17 October 2013 Rights Issue Update

John Keells Holdings PLC (JKH)

Rights Issue A Gamble Worth Taking
Recommendation Rights : SUBSCRIBE Ordinary Voting Share : SELL Price (17.10.13) Target Price Sector : LKR217.50 : LKR195.00 : Diversified
After much speculation for several months, JKH announced the details of its land mark integrated resort project, which was followed by the announcement of a rights issue attached with warrants (2 for every 3 rights subscribed) to partly fund the USD820m project. The project is planned to include apartments, a hotel, entertainment and gaming facilities, a shopping complex, a convention centre and office space, largely resembling some of the regional integrated resorts. We are optimistic of this project, largely owing to the success this model has witnessed in the region and the countrys favourable location. Waterfront Properties (WFP) project to be the key growth driver of the group in the long term assuming proper execution: The WFP project which is planned to commence full operation by end of 2017E, is relying on Sri Lankas location and the integrated resort concept to attract high spending gaming tourists and Meeting, Incentives, Conferencing, Exhibitions (MICE) tourists. Management has indicated that WFP would merely rent the gaming area, whilst it stated that the rental to be received from the gaming area would consist of a fixed component; and a variable component linked to the performance of the gaming tenant. The total rental, according to the management could account for c. 60% of the gaming economics and would provide WFP an indirect exposure to the gaming business. We estimate that the rental received from the above to be largest contributor to WFP project, and hence believe that the success of WFP would largely depend on the ability of the company to attract a well reputed international gaming operator. Meanwhile, we expect the increase in finance charge from the 60:40 debt to equity optimal capital structure of WFP to exert pressure on JKHs bottom-line in the short to medium term, as the only cash flow stream to the company during that period would be from the pre-sales of apartments.

Balakrishnan Nirmalan nirmalan@asiacapital.lk

Price vs. Volume
Volume
350.00 300.00 250.00 200.00 6,000,000 150.00 100.00 50.00 4,000,000 2,000,000 0

LKR

12,000,000 10,000,000 8,000,000

Price

volume

Source Asia Wealth Research, Bloomberg

As at 17.10.2013 Index Price Movement 1Month 3Months 12Months Total Issued Qty (Mn) Average Daily Turnover (LKR 000's) (USD 000's) Market Capitalisation (LKR Mn) (USD Mn) Trailing P/E Trailing PBV Trailing ROE % DY % Free Float % 52 week High 52 week Low 5.6% -9.1% 10.3% 989.9 169,443.9 1293.6 186,426.4 1,423.2 15.8 2.2 14.8 1.4 73.8 291.2 196.3 12.1 1.8 12.5 2.7 15.4 1.7 11.2 1.3 4.3% -0.5% 6.6% 5.6% -5.5% -1.5% JKH ASI Diversified

Short-medium term EBITDA margin is likely to be driven by the Leisure and Property segments: We expect the Leisure segment, which is the largest contributor to EBITDA and the segment with the highest EBITDA margin, to continue to drive the groups EBITDA and the EBITDA margin. This is likely to be supported by the growth momentum in the high margin yielding Maldivian subsegment (c. 27% of FY2013 segment revenue); and the strong portfolio of restaurants and MICE facilities at the city hotels. However, we expect the Sri Lankan resorts to continue with their lacklustre performance. The Property segment is likely benefit from the commencement of revenue recognition from OnThree20 project and the possible revenue recognition of the 7th Sense premium apartments from 2HFY2014E or FY2015E. Further, we expect a recovery in the EBITDA margins of the Consumer Foods and Retail segment from 2HFY2014E subsequent to the ending of the re-structuring program undertaken by the Retail unit. We recommend a SELL on the ordinary voting share and recommend a SUBSCRIBE on the rights: Based on our sum of the parts valuation, taking into account a probability weighted value for WFP, we arrive at a one year price target of LKR195. We believe that the ordinary share is currently trading at a 10.3% premium to our intrinsic value and is yet to fully reflect the dilution effect from the rights to be listed and the warrants. However, we believe that the rights issue is attractively priced at LKR175 given that the attached warrants would reduce the effective cost of investing in the rights for an investor who opts to dispose the warrants during the warrants trading.
FY2011 Revenue (LKR'm) % YoY change EBITDA (LKR'm) % YoY change Net profit to shareholders (LKR'm) - Reported % YoY change P/E (x) ROE P/B (x) Dividend yield 60,500 26.1% 8,357 60.1% 8,246 58.5% 21.6 15.0% 3.0 1.4% FY2012 77,690 28.4% 11,808 41.3% 9,687 17.5% 17.7 14.7% 2.4 1.3% FY2013 85,557 10.1% 12,624 6.9% 12,201 26.0% 17.2 15.1% 2.4 1.4% FY2014E 95,852 12.0% 14,056 11.3% 10,662 -12.6% 19.0 10.1% 1.8 1.4% FY2015E 105,939 10.5% 16,000 13.8% 11,604 8.8% 18.8 9.2% 1.7 1.6% FY2016E 113,303 7.0% 16,571 3.6% 11,295 -2.7% 19.9 8.1% 1.5 1.5%

Source Bloomberg

Top 5 shareholders as of 30th June 2013 Mr S E Captain Broga Hill Investments Limited Janus Overseas Fund Paints & General Industries Limited Deutsche Bank AG London
Source Company Filings

