Gradient Alliance

M ont hly Bullet in: Augus t 2 0 1 2

In Economic news:

The Ceylon Electricity Board imposed power cuts as rains failed and Lakvijaya coal power plant was shut down for the 12th time after technical faults. Inflation in August 12 eased to 9.5% YoY (-30 bps MoM), as food and nonalcoholic beverages fell 1.1%MoM. Treasury yields continue to rise on high inflation, currency depreciation and low liquidity; 182 day treasury bills rose to a 39 month high 13.07% (+5bps wow). The All Share Price Index was up 5180.15 (+4.76% MoM), reducing year to date losses to 9.2% from 18.6% a month ago. Tilak Karunaratne stepped down as chairman of Securities and Exchange Commission having come under pressure from stock market players who were under investigation for stock manipulation. The rupee ended at 130.94/133.96 vs. the USD (rupee weaker ~0.5% MoM). LankaPropertyWeb.com says that overall house prices increased to Rs.17.6m from Rs.17.1m in March 2012. The trade deficit in June 12 narrowed to a 16 month low of $663.2m (-21.8% YoY), deficit in the first six months was $4.70bn (+11.8% YoY). June imports dropped 15.0% YoY, but more worryingly exports were $755.8m (-7.9% YoY).

In Business news:
Tea production in July 12 declined for the sixth consecutive month down 4.25% YoY to 24.11mn kg as prevailing drought conditions affected high and medium grown tea production. Tourist arrival in July 12 was up 7.8% YoY to 90,338, but came in below our estimates of 94,000.As of July, 129 investment applications had been approved to build about 9,364 hotel rooms. New vehicle registrations declined 55% YoY in July to 26,799 with motor car registrations dipping 42% YoY to 18,376. Industry experts anticipate imports to continue to decline given the availability of ample stock. Substandard fuel costs SL Railways Rs.30m and Transport Board Rs.6m. The LMD-Nielsen Business Confidence Index in July at a four month high of 108

In Consumer news:
On a Presidential directive Lanka Sathosa reduced the prices of rice, sugar, dhal, canned fish and sprats. Minister of Cooperatives and Internal Trade turned down a request from traders to increase the price of eggs. AC Nielsen says consumer spending declined in the second quarter of 2012.Spending on branded was up marginally(3% YoY Jan-June 2012). The Nielsen Consumer Confidence Index in July 2012 was 59.

Gradient Alliance
M ont hly Bullet in: Augus t 2 0 1 2
The China National Machinery Import 70% and Export 60% 20.0% Forecast Corporation (CMEC), 50% 15.0% who built the 40% power plant, has 30% 10.0% 20% been accused of 5.0% The 3 hour 10% using substandard and 20 minute power cuts were brought in as monsoon rains 0% 0.0% equipment and 2003 2004 2005 2006 2007 2008 2009 2010 2011 Jul-12 2012 2013 2014 2015 failed for the second consecutive year and Lakvijaya coal reportedly certain power plant in Norochcholai was shut down after technical Source: CBSL , CEB and http://epubs.surrey.ac.uk/380521/1/SEEDS118.pdf (for forecasts) sections of the faults. Acute drop in rainfall caused hydro power generation to planthave corroded. Power and Energy Minister said that the cost fall to an all-time low of 15%, as storage levels at reservoirs dropped of repairs would be minimal the breakdowns are within the defect to 19%. The Lakvijaya plant broke down for the 12th time, since it liability period (expiring in Sep13). In a hilarious turn of events an was commissioned in March 2011, exacerbating the power crisis. opposition legislator requested the 100 rupee currency note be A loss of Rs.200m is incurred each day the plant is not operational withdrawn from circulation as it displays the ineffective Lakvijaya amounting to a loss of Rs.6.5bn over the 12 breakdowns. power plant.

In Economic news:

90% 80%

Hydro power generation % (LHS) Thermal power generation % (LHS)

30.0% 25.0%

The Ceylon Electricity Board (CEB) imposes rotational power cuts.

Customer Class Small Household Medium Large Small CommerciaMedium Large Small Industrial Medium Large Very large

Electricity Usage (Kwh/mth) 30 90 300 1,000 58,000 600,000 5,000 65,000 270,000 1,050,000

1.87,M I 3.98,K I 4.94,B 5.33,B 8.76,T 6.67,B 5.74,SK 4.12,B 6.51,SK 5.25,B

2.78,TN I 4.58,B 7.32,TN I 10.11,T 8.82,B 7.67,SK 6.81,B 6.5,SK 7.71,B 6.35,SK

2.82,K I 4.61,TN I 7.53,K I 10.52,SK 9.44,SK 8.75,T 8.11,K I 8.49,T 8.46,T 7.61,N

3.26,P 5.68,P 7.63,P 13.85,N 12.01,P 10.68,P 10.27,N 9.2,K I 8.84,K I 8.38,T

5,SRI 6.07,SRI 8.79,T 14.02,M I 12.66,N 11.23,K I 10.55,SRI 9.83,N 9.39,M 8.49,K I

Rate bands 5.31,B 6.59,M I 9.12,M I 14.56,M 13.29,M 12.15,N 10.65,T 10.72,P 9.47,N 8.84,M

5.58,T 7.8,N 8,M 7.04,T 7.77,SK 8,M 9.41,M 11.5,N 12.92,SK 15.73,TN I 17.32,P 19.74,SRI 15.03,K I 16.52,TN I 18.93,PH 12.76,M 14.6,Sin 16.08,TN I 11.6,P 11.95,M I 12.04,TN I 11.86,TN I 12.13,M 12.31,M I 10.18,P 11.45,TN I 11.55,SRI 9.72,P 11.4,TN I 11.48,SRI

8.46,SK 10.05,N 18.31,PH 21.09,Sin 21.02,M I 16.95,PH 12.77,M 12.47,SRI 13.21,M I 13.18,M I

11.92,PH 14.54,PH 21.09,Sin 21.23,K I 21.09,Sin 18.47,M I 16.33,PH 18.37,PH 16.61,PH 16.36,PH

21.09,Sin 21.09,Sin 23.87,SRI 26.44,PH 22.09,SRI 20.98,SRI 21.09,Sin 20.95,Sin 20.49,Sin 14.09,Sin

