Team Members

Md. Monitur Rahman – 083 066 060

Sabbir Hussain – 091 0472 060
Iftekher Hussain – 082 534 060
Ekhlasul Jannet – 083 606 560
Nowreen Musarrat Rahman – 083 164 060
d. Zahir Rownak Salehin – 083 330 060

Date: January 10, 2011

 Bangladesh Economic Outlook
 Where we are now
 DSE Annualize Return trend
 Valuation report by DSE
 Comparable Markets
 How we got here
 Proliferation of Capital Market Institutions and
Participants
 What’s next?

2
 GDP Growth (YoY%)
 Remittance inflow has been resilient to global turmoil
• Bangladeshis abroad sent home US$887.9mm in
September’09
 Inflation continues to decline
• Fell to 6.04% in July’09, from 6.66% in June’09 and
8.90% in December’08
 GDP growth forecast has been revised downwards to
5.88%, compared to 6.19% in the previous fiscal year
Inflation (YoY %)
 Exports have been relatively sheltered due to low cost
nature of Bangladeshi products
• Recovery in the US and Europe, the major buyers,
expected to boost export earnings

Export as a % of GDP

Remittance by Region
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Comments: Stocks are overpriced compared to those of developed countries.
5
Bangladesh is an emerging Capital Market compared to other
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7
8
 Sector Valuation 6 mnths' avg. 6 mnths' median
(Sept 26, 2010) PE PE PE Forward PE PB
Banking Sector 20.8 17.8 17.7 16.5 1.7
NBFI 57.2 53.5 55.0 32.4 12.0
Mutual Funds 118.5 95.8 93.4 .0 2.0
Pharmaceuticals 44.1 39.2 38.5 33.1 5.2
Cement Sector 65.7 47.1 45.1 30.8 3.8
Fuel & Power 29.9 33.3 30.4 25.8 6.5
Service & Real estate 116.2 70.0 56.2 8.5 7.0
Engineering 68.2 52.3 50.6 28.6 7.1
Food & Allied 23.0 19.5 18.2 19.4 6.8
IT 83.0 67.6 64.5 60.9 3.7
Textile 77.9 51.7 51.3 40.4 3.0
Travel & Leisure 45.7 35.8 34.4 .0 3.5
Paper & Printing 36.3 29.2 28.1 212.5 4.9
Telecommunication 21.9 25.1 23.7 26.0 6.5
Tannery 20.9 18.4 18.3 28.0 4.0
Jute 48.6 50.3 42.5 44.0 1.2
General Insurance 30.9 32.3 31.1 32.5 4.2
Life Insurance NA NA NA NA 17.8
Ceramic 109.9 104.5 94.8 74.6 18.7
Miscellaneous 47.2 41.3 42.6 18.1 6.0
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Strengthening of Surveillance

 Following the stock market crash of 1996, measures have been taken to
prevent future incidents of the sort
Constant market surveillance by the SEC
Increasing standards of corporate governance
Demat Trading
Focus on investor education – establishment of Capital Markets
Institute

Introduction of BASEL II Guidelines

 Introduction of BASEL II guidelines by Bangladesh Bank likely to

encourage banks to raise capital through debt instruments in 2010
Issuance of debt and equity by banks through capital markets likely
to generate increasing liquidity
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Introduction of Book building / Price Discovery
 Introduction of book building is a big step towards developing
Bangladesh capital markets
 Book building reduces risk of undervaluation for issuers
 Ensures fair pricing by factoring in demand, likely to encourage
listing of large, well-reputed companies
 SEC qualifying conditions for book-building set certain criteria for
companies to be eligible

Infrastructure Development through Capital Markets

 Focus on infrastructure development may see Government of Bangladesh
(GoB) seek capital markets as an avenue for financing
 GoB plans to issue BDT 5.0 bn (US$72mm) in securitized bonds to
fund Bangabandhu Bridge
 Cabinet approval for the issue of BDT 42 bn (US$650mm) in bonds
to fund Padma Bridge likely
 Plans to construct second bridge over Padma at a cost of US$1.89bn
signals potential financing needs
 Further GoB funding requirements arise from needed development
in the power sector and development of roads and highways 11
Information Asymmetry
 Access to credible information is restricted
- Retail investors lack dedicated investment process infrastructure
- Forced to look to brokers for advice that may consist of market rumors
- Syndicate of large investors manipulate the market through price inflation, pump
and dump strategies

