securities Research

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Royal Ceramics' net profit has risen 43.8% YoY to LKR77 mn in 1QFY10

Royal Ceramic’s (RCL) net earnings have increased by 72% YoY to LKR132.4 mn in 1QFY10 on the back of a dramatic increase in other income to LKR108.7 mn (vs 4.1 mn in 1Q09) which is due to a reversal of provision made in short term investments.

RCL, the market leader in floor tiles with 40% market share has two manufacturing plants for floor tiles in Horana & Ehaliyagoda and one for sanitary ware in Homagama.
Historically the floor tile production lines operated closer to 100% capacity to produce circa 10,500-11,000 sqm/day, however due to the meager economic conditions the demand has dipped which resulted in the slow down in production. The bathware currently produces circa 12,000 pieces/month where the installed capacity is a near 20,000-24,000 pieces per month.

With the economic conditions improving we project FY10 earnings to reach LKR585 mn (up by 13.6%YoY). Along with the downward trend in interest rates and reconstruction boom in the North and East drumming up the overall economic growth,the construction industry is expected to witness a turnaround. However, for 2010 we expect a marginal growth in numbers where most of the post war benefits are expected to materialize in 2011. Hence we forecast the net earnings to reach LKR695.5 mn in FY11E (up by 19%).

The share remains attractive on 4.4X forecast FY10 net profit and just 3.7X projected FY11 earnings whilst trading at 0.7XPBV.



Gross revenue down 9% YoY to LKR813.2 mn in 1QFY10. RCL’s gross turnover has dipped 9% YoY to LKR813.2 mn on the back of a near 10%-15% plunge in sales volumes in 1QFY10 (vs. 870,000 Sq.Mt. in 1QFY09) due to poor demand despite a marginal increase in sales price. Due to the global economic down turn, the export sales which contributes to around 5%-10% of the total revenue too has dipped marginally.

Gross profit has risen by 10% YoY to LKR341.9 mn. RCL’s cost of sales has dipped by 17% YoY to LKR387.1 mn in 1QFY10 owing to the vigorous ongoing cost rationalization process especially in the porcelain segment. The company has posted a gross profit of LKR341.9 mn in 1QFY10 (up 10% YoY) largely due to cost efficiency in production.

Accordingly, RCL’s gross margin has improved to 42.1% in 1QFY10 (from 34.8% in 1QFY09). Operating profit has dipped by 14% YoY to LKR147.5 mn in 1QFY10. The company’s administrative expenditure has increased to LKR64.1 mn (up 76% YoY) in 1QFY10.

Moreover, distribution expenses have risen by 27% YoY to LKR130.3 mn on the back of increased fuel cost and expansion of sales network to 40 showrooms. Consequently, RCL has recorded an operating profit of LKR145.7 mn in 1QFY10 (down 14% YoY) whilst the operating profit margin has dipped marginally to 18.1% in 1QFY10 (from 19.2% in 1QFY09).

Dramatic increase in other income. RCL’s other operating income has dramatically increased to LKR108.7 mn (vs LKR4.1 mn in 1QFY09) in 1QFY10 owing to a reversal of provision made for change in the value of short term equity investments. The short term investments have increased by 72.2% to reach LKR290.4 mn in 1QFY10 mainly on the back of the buoyant performance of the stock market subsequent to the war victory.

Net profit has grown by 72% YoY to LKR132.4 mn in 1QFY10. Despite the increase in RCL’s finance cost to LKR124.4 mn (up 26.3%YoY) in 1QFY10 (owing to the increased level of borrowings totaling LKR2, 705.1 mn borrowed at high interest rates) the company has reported a net profit of LKR133.4 mn in 1QFY10 (up 71.9% YoY).



Excluding the one off increase in other income during 1QFY10 the quarterly net earnings would have been circa LKR 35 mn (vs LKR132 mn reported). This is mainly on the back of the drop in sales volumes due to the low demand from home builders. Bathware contributes for the first time in 1QFY10. The new Bathware manufacturing plant that commenced operations in FY08 (built at a cost of LKR1.2 bn) with an installed plant capacity of around 250,000 pieces per annum has contributed LKR26 mn in revenue. However, we believe it would take at least another 12 months for the manufacturing facility to breakeven.

Future Plans. Further, the company plans to open around 3 to 4 new showrooms during this year mainly in the recently liberated North and East and it would increase the total number of showrooms to 44 by end FY10. Moreover, the company plans to commission a brand new floor tile facility at the newly acquired 33 acres land in Kiriwaththuduwa (owned by its newly incorporated subsidiary, Rocell Ceramics Limited) however due to the current lull in the economy construction of the facility is postponed to FY11.

Forecast net profit to grow by 13% YoY to LKR585.0 mn in FY10E. With the economic conditions improving we project FY10 earnings to reach LKR585 mn (up by 13.6%YoY). RCL will be one of the prime beneficiaries when developments in the previously war torn North and East commence and the revival of the construction industry plus we believe bathware would start contributing to earnings from 2011 onwards. With the interest rates on the downward trend and the anticipated reconstruction boom in the North and East drumming up the overall economic growth, the construction industry is expected to witness a turnaround. However, for 2010 we expect a marginal growth in numbers where most of the post war benefits are expected materialize in 2011. Hence we forecast the net earnings to reach LKR695.5 mn in FY11E (up by 19%).

Share offers good value on 4.4X forecast FY10 earnings. The share remains attractive on 4.4X forecast FY10 net profit and just 3.7X projected FY11 earnings whilst trading at 0.7XPBV. Maintain - BUY

Source - Asia Securities Research

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The Bank with a Heart to undergo Surgery

A 54.2 million sale of fresh voting shares in Sri Lanka's Seylan Bank expected to raise 1.9 billion rupees, after it was put under new management by regulators, a top official said.

Seylan voting shares closed at 33.00 rupees Friday and non-voting shares at 12.0. The issue is not underwritten, but officials say there is an appetite for the share among foreign institutional investors who want to buy into a sizeable stake in a Sri Lankan bank.
"Several foreign funds have expressed interest in buying a stake," chairman Eastman Narangoda said.

Under Sri Lankan banking law, which is makes take-overs and restructuring of banks difficult, a single shareholder can only hold 10 percent of a bank, though its enforcement has been questioned.

Seylan is offering 54.29 million shares at 35.00 rupees each to the public to raise 1.9 billion rupees in an offering that opens on September 21.

It is also placing 13.0 million voting shares with state-run Bank of Ceylon to raise 450 million, and 19.15 million shares with Sri Lanka Insurance Corporation to raise 675.25 million rupees.

After the issue the bank will have 130.0 million voting shares, 123.56 million non-voting shares and 3.3 million non-convertible, non-redeemable preference shares.

Seylan was taken over by regulators and put under an independent board after a the collapse of Ceylinco group firm last year triggered a run on the bank.

The Ceylinco group controlled the bank through its own shares as well as through employee share trusts, which was controlled by the management. After the share issue, the voting shares controlled by the share trusts will fall to 9.0 percent.

For the 6-months to June the Seylan Bank group made a profit of 188.0 million rupees. At bank level, profits were 137.8 million rupees.

In the quarter to June the group profit was 187.8 million rupees. At bank level the profit was 93.9 million rupees.

Officials say the bank has raised 4.0 billion rupees in fresh deposits following a recent marketing drive, its liquid assets are above regulatory requirements and after the share issue, it will also meet capital requirements.

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