BangladK I Kerala, K-I M I Maharashtar,InTN I I - Maharashtar,India TN-I - Pakistan PH Phillipp Sin BB- Bangladesh India - Kerala, India M- Tamilnadu, InM Malaysia N Nepal P Tamilnadu, India Singap - Malaysia Sri LankT Thailand P - Pakistan M SK South KoSL N - Nepal Source: Tilak Siyamabalapitiya/Oct PH - Phillippines Sin - 2011 Singapore SK - South Korea SL - Sri Lanka T - Thailand Source: Tilak Siyamabalapitiya/Oct 2011

CEB estimates energy demand to reach 12,005 GW in 2012. As electricity generation continuous to lag demand, CEB is compelled to purchase power from independent power providers (IPP), currently owing Rs.16bn to IPPs and Rs.15bn to Ceylon Petroleum Corporation. Sri Lanka has relatively high electricity tariffs in the region.

30MWs of wind power was added to the national grid thus increasing total wind power generation to 60MW.

However in a disruptive move the CEB chairman, Dr. W. Abeywickrama stated that new wind power licences will not be granted as they needed to explore the success of the projects so far. Manjula Perera, CEO of Wind Force (Pvt.) Ltd., stated that for the past 18 months the CEB has not allowed them to expand their output. He further went on to state that it took almost an year to be granted a license in 2008 and that approval from 24 different authorities had to sought; noting that the construction of the 20MW plant took only 10 months.

Inflation in August 12 eased to 9.5% YoY (-30 bps MoM), due to food and non-alcoholic beverages falling 1.1%. Additionally credit to government, corporations and private sector
CBSL noted decreases in the prices several vegetables offset increases in the prices of rice, sugar, fruits and lime. The drop in inflation surprised many, as a Reuters poll conducted among 15 analysts expected inflation to reach 10.2%. The analysts had considered the extended drought to increase food prices and the weaker rupee to aggravate import Source: CBSL CBSLCBSL Source:Source: Source: CBSL bills. Link to to Link to inflation Link inflation Link to inflation inflation continue to decelerate thus easing inflationary pressure. Net credit to government dipped for the second consecutive month. Slow credit growth eases inflation.
1.151.15 290Credit to State Corporations (Rs. bn) 1050 1.15 to Credit to (Rs. bn) Growth Credit to CreditCorporationsGovernment (Rs. Growth YoY% Growth YoY% Credit StateNetCorporations (Rs. bn) bn) bn) Growth YoY% YoY% to State State Corporations (Rs. Growth YoY% 1.05 1105 05 1.05 05 1.05 1 270 1000 0.950.95 0.95 250 0.850.85 950 0.85 0.750.75 230 0.75 900 0.650.65 0.65 210 190
850

1050 10501050 0.55 0.55 0.55 290 290 1050 0.55 290 Net Credit Net Credit to Governmentbn) bn) Growth YoY% to Government (Rs. (Rs. Growth Net Credit to Government (Rs. bn) (Rs. Growth YoY% YoY% Growth YoY% Net Credit to Government bn) 270 270 1000 10001000 1000 0.5 0.5 0.5 270 0.5 250 250 250 950 950 950 950 0.45 0.45 0.45 0.45 230 230 230 900 900 900 900 0.4 0.4 0.4 210 210 210 0.4 850 850 850 850 190 190 190 0.35 0.35 0.35 0.35 800 800 800 800 170 170 170 750 750 750 0.3 0.3 750 0.3 40848 40878 40909 40940 40969 41000 41030 41061 40848 40848 40878 40909 40940 40969 41000 41030 41061 40848 40878 40909 40940 40969 41000 41030 41061 40878 40909 40940 40969 41000 41030 41061

1.15 1.05 1 05 0.95 0.85 0.75 0.65

0.55 0.5 0.45 0.4 0.35 0.3

0.550.55 0.55 0.55 0.450.45 0.45 0.45 0.350.35 0.35 0.35

170 800

2,300 0.355 0.55 290 1050 2,300 1.15 0.355 0.355 2,300 2,300 Net Credit to Credit to StateCredit Governmentbn)bn) (Rs. bn) Corporations (Rs. GrowthGrowth YoY% 0.355 Credit to thethe Private Private(Rs. bn) GrowthYoY% to Sector (Rs. bn) Credit to the Privatethe Sector (Rs. bn) Credit to Private Sector (Rs.Sector Growth YoY% GrowthGrowth YoY% YoY% YoY% 0.35 1.05 1 05 0.35 0.35 2,250 0.35 270 1000 2,250 2,250 2,250 0.345 0.5 0.95 0.345 0.345 0.345 2,200 2,200 2,200 2,200 250 0.34 950 0.85 0.34 0.34 0.34 2,150 2,150 2,150 2,150 0.45 230 0.335 0.75 0.335 0.335 0.335 2,100 900 2,100 2,100 2,100 0.33 0.65 0.33 0.33 0.33 0.4 210 2,050 2,050850 2,050 2,050 0.325 0.55 0.325 0.325 0.325 190 2,000 2,000 2,000 2,000 0.32 0.45 0.32 0.35 0.32 0.32 170 800 1,950 1,950 0.315 1,950 1,950 0.35 0.315 0.315 0.315 1,900 750 1,900 0.31 150 0.25 0.31 0.30.31 1,900 1,900 0.31 40848 40878 408784087840940 40940 4096941000 41000 41030 40848408484084840909 40909 4094040969409694100041030 41061 41061 40848 40878 40909 40940 40969 41000 41030 4084840878 40909 40940 40969 41000 41030 41061 40878 40909 40909 40940 40969 41000 41061 41030 41030 41061 41061

