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At Capital Weekly 27 July 2008

At Capital Weekly 27 July 2008

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Published by ashek ishtiak haq
Key themes in this issue are:
Bangladesh:
• With the prospects for the global economy remaining negative, political uncertainty in the
run-up to the elections and stretched valuations relative to other equity markets in the
region a defensive stance on the DSE is justified.
• The proposed valuation of USD 3.2bn for the Grameenphone IPO appears at the upper end
of expectations. The key to its success will likely be foreign investor interest.
• Although we have yet to see the move to book building for IPO pricing, if Grameenphone
achieve its price targets then we believe this will encourage other large companies to come
to market in addition to other telcos.
• We believe that a move to book building, that had also been anticipated as a likely part of
the Grameenphone IPO, will yield more effective and transparent price discovery.
• The monitoring mechanism for the regulators needs to be strengthened and the SEC needs
to have its budget, headcount, and IT infrastructure increased substantially.
Global Markets:
• US equity markets ended down by 1.1% last week as the positive news on durable goods,
home sales and soft oil prices failed to offset the ongoing unease about the prospects for
housing.
• Nerves increased given sharply rising foreclosures, further bank failures and the likelihood
of the recessionary pressures intensifying in several European economies.
Key themes in this issue are:
Bangladesh:
• With the prospects for the global economy remaining negative, political uncertainty in the
run-up to the elections and stretched valuations relative to other equity markets in the
region a defensive stance on the DSE is justified.
• The proposed valuation of USD 3.2bn for the Grameenphone IPO appears at the upper end
of expectations. The key to its success will likely be foreign investor interest.
• Although we have yet to see the move to book building for IPO pricing, if Grameenphone
achieve its price targets then we believe this will encourage other large companies to come
to market in addition to other telcos.
• We believe that a move to book building, that had also been anticipated as a likely part of
the Grameenphone IPO, will yield more effective and transparent price discovery.
• The monitoring mechanism for the regulators needs to be strengthened and the SEC needs
to have its budget, headcount, and IT infrastructure increased substantially.
Global Markets:
• US equity markets ended down by 1.1% last week as the positive news on durable goods,
home sales and soft oil prices failed to offset the ongoing unease about the prospects for
housing.
• Nerves increased given sharply rising foreclosures, further bank failures and the likelihood
of the recessionary pressures intensifying in several European economies.

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27July2008

AT CAPITAL RESEARCH
 
EDITORS
Ifty Islam 
Managing Partnerifty.islam@at-capital.com
 
Syeed Khan
Partnersyeed.khan@at-capital.com
 
Professor Jahangir Sultan
Senior Advisor
 
 jahangir.sultan@at-capital.com
  Asian TigerCapital Partners
UTC Building, Level 168 Panthapath, Dhaka-1215BangladeshTel: 8155144, 8110345Fax: 9118582www.at-capital.com
 
ATCapitalWeeklyUpdateATCapitalWeeklyUpdateATCapitalWeeklyUpdateATCapitalWeeklyUpdate
DSEDSEDSEDSE–  ––  –nobearmarketfornownobearmarketfornownobearmarketfornownobearmarketfornow
    A   s    i   a   n    T    i   g   e   r    C   a   p    i    t   a    l    P   a   r    t   n   e   r   s    A   s    i   a   n    T    i   g   e   r    C   a   p    i    t   a    l    P   a   r    t   n   e   r   s    A   s    i   a   n    T    i   g   e   r    C   a   p    i    t   a    l    P   a   r    t   n   e   r   s    A   s    i   a   n    T    i   g   e   r    C   a   p    i    t   a    l    P   a   r    t   n   e   r   s    W   e   e    k    l   y    N   e   w   s    U   p    d   a    t   e    W   e   e    k    l   y    N   e   w   s    U   p    d   a    t   e    W   e   e    k    l   y    N   e   w   s    U   p    d   a    t   e    W   e   e    k    l   y    N   e   w   s    U   p    d   a    t   e
Keythemesinthisissueare:
Bangladesh:Bangladesh:Bangladesh:Bangladesh:
 
Withtheprospectsfortheglobaleconomyremainingnegative,politicaluncertaintyintherun-uptotheelectionsandstretchedvaluationsrelativetootherequitymarketsintheregionadefensivestanceontheDSEisjustified.
 