Shareholding 9.9% 9.9% 8.9% 5.8% 3.9%

Rights Issue Update

Waterfront Properties Project to be the Key Growth Driver of the Group in the Long Term
The project which would be undertaken through the project company Waterfront Properties (WFP) would consist of apartments, a hotel, entertainment and gaming facilities, shopping complex, a convention centre and office space. The project, is estimated to cost c. USD820m (excluding land transfers) in total and is planned to be undertaken in two phases, with the estimated time of completion between 4-5 years. Phase 1 alone would cost c. USD660m (excluding land transfer) and WFP has the option to undertake Phase 2. The rights issue attached with warrants would be used to partly fund the project, whilst the balance would be funded via debt financing. The company indicated that, at optimal funding, WFP would be operating at a D/E ratio of 60:40. The project which has been granted the Strategic Development Project status, would enjoy several tax concessions subsequent to the approval of the parliament. Given the long gestation period for the implementation of the project and the lack of information regarding the international operator who would be operating the gaming facility, it would prove to be a cumbersome task to evaluate the project at this juncture. Further, the magnitude of the project and the long period for net cash inflow generation (the management expects the project to be in full operation during FY2019E) could increase the riskiness of the project in the short term. Further, we expect the bottom line of JKH to be under pressure in the short to medium term, due to the interest cost arising from the WFP project in the absence of any significant inflows from the project. However, we remain optimistic about the project, given the success that this model has witnessed in several countries in our region and due to the strategic location of Sri Lanka which is a key catalyst for the success of this project. We believe that the successful implementation of the project would be value accretive to the shareholders in the long term. We discuss below the details regarding some of the key components of the WFP project. Gaming Facility The project would include a 150,000 sq.ft gaming facility. Management has indicated that it would neither own nor operate the gaming facility, but it would merely rent out the facility. However, the management has indicated that the rental income that WFP would earn from letting out the gaming area would consist of a fixed component and a variable component (that would be linked to the performance of the gaming tenant), which in total could account for c. 60% of gaming economics. The variable component of the rental structure would enable WFP to indirectly benefit from the upside potential of the gaming business. As per the gazette notification issued under the Strategic Development Projects Act, if WFP engages in gaming operations, profits from such operations would be taxed at the normal corporate tax rate (currently 40%). However, rentals (both fixed and variable) received from letting out the gaming area would enjoy the tax breaks. By structuring its exposure to the gaming operations in the above method, WFP would benefit from the tax breaks, whilst benefiting from the upside potential from the variable component of the rental. In order to succeed from the exposure to the gaming operations, which would also influence the success of most of the other units of WFP, a well reputed global gaming operator would need to be drawn into this location. Further, given the restrictions in issuing new licenses for gaming businesses, the international partner would have to partner up with a local license owner. Whilst, there have been media reports on the possible local partner, management has indicated that it is still in the process of finalising an international gaming operator. We believe that the successful execution of the gaming facility would trickle down to other units of WFP and result in substantial value addition to the shareholders of JKH. Convention Centre The convention centre would have a seating capacity of 2,500 in a 247,000 sq.ft area. The convention centre along with the 800 room luxury hotel would enable WFP to be an ideal location to host large scale conferences and events in Sri Lanka given the current scarcity of such facilities within the country the strategic location of the country in the region. Luxury Hotel Despite the intense competition that is prevalent within the city hotel sphere, we believe that the integrated resort model would enable the hotel to maintain substantially higher occupancy levels than the general industry average as witnessed in other regional integrated resorts. Success in attracting a reputed global gaming operator and a successful destination marketing of WFP convention centre would allow the hotel to attract MICE travellers during weekdays and leisure/gaming travellers during the weekends, and thus enable to maintain relatively high occupancies.

Asia Wealth Management Co. (Pvt) Ltd

Rights Issue Update

Luxury Condominiums Backed by the success witnessed in JKHs apartment projects such as Monarch, Emperor, OnThree20 and 7th Sense; the WFP project is planned to include 240 luxury condominiums under Phase 1, which would be followed by another 200 serviced/residential apartments if Phase 2 is implemented. Management indicated that the apartments would be priced lower than the 7th Sense up market apartments, but would be priced higher than the Emperor and Monarch apartments. We believe that the initial cash inflows from the project could accrue to WFP beginning from FY2015E in the form of apartment pre-sales. However, we remain cautious regarding the luxury condominium component of the WFP project, given the exponential growth that is being witnessed in the apartment stock within Colombo. Shopping Mall The shopping mall with a floor area of c. 400,000 sq.ft is planned to be positioned as an up-market shopping mall similar to Crescat Boulevard. Management has indicated that it is evaluating the possibility of a tie-up with an international mall operator to manage the mall operations. We expect the shopping mall operation to benefit from the gaming facility which generally attracts high spenders and the convention centre.