290 270 250 230 210 190 170 150

2,300 Credit to Sta C 2,250 2,200 2,150 2,100 2,050 2,000 1,950 1,900 40848

0.250.25 0.25 0.3 150 150 150 750 150 0.25 40848 40878 4090940878 4094040969409404100041030 41000 41030 41061 40848 40848 40848 40878 40940 40909 4096941000 40969 4084840878 40909 40940 40969 41000 41030 41061 40878 4090940909 40940 40969 41000 41061 41061 41030 41030 41061

40878 4 40848

Source: CBSL Source: CBSL Source: CBSL CBSL Source: CBSL Source:
Link to inflation

Source: CBSLSource: CBSL CBSL Source: CBSL Source: CBSL CBSL Source: Source:
Link to inflation

Source: CBSL CBSL Source:

Gradient Alliance
M ont hly Bullet in: Augus t 2 0 1 2

In Economic news:
Treasury yields continue to rise. The weighted average yield
on the 182 day (six-month) treasury bills rose to a 39 month high of 13.07% (+5bps week over week - wow). Yields across government instruments have increased due to high inflation, currency depreciation putting fiscal pressure and low liquidity as cash outflows outweigh inflows. CBSL kept repo and reverse repo rates unchanged for the fourth consecutive month. CBSL is reluctant to reduce rates due to the prevailing high inflation climate and its objective of limiting credit growth.

Steady rise in T.bills yields as inflation persists

364 days T .bill

15% 13% 11% 9% 7% 5% 3%

182 days T .bill

91 days T. bill Inflation

15.00% 14.80% 14.60% 14.40% 14.20% 14.00% 13.80%

The All Share Price Index closed at 5180.15 up 4.76%, reducing year to

13.60% 13.40% 2 year 3 year 4 year 5 year 6 year 8 year 10 year

date losses to 9.2% from 18.6% a month ago. Best performing sectors were trading (+18.9 % MoM), health care (+12.9%) and land and property (+10.0%) while oil and construction lost 3.9% and 0.2%. In August, foreign investors were net buyers of Rs.2.8bn and have been net buyers of Rs.28.4bn in 2012. Tilak Karunaratne stepped down as chairman of Securities and Exchange Commission (SEC). Mr. Karunaratne who took over the reigns only in December 11 was considered to have come under pressure from stock market

Source: CBSL

players who were under investigation for stock manipulation. His predecessor Indrani Sugathadasa resigned to uphold her principles. Several investor groups and brokers considered Mr. Karunaratne to have overregulated the system and created a fear psychosis. However the IMF viewed that the regulator had been taking the right steps to ensure market participants obeyed the rules. Nalaka Godehewa was appointed as the new SEC chairman.

The real wage index across all sectors dipped in 2Q12 with the onset of inflation.
140 130 120 110 100 90 80 70 60 50 2Q10
Source: CBSL

Agriculture real wage rate index Industry and Commerce real wage rate index Services real wage rate index Inflation (RHS)

10.5% 9.5% 8.5%

The three sector wage indexes decreased about 3.7% QoQ as inflation increased to 9.3% in June 12. Real wages will continue to trend lower in the current high inflation climate and the government resource strapped to grant public sector employee significant salary increases. A strengthening rupee would further help ease inflationary pressure; however the rupee has remained around the 133 level despite increased capital inflows. This is due to the monetary authority continuing to buy dollars preventing a strengthening of the exchange rate.

Inflation

7.5% 6.5% 5.5% 4.5%

4Q10

1Q11

2Q11

4Q11

1Q12

2Q12

buying dollars is preventing the rupees appreciation from increased cash inflows. Several brokers were quoting one month forward rates at 133.68, three months at 133.68 and six months at 139.63.

The rupee ended the month at 130.94/133.96 vs. the USD (rupee weaker ~0.5% MoM). The Monetary authority

12.08.2011 26.08.2011 09.09.2011 23.09.2011 07.10.2011 21.10.2011 11.11.2011 02.12.2011 30.12.2011 13.01.2012 27.01.2012 09.02.2012 24.02.2012 09.03.2012 30.03.2012 11.04.2012 27.04.2012 11.05.2012 25.05.2012 08.06.2012 22.06.2012 06.07.2012 20.07.2012 03.08.2012 17.08.2012 31.08.2012

Bond

Gradient Alliance
M ont hly Bullet in: Augus t 2 0 1 2

In Economic news:
The government entered into an Rs.100bn loan to the fund second phase of the Hambantota port development project.
The funding is from Exim Bank of China (Rs.79bn) and a Chinese Government concessional loan of Rs.21bn. Phase I of the port development project was also implemented with funding from the Exim Bank of China.

Minimum monthly expenditure as % of monthly provincial per capita income Northern, 22.6% 22.0% S'gamuwa, 20.6% 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% Western, 9.2% 8.0% Island (excl. W.P), 17.6% Uva, 19.3% Eastern, 18.9% Central, 18.2%

North Central, 17.8% North Western, 15.5% Southern, 14.5% Island, 13.6%

Census and Statistics states that those in this province have to spend a minimum of Rs.3,762 to meet their basic needs, 5.3% higher than the July national average of Rs.3,571. The island average of 13.6% is skewed due to the low western province (W.P) proportion spending, excluding western province the island average is 17.6%.

Northern Province spends at least 22.6% of their income to fulfill their basic needs, the highest among all provinces. The Department of

Source: Department of Census and Statistics

Overall house prices in the country rose 3.0% since March 12.
per data released from LankaPropertyWeb.com overall house prices increased to Rs.17.6m from Rs.17.1m in March 2012. Colombo house rental and apartment rental prices reportedly increased to Rs.210,000 per month (Rs.190,000 in March 2012) and Rs.220,000 per month (Rs.210,000 in March 2012). Above prices cannot be independently verified and is based on average property prices on advertisements published on LankaPropertyWeb.com.