Supply Side Constraints

 Lack of fundamentally sound scripts as companies prefer traditional bank finance to
capital markets
- Need to encourage listing of good scripts in the market
- Reducing supply side constraints generates liquidity, reducing scope for price
manipulation

Lack of Professional Portfolio Management

 Ratio of institutional-to-retail investors remains low
- Institutional investors bring stability through non speculative long term
investments
- Listing of more mutual funds can be a starting point to increasing institutional
activity

Valuation Disparity
 Value of scripts is subject to speculative trading rather than sound fundamentals,
resulting in market volatility
- Education of investors, overall development of capital markets through time can
address this issue 12
Lack of a Formal Debt Market
 Bangladesh does not have established secondary debt market
- Markets are unable to provide short term financing solutions to
corporations, i.e., commercial paper
- Listing of debt instruments from quality issuers and institutional trading
can increase activity
- Introduction of BASEL II guidelines by Bangladesh Bank likely to
encourage banks to raise capital through debt
instruments in 2010
Quality Research and Analysis
 Development of quality equity research in the country is yet to match the
growth of local capital markets
- Quality research increases investor awareness, reducing speculative
trading and market volatility

Central Co-ordination of Regulators

 Top down co-ordination between Bangladesh Bank, SEC and related bodies
would:
- Streamline regulatory processes
- Reduce time required for quality issuers and new capital markets
products to reach market
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14
 A major foreign investor took out about BDT 1000 crore from the
Dhaka Stock Exchange that put the overall market into the current
state, i.e: liquidity shortage.
 Banks exposure in the stock market is greater than the permitted
limit.
 Inter-bank call money rate was greater than actually declared and
it still persists.
 Merchant banks and brokerage houses are not giving permitted
level of margin to the clients as they have fund shortage.

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 Banking Sector:
 Trust Bank (Forward P/E=10.09 )
 Bank Asia (Forward P/E=10.01)
 Islami Bank (Forward P/E=7.98)
 Standard Bank (Forward P/E=10.24)
 NBFI:
 LankaBangla Finance (Forward P/E=18.56 )
 Uttara Finance (Forward P/E=24.77 )
 PLFSL (Forward P/E=26.10 )
 Bay Leasing (Forward P/E=38.37)
 Engineering:
 Aftab Auto (Forward P/E=18.37 )
 BD Thai (Forward P/E=28.75 )

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 A total of BDT 10,00,000/- was invested in ten
stocks to form a portfolio.
 Equal investment in each stock.
 Passive investment.
 Investment started on 26th September, 2010 and
ended on 23rd Dec, 2010.
 Investment is made only in Dhaka Stock Exchange.
 No transaction cost.
 DSE General Index is used as a proxy for market.
 Risk Free rate 5%
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Company TRUST BANK ISLAM STAND LANKA UTTARA BAYLE AFTAB BD Portfo Marke
PLFSL
Name BANK ASIA IBANK BANKL BAFIN FIN ASING AUTO THAI lio t

Total
35.55% 19.75% 25.64% 52.57% -6.17% -15.58% 45.93% 63.33% 10.57% 16.35% 24.80% 16.52%
Return

Daily avg.
0.56% 0.34% 0.44% 0.77% -0.1% -0.19% 0.68% 0.9% 0.22% 0.3% 0.36% 0.0027%
Return

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19
 TRUSTBANK BANKASIA ISLAMIBANK STANDBANKL LANKABAFIN UTTARAFIN PLFSL BAYLEASING AFTABAUTO BDTHAI

TRUSTBANK 1.0000

BANKASIA 0.7522 1.0000

ISLAMIBANK B 0.7988 0.6476 1.0000

STANDBANKL 0.6751 0.7094 0.5306 1.0000

LANKABAFIN 0.2893 0.1258 0.1481 0.1284 1.0000

UTTARAFIN 0.2770 0.1901 0.1307 0.2476 0.3138 1.0000

PLFSL 0.1985 0.1974 0.0902 0.1352 0.4833 0.4395 1.0000

BAYLEASING 0.2396 0.3023 0.1335 0.0752 0.5342 0.3473 0.6341 1.0000

0.0274 -0.094 -0.072 -0.167 0.487 0.143 0.267 0.261 1.0000
AFTABAUTO

BDTHAI 0.4472 0.2271 0.4446 0.1579 0.3790 0.1009 0.1750 0.1716 0.1924 1

Interesting findings is the negative correlation of Aftab Auto with 3 out of 4

banks considered in the portfolio. Its negative correlation with banks can help to
reduce portfolio risk even though individually the stock is quite risky. 20
 Standard Deviation of individual stocks