Asia Wealth Management Co. (Pvt) Ltd

Rights Issue Update

Outlook for Other Key Segments of JKH

Transportation (accounted for c. 23% of the groups FY2013 external revenue)
Transportation Segment External Revenue (LKR'm) % YoY Change Adjusted EBITDA (LKR'm) % YoY Change FY2011 13,426 41.4% 852 214.4% FY2012 18,428 37.3% 1,215 42.6% FY2013 19,438 5.5% 1,074 -11.7% FY2014E 20,129 3.6% 1,106 3.0% FY2015E 21,031 4.5% 1,142 3.3% FY2016E 1QFY2013 1QFY2014 21,480 2.1% 1,152 0.9% 5,307 n/a 364 n/a 4,129 -22.2% 250 -31.3%

Transportation segment external revenue mainly consists of the bunkering revenue earned from Lanka Marine Services (LMS). We expect the segment which witnessed a 22% YoY drop in revenue in 1QFY2014, primarily due to drop in volumes (owing to slowdown in Sri Lankas external trade and world trade) to recover in line with the recovery witnessed in Sri Lankas external trade and the projected recovery in world trade. Further, the opening of the Colombo International Container Terminal (CICT) deep draft terminal in August 2013could increase the traffic in the Colombo port in the medium to long term and provide an opportunity for LMS to increase its volumes sold. However, the growth in revenue is likely to be restricted, due to the anticipated downward trend in crude oil prices, which would require LMS to adjust prices to remain competitive within the region.
Transportation Segment Revenue Fluctuation with Crude Oil Price
25,000 20,000 15,000 10,000 5,000 0 FY2009 FY2010 FY2011 FY2012 FY2013 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0%

SAGT's Share of Containers Handled Trending Downwards

2,500 2,000 TEUs'000 1,500 1,000 500 0 CY2007 CY2008 CY2009 CY2010 CY2011 CY2012 51.0% 50.0% 49.0% 48.0% 47.0% 46.0% 45.0% 44.0% 43.0% 42.0% 41.0%

Revenue (LKR'm) Brent crude oil price change

Revenue growth Containers handled by SAGT SAGT containers handled as a % of total container traffic
Source: SAGT website, Central Bank Annual Report

Source: Company filings, EIA, Asia Wealth Research

South Asia Gateway Terminals (SAGT), an associate of JKH which operates a container terminal at the Colombo port, is the cash cow of the JKH group and the key driver of the bottom-line of the Transportation segment. SAGT witnessed a slowdown in its volumes handled during FY2013 in line with the slowdown in global trade and the tight monetary policy adopted in Sri Lanka during 2012. This trend persisted in 1QFY14, which resulted in the groups share of SAGTs profits dipping 17% YoY. We expect an improvement in SAGTs performance subsequent to the recovery that is being witnessed in Sri Lankas external trade after the expansionary monetary policies adopted by the Central Bank and the improvement witnessed in several developed economies. However, the commencement of operations of CICT (with a 1.4m TEU capacity), which is a joint venture between China Merchants Holdings (International) Co., Ltd. (85% shareholding) Sri Lanka Ports Authority (SLPA) (15% shareholding) could increase the competition for SAGT. As such, we expect the share of containers handled by SAGT to continue its downward trend. According to the management, the segments latest associate Saffron Aviation which is in the business of domestic airline operations, commenced its operations during 2QFY14. However, the management indicated that the company which operates two aircrafts (eight seats each), has been witnessing low load factor. Given, the comparatively small size of the investment (LKR238m), we expect the impact on same to be limited.

Asia Wealth Management Co. (Pvt) Ltd

Rights Issue Update

Leisure (accounted for c. 24% of the groups FY2013 external revenue)

Leisure Segment External Revenue (LKR'm) % YoY Change Adjusted EBITDA (LKR'm) % YoY Change FY2011 13,810 20.1% 3,294 46.1% FY2012 17,415 26.1% 5,595 69.9% FY2013 20,593 18.2% 6,864 22.7% FY2014E 22,951 11.4% 7,495 9.2% FY2015E 24,522 6.8% 7,950 6.1% FY2016E 1QFY2013 1QFY2014 26,057 6.3% 8,348 5.0% 3,913 n/a 1,107 n/a 4,117 5.2% 956 -13.6%

The Leisure segment had been witnessing an uptrend in revenue and EBITDA post war in line with the overall growth witnessed in Sri Lankan tourism. However, occupancies have been trending downwards in the properties in Sri Lanka in line with overall dip witnessed in star class hotels in Sri Lanka as the country continues to attract a high number of low end customers. This has been partly reflected in the 1QFY14 performance, where the revenue growth slowed down to 5.2% YoY, whilst the EBITDA dipped 13.6% YoY. In addition, the hike in electricity prices and the industry wide wage hike in Sri Lanka could also have contributed to the dip in EBITDA.
Leisure Segment Revenue - City Hotels have been Driving the Revenue During the Past Few Years
25,000 Total Revenue (LKR'm) Occupancies 20,000 15,000 10,000 5,000 0 FY2009 City Hotels Maldivian Resorts FY2010 FY2011 FY2012 FY2013 Sri Lankan Resorts Destination Management

Segment Occupancies Across Hotel Categories Maldivian Resorts Top the List
90% 80% 70% 60% 50% 40% 30% FY2009 FY2010 FY2011 FY2012 FY2013 Cinnamon Grand Sri Lankan Resorts Cinnamon Lakeside Maldivian Resorts

Source: JKH, AHPL and KHL company filings, Asia Wealth Research Source: AHPL and KHL company filings, Asia Wealth Research