4Q11
Sri Lanka Overall House Sale prices Sri Lanka Overall Land prices Colombo House Sale prices Colombo Apartment Sale prices Colombo Houses Rental prices Colombo Apartments Rental prices Colombo Commercial Rental prices
Source: LankaPropertyWeb.com

Mar 12
Rs. 17.11 million Rs. 670,000 Per perch Rs. 50.21 million Rs. 27.70 million Rs. 190,000 Per Month Rs. 210,000 Per Month Rs. 830,000 Per Month

Jul 12
Rs. 17.63 million Rs. 710,000 Per perch Rs. 42.48 million Rs. 27.52 million Rs. 210,000 Per Month Rs. 220,000 Per Month Rs. 690,000 Per Month

Rs. 17.88 million Rs. 630,000 Per perch Rs. 46.77 million Rs. 23.70 million Rs. 170,000 Per Month Rs. 220,000 Per Month Rs. 820,000 Per Month

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Gradient Alliance
M ont hly Bullet in: Augus t 2 0 1 2

In Economic news:
The trade deficit in June 12 narrowed to a 16 month low of $663.2m (-21.8% YoY), reducing the first six months deficit to $4.70bn (+11.8% YoY). Imports in June dropped 15.0%

4,800.0 4,500.0 4,200.0 3,900.0 3,600.0 3,300.0 3,000.0 2,700.0 2,400.0 2,100.0 1,800.0 1,500.0 1,200.0 900.0 600.0 300.0 -

+11.8% YoY 67.6% 54.4% Trade deficit ($m) (LHS) YoY %

80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%

-6.6%

-9.2% -21.8%

-10.0% -20.0% -30.0% Jan - Jun 12

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jan - Jun 11

YoY also a 16 month low, but more worringly exports were only $755.8m (-7.9% YoY), the fourth consecutive monthly reduction. The monthly growth of the trade deficit is decelerating, and the June deceleration is slowest since the deficit contracted 35.0% YoY in Feb 11. This is evidence of restrictive monetary and fiscal policies introduced in early 2012 impacting trade.

Source: CBSL

Imports at $1.42bn also came in below our forecast of $1.65bn. Intermediate goods imports (~62% of imports) declined 9.6% YoY despite a 16.3% YoY increase in petroleum imports. Consumer goods imports declined 25.6% YoY, as imports of food and beverages dropped 24.3% YoY to $108m and vehicle imports were
Total imports 2400 $m 2200

Total exports 1200 $m 1100

Estimated monthly export progression to meet CBSL 2012 exports target of $11.7bn
2012E

Estimated monthly import progression to meet CBSL 2012 imports target of $20.9bn

2012E

1000 900 800 700 600 500 400

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2000 1800 2011 1.65bn 1.42bn

916 2011 755.8 2010 2009

1600 1400 1200 1000 800 600

Jan Feb Mar Apr May

2010

2009

Jun

Jul

Aug

Sep

Oct

Nov

Dec

*Note: May - Dec 2012 monthly estimates is based on average monthly contribution to annual imports from 2009-2011 - Source: CBSL

*Note: May - Dec 2012 monthly estimates is based on average monthly contribution to annual imports from 2009-2011 - Source: CBSL

Based on CBSL s 2012 road map targets of $11.70bn for exports and $20.90bn for imports and analysing monthly trade activities in 20092011, we estimated June 12 exports to be $915.5m, significantly higher than the recorded $755.8m. In June, industrial exports (~77% of exports) declined 6.7% YoY as textile and garments exports reduced 6.3% YoY to $310.6m due to lower demand in the EU area, lower cotton prices and what we feel as the industry loosing price competitiveness due to withdrawal of GSP+. Agriculture exports (22% of exports) decreased 11.7% YoY as tea exports dropped a staggering 13.6% due to lower international prices.

lower 58.9% YoY. Investment goods (~20% of imports) decreased by 21.0% YoY as imports of machinery & equipment and transport dropped 25.1% and 31.4% YoY. During Jan- Jun 12, exports fell 2.2% YoY to $4.97bn and imports increased 4.2% YoY to $9.67bn, expanding the trade deficit to $4.70bn (+11.8% YoY). Averaging monthly trade activity during 2009-2011 the last six months of the year account for about 55% of annual exports and imports. Thus we forecast full year exports to be $11.03bn (~+5% YoY) and imports to be $21.48bn (~+6% YoY). The resulting trade deficit of $10.44bn (~+6% YoY).

Jan Jun 12 (m) Trade Exports 4,965 Imports 9,667 Trade Deficit 4,702 Source: CBSL and Gradient estimates

Gradient Cumulative Cumulative CBSL target estimates trade in Jan trade, full year 2012E (m) % of target 2012E (m) Jun 2009 11 (m) 2009 11 (m) 11,700 42.4% 11,033 11,811 25,965 20,900 46.3% 21,481 20,185 44,289 9,200 51.1% 10,448 8,374 18,324

% of cumulative balances 45% 46% 46%

Gradient Alliance
M ont hly Bullet in: Augus t 2 0 1 2

In Business news:
Tea production in July declined for the sixth consecutive month down 4.25% YoY to 24.11mn kg.
36.0 34.0 32.0 30.0 28.0 26.0 24.0 22.0 20.0 Jan Feb Mar Apr 2010 May Jun 2011 Jul 2012E Aug Sep Oct Nov Dec

Tea Production (mn kg)

Tea Board forecasts 325mn kg of production for 2012. Assumed monthly progression of tea production.

Production for the first seven months was down to 188.16mn kg (-3.9% YoY). The prevailing drought conditions continue to be the main reason which has hampered high and medium grown tea. Industry experts have also stated that certain tea factories have been temporarily closed due to rising costs and falling output. India and Kenya have also suffered similar plights with tea production for the first six months declining by 6% and 11%. Based on the monthly production during 2010 and 2011, we have analysed a likely monthly progression in production for the rest of the year, given 2012 production estimates of 325mn kg.