Company TRUSTBANK BANKASIA ISLAMIBANK STANDBANKL LANKABAFIN UTTARAFIN PLFSL BAYLEASING AFTABAUTO BDTHAI

Std. Dev 2.95% 2.60% 3.2% 3.37% 1.6% 4.14% 2.76% 3.64% 3.023% 3.14%

Stocks Name Beta

Portfolio risk TRUSTBANK 1.4200
BANKASIA 1.0800
Total variance term (a) 1.060% ISLAMIBANK 1.2000
Total covariance term (b) 2.222% STANBANKL 1.3200
LANKABAFIN 0.5727
Total portfolio variance (a+b) 3.282%
UTTARAFIN 1.1300
Portfolio risk 1.809% PLFSL 0.9408
BAYLEASING 1.2400
AFTABAUTO 0.5320
BDTHAI 1.1000
Portfolio 1.0900 21
 Avg Remarks Avg Remarks
daily daily
return return
Portfolios (%) Risk (%) Portfolios (%) Risk (%)
Most risky
- & lowest
Portfolio 1 0.5394 2.82 Portfolio 16 0.1348 3.82 return
-
Portfolio 2 0.4983 2.55 Portfolio 17 0.0193 3.22
Portfolio 3 0.45 2.3 Portfolio 18 0.0925 2.69
Portfolio 4 0.3399 2.48 Portfolio 19 0.6485 2.62
Portfolio 5 0.3417 2.25 Portfolio 20 0.5848 2.35
Portfolio 6 0.3449 2.07 Portfolio 21 0.5205 2.11
Highest
Portfolio 7 0.4257 2.99 Portfolio 22 0.8485 3.43 return
Portfolio 8 0.4066 2.61 Portfolio 23 0.7454 3.02
Portfolio 9 0.39 2.28 Portfolio 24 0.639 2.61
Portfolio 10 0.734 3.17 Portfolio 25 0.2286 2.74
Portfolio 11 0.6522 2.79 Portfolio 26 0.26 2.27
Portfolio 12 0.5695 2.43 Portfolio 27 0.295 1.95
Portfolio 13 0.0455 1.55 Portfolio 28 0.306 2.9
Least
Portfolio 14 0.0509 1.52 risky Portfolio 29 0.3127 2.48
Portfolio 15 0.1432 1.56 Portfolio 30 0.3226 2.16

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 Cash Account Margin Account
Assumptions: Assumptions:
a. 100% Equity Financed a. 50% Initial Margin
b. No transaction cost b. Minimum Maintenance margin is 40%
c. No transaction cost.
d. Interest cost is 16.50%.

ROE Calculations ROE Calculations

Beginning value 999,964
Beginning value 999,964

End value End value 1,247,923

1,247,923
Profit 247,959
Profit 247,959
3 months
Equity investment 999,964
Interest (16.5%) 20,625 interest
ROE (%) 24.80 Net profit 227,334

Equity investment 499982

ROE (%) 45.47

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Stock Name Beta Required Return (k)
Trust Bank 1.4300 21.47
Bank Asia 1.0800 17.44
Islami Bank 1.2000 18.82
Standard Bank 1.3200 20.21
LankaBangla Finance 0.5727 11.60
Uttara Finance 1.1300 18.02
PLFSL 0.9408 15.84
BayLeasing 1.2400 19.28
Aftab Auto 0.5320 11.15
BDThai 1.1000 17.67

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Always consider technical analysis, company performance analysis, risk-return
analysis, and other analytical tools for perfect decision

For a risk averse (not risk taker) shouldn’t proceed before the volume changes
highly, otherwise investment might be blocked for long time.

We can take risk, but it has to be within our absorption/resilience capacity.
Diversify the portfolio, e.g. as it has been mentioned in our case.

Gathering at brokerage house is a waste of time, rather Internet serves all the
purposes. After checking on the internet, put the orders over phone, email or
physically.

Keep a certain amount of cash in the portfolio to buy any share on urgent basis
Be rational , not emotional and use own judgment

Keep Patience, whatever the value (profit/loss) changes in the portfolio !

Trust the own decision because price will increase someday in future, whenever
it is.
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