The city hotel sub-segment which has been driving the overall segment revenue during the past few years and catering to MICE travellers is likely to witness intense competition in the medium to long term with the entrance of several new hotels in the city hotel sphere. However, the successful implementation of WFP project and the increase in number of entertainment facilities within the city limits could assist the city hotels to maintain sustainable occupancy levels. In addition, the strong portfolio of restaurants of the city hotels is likely to support the revenue growth momentum. The city hotels are likely to witness a slight improvement in occupancies during 2HFY2014E due to the Commonwealth Heads of Government Meeting (CHOGM) that is being held in Colombo. Sri Lankan resort hotels are likely to continue to witness slowdown in occupancies, amidst a rise in room stock, unless the country as whole is able to draw in high a proportion of high-end tourists. Further, relatively higher Average Room Rates (ARR) cf. regional competitors could restrict the Sri Lankan resort hotels to increase the ARR, despite the rise in operating expense. This is also likely to exert pressure on the margins. The Maldivian resorts are likely to be a key growth driver amidst a rise in occupancies. Further, the region which attracts a high number of high end tourists and charges premium ARRs, yields higher margins cf. other locations. This is likely to support the Leisure segment to sustain its margins. JKH expects the 240 room Sancity Hotels project (which is a joint venture between JKH and Sanken Lanka) to commence operations during 2QFY2015E. The hotel is branded as a three star business hotel, where JKH currently holds a c. 28% stake in it. Management indicated that the shareholding would dilute to c. 20% as at the completion of the project and the hotel would be treated as an associate in the books of JKH. We expect the demand for this hotel to be driven by the budget MICE travellers.

Consumer Foods & Retail (accounted for c. 28% of the groups FY2013 external revenue)
Consumer Foods & Retail External Revenue (LKR'm) % YoY Change Adjusted EBITDA (LKR'm) % YoY Change FY2011 18,358 15.9% 1,113 41.5% FY2012 21,969 19.7% 2,257 102.8% FY2013 24,267 10.5% 1,826 -19.1% FY2014E 26,742 10.2% 2,012 10.2% FY2015E 29,316 9.6% 2,336 16.1% FY2016E 1QFY2013 1QFY2014 31,967 9.0% 2,547 9.0% 5,987 n/a 555 n/a 6,155 2.8% 421 -24.1%

Asia Wealth Management Co. (Pvt) Ltd

Rights Issue Update The Consumer Foods & Retail (CF&R) segment, despite witnessing a double digit growth in revenue during the past few years has been witnessing high volatility in EBITDA margins due to fluctuation in raw material prices, hike in import duty, etc. In addition the FY2013 performance was hampered by the one-off VAT impact after the introduction of VAT on retail trade, where the Retail unit was unable claim input VAT on the inventory as of 31 December 2012 due to a non-availability of a transitional provision in the VAT Act. Further, the restructuring expense incurred by the retail unit termed as the way forward strategy also impacted the performance of the segment. The 1QFY2014 performance of the CF&R segment was affected by the weakening consumer demand due to rise in cost of living, increase in raw material and energy costs and the continuation of the restructuring program at the Retail unit. However, with the completion of the restructuring at the Retail unit during 1QFY2014, the EBITDA margin of the segment is likely to improve in the absence of the one-off restructuring expense. Further, the projected growth in per capita income and improvement in life style is likely to improve the demand for the CF&R segment, albeit the rise in cost of living could be a damper.

Financial Services (accounted for c. 10% of the groups FY2013 external revenue)
Financial Services External Revenue (LKR'm) % YoY Change Adjusted EBITDA (LKR'm) % YoY Change FY2011 6,484 23.2% 953 87.6% FY2012 7,932 22.3% 1,514 58.9% FY2013 8,599 8.4% 1,204 -20.4% FY2014E 9,931 15.5% 1,392 15.6% FY2015E 11,256 13.3% 1,607 15.4% FY2016E 1QFY2013 1QFY2014 12,737 13.2% 1,808 12.5% 1,997 n/a 257 n/a 2,230 11.6% 116 -54.7%

Segments revenue is derived from Union Assurance (c. 98% contribution to revenue) and John Keells Stock Brokers (c. 2% contribution to revenue). Despite the gradual growth that has been witnessed in the insurance industry, the life insurance industry in Sri Lanka continues to be under penetrated, which provides ample growth opportunity for the industry. The projected growth in disposable income coupled with the enhanced awareness on insurance products is likely to drive the demand Union Assurances (UAL) life insurance products. However, the rise in cost of living and high interest rates provided by banks creates a resistance for the growth of the life insurance business. The general insurance business is likely to benefit from the growth in post war business activity in the country and due to the slight recovery witnessed in the automobile market. However, the industry is likely to witness certain structural changes due to the newly introduced regulations which requires composite insurance companies (companies involved in both life and general insurance business) to segregate both the business segments into different entities by February 2015. This would be followed by the listing of the unlisted unit within three years from the issue of new license. This could possibly result in cost increases arising from duplication of overheads and capital expenditure; and also from oneoff expenses resulting from restructuring.
UAL's Life Insurance Unit Continues to Maintain the Fourth Position Whilst Increasing its Market Share
6,000 5,000 4,000 LKR'm 4,000 LKR'm 3,000 2,000 1,000 0 CY2008 CY2009 CY2010 CY2011 CY2012 Life Insurance - Gross premium written Life Insruance - UAL's market share
Source: Insurance Board of Sri Lanka Annual Report 2012

15.0%

5,000

UAL General Insurance Unit Continues to Maintain the Fourth Position Whilst Gradually Loosing Market Share

10.0%

10.0%

3,000 2,000 1,000

9.5%

5.0%

9.0%

0.0%

0 CY2008 CY2009 CY2010 CY2011 CY2012 General Insurance - Gross premium written General Insruance - UAL's market share

8.5%

Source: Insurance Board of Sri Lanka Annual Report 2012

The Monetary Board of the Central Bank has directed JKH to reduce its current shareholding of c. 30% held in Nations Trust Bank (NTB) to 15%, whist JKH has requested for an extension for same. We believe that JKH could look into the possibility of trimming its shareholding in NTB depending on the funding requirements for the WFP project. This would result in a one-off gain in the income statement of JKH, whilst the share of profits from NTB would be stopped being recognized in the income statement.