Sources: Sri Lanka Tea Board Note: July - Dec 2012 monthly progression estimates is based on average monthly contribution to annual production during 2010 and 2011

Source: Sri Lanka Tea Board

Tourist arrival for the month of July 12 was up 7.8% YoY to 90,338, but came in below our estimates of 94,000.
123,000 113,000 103,000 93,000 83,000 73,000 63,000 53,000 43,000 33,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011 2010

Tourist arrivals in 2012 are up 61.7% YoY to 534,205. Sri Lanka plans to attract 100,000 American tourists by 2016 by diverting tourist traffic from the Maldives and India. For the first six months of 2012, arrivals from North America rose 20% YoY to 27,355. British Airways is to resume flights to Colombo in early 2013 following an absence of 15 years after the airline suspended services in 1998 citing security issues. However, the UK issued a travel advisory to British citizens warning them of an upsurge of nationalism and an increase in the number of sexual offences. The UK brings in the highest number of visitors behind India with arrivals in July up 13.7% YoY to 13,643. As of July, the government had approved 129 investment applications to build about 9,364 hotel rooms. This was in line with government aims to increase hotel rooms to 40,000 by 2016 to meet target arrivals of 2.5m visitors.

Tourist Arrivals

2012E SLTDA forecatsts 1m tourist arrivals in 2012. Assumed monthly progression 2012E of tourist arrivals .

Source: Sri Lanka Tourism Development Authority (SLTDA) , Capital Alliance (CAL), Business Monitor International (BMI)

of Motor Traffic indicated that registration of cars below 1000cc had declined to 7,343 (-41% YoY) for the first six months of 2012. Motor Cycle sales for the month of July were down 44% YoY to 11,315. Trishaw sales were the only positive note with sales of 8,009 units in July, a gain of 4,000 units compared to a month earlier. Industry experts anticipate imports to continue to decline given the availability of ample stock, government regulations curtailing credit extensions together with the rise in leasing interest rates.

New vehicle registrations continue to decline with a drop of 55% YoY in July to 26,799 with motor car registrations dipping 42% YoY to 18,376, according to JB Securities. Department

1,600 1,400 1,200 1,000 800 600 400 200 Maruti Alto Source: JB Securities 127 858

July vehicle sales by brand

1,373 Jul-12 Jul-11

236 4 41 Maruti/Suzuki 3 58 27 66 Toyota

Cherry

Nissan

Gradient Alliance
M ont hly Bullet in: Augus t 2 0 1 2

In Business news:
Substandard fuel costs SL Railways Rs.30m and Transport Board Rs.6m.
This is the fourth reported instance on substandard fuel within the last three years. According to CPC, this stock of fuel that was alleged to have been imported from Vitol Group, who were blacklisted in 2009 for supplying contaminated lubricants. Subsequently the company was reinstated following a payment of $150,000 for damages. Vitol declared that it would continue to honour the terms of the contract with the government. Further the company threatened to

take legal action for breach of contract as it was not permitted to engage in bids though not being officially blacklisted. At a recent tender, Vitols bid which was $0.9m cheaper was not considered as the CPC purchased oil from a little-known Vietnamese supplier, Bumi Siak Pusako at a premium of $84.95 and $69.95 a tonne.

Sri Lanka continues to strengthen ties with India to improve bilateral trade.
A delegation of Indian pharmaceutical companies proposed to establish a pharmaceutical manufacturing hub in Sri Lanka, to increase bilateral trade to US10bn by 2015. Moreover, India pledged

to set-up apparel and textile manufacturing plants along with a proposal to reform Sri Lankas closed textile mills. On a negative note, US retailer J Crew pulled orders from Sri Lankan manufacturer Mirrai (Pvt) Ltd following its refusal to correct serious violations. This is likely to result in a loss of foreign exchange to the country along with about 1,000 jobs.

Large-scale capacity shortfall in the construction industry.

Construction GDP in billions of 2002 LKR

2012P-2016P CAGR: 12.0%
344.9 307.9

Prof. Krishan Deheragoda, Chairman of GS Engineering, warned of a large-scale capacity shortfall in the construction Industry, as only 5% of the 2500 registered contractors are graded as Major or Specialist contractors according to the Institute of Construction Training and Development. The reason was that many construction companies were family based and lacked aggression to take up challenges for innovation and expansion. Moreover Vox& Company forecasts $700m of commercial construction activities over the next five years (growth of 8%-10% p.a), driven by investments in the hotel sector. However, they noted that a high level of international involvement is hampering growth of the local industry.

2005-2011E CAGR: 8.5%

177.9 195.7 219.2

245.5

274.9

162.8 143.0 154.2 120.2 131.2

2005 2006 2007 2008 Source: Vox & Co. and CBSL

2009

2010 2011E 2012P 2013F 2014F 2015F 2016F

The LMD-Nielsen Business Confidence Index in July at a four month high of 108; up 18 points MoM,

Aug-11

Dec-11

Apr-11

Oct-11

Nov-11

Feb-11

Sep-11

May-11

Feb-12

Apr-12

Jan-11

Jan-12

May-12

Jun-11

Jun-12

Jul-11

Mar-11

Gradient note Business confidence data for August 12 was not released at the time of publication.

Source: www.lmd.lk

Mar-12

Jul-12

as negative economic sentiment from policy tightening was reported to be receding. The Nielson Sri Lankas Director Shaheen Cader stated The business sector is increasingly optimistic that the economy would stage a recovery post the devaluation period, although respondents are still extremely concerned about inflation and the economy.

185 175 165 155 145 135 125 115 105 95 85

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In Business news:

2Q12 Industry wise earnings summary:

interest margins remained steady at 4% as high deposit pricing ate into high loan rates. The Gross NPL has increased by 20 basis points to 3% compared to 2.8% in 1Q12.