TheproposedvaluationofUSD3.2bnfortheGrameenphoneIPOappearsattheupperendofexpectations.Thekeytoitssuccesswilllikelybeforeigninvestorinterest.
 
AlthoughwehaveyettoseethemovetobookbuildingforIPOpricing,ifGrameenphoneachieveitspricetargetsthenwebelievethiswillencourageotherlargecompaniestocometomarketinadditiontoothertelcos.
 
Webelievethatamovetobookbuilding,thathadalsobeenanticipatedasalikelypartoftheGrameenphoneIPO,willyieldmoreeffectiveandtransparentpricediscovery.
 
ThemonitoringmechanismfortheregulatorsneedstobestrengthenedandtheSECneedstohaveitsbudget,headcount,andITinfrastructureincreasedsubstantially.
GlobalMarkets:GlobalMarkets:GlobalMarkets:GlobalMarkets:
 
USequitymarketsendeddownby1.1%lastweekasthepositivenewsondurablegoods,homesalesandsoftoilpricesfailedtooffsettheongoinguneaseabouttheprospectsforhousing.
 
Nervesincreasedgivensharplyrisingforeclosures,furtherbankfailuresandthelikelihoodoftherecessionarypressuresintensifyinginseveralEuropeaneconomies.
 
 
27July2008

AT CAPITAL RESEARCH
_______________________________________________________________________________________AT Capital Weekly Update 2
OverviewOverviewOverviewOverview----BangladeshBangladeshBangladeshBangladesh
AsignificantweekforBangladeshiequitieswiththreemainquestionsforinvestors:1)
 
Isthe3.5%jumpintheDSEreversingthesharpdeclinesofthepreviousweekasustainablestabilizationinthemarket?2)
 
Howsignificantisthelong-awaitedIPOannouncementbyGrameenphonethattheywillissueUSD300mnoftheirUSD3.2bnestimatedmarketcapitalization?IsitgoodfortheDSE?Willitdowell?3)
 
