Analysis of Sectoral Performance & Market Opportunities 15 AUGUST 2017

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1 Analysis of Sectoral Performance & Market Opportunities 15 AUGUST 2017 Candor Research By Ravi Abeysuriya, CFA Group Director, Candor President, Colombo Stock Brokers Association (CSBA) President, Association of Alternate Financial Institutions (AAFI)

2 Content All time high net foreign inflows in 1H2017 Possible reasons for foreign interest Sectoral analysis where foreign investors see value Foreign favorites net foreign purchases as of end July 2017 Are local investors missing out? How local investors can capitalize on market opportunities Licensed Candor Regulated Equities Limited 2 by the Securities & Exchange Commission of Sri Lanka

3 Disclaimer The information and opinions contained herein are based upon information obtained from sources believed to be reliable and made in good faith. Such information has not been independently verified and no guarantee, representation or warranty, express or implied is made as to their accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This is for information purposes only, and the description of any company or their securities mentioned herein is not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments. 3

4 Net Foreign Inflow (Rs. Bn) Candor Research Market performance closely correlated with net foreign inflows 30 30% % ASPI Performance 7.8% 4.8% (YTD - July) -5.5% -9.7% 25% 20% 15% 10% 5% 0% -5% -10% -15% Source: CSE Annual Report 2016, Bloomberg, Candor 4

5 Rs. Bn Candor Research Gradual growth in foreign turnover compared to domestic turnover % Foreign (Rs. Mn) Domestic (Rs. Mn) % 36.0% 42.0% 46.9% 64.0% 72.4% 65.6% 58.0% 53.1% (YTD - June) Source: CSE Annual Report 2016, Bloomberg, Candor Research 5

6 1.2% Sri Lanka attracted highest net foreign Inflow as a % of total market cap in 1H % 1.0% 0.8% 0.6% 0.4% 0.6% 0.4% 0.4% 0.2% 0.1% 0.0% -0.2% Malaysia Indonesia India Sri Lanka Pakistan Vietnam -0.4% -0.6% -0.4% PER* Source: CSE Annual Report 2016, Bloomberg, Candor Research * PER as at January 2017 Bloomberg PE Values 6

7 SL is one of three Asian countries in the MSCI Frontier Markets Index 7

8 LKR Billion Candor Research Top countries that contributed to YTD net foreign inflows to SL Luxembourg United States Cayman Islands Ireland Virgin Islands (Br.) Norway Australia Source: CSE, Candor Research 8

9 LKR Million % Candor Research Three sectors with top YTD return had highest foreign inflows ,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 - Industrials ,377 Financials ,970 Sector Performance % (YTD - July) Consumer Staples 18.0 Consumer Discretionary 2.4 Materials 19.2 Telecommunication Services 5.5 Net Foreign Inflow (LKR Mn) 1, Source: CSE, Candor Research 9

10 Key stocks within the performing sectors Sector (GICS) Key Stocks Net Foreign Inflow (LKR Mn) YTD - Total Return (%)* PE(x) - Jan 2017 Current PE(x) Industrials 14, JOHN KEELLS HOLDINGS PLC 10, HEMAS HOLDINGS PLC 1, RICHARD PIERIS AND COMPANY PLC EXPOLANKA HOLDINGS PLC 1, Financials 6, SAMPATH BANK PLC 1, HATTON NATIONAL BANK PLC LB FINANCE PLC Source: CSE, Bloomberg, Candor Research * Bloomberg Total Return Return with dividend Reinvested 10

11 Key stocks within the performing sectors Sector (GICS) Key Stocks Net Foreign Inflow (LKR Mn) YTD - Total Return (%)* Consumer Staples 1, PE(x) - Jan 2017 Current PE(x) SUNSHINE HOLDINGS PLC CEYLON TOBACCO COMPANY CEYLON COLD STORES PLC Materials TOKYO CEMENT PLC 1, % CHEVRON LUBRICANTS PLC % Source: CSE, Bloomberg, Candor Research * Bloomberg Total Return Return with dividend Reinvested 11

12 Foreign favorites net foreign inflow YTD July 2017 Company Name Net Foreign Inflow - Rs. M YTD - Price Return PE(X) Jan 2017 PE(X) Aug John Keells Holdings plc 10, % Commercial Bank of Ceylon plc 5, % Hemas Holdings plc 1, % Expolanka Holdings plc 1, % Sampath Bank plc 1, % Tokyo Cement company (Lanka) plc - (NV) 1, % Sunshine Holdings plc % Hatton National Bank plc % Access Engineering plc % Dialog Axiata plc % Teejay Lanka plc % Royal Ceramics Lanka plc % Richard Pieris and company plc % The Kandy Hotels company plc % Ceylon Cold Stores plc % DFCC Bank plc % Ceylon Tobacco Company plc % Lb Finance plc % Tokyo Cement company (Lanka) plc % Hatton National Bank plc (NV) % Commercial Bank of Ceylon plc (NV) % Lanka IOC plc % Lanka Tiles plc % Hayleys plc % Piramal Glass Ceylon plc % Renuka holdings plc % Cargills (Ceylon) plc %

