Sri Lanka Weekly

DNH MARKET WATCH

DNH Financial (Pvt) Ltd. www.dnhfinancial.com +94-11-5700777

07-11 Jan 2013

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

Market Indices

5,746 3,134 3.8 1,749 1,865 275 16.3 2,207 17.3 2.3 2.1

5,748 3,122 3.72 2,463 2,061 271 16.2 2,208 17.1 2.3 2.1

0.0 0.4 2.2 -29.0 -9.5 1.5 0.4 0.0 0.9 0.0 0.0

The market traded largely sideways with the ASPI closing virtually flat at 5,746. Turnover recorded LKR3.8 bn with trading in John Keells Holdings, Asiri Central and Commercial Bank accounting for 45% of the weeks total. Foreign participation continued throughout the week with overseas investors focusing on bluechip counters. Gainers matched losers with Colombo Investments, AMF Co Ltd and Ceylon Beverage rising by 36.8%, 21.1% and 19.9% and offsetting declines in Renuka Shaw(X), Renuka Shaw and SMB Leasing (X) which fell by 48.8%, 47.7% and 20.0% respectively.

In global markets, a positive start to US corporate earnings season and a sharp improvement in Chinas monthly trade helped boost international markets.

Gainers & Losers (%)

Indo Malay SMB Leasing (X) Renuka Shaw Renuka Shaw (X) Hayleys Fibre Ceylon Beverage AMF Co Ltd Colombo Investment
-47.7 -48.8 16.9 19.9 21.1 36.8 -16.1 -20.0

Global Markets
11-Jan 4-Jan

Interest Rates & Currencies

11-Jan

WoW% -0.04 -0.73 -0.02 0.17 -0.28 -0.29

Prime Lending Rate (Avg. Weighted) Deposit Rate (Avg. Weighted) Treasury Bill Rate (360 Days) Dollar Denominated Bond Rate LKR/US$ (Selling Rate) LKR/EURO (Selling Rate)

14.3% 10.1% 11.4% 5.9% 127.9 170.2

Sri Lanka - ASPI India - Sensex Pakistan - KSE 100 Taiwan Weighted Singapore - Straits Times Hong Kong - Hang Seng

5,746 19,639 16,664 7,819 3,216 23,264

5,749 19,784 16,667 7,806 3,225 23,331

Market Performance (Cont.)

Thousands

Tourist Arrivals
1300 1200 1100 1000 900 800 700 600 500 400 2010 2011 2012 Source - SLTDA/ DNH Research 2013 E

Domestic & Foreign Participation in the CSE (YTD)

Domestic Purchase 42%

Foreign Purchase 58% Source - CSE/ DNH Research

In economic news, Sri Lanka t-bill rates fell further across all maturities. 3 months, 6 months and 12 months t-bill yields continued to decline falling by 03, 18 and 03 bps respectively to 9.88%, 10.81% and 11.35% as the government sold LKR31.3 bn worth of securities. In cumulative terms, 3 months t-bill yields have fallen by 91 bps so far after the policy rate adjustments while 6 month and 12 month yields fell by 129 and 151 bps respectively. Rates on Government Securities (T-Bills)

2013 Stock picking guidelines basics

- Back to

14.00 12.00 10.00 8.00 6.00

In order to benefit fully from the bourses movements in 2013, we believe that investors may have to revisit the basics of equity investing to derive maximum returns at their accepted level of risk. While most domestic investors were discouraged to enter the bourse last year on the grounds that the market did not deliver and declined by 8% YTD, quality stocks listed on the bourse did however generate significant double digit returns and we believe is likely to replicate their robust gains in 2013 provided the right investment strategy is employed over a reasonable investment horizon. Key factors to consider when investing in Sri Lankan equities Define risk appetite Define expected rate of return Define Investment horizon Decide on sector Decide on stocks within sector

91 Days 364 Days

182 Days

Meanwhile, Sri Lanka is confident in achieving the targeted 1.25 million tourists by the end of 2013 following the one million arrivals last year. Given the increasing availability of room capacity, infrastructure development, ongoing hotel refurbishments and upliftment of Sri Lankas ranking in the global travel destination list, we believe that the 2.5 million tourist target set by the government is feasible .

06.01.2012 03.02.2012 24.02.2012 15.03.2012 03.04.2012 25.04.2012 18.05.2012 08.06.2012 27.06.2012 18.07.2012 10.08.2012 28.08.2012 19.09.2012 10.10.2012 09.11.2012 28.11.2012 19.12.2012 09.01.2013

Source - CBSL/ DNH Research

As we mentioned in our previous weekly, we advise investors to refrain from buying the market but rather focus on actively seeking bluechip counters that are cash generative (and are able to successfully pass on any cost increases without losing market share) in high growth sectors that are likely to outperform. Page 2

Sri Lanka Weekly

07-11 Jan 2013

Market Performance (Cont.)