Asia Wealth Management Co. (Pvt) Ltd

Rights Issue Update

Property (accounted for c. 4% of the groups FY2013 external revenue)

Property External Revenue (LKR'm) % YoY Change Adjusted EBITDA (LKR'm) % YoY Change FY2011 2,494 53.9% 617 63.8% FY2012 3,790 52.0% 763 23.7% FY2013 3,170 -16.4% 720 -5.7% FY2014E 5,410 70.7% 1,249 73.5% FY2015E 6,974 28.9% 1,610 28.9% FY2016E 1QFY2013 1QFY2014 5,030 -27.9% 1,161 -27.9% 612 n/a 33 n/a 673 10.0% 133 299.5%

According to management, the 475 unit OnThree20 apartment project has witnessed c. 80% completion to date and is poised to be fully completed by the scheduled date of December 2014. The project which has witnessed c. 81% pre-sales to date has commenced revenue recognition and we expect the revenue recognition from the project to continue to add strength to the Property segment during FY2014E-FY2016E. During 1QFY2014, the segment commenced construction of the 7th Sense premium residential apartment project with a targeted date of completion of April 2015. According to management, the 65 unit apartment project, which is priced at a premium rate of c. USD380390 per sq. ft, has already witnessed c. 50% pre-sales. Given the projected 2 year period for completion of the project, we expect the revenue recognition from this project to commence towards the latter part of FY2014E.

Valuation
Sum of the parts (SOTP) Valuation
Segment/Line Item Transportation Leisure Property Consumer Foods & Retail Financial Services Sub-segment/Comments South Asia Gateway Terminals Others (LMS) Method of valuation and Inputs DDM (Ke=14.9%, TGR=3%) FCFF (WACC=14%, TGR=3%) FCFF (WACC=14.1%, TGR=6%) P/B (peer average P/B of 1.0x) FCFF (WACC=14.8%, TGR=5%) Justified P/B of 1.1x P/B - 2.1x. (Five year average P/B of UAL adjusted for peer average P/B of JKSB) FCFF (WACC=14%, TGR=5%) FCFF (WACC=13.7%, TGR=5%) FCFF (WACC: 1-4 years=13.6%, 5-10 years=13.7%, 10-25 years=13.3%, after 25 years=12.9%, TGR=3%, Exchange rate=LKR130/USD) LKR'm 18,519 6,871 62,346 11,969 11,186 4,294 8,405

Nations Trust Bank Others (UAL & JKSB)

Information Technology Others Waterfront Properties

Probability weighted average value of base case, optimistic case and pessimistic case

3,163 1,213 82,769

Other Adjustments

Adjustment for net debt, land and minority interest Effect from issuing warrants at a Black-Scholes model (2 year bond yield discount to the current market price of =10.8%, 3 year bond yield =11.1%, the share current share price=LKR217.50, adjusted share price LKR199.74)

(8,843)

Dilution effect from warrants

(5,539)

Total Equity Value Number of shares (m) Shares post rights issue + outstanding ESOPs

196,352 1,007

Price per share (LKR)

DDM Dividend Discount Model, FCFF Free Cash Flow to Firm, Ke Cost of Equity, WACC Weighted Average Cost of Capital, TGR Terminal Growth Rate

195

Asia Wealth Management Co. (Pvt) Ltd

Rights Issue Update We believe that SOTP valuation is the most suitable valuation methodology for JKH, given its diverse unrelated business segments. The valuation of the WFP project poses several challenges due to the long gestation period of the project, inclusion of multiple components in the project, inclusion of an option to undertake Phase 2 and also due to the international gaming operator not being selected yet. Despite WFP playing a passive role in the gaming unit, we believe that the rental income (fixed + variable) generated from renting out floor space to the gaming operator would be the key driver and the largest contributor to the WFP project. In valuing the WFP project, we have considered similar integrated resorts in the region and projected the cash flows over the three different tax regimes (i.e 1-10 years 0% tax, 11-25 years - 6% tax and after 25 years the current tourism tax rate of 12%) under a base case, optimistic case and a pessimistic case. We have assumed that under the base case and the optimistic case, WFP would undertake Phase 2. In arriving at the probability weighted value for WFP, we have assigned the highest weightage for the base case whilst assigned a lower weightage for the optimist case (due to the peer integrated resorts considered being in close proximity cf. Sri Lanka to countries with a large gambling population), and the pessimistic case (on the assumption that JKH would be able to attract an international casino operator who would be successful in attracting gaming tourist). As per our estimation, we believe that WFP would be the largest contributor to the share price of JKH and hence it is critical that JKH successfully implements the project.

WFP - base case WFP - optimistic case WFP - pessimistic case Weighted average value

Value (LKR'm) 60,348 216,850 15,951 82,769

Weight 60.0% 20.0% 20.0%

Based on the above valuation, we believe that the ordinary share of JKH is currently trading at a c. 10.3% premium to its intrinsic value of LKR195 and has not fully factored in the dilution effect from rights and the warrants yet. However, we believe that the rights are attractively priced at LKR175. Given that every 3 rights subscribed entitles the investor for 2 warrants, we believe that the effective cost of investing in the rights would be much lower than LKR175 assuming that the investor opts to dispose the warrants during warrants trading. Hence we believe that the rights issue attached with warrants provides an opportunity to gain for both a trader with a short term investment horizon (through arbitrage) and a long term investor who is likely benefit from the long term growth prospects of the WFP project.