Finally,istheGrameenphonedecisionlikelytoactasacatalystforasignificantnumberofotherprivatelyheldcompaniestocometomarket?
DefensivestanceonDSEremainsjustifiedDefensivestanceonDSEremainsjustifiedDefensivestanceonDSEremainsjustifiedDefensivestanceonDSEremainsjustified
Acombinationofbroad-basedpositivestatementsabouttheprospectsfortheDSEbyseniormarketfigurescoupledwiththeannouncementofthemuch-anticipatedGrameenphoneIPOannouncementunderpinnedThursday’sstrong3.5%reboundinthemarket.
ImportanceImportanceImportanceImportanceofopendialogue/researchonofopendialogue/researchonofopendialogue/researchonofopendialogue/researchonequitymarketfundamentalsequitymarketfundamentalsequitymarketfundamentalsequitymarketfundamentals
FromtheperspectiveofBangladeshmovingtoamorematureanddevelopedcapitalmarket,itisimportantthatinvestorsandmarketcommentatorscantalkopenlyaboutthenegativeaswellasthepositiveprospectsforboththemarketoverallaswellasindividualissues.ItisencouragingthattheSECispushingbrokersandbankstoprovidegreaterinvestoreducation,especiallyforretailbuyersofstocks,sotheyhaveagreaterunderstandingandawarenessofthefundamentaldriversofthemarket.Stockscangodownaswellasupbutthekeyistoprovidebothprofessionalandretailinvestorswithenoughfundamentalresearchtoformabalancedandinformed judgementaboutif,howmuchandinwhattheychoosetoinvest.Astrategyofbiasingnewstowardsthepositiverunsrisksofsocialtensionswhen,asisinevitable,marketscorrect.AgainPakistanwasarecentillustrationofthat.
SECneedsgreaterinvestmentandresourcesSECneedsgreaterinvestmentandresourcesSECneedsgreaterinvestmentandresourcesSECneedsgreaterinvestmentandresources
Clearlytherisksofmarketmanipulation,insidertradinganddishonestpracticesincreasewithanymovetowardsbrokerspublishingresearchwithpricetargetseitherforindividualstocksorforthemarketasawhole.ThemonitoringmechanismfortheregulatorsneedstobestrengthenedandtheSECneedstohaveitsbudget,headcount,andITinfrastructureincreasedsubstantially.ItisfineforBangladeshtoaspiretowardsgreaterintegrationintoglobalcapitalmarketsandincreaseddepth,liquidityandforeigninvestorparticipation.Butweneedgreateracknowledgementoftheimportanceofabetter-resourcedregulator.Thiswasalessonthelargestcapitalmarketintheworld,theUS,learnednotsolongagoaftertheEnron/Worldcomaccountingscandalsin2002.TheUSSEChadtheirbudgetexpandeddramatically.Eventhatfailedtopreventthecurrentcreditcrisis.ThereiscurrentlyanADBfundedprojecttosupporttheSECandwewouldencourageothermultilateralinvestmentinboththeSECsandtheBangladeshBanksmarketmonitoringcapacity.
ThedebateontheGrameenphoneIPOThedebateontheGrameenphoneIPOThedebateontheGrameenphoneIPOThedebateontheGrameenphoneIPOprospectsprospectsprospectsprospects
Whiletheknee-jerkmarketresponsetotheGrameenphoneIPOannouncementwaspositive,theprospectsfortheissuearehardertoevaluate.Ontheonehand,thereislittledoubtitisthemarqueeissuethatallinvestors,bothdomesticandforeign,havebeenwaitingfor.ItseemslikelythatmuchoftheUSD150mnpre-IPOissuewillgotooverseasbuyersgiventheprospectiveappetiteamongsomeforexposuretoBangladeshinaliquidstockthathascriticalmass.TheapproxUSD1bn+implicitvaluationofAKTELonthebasisoftheUSD350mnsaleof30%oftheissuetoNTTDocomotosomeextentvalidatestheUSD3.2bnvaluationofGrameenphonegivenAKTEL’s7.45mnsubscribersversusaround20.31mnforGrameenphone.However,itseemspricing,atleastonthisbasis,isontheaggressiveside.Grameenprofitswerealsodownsharplybetween2006and2007,albeitpartlyontheVOIPfines.TelenorPakistanhasasubscriberbaseof16.7millionasofMarch2008,comparedtoGrameenphone's20.31subscribersasofJune2008.However,Grameenphoneemploys4973,whereasTelenorPakistanemploysonly2500.ThissuggeststhereremainsscopeforimprovedoperationefficienciesthatmightenhancefutureearningsTheGrameenphonenetworknowcoversmorethan99%ofthecountry'spopulation,upfromaround50%twoyearsago.GrameenphonehasgreatlybenefitedfrombeingpartofTelenorGroup's,withitstwelvemobileoperationsworldwide,aggregatedpurchasingpower.Thishasenabledthecompanytorapidlyextenditsnetworkcoverageandupgradeitsnetwork.Groupcost-savinginitiativeshavealsoallowedGrameenphonetoreducetariffssubstantially,thusmakingmobilecommunicationaffordableforawidercommunityinBangladesh,especiallythosewhohavelittletospendon
 
IftyIslam,
ManagingPartner
ifty.islam@at-capital.com
 
Table:NumberoftimesTable:NumberoftimesTable:NumberoftimesTable:NumberoftimesDGENhaschangedby2%ormoreDGENhaschangedby2%ormoreDGENhaschangedby2%ormoreDGENhaschangedby2%ormoreChangeChangeChangeChange200320032003200320042004200420042005200520052005200620062006200620072007200720072008200820082008(YTD)(YTD)(YTD)(YTD)+2%715911176-2%47121096TotalTotalTotalTotal112221212612
Source:DhakaStockExchange&Bloomberg
 