Market Trajectory While net foreign buying in the bourse appears to be increasing, it is likely to rise further as global macro-economic uncertainties could force foreign asset managers to square off global positions and identify new and fundamentally solid emerging markets such as Sri Lanka resulting in a flow of funds into domestic equities. Consequently, we advise investors to pro-actively seek counters that are likely to record healthy and sustainable top line growth (as a result of their strong domestic focus), firm margins and are cash generative, attributes which we believe will lead to strong positive gains and outperformance in the market. The majority of domestic investors appear to be waiting for either a short term rally to participate in or a strong correction before entering the market. We believe that neither will happen but a gradual re-rating in the market may be the most likely scenario against a solid fundamental backdrop led by a rise in quality stocks. Notwithstanding the current sideways movement, we believe that the market now offers an attractive investment opportunity for those who are willing to look beyond the short term. The bourses appeal at current levels is even more pronounced when considering its relative underperformance against major emerging and developed markets.

Global Outlook
US After a pullback on Monday and Tuesday, stocks finished the week higher as they extended the previous week's rally. The S&P 500 slipped from a five-year high reached on Thursday closing 0.3% higher at 1471, while the Nasdaq and Dow Jones rose by 0.9% and 0.5% to end the week at 3117 and 13507. The US corporate earnings season meanwhile kicked off after Tuesday's markets close, when metals giant Alcoa reported a fourth-quarter profit despite continued low prices for aluminum. The report was largely in line with analysts' expectations and appeared to ease investor worries that corporate profit growth had slowed considerably toward the end of 2012 in the face of the "fiscal cliff" and other obstacles. Major financial firms have been cutting jobs and expenses in response to new regulations and declining trading profits. In economic news, the US trade deficit widened sharply and unexpectedly in November, growing almost 16%. The deficit, excluding petroleum goods, reached its highest level in more than five years. The trade gap rose to $48.7 billion from $42.2 billion in October. However, import of consumer goods rose substantially, particularly cell phones and other related goods, as well as pharmaceutical purchases. Eurozone Stocks in Europe ended the week on a largely flat note with the Eurostoxx 50 rising by 0.2% to close at 2718. European indicators were not very encouraging with the eurozone unemployment rate reaching yet another record high. Meanwhile, German exports declined more than expected and a UK tripledip recession appeared more likely, Page 3

Sri Lanka Weekly

07-11 Jan 2013

Global Outlook (Cont..)

mirroring weakening demand in the eurozone and globally. Yields on the Spanish 10-year government bond, which had soared to more than 7.5% last summer, fell below 5% for the first time since last March as investor risk appetites rose. Asia Asian markets ended the week flat with the MSCI Asia Pacific Index closing at 132. On Thursday, China reported surprisingly strong exports in December, indicating that the country's recovery may be quickening, while a separate gauge of credit showed that nonbank financing surged last month. The Japanese government meanwhile approved a 10.3 trillion ($116 billion) emergency stimulus package to jump-start its long-stagnant economy. The government also pledged to

work closely with the Bank of Japan to overcome deflation and promote economic growth. A new report of a sharply widening Japanese current account deficit led the yen to weaken further. Chinas trade surplus meanwhile increased sharply in December as a result of growth in exports with the surplus widening to $31.6 billion, from $19.6 billion in November. This adds to a more bullish outlook on Chinas resurgent growth, which in previous months was driven by domestic factors. In commodity news, brent for February settlement traded at $111.6/barrel, down 25 cents while Spot gold gained as much as 0.4% to $1,674 an ounce as concern about the US debt ceiling weakened the dollar, increasing demand for bullion as a haven.

Sri Lanka Weekly

07-11 Jan 2013

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DNH TOP 30
Company CSE CODE Share Price (LKR)
Sri Lanka Telecom Lanka ORIX Leasing AHOT Properties Dialog Axiata Softlogic Holdings Colombo Fort Land & Buildings Aitken Spence John Keells Holdings Commercial Bank Hemas Holdings Hayleys Hatton National Bank Distilleries Richard Pieris Eden Hotel Lanka Nawaloka Hospitals Kotagala Plantations Asiri Hospitals DIMO Kegalle Plantations Royal Ceramics Lanka WallTile Ceylon Glass Laugfs Gas VallibelOne National Development Bank DFCC Bank Sampath Bank Ceylon Leather Ceylon Grain Elevators Expolanka Holdings SLTL LOLC AHPL DIAL SHL CFLB SPEN JKH COMB HHL HAYL HNB DIST RICH EDEN NHL KOTA ASIR DIMO KGAL RCL LWL GLAS LGL VONE NDB DFCC SAMP CLPL GRAN EXPO 44.90 60.00 74.50 8.30 11.50 34.20 121.90 223.00 105.00 28.00 299.90 147.00 180.20 7.90 36.00 3.10 75.90 11.50 603.70 108.70 96.00 61.00 6.00 26.50 18.50 140.40 118.40 203.30 81.00 55.20 7.00