Valuation of Rights and Warrants

We illustrate below the implied value of warrants and the right considering the current price of LKR217.50 and our intrinsic value of LKR195 as two scenarios. We have valued the warrants using the Black-Scholes model with the following inputs: 2 year government bond yield =10.8%, 3 year government bond yield =11.1%, 2 year share price volatility =21.4%, 3 year share price volatility =28.0%. Further, we have assumed at the time of disposal the current price will prevail in the current price scenario and our intrinsic price will price will prevail in the intrinsic price scenario.
Current Price LKR217.50 (525) 71 86 645 277 92 Intrinsic Value LKR195 (525) 51 67 585 178 59

Subscription of 3 rights @ LKR175 (LKR) Estimated value of 2015 Warrant (LKR) Estimated value of 2016 Warrant (LKR) Disposal of the 3 shares subscribed via rights (LKR) Total value of 3 rights (LKR) Implied value per right (LKR)

Relative Valuation

Source: Bloomberg, Asia Wealth Research

JKH is currently trading at a premium to its closest peers in terms of P/E, EV/EBITDA, P/BV and P/S. We expect the multiples to rerate downwards in the short term, due to the dilution effect from the rights issue and due to the slowdown in the short term performance of the group.

Based on our above analysis we recommend a SELL on the ordinary voting share due to the potential downside within a 1 year period and recommend a SUBSCRIBE for the rights due its attractiveness. 8 Asia Wealth Management Co. (Pvt) Ltd

Rights Issue Update

Key Risks to Our Recommendation, Target Price and Estimates

The Gazette notification issued for WFP under the Strategic Development Projects Act is yet to obtain the Parliaments approval to be valid. A failure to obtain such approval from the Parliament could significantly impact our estimates. Fluctuation in exchange rates, cost overruns and delay in completing the construction could affect the estimates of the WFP project. In ability to attract one of the leading gaming operators who has a network of large amount of high spending clientele could result in lower than expected return from the WFP project. Management has indicated that the rental received from the gaming area would account for c. 60% of the gaming economics. A steep reduction in this percentage (arising from the higher bargaining power of the casino operator) could significantly impact the valuation of the share. The WFP includes a condominium component in its each Phase. If an oversupply of apartments results in a drop in real estate prices, it could adversely affect the margins of the condominium component of the WFP project. Pressure groups against the operation of casinos in Sri Lanka could negatively impact the successful implementation of the gaming business. A sharp drop in occupancies in Sri Lankan resorts could impact the margins of the group, whilst political instability in Maldives good impact the performance of the high margin yielding Maldivian segment. Slow down in global and local trade could adversely impact the performance of the Logistics segment. A sharp rise in cost of living could hamper the performance of the CF&R and the Financial Services segment. Volatility in LKR, volatility in exchange rates and rise in raw material costs could significantly affect the margins of the group.

Asia Wealth Management Co. (Pvt) Ltd

Annexure 1

Rights Issue Update

Summary Financial Statements

Income Statement (LKR'm) - Condensed Revenue EBITDA Total segment results Associate Profits Profit Before Tax Net profit to shareholders (reported) Net profit to shareholders (recurring) Diluted EPS (LKR) - reported Diluted EPS (LKR) - recurring
Balance Sheet (LKR'm) - Condensed Non-current Assets Property, plant and equipment Intangible assets Investment in associates Other non-current assets Current Assets Cash in hand and at bank Other current assets Total Assets Total Equity Non-current Liabilities Borrowings Other non-current liabilities Current Liabilites Borrowings Other current liabilities Total equity and liabilities Net asset value per share (LKR) 6,334 2,046 99,680 71.59 7,833 1,760 119,582 84.51 8,259 2,632 144,510 104.78 6,218 2,374 173,254 122.05 5,477 2,518 197,515 130.55 6,183 2,624 230,800 140.70 8,275 15,276 12,221 17,567 11,858 20,576 9,525 21,971 23,887 22,870 37,719 24,008 2,113 20,971 99,680 67,748 4,267 28,603 119,582 80,201 3,555 31,855 144,510 101,185 4,024 53,210 173,254 133,167 3,169 49,464 197,515 142,763 4,070 60,648 230,800 160,265 28,628 2,632 14,692 30,644 34,290 2,633 15,654 34,134 49,273 2,690 15,724 41,413 56,338 2,504 16,123 41,054 84,631 2,325 16,648 41,278 104,770 2,150 17,354 41,808

FY2011 60,500 8,357 6,062 2,641 10,629 8,246 6,025 9.77 7.14
FY2011

FY2012 77,690 11,808 9,185 2,765 12,820 9,687 8,440 11.44 9.96
FY2012

FY2013 85,557 12,624 9,447 3,369 15,775 12,201 10,172 14.22 11.85
FY2013

FY2014E 95,852 14,056 10,613 3,458 14,323 10,662 10,662 11.42 11.42
FY2014E

FY2015E 105,939 16,000 12,628 3,765 15,588 11,604 11,604 11.55 11.55
FY2015E

FY2016E 113,303 16,571 13,248 4,132 15,123 11,295 11,295 10.95 10.95
FY2016E

Growth rates and Ratios Growth rates Revenue EBITDA Total segment results Net profit to shareholders (reported) Net profit to shareholders (recurring) Diluted EPS (LKR) - reported Diluted EPS (LKR) - recurring Margins and Ratios Gross profit margin EBITDA margin Total segment results margin Net margin (reported) Net margin (recurring) ROE (based on reported net income) ROE (based on recurring net income) Dividend Yield