 
27July2008

AT CAPITAL RESEARCH
_______________________________________________________________________________________AT Capital Weekly Update 3
communication.Overtheyears,theshareholdershavere-investednearlyalloftheirearningstoexpandcoverageandincreasecapacityofthenetwork.OnebasisforarguingthattheGrameenphoneIPOisattractivelypricedisthefuturepotentialgrowthinthemobilemarketinBangladesh.InMay2008,therewereapproximately42mnmobilesubscribers(27%mobilepenetration)and1.1mnfixedlinesubscribersinthecountry.Giventhelargepopulationofthecountryandthelowtelecompenetration,thegrowthtrendisexpectedtocontinueinthecomingyears.
Source:BTRC&ATCapitalprojection
Finally,asthechartbelowillustrates,thepremiumtofacevalueoftheGrameenissueisthemostaggressiveseeninBangladeshiIPOs.ThekeyvariableremainstheappetiteofforeigninvestorsfortheissueaswellastheoptimismamonglocalandglobalinvestorsintermsofthegrowthprospectsfortheBangladeshTelecomsmarket.
WillGrameenphoneactasacatalystformoreWillGrameenphoneactasacatalystformoreWillGrameenphoneactasacatalystformoreWillGrameenphoneactasacatalystformorestockstocometomarket?stockstocometomarket?stockstocometomarket?stockstocometomarket?
OneofthereasonsboththeSECandBTRChavebeenpushingGrameenphonetocometomarketisthebeliefthemovewouldactasacatalystfornotonlytheotherTelecomprovidersbutalsootherleadingprivatelyheldcompaniesinBangladeshtoalsolisttheirshares.Althoughwehadsuggestedtheissuehasbeenaggressivelypriced,oneencouragingaspectofthevaluationdecisionisthatitshowsagreaterwillingnessoftheSECtomoveawayfromanassetorbookvaluebasedmethodofassessingtheissuepricetoamorebalancedonethatcombinesafairassessmentofthegrowthprospects,marketpositionandgoodwillinassessinghowmuchacompanyshouldbesoldfor.Thiswillalmostcertainlyencouragemorecompaniestocometomarket,especiallyifthereisstrongdemandfortheGrameenphoneissue.OneofthegripesmanyprivatecompaniesinBangladeshwehavetalkedtoinrecentmonthsistheircomplaintthattheydonotwanttoselltheirassetsatundervaluedorunfairlevelsbecauseofpreviousvaluationmethodswhichwasreflectedinverylargejumpsinsharepricesonthefirstdayoftrading.Thisisillustratedinthechartbelow.Chart:IPOperf Chart:IPOperf Chart:IPOperf Chart:IPOperformanceonFirsttradingdaysince2003ormanceonFirsttradingdaysince2003ormanceonFirsttradingdaysince2003ormanceonFirsttradingdaysince2003Webelieve,however,thatamovetobookbuilding,thathadalsobeenanticipatedasalikelypartoftheGrameenphoneIPOwillyieldmoreeffectiveandtransparentpricediscovery.WeareencouragedthattheSEChasannounceditwillholdaseminaronbookbuildingtotakefeedbackfrommarketparticipantsonthewayforward.WewillpublishamoredetailedanalysisontheprosandconsofthebookbuildingprocessinBangladeshaswellaslessonsfromotherIPOmechanismsintheregioninthenextissueoftheATCapitalWeekly.
 
0%600%1200%1800%Berger Paints Bangladesh LimitedILFSLDBHIPDCBRAC Bank LimitedTrust Bank LimitedSummit Power LimitedExport-Import (EXIM) Bank LimitedMutual Trust Bank LimitedJamuna Bank LimitedProposed Grameenphone IPO
Premium as % of Face value
 

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