Valuation Guide
Net Profit (LKR mn)

2009
778 2,385 689 -12208 155 50 2987 5552 4304 935 2581 4352 2136 712 498 97 323 318 278 376 711 766 -61 528 N/A 2085 1713 2098 36

2010
3,943 7,023 2148 5047 971 2139 3428 9063 5524 1355 1128 4464 8308 2141 101 1071 668 262 2122 883 1374 990 579 853 N/A 2176 7137 3520 107 475 1768

2011
4,781 8,937 2,507 5,354 1022 2087 4711 11069 8048 1315 3845 5570 6138 2561 146 271 439 842 2697 682 1970 1135 686.4 930 3645 2941 2973 4173 44 455 1230

134 518

DNH Top 30 stock list does not indicate BUY recommendation

Sri Lanka Weekly

07-11 Jan 2013

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DNH TOP 30
EPS EPS Growth (%) PE (X)

Valuation Guide
Price to Growth (X) 2011 2011 Dividend Yield (%) Shares in issue (mn) Market Cap (LKR bn)

2009

2010

2011

2009

2010

2011

2009

2010

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

0.43 8.32 9.71 -1.50 0.20 0.36 5.07 6.19 5.48 1.75 23.08 12.17 7.12 0.30 0.06 0.07 10.09 0.21 31.32 15.04 6.42 5.12 -0.06 1.36 N/A 12.70 9.73 13.21 1.05 2.23 0.26

2.18 8.08 8.02 0.62 1.06 6.37 8.44 9.81 7.20 2.35 9.03 12.49 27.08 0.87 1.92 0.76 20.88 0.21 239.06 35.32 12.40 8.87 0.61 2.20 N/A 12.81 19.20 22.21 3.12 7.92 0.79

2.65 13.17 9.71 0.64 0.62 7.15 9.14 11.63 10.58 2.35 33.60 15.58 18.92 1.21 2.76 0.19 13.71 0.67 303.87 27.28 17.78 13.77 0.72 2.40 3.35 16.48 10.94 26.46 2.68 6.46 0.54

-89% 275% 305% 324% 124% 82% 1% 5% 2% 16% 457% 35% -37% -276% -108% -189% 89% 137% 170% 112% 245% -23% -77% 131% N/A 74% 19% 39% -250% 355% N/A

407% -3% -17% -141% 438% 1653% 66% 59% 31% 34% -61% 3% 280% 190% 3261% 1004% 107% 3% 663% 135% 93% 73% -1049% 61% N/A 1% 97% 68% 197% 255% 199%

21% 63% 21% 3% -42% 12% 8% 19% 47% -0.1% 272% 24.8% -30% 39.2% 44% -74.7% -34% 214.6% 27% -22.8% 43% 55% 19% 9% N/A 29% -43% 19% -14% -18% -32%

104.2 7.2 7.7 N/A 58.1 94.1 24.0 36.0 19.2 16.0 13.0 12.1 25.3 26.4 629.7 45.0 7.5 55.4 19.3 7.2 15.0 11.9 N/A 19.4 N/A 11.1 12.2 15.4 77.0 24.7 26.4

20.6 7.4 9.3 13.4 10.8 5.4 14.4 22.7 14.6 11.9 33.2 11.8 6.7 9.1 18.7 4.1 3.6 53.6 2.5 3.1 7.7 6.9 9.8 12.0 N/A 11.0 6.2 9.2 25.9 7.0 9

17.0 4.6 7.7 13.0 18.5 4.8 13.3 19.2 9.9 11.9 8.9 9.4 9.5 6.5 13.0 16.1 5.5 17.0 2.0 4.0 5.4 4.4 8.3 11.0 5.5 8.5 10.8 7.7 30.2 8.5 13.0

0.80 0.07 0.36 4.25 -0.44 0.39 1.63 1.03 0.21 -131.17 0.03 0.38 -0.32 0.17 0.30 -0.22 -0.16 0.08 0.07 -0.18 0.12 0.08 0.45 1.21 N/A 0.30 -0.25 0.40 -2.14 -0.47 -0.41

1.9% N/A 1.3% 3.0% 1.1% 0.9% 1.1% 1.3% 2.5% 1.8% 1.3% 5.1% 1.7% 10.1% N/A 1.6% 2.6% 2.2% 6.6% 6.9% 4.2% 1.6% 6.0% 5.7% 1.6% 2.5% 8.4% 4.4% N/A N/A 1.7%

