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The Sri Lankan Equity Market World’s Top Performer in 2010.

The Sri Lankan Equity Market World’s Top Performer in 2010.

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Published by Dilupa Tharaka
by Hardman & Co
by Hardman & Co

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Published by: Dilupa Tharaka on Jul 01, 2011
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Hardman & Co. Leaders in Corporate Research
Tel: +44(0)20 7929 3399 www.hardmanandco.com
Leaders in Corporate Research
The Sri Lankan Equity Market
World’s Top Performer in 2010.
12 January 2011
The Sri Lankan equity market finished the year 96%* higher than itstarted it, making it the top performing equity market in the worldduring 2010.
Every Asian and Emerging Market Investment fund of any sizeneeds to obtain some knowledge of this market.
Key facts on the Sri Lanka stock market are:
There is rapid eps growth. The last quarterly earningsfigures for the market were up 202%. The 22 largestcompanies showed eps growth of 71% for the first ninemonths of 2010.
 Asia Securities
earnings growth forecasts do not yetreflect the proposed reduction in Corporation Tax, whichwill boost both quoted company eps and economicactivity generally.
Last year’s stock market growth was achieved without‘hot money’ inflows from abroad. Overall, there was a net
of foreign money during the year, particularlyduring the first nine months.
The market p/e ratio is higher than many comparatives.This is, however, based on historic earnings.
Nationally, GDP growth in 2010 is expected to be 8%, thefastest rate of growth since 2002. The growth is comingfrom all three main sectors of the economy, i.e. theservice industry (including tourism), manufacturing andagriculture.
The national Budget deficit, while significant, isnarrowing. Rising inflation, driven by food and oil imports,is more of a concern, but the Central Bank believesinflation will remain in single digits in the coming year.
The national economy is becoming more open. Theimport duty on vehicles was halved last year, andcustoms duties for raw materials and capital equipmentreduced.
There are as yet no ETFs for the Sri Lanka market.Hardman & Co has produced this research is association with AsiaSecurities, Sri Lanka’s premier, and largest, stockbroking firm.Hardman & Co will be regularly producing research written by
’ analysts over the coming months.
 Asia Securities’ senior management will be visiting Londonshortly in order to meet investment managers and strategists at leading UK investment funds. Please phone or email for details.
* As measured by the Colombo All Share Index 
Trading +462%Stores & Supply +314%Motors +232%Services +148%Banks Finance & Insurance +141%
Land & Property +39%Telecoms +34%Healthcare +24%Construction & Engineering +16%Investment Trusts -6%
Construction +10.3%Information Technology +9.2%Oil Palms +8.3%Motors +3.8%Stores & Supply +2.3%
Financial Services -8.1%Healthcare -8.4%Power & Energy -12.6%Footwear -14.1%Land & Property -16.0%
Roger Hardman/RobinAbeyesinhe/Sonia Kaur 
0207 929 3399
 Leaders in Corporate Research
The Sri Lankan EquityMarket
12 January 2011
Hardman & Co. Leaders in Corporate Research
Tel: +44(0)20 7929 3399 www.hardmanandco.com
The Economy in 2010
Q2 2010 witnessed the highest growth rate in Sri Lanka since 2002, with an increasein GDP of 8.5%, to Rs634.9bn, equivalent to US$5.72bn. All three sectors of theeconomy, Services, Industry and Agriculture, registered significant growth.The Services Sector is the largest sector in the economy, representing 59.5% of economic activity. There was expansion in the hotel and leisure industry, and this inturn boosted the food and beverages industry. Banking and finance witnessednoteworthy growth.The Industry sector saw improvement in the demand for semi-precious stones, astronger construction industry, and also more demand for electricity gas and water.Industry accounted for 28.5% of the national economy last year.The Agriculture sector gained significantly from higher global prices for its output, andin particular the rise in the price of natural rubber. There was also an increase in paddyand fishing production as land in the North and East of the country came back intoproduction after decades of enforced inactivity because of the Tamil Tiger terroristinsurgency. Agriculture accounted for 12.0% of total economic output, a remarkablylow proportion for an emerging market economy.This indicates to us that the Sri Lanka economy is rather more advanced andsophisticated in its structure than its size or its GDP per head would suggest, and thatit will be much easier for Sri Lanka as a nation to make the transition to a developed,mid- or high-value economy, than some of the other emerging economy countries inAsia that lack the infrastructure or educated workforce necessary for consistently highgrowth rates.Government figures indicate that Q3 2010 growth was well above the Central Bank’sexpectations, and that this growth rate has continued through to give the provisional2010 estimates that we have quoted above. The Central Bank appears optimistic thatthis forward momentum will continue well into the next year. This view is supported bythe economists and analysts at