FY2011 26.1% 60.1% 83.3% 58.5% 42.9% 54.7% 39.5% 22.6% 13.8% 10.0% 15.0% 11.2% 15.0% 11.0% 1.4%

FY2012 28.4% 41.3% 51.5% 17.5% 40.1% 17.1% 39.6% 23.4% 15.2% 11.8% 14.1% 12.3% 14.7% 12.8% 1.3%

FY2013 10.1% 6.9% 2.8% 26.0% 20.5% 24.3% 18.9% 23.9% 14.8% 11.0% 15.9% 13.3% 15.1% 12.6% 1.4%

FY2014E 12.0% 11.3% 12.3% -12.6% 4.8% -19.7% -3.7% 23.4% 14.7% 11.1% 12.5% 12.5% 10.1% 10.1% 1.4%

FY2015E 10.5% 13.8% 19.0% 8.8% 8.8% 1.1% 1.1% 23.4% 15.1% 11.9% 12.3% 12.3% 9.2% 9.2% 1.6%

FY2016E 7.0% 3.6% 4.9% -2.7% -2.7% -5.2% -5.2% 23.4% 14.6% 11.7% 11.2% 11.2% 8.1% 8.1% 1.5%

Segment External Revenue (LKR'm) Transportation Leisure Property Consumer food and retail Financial services Information Technology Others Waterfront Properties
Segment EBITDA (LKR'm) Transportation Leisure Property Consumer food and retail Financial services Information Technology Others Waterfront Properties

FY2011 13,426 13,810 2,494 18,358 6,484 3,107 2,823 FY2011 852 3,294 617 1,113 953 200 1,328 -

FY2012 18,428 17,415 3,790 21,969 7,932 5,926 2,229 FY2012 1,215 5,595 763 2,257 1,514 341 122 -

FY2013 19,438 20,593 3,170 24,267 8,599 6,514 2,978 FY2013 1,074 6,864 720 1,826 1,204 547 390 -

FY2014E 20,129 22,951 5,410 26,742 9,931 7,445 3,244 FY2014E 1,106 7,495 1,249 2,012 1,392 627 175 -

FY2015E 21,031 24,522 6,974 29,316 11,256 8,494 3,569 777

FY2015E 1,142 7,950 1,610 2,336 1,607 715 474 166

FY2016E 21,480 26,057 5,030 31,967 12,737 9,647 3,906 2,478

FY2016E 1,152 8,348 1,161 2,547 1,808 812 211 530

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Asia Wealth Management Co. (Pvt) Ltd

Annexure 2

Rights Issue Update

Waterfront Properties at a Glance

Salient Features of the Project
Project scope Integrated resort consisting of multiple businesses including a luxury hotel, convention centre, entertainment and gaming facilities, international standard shopping mall, luxury condominiums, serviced apartments and office space. The project would be undertaken in two phases and the implementation of Phase 2 would depend on the market conditions. 4 to 5 years. Management has indicated that the decision to undertake Phase 2 would be taken while the construction of Phase 1 is in progress and the decision would not impact the estimate time line. Phase 1 + Phase 2 = USD820m or; Phase 1 only = USD660m

Time line

Estimated cost of the project (excluding land) Tax benefits

The project company, Waterfront Properties would enjoy several tax concessions under the Strategic Development Projects Act. Profits and income derived from non-gaming activities would be exempted for 10 years from income tax and would be taxed at a concessional rate for another 15 years. Dividends distributed by Waterfront Properties would be exempted from income tax for 11 years. Further, importation of projected related goods and services would be exempt from Value Added Tax for 5-8 years depending on the implementation of Phase 2. Land transfer amounting to USD60m Equity infusion by JKH USD240m Pre-sales of residential apartments Balance to be funded by debt (The company has indicated that the optimal Debt/Equity ratio would be 60/40)

Proposed mode of funding

Source: Company circular to the shareholders, Asia Wealth Research

Artists Impression of the Waterfront Properties Project

Source: Company

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Asia Wealth Management Co. (Pvt) Ltd

Rights Issue Update

Annexure 3

Proposed Shareholding Structure of Waterfront Properties (Approximate Shareholding)

John Keells Holdings (effective shareholding of c. 96.7%)
86.9%

81.36%

100%

Ceylon Cold Stores

John Keells PLC

John Keells Properties

79.24% 5.03% 14.15%

1.57%

Waterfront Properties (Project Company)

Phase 1

Phase 2

Luxury hotel (800 rooms) Convention centre to accommodate 2,500 guests Shopping mall Entertainment and gaming facilities Luxury condominiums (240 units) Car park facilities (2,500 slots)

Serviced apartments (200 units) Office complex (400,000 sq. ft)

Source: Company circular to the shareholders, Asia Wealth Research

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Asia Wealth Management Co. (Pvt) Ltd