1,805 475 221 8,144 779 180 406 840 765 515 75 358 300 1,937 53 1,410 32 889 9 25 111 55 950 387 1,087 164 265 157 34 60 1,955

81.0 28.5 16.5 67.6 9.0 6.2 49.5 187.4 80.3 14.4 22.5 52.6 54.1 15.3 1.9 4.4 2.4 10.2 5.4 2.7 10.6 3.3 5.7 10.3 20.1 23.1 31.4 31.9 2.8 3.3 13.7

DNH Top 30 stock list does not indicate BUY recommendation

Sri Lanka Weekly

07-11 Jan 2013

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Key Economic Indicators Key Economic Charts

2004 Nominal GDP (LKR bn) % YoY Nominal GDP (US$ bn) % YoY Real GDP Growth (%) GDP per Capita (US$) % YoY Population (mn) % YoY Inflation (%) M2 (LKR bn) % YoY Average Oil Prices (US$ / barrel) % YoY Exports (US$ bn) % YoY Imports (US$ bn) % YoY Trade Balance (US$ bn) % YoY Current Account Balance (US$ bn) % YoY Balance of Payments (US$ bn) % YoY Budget Deficit (US$ bn) % YoY Budget Deficit as % of GDP Exchange Rate (LKR/US$) 2,091 15 21 9 5.4 1,062 8 19.5 1 9 688 18 36.1 28 5.8 14 8 19 -2.2 47 -0.6 813 -0.2 -140 -1.5 12 -7.5 101.2 2005 2006 2007 2008 2009 2010 2011 2,453 2,939 17 24 18 6.2 20 28 16 7.7 3,579 4,411 4,835 5,602 6,543 22 32 14 6.8 23 41 26 6 10 42 3 3.5 16 50 18 8 17 59 18 8.3

1,241 1,421 17 19.7 1 11 823 20 50.6 40 6.3 9 8.9 11 -2.5 14 -0.7 0 0.5 -350 -1.7 11 -7.0 100.5 15 19.9 1 10 993 21 61.1 21 6.9 10 10.2 15 -3.4 36 -1.5 130 0.2 -60 -2 15 -7.0 104

1,617 2,014 2,057 2,399 2,836 14 20 1 15.8 25 20.2 1 22.6 2 20.5 1 3.4 17 20.7 1 5.9 18 20.9 1 6.7

1,148 1,282 1,537 1,813 2,193 16 69.1 13 7.6 10 11.3 11 -3.7 9 -1.4 -6 0.5 150 -2.2 12 -6.9 12 94.5 37 8.1 7 14.1 25 -6 62 -3.9 177 -1.4 -380 -2.9 29 -7.0 20 61.1 -35 7.1 -12 10.2 -28 -3.1 -48 -0.2 -94 2.7 -293 -4.1 45 -9.9 18 77.5 27 8.6 17 13.5 32 -4.8 67 -1.1 563 0.9 -67 -3.9 -5 -8.0 21 109 41 10.6 23 20.3 50 -9.7 -102 -4.6 318 -1.1 -222 -4.1 -4 -6.9

110.6 108.3 114.9 113.1 110.6 Page 7

Sri Lanka Weekly

07-11 Jan 2013

Key Economic Charts

Nominal GDP
8,000 6,000 4,000 2,000 0 2004 2005 2006 2007 2008 2009 2010 2011 Nominal GDP Real GDP 3000 2500 2000 1500 1000 500 0 2004 2005 2006 2007 2008 2009 2010 2011 GDP Per Capita

GDP per Capita

10 8 6 4 2 0

GDP Growth
GDP Growth

21.5 21 20.5 20 19.5 19 18.5

Population (mn)
Population

2004 2005 2006 2007 2008 2009 2010 2011

2004 2005 2006 2007 2008 2009 2010 2011

Exports (US$ bn)

11 10 9 8 7 6 5 4 2004 2005 2006 2007 2008 2009 2010 2011 Exports (US$ bn) 19 14 9 24

Imports (US$ bn)

Imports (US$ bn) 4 2004 2005 2006 2007 2008 2009 2010 2011

BOP(US$ bn)
3 2 1 0 -1 -2 2004 2005 2006 2007 2008 2009 2010 2011 Balance of payment 120 115 110 105 100 95 90

Exchange Rate (LKR/USD)

LKR/US$

2004 2005 2006 2007 2008 2009 2010 2011

Sri Lanka Weekly

07-11 Jan 2013

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

Contacts
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Sri Lanka Weekly

07-11 Jan 2013

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