 Asia Securities
Company Symbol Price RsCapRs BnCap as % of Total Market
John Keels Hldge JKH 295 184 7.6%Carsons Cumberbatch CARS 542 106 4.4%Commercial Bank of Ceylon COMB 280 99 4.1%Dialog Axiata DIAL 12 97 4.0%Sri Lanka Telecom SLTL 50 91 3.8%The Bukit Darah BUKI 840 86 3.6%Aitken Spence SPEN 189 77 3.2%Hatton National Bank HNB 400 77 3.2%Ceylon Tobacco CTC 370 69 2.9%Lanka Orix Leasing LOLC 127 60 2.5%
Total 39.3%
The highestgrowth ratesince 2002It will be easyfor Sri Lanka tomake thetransition to adevelopedeconomy
 Leaders in Corporate Research
The Sri Lankan EquityMarket
12 January 2011
Hardman & Co. Leaders in Corporate Research
Tel: +44(0)20 7929 3399 www.hardmanandco.com
Fiscal Deficit
There is concern within the Colombo financial community about the size of the fiscaldeficit, even though it is by no means out of line with those of other countries. The2009 fiscal deficit was 9.9% of GDP, compared to the target deficit rate of 7.7%.However, for the first ten months of 2010, total Government revenue rose by 12.6%(tax revenue grew by 14.4%) and expenditure grew by only 6.9%. Most of thespending increase took place on the capital account, with recurrent expenditure up bya well controlled 3.1%.
 Asia Securities’ 
economists expect the FY2010 deficit to be8.5% of GDP, ahead of the IMF’s target for the country of 8.0% but nevertheless aconsiderable improvement.For 2011 the Government has targeted a fiscal deficit of 6.8% of GDP.By comparison, the UK Budget Deficit this year is expected to run at 12.0% of GDP.Tax revenue has been forecast by the Government to be 15.2% of GDP during 2011,so this is a low State intervention, low tax economy.By comparison, in the UK, public spending currently accounts for 48% of GDP.Even though the total Sri Lankan tax intake has been forecast to increase in 2011, taxrates themselves are to fall dramatically, presumably with the hope of creating a‘Thatcher effect’. Tax rates on personal income, which until now have been in therange of 5% to 35%, are being reduced to 4% - 24% for 2011, and the tax free incomethreshold has been increased by 60%. The tax lost in this way is being recouped by,for the first time, taxing public sector workers through the PAYE system, and by moreeffective action against tax evaders.
Corporation tax for businesses has been reduced from 35% to 28%. This willboth boost economic activity and on its own create an increase in eps of 10.7%.
 Additionally, VAT on financial services has been reduced from 20% to 12%, and taxeson venture capital corporations and investment trusts have been considerably reduced.
Trade Deficit
The Sri Lankan trade deficit in the first eight months of 2010 was USD 3.6bn. On anannualised basis this is equivalent to approximately 10% of GDP. By comparison, theUK is currently running a trade deficit of 2.6% of GDP.From month to month the trade deficit has been rising because of rising food and oilprices. 14% of imports are foodstuffs, and 25% are petroleum. Sri Lanka has noindigenous oil supplies of its own, and this can be viewed as a weakness.A large trade deficit can be tolerated because Sri Lanka receives approximatelyUSD3.75bn a year in remittances from overseas workers, and this covers 70% of thedeficit in trade. In common with other countries, e.g. Bangladesh, it is highly likely thatthe Central Bank under-records the remittances from its citizens working overseas,because quite naturally the workers are keen to pass as much money as possible totheir families without it coming to the attention of the Authorities.Official workers’ remittances have been growing at 20% p.a.
The national annual average inflation rate has increased over the course of the pastyear from 3.1% to 5.8%. This has largely been driven by higher food prices.
The Deficit isnot out of linewith other countries, andit is reducingTax rates arebeing reducedCorporationTax has beencut, this willboost epsInflation isincreasing

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