The Banking & Finance Sector recorded strong results for 2Q12. Among the top five players, net interest income grew at an average of 33% YoY due to high interest rates during the quarter. Net

Net Interest Income Net Interest Margin Net Profits ROA ROE Gross NPL Group Bank Group Loans to deposit Bank level Bank level Bank level Rs. Bn YoY% 2Q12 1Q12 Rs. Bn YoY% 2Q12 1Q12 2Q12 1Q12 2Q12 1Q12 2Q12 1Q12 Commercial Bank of Ceylon 5.4 19.7% 4.5% 4.4% 2.5 25.0% 88.6% 87.9% 3.3% 3.6% 22.9% 25.2% 3.7% 3.6% HNB 5.4 37.0% 4.9% 4.7% 1.7 32.0% 92.8% 91.3% 2.2% 2.2% 16.2% 15.3% 4.6% 4.3% Sampath Bank 3.0 39.3% 4.1% 3.9% 1.4 19.8% 94.5% 96.8% 3.2% 3.4% 28.0% 29.2% 2.4% 2.6% NDB 1.4 26.6% 3.6% 3.6% 0.6 61.7% 115.4% 120.1% 1.8% 2.1% 20.0% 22.8% 1.6% 1.4% BOC 8.8 40.6% 3.4% 3.3% 3.6 65.5% 97.7% 94.3% 2.4% 2.6% 37.5% 41.4% 2.4% 2.2% Net Interest Income Net Interest Margin Net Profits ROA Gross NPL 2.8% Average 4.8 32.6% 4.1% 4.0% 2.0 40.8% 97.8% 98.1% 2.6% 2.8% 24.9%ROE 26.8% 3.0% Group Bank Group Loans to deposit Bank level Bank level Bank level Source: Company Data Rs. BnRevenue YoY% 2Q12 Net Profit 1Q12 Rs. BnEBITDA YoY% 2Q12FOREX 1Q12 2Q12 Net Profit 1Q12 2Q12 1Q12 2Q12 1Q12 losses ARPU Rs. MoU Commercial Bank of Ceylon 5.4 4.5% 4.4% 2.5 88.6% Bn 87.9% 3.3% 3.6% (Mobile Post & Pre Paid) (Mobile Post & Pre Paid) 22.9% 25.2% 3.7% 3.6% Group 19.7% Group Group 25.0% Rs. Margin driven down profitability 2.2% 2Q12 SLT and 15.3% 2Q12 4.6% 1Q12 4.3% 4.7% Rs. Bn Income 2.2% 1Q12 Rs. Bn 5.4 YoY%37.0% Rs. Lanka telecom and Dialog 2Q12 92.8% 1Q12 91.3% TheHNB leaders in the telecom sector, Sri Bn4.9% YoY%Net Interest1.7 YoY%32.0% Net Interest Margin 2Q12 Net Profits 39.0% at16.2% 1Q12 30.4% at Dialog. Dialog two ROA ROE Sampath Bank 3.0 39.3% 4.1% 3.9% 1.4 19.8% 94.5% 96.8% 3.2% 3.4% 28.0% 29.2% 2.4% Sri lanka Telecom 14.0 12.0% 0.7 39.0% 4.8 9.5% 0.5 1.4 5.0% 2.7% NA NA NA NA Bank Group Bank level base Bank lev recorded a its 20.0% and 22.8% post Axiata, registered revenue growth of 12.0%3.6% 9.5% for 2Q12. 61.7% 115.4% 120.1% 6.0% YoY growth in Loans to depositpre-paid subscriber2.6% and 30.4% Group NDB 1.4 26.6% 3.6% 0.6 1.8% 2.1% 1.6% 1.4% Dialog Axiata 14.1 9.5% 0.9 4.7 4.0% 0.9 2.1 6.2% 4.0% 350.0 346.0 2.1 2.1 Bn 2Q12 1Q1 to 7.4m.1.8 BOC 8.8 40.6% 3.4% 3.6 2.4% 2.6% 37.5% 41.4% Average 14.1 10.8% 0.8 34.7% 0.7 2.1 2.1 However, foreign exchange losses amounting toRs.3.3% YoY% 65.5% Rs.1.4bn4.8 have 6.7%2Q12 97.7%1Q12 94.3% Rs. Bn5.6%YoY% 0.7%2Q12 350.0 1Q12 346.0 2Q12 2.4% 1Q122.2% Commercial Bank 32.6% of Ceylon 4.1% 4.5% 4.4% 2.5 25.0% 88.6% 87.9% 3.3% 22.9% Average 4.8 4.0% 5.4 2.0 19.7% 40.8% 97.8% 98.1% 2.6% 2.8% 24.9% 26.8% 3.0% 2.8%3.6% Revenue Government Net HNB 5.4 PAT 37.0% 4.9% Profit 4.7% 1.7 32.0% 92.8% 91.3% 2.2% 2.2% 16.2% Revenue Net Profit FOREX ARPU MoU Net Group Levies/ Finance Cost 3.0 EBITDA Group Margin Sampath Bank 39.3% 4.1% losses 3.9% 1.4 Profit19.8% 94.5% Rs. 96.8% 3.2% 3.4% 28.0% Rs.1Q12 Bn (Mobile Post & Pre Paid) (Mobile Post & Pre Paid) Margin Rs. Bn Group YoY% Rs. Bn Group YoY% Rs. Bn Group YoY% 2Q12 NDB Rs. Bn20.8 YoY% 8.9% Rs. Bn16.0 YoY% 7.8% 1.4Bn2.4 YoY% 26.6% 2Q1211.6% 1Q12 7.5% 2Q12 0.6 1Q12 3.6% 3.6% 61.7% 2Q12 115.4% 1Q12 120.1% 2Q12 1.8% 2.1% 20.0% Rs. 1Q12 Ceylon Tobacco 32.2% Net Interest Income 0.3Net Interest Margin 40.6% Net Profits ROA Gross BOC 3.4% 3.3% 3.6 65.5% 97.7% 94.3% 2.4% 37.5% NPL Sri lanka Telecom 14.0 12.0% 0.7 39.0% 4.8 9.5% 0.5 1.4 5.0% 2.7% NA NA NAROE NA2.6% *Cargills Ceylon 14.1 25.7% 115.5% 8.8 0.3 24.3% 1.8% 2.6% Bank Loans Bank level Bank Dialog Axiata 9.5% 0.9 2846.5% 4.8 0.8 32.6% Group 0.9 30.4% 4.7 4.0% 2.1 6.2% 4.0% Bank level 350.0 346.0 2.1 2.1 Average 14.1 Group 4.1% 4.0% to deposit 40.8% 2.0 97.8% 98.1% 2.6% 