13 Increasing % foreign holdings of performing stocks JOHN KEELLS HOLDINGS PLC EXPOLANKA HOLDINGS PLC SAMPATH BANK PLC 19% 50.92% 16.84% 57% 70.72% 82% HEMAS HOLDINGS PLC TOKYO CEMENT PLC SUNSHINE HOLDINGS PLC 32% 31% 29.89% 37.65% 26.11% 49% Source: CSE, Candor Research Foreign Holding % August 2017 Foreign Holding % Jan

14 Foreign & Domestic Participation (%) PE(x) Candor Research Declining market PE levels resulted in increased foreign participation while domestic participation decreased 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% (YTD - June) Average PE(x) Foreign (%) Domestic (%) Source: CSE Annual Report 2016, Bloomberg, Candor Research 14

15 Are local investors missing out? Behavioral aspects explain Source: The 4 Psychological Phases of Asset Bubbles 15

16 How local investors can capitalize on market opportunities 16

17 Financial Year Latest Quarter 3 YR Avg High P/E 3 YR Avg Low P/E 2016/03 / /03 /02 Forward PER 3 YR Avg High P/B 3 YR Avg Low P/B PBV BVPS (LKR) Candor Research Use screens to identify bargains & Invest based on fundamentals Bloomberg Code Forec asted EPS Earnings Growth (%) P/E Analysis (1x) PBV Analysis (1x) Dividend Analysis Dividen d Yield DPS % JKH % 16.9% TKYO % 130.6% HEMS % 0.6% CLND LGL % % % % Source: Candor Stock Tracker 31 Mar 2017, (based on Bloomberg data) 17

18 Financial Year Latest Quarter 3 YR Avg High P/E 3 YR Avg Low P/E 2016/03 / /03 /02 Forward PER 3 YR Avg High P/B 3 YR Avg Low P/B PBV BVPS (LKR) Candor Research Use screens to identify bargains & Invest based on fundamentals Bloomberg Code Forec asted EPS Earnings Growth (%) P/E Analysis (1x) PBV Analysis (1x) Dividend Analysis Dividen d Yield DPS % Return YTD (%) - July JKH % 16.9% TKYO % 130.6% HEMS % 0.6% CLND LGL % % % % Source: Candor Stock Tracker 31 Mar 2017, (based on Bloomberg data) 18

19 Regularly review portfolio returns Portfolio A Stock Quantity Avg Cost Total Cost Market Value as at 31st July 2017 Portfolio Value as at 31st July 2017 Unrealized Gain/Loss Total Return% Annualize Return % JOHN KEELLS HOLDINGS PLC , , , % 45.63% HEMAS HOLDINGS PLC , , , % 95.35% RICHARD PIERIS & CO PLC , % % SUNSHINE HOLDINGS PLC , , , % 42.20% CEYLON COLD STORES PLC , , , % 22.33% SAMPATH BANK PLC , , , % 14.50% Total Portfolio Return 27.43% 53.97% ASPI Return 7.80% 12.80% S&P SL20 Return 9.74% 17.54% Portfolio Btfolio B Stock Quantity Avg Cost Total Cost Market Value as at 31st July 2017 Portfolio Value as at 31st July 2017 Unrealized Gain/Loss Total Return% Annualize Return % COLOMBO LAND & DVLP CO PLC , , (150.00) -5.88% % BLUE DIAMONDS JEWELLERY WORL (10.00) -7.14% % ADAM INVESTMENTS PLC (35.00) % % LANKEM DEVELOPMENTS PLC (90.00) % % ADAM CAPITAL PLC (30.00) % % Total Portfolio Return % % ASPI Return 7.80% 12.80% S&P SL20 Return 9.74% 17.54% 19

20 Do not make these amateur mistakes 1. Investing based on Rumors or Gossip (unproven facts) 2. Believing that the stock market is inherently risky 20

21 Educate yourself & gain experience on investing before you start It takes a lot of hard work to be a successful investor Invest in your financial education before you invest The goal of enlightened stock analysis is to identify underpriced securities relative to their true intrinsic value Take time to learn about the company before you buy, to be sure it meets your criteria for achieving your goal(s) If you don't have the time, or interest in following individual stocks, unit trust funds are a more efficient way to invest 21

22 THANK YOU 22