2.8% 24.9%level Nestle Lanka 7.1 13.0% 0.05 21.7% 11.0% 6.3% Average 14.1 10.8% 0.8 34.7% 4.8 6.7% 0.7 1.8 5.6% 0.7% 350.0 346.0 2.1 1Q12 2.1 Average 14.0 15.8% 5.4 9.9% 8.1% 5.5% Rs. Bn YoY% 2Q12 990.0% 1Q12 1.1 Rs. Bn YoY% 2Q12 1Q12 2Q12 1Q12 2Q12 2Q12 1Q12 *YE 31st March of Source: Company Commercial BankDataCeylon 5.4 19.7% 4.5% Revenue 4.4% 2.5 Net Profit 25.0% 88.6% EBITDA 87.9% 3.3% losses3.6% 22.9% Profit 25.2% 3.7% FOREX ARPU Rs Net Revenue Government PAT Net Profit HNB 5.4 37.0% 4.9% 4.7% 1.7 32.0% 92.8% 91.3% 2.2%Rs. Bn 2.2% 16.2% 4.6% Group Group (Mobile Post & Margin 15.3% Group Levies/ Finance Cost Group Margin Group Margin Revenue Net Profit Net Profit Revenue PBT PBT Margin Sampath three 3.0 39.3% Group Rs. Bn Rs. Bn3.9% 4.1% 1.4 19.8% 94.5% Bn Hotel 96.8% 3.2% Hotel rates. Levies paid to 29.2% 2Q12 2.4% 1Q1 The top Bank companies Rs. Bn Group in the Food, Beverage & TobaccoGroup sector Rs. Bn surge in finance costs due to high interest 3.4% 2Q12 28.0% 1Q12the YoY% YoY% Rs. YoY% 2Q12 1Q12 YoY% Rs. Bn YoY% YoY% 2Q12 Hotel 1Q12 NDB 1.4 3.6% 14.0 2.4 4Q12 61.7% 7.5% Rs. 115.4% 120.1% 1.8% 1.6%NA Ceylon Tobacco Rs. 20.8 YoY% Rs. Bn 16.0 Sri lankagrowth 8.9% 26.6% YoY% 7.8% 1Q13 3.6% 12.0% Rs. 0.7 5.0% 2.7% government by 4.8 rose 7.8% YoY despite a 1.4 in20.0% drop volume. 22.8% posted an average revenueBnTelecom of about 16.0%. Net profit 32.2%0.6 Bn11.6% YoY% 39.0% Bn CTC YoY% 9.5% 1Q13 0.5 4Q12 2.1% *Cargills Ceylon 14.1 115.5% 28.5% 0.3 24.3% 1.8% 2.6% BOC Hotels & Properties Dialog Axiata 8.8 25.7% 40.6% 0.3 3.4% 14.1 3.3% 9.5% 3.6 65.5% 30.4% 97.7% 4.7 94.3%4.0% 2.4% 2.6% 37.5% 41.4% 2.4% Asian 1.7 8.0% 0.50 47.0% 43.4% 1.6 27% 0.47 75.7% 29.6% NA 0.9 0.9 2.1 6.2% 4.0% 350.0 marginsLanka Hotel Holdings down 2.3 both Cargills and Nestle12.2% a 33.1% as 27.0% saw 21.7% Nestle 7.1 13.0% 0.05 2846.5% 0.8 11.0% 6.3% Aitken were 0.29 119.0% 0.5 47% 0.01 195.2% 1.9% 27.1% AverageSpence dragged 4.0% 40.8% 34.7% 97.8% 4.8 98.1%6.7% 2.6% 2.8% 24.9% 26.8% 3.0% Average 14.0 4.8 37.0% 32.6% 5.4 4.1% 14.1 2.3% 10.8% 2.0 0.8 0.7 1.8 5.6% 0.7% 350.0 Average 15.8% 990.0% 1.1 9.9% 8.1% 5.5% John Keells Hotels 1.7 0.04 493.0% 26.6% NA NA NA NA NA NA *YE 31st March Trans Asia 0.6 37.0% 0.16 122.0% 24.6% 40.0% 0.6 39% 0.18 150.6% 27.7% 33% Revenue Net Profit EBITDA0.9 ARPU Rs. MoU Net Profit Average 1.6 27.3% 0.24 195.3% Revenue 16.9% 35.8% 38.0% 0.22 19.7% Government FOREX losses PAT 140.5% Net Profit 30.1% Group Group (Mobile Post & Pre Paid) (Mobile Post & Pr MarginMargin Revenue Net Profit GroupNet Profit Margin Levies/Revenue Cost Rs. Bn Group PBT PBT Group Finance Margin Rs. Bn Rs. Bn YoY% Group Bn Rs. YoY%Hotel 2Q12 1Q12 2Q12 1Q12 2Q12 1Q12 2Q12 1Q12 Group YoY% Group Hotel Hotel Rs. Bn YoY% Rs. Bn YoY% Rs. Bn YoY% 2Q12 1Q12 Rs. Bn YoY% Rs. Bn YoY%0.7 1Q13 4Q12 Rs. YoY% Rs. Bn YoY% 1Q13 4Q12 2.7% Sri lanka Telecom 14.0 12.0% 39.0% 4.8 Bn 9.5% 0.5 1.4 5.0% NA NA NA Ceylon Tobacco 8.0% 20.828.5% 8.9% 16.0 7.8% 2.4 32.2% 11.6% 7.5% Asian Hotels 1.7 0.50 47.0% 1.6 27% 0.47 29.6% Dialog Axiata & Properties 14.1 9.5% 0.9 30.4% 43.4% 4.7 4.0% 0.9 2.1 75.7% 6.2% 4.0%NA 350.0 346.0 2.1 14.112.2% 25.7% 0.3 115.5% 0.3 24.3% 1.8% 2.6% Aitken Spence Hotel Holdings*Cargills Ceylon 27.0% 2.3 0.29 119.0% 33.1% 0.5 47% 0.01 195.2% 1.9% 27.1% Average 14.1 37.0%10.8%0.04 0.8 34.7% 26.6% 4.8 6.7% 0.7 1.8 5.6% NA 0.7%NA 350.0 346.0 2.1 John Keells Hotels 1.7 493.0% 7.1 2.3% 13.0% NA NA NA NA Nestle Lanka 0.05 2846.5% 0.8 21.7% 11.0% 6.3% Trans Asia 37.0% 0.16 122.0% 40.0% 0.6 39% 0.18 150.6% 27.7% 33% Average 0.6 14.0 24.6% 15.8% 5.4 990.0% 1.1 9.9% 8.1% 5.5% Government Average 1.6 Revenue 27.3% 0.24 195.3% 16.9% 35.8% PAT 0.9 38.0% Net Profit 0.22 140.5% 19.7% 30.1%
Source: Company Data

*YE 31st March Group Levies/ Finance Cost Group Margin Rs. Bn YoY% Rs. Bn YoY% Rs. Bn YoY% 2Q12 1Q12 Revenue Net Profit Net Profit Margin Revenue PBT PBT Marg Ceylon Tobacco 20.8 8.9% 16.0 7.8% 2.4 32.2% 11.6% 7.5% on Group Group Group Hotel Hotel Hotel The hotel and travel sector continued its strong growth 115.5%the 0.3 about 17%1.8% average, below the 4Q12 levels of 36% due the end of with *Cargills Ceylon 14.1 25.7% 0.3 24.3% 2.6% Rs. and net profits,0.8Bn the peak season in April. YoY% Rs. YoY% 1Q13 4Q12 Rs. Bn YoY% Rs. Bn YoY% 1Q13 4Q1 top four companies recording a growth13.0% in revenue Bn 2846.5% Nestle Lanka 7.1 0.05 21.7% 11.0% 6.3% 43.4% 1.6 27% 0.47 75.7% 29.6% Average 14.0 990.0% 9.9% 47.0% 8.1% 28.5% 5.5% driven by an increase Asian Hotels arrivals.15.8% profit 5.4 1.7 were 1.1 0.50 in tourist & Properties Net margins 8.0% Aitken Spence Hotel Holdings 2.3 27.0% 0.29 119.0% 12.2% 33.1% 0.5 47% 0.01 195.2% 1.9% *YE 31st March John Keells Hotels 1.7 37.0% 0.04 493.0% 2.3% 26.6% NA NA NA NA NA Trans Asia 0.6 37.0% Profit 0.16 24.6% 40.0% 0.6 39% 0.18 27.7% Revenue Net Profit Net Margin 122.0% Revenue PBT PBT Margin 150.6% Average 1.6 27.3% Group 0.24 195.3% Hotel 16.9% 35.8% 0.9 38.0% 0.22 140.5% 19.7% Group Group Hotel Hotel
Rs. Bn Asian Hotels & Properties Aitken Spence Hotel Holdings John Keells Hotels Trans Asia Average
Sri Lanka sector
Source: Company Data

YoY% 1.7 2.3 1.7 0.6 1.6 8.0% 27.0% 37.0% 37.0% 27.3%

Rs. Bn YoY% 1Q13 4Q12 Rs. Bn 0.50 47.0% 28.5% 43.4% 0.29 119.0% 12.2% 33.1% 0.04 493.0% 2.3% 26.6% 0.16 122.0% 24.6% 40.0% 0.24 195.3% 16.9% 35.8%

YoY% 1.6 0.5 NA 0.6 0.9 27% 47% NA 39% 38.0%

Rs. Bn 0.47 0.01 NA 0.18 0.22

YoY% 75.7% 195.2% NA 150.6% 140.5%

1Q13 29.6% 1.9% NA 27.7% 19.7%

4Q12 NA 27.1% NA 33% 30.1%

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M ont hly Bullet in: Augus t 2 0 1 2

In Consumer news:
The President instructed Lanka Sathosa to
reduce the prices of rice, sugar, dhal, canned fish and sprats. Though the government stated that the objective of the move was to provide maximum relief to the consumer, less than a week later, authorities upped import duties on big onions from Rs.25 to Rs.50 per kg and potatoes to Rs.30 from Rs.10. The purpose of the hike was claimed as to safeguard local farmers and provide them a fair price. It was only in July that the cost of living committee chaired by the President decided to reduce the import duties on big onions and potatoes. Minister of Cooperatives and Internal Trade, Johnston Fernando, turned down a request made by poultry farmers in the North Western province to increase the price of eggs. According to the Department of Census & Statistics, egg prices have declined by 20.8% YoY to Rs.10.86 in August 12.

AC Nielsen says consumer spending declined in the second quarter of 2012.

The main reasons for the drop is the high level of inflation (9.8% in July, 6% annual average), rise in cost of debt and depreciation of the rupee which has increased prices of imported goods and raw material. Spending on branded FMCG in general trade registered a marginal growth of 3% YoY Jan-June 2012. The report also noted that the slowdown has been more noticeable in urban areas due to sharp increases in cost of fuel and utilities. For the 12 months to June 2012, the FMCG market in Sri Lanka has grown 7% YoY, purely based on price increases since Q2 2011.

The Nielsen Consumer Confidence Index in July 2012 was 59,

up 1 point from the all-time low of 58 recorded in June 12. 54% of the respondents (up from 34% in June 12) stated that conditions will be bad for people to buy things they need over the next 12 months, a clear indication of inflation impacting household disposable income. Consumers who consider job prospects to be bad over the next 12 months had risen to 24%, from 21% in June 12, but was still lower than the April 12 high of 31%.

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Mo n t h l y B u l l e t i n : August 2 0 1 2
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