Annexure 4

Rights Issue Update

Proposed Rights Issue Attached with Warrants at a Glance

Rights Issue Proportion Number of rights to be issued (m) Issue price 2015 Warrant Proportion Number of warrants to be issued (m) Conversion to ordinary shares Issue price Point of exercise 2016 Warrant Proportion Number of warrants to be issued (m) Conversion to ordinary shares Issue price Point of exercise 1 warrant for 3 subscribed rights 44.0 1 warrant to 1 share LKR195 36 months from the issue of rights (11 November 2016) 1 warrant for 3 subscribed rights 44.0 1 warrant to 1 share LKR185 24 months from the issue of rights (12 November 2015) 2 new shares for every 13 shares held 132.0 LKR175

Share Dilution from Rights Issue and Warrants The following illustration excludes the dilution effect from ESOPs. Period 4 October 2013 4Q2013 12 November 2015 11 November 2016 Description Outstanding Listing of rights Conversion of 2015 warrant Conversion of 2016 warrant Number of shares issued (m) N/A 132.0 44.0 44.0 Total shares outstanding (m) 857.9 989.9 1,033.9 1,077.9

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Rights Issue Update

Important Disclosures
Equity Rating Definition Buy The stock is expected to deliver an absolute return greater than or equal to 15% within a 12-month time horizon Long-term buy The stock is expected to deliver an absolute return less than 15% but greater than or equal to 5% within a 12month time horizon. However, we maintain a positive outlook for the stock based on the underlying fundamentals and the future growth prospects of the firm. Hold The stock is expected to deliver an absolute return less than 15% but greater than -5% within a 12-month time horizon. Sell The stock is expected to deliver an absolute return less than or equal to -5% within a 12-month time horizon. Disclaimer The report has been prepared by Asia Wealth Management Co (Private) Limited. The information and opinions contained herein has been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, express or implied is made as to its accuracy, completeness or correctness, reliability or suitability. All such information and opinions are subject to change without notice. This document is for information purposes only, descriptions of any company or companies or their securities mentioned herein are 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. In no event will Asia Wealth Management Co (Private) Limited be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising out of, or in connection with the use of this report and any reliance you place on such information is therefore strictly at your own risk. Asia Wealth Management Co (Private) Limited may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis in which they are based before the material is disseminated to their customers. Not all customers will receive the material at the same time. Asia Wealth Management Co (Private) Limited, their respective directors, officers, representatives, employees, related persons and/or Asia Wealth Management Co (Private) Limited, may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principal or agent. Asia Wealth Management Co (Private) Limited may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. Asia Wealth Management Co (Private) Limited may have recently underwritten the securities of an issuer mentioned herein. The information contained in this report is for general information purposes only. This report and its content is copyright of Asia Wealth Management Co (Private) Limited and all rights reserved. This report- in whole or in part- may not, except with the express written permission of Asia Wealth Management Co (Private) Limited be reproduced or distributed or commercially exploited in any material form by any means whether graphic, electronic, mechanical or any means. Nor may you transmit it or store it in any other website or other form of electronic retrieval system. Any unauthorized use of this report will result in immediate proceedings.

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Asia Wealth Management Co. (Pvt) Ltd

Research
Manager - Research Balakrishnan Nirmalan Corporates Yogini Yogarasa (94-11)5320361 (94-11)5320362 nirmalan@asiacapital.lk Assistant Manager - Research Amali Perera Economy Dhanusha Pathirana (94-11)5320254 (94-11)5320256 amali@asiacapital.lk

Rights Issue Update

Statistician Nuwan Pradeep

(94-11)5320257

Sales
Institutional Sales SabriMarikar NiroshanWijayakoon ManjulaKumarasinghe ChelakaHapugoda ChamindaMahanama HiranBibile NiroshanRathnam JeevanHettigoda FarajFouz MiflalFarook (94-11) 5320224 (94-11) 5320208 (94-11) 5320211 (94-11)5320240 (94-11) 5320223 (94-11) 5320238 (94-11) 5320242 (94-11) 5320220 (94-11) 5320210 (94-11) 5320247 077 3-576868 0777-713645 0777 -874310 0777 -256740 0777 -556582 0777 -352032 0773 -717515 0773 -691251 0773 -810159 0772-253730 sabri@asiacapital.lk niroshan@asiacapital.lk manjula@asiacapital.lk chelaka@asiacapital.lk mahanama@asiacapital.lk hiran@asiacapital.lk ratnam@asiacapital.lk jeevan@asiacapital.lk faraj@asiacapital.lk miflal@asiacapital.lk Retail Sales ShiyamSubaulla PriyanthaHingurage SubeethPerera NelukaRodrigo GaganiJayawardhana ShamalPerera NuwanEranga RomeshPriyadarshana RukshanLiyanage NathashaMunasinghe IreshaFernando SharikaRathnayake (94-11)5320218 (94-11)5320217 (94-11)5320227 (94-11)5320214 (94-11)5320236 (94-11)5320219 (94-11)5320246 (94-11)5320228 (94-11)5320235 (94-11)5320231 (94-11)5320232 (94-11)5320209 0773-502016 0773-502015 0714-042683 0777-366280 0714-084953 077-3717558 0777368012 0772548795 077-3413297 0777-569266 0777359012 0777567994 shiyam@asiacapital.lk priyantha@asiacapital.lk subeeth@asiacapital.lk neluka@asiacapital.lk gagani@asiacapital.lk shamal@asaiacapital.lk eranga@asiacapital.lk priyadarshana@asiacapital.lk rukshan@asiacapital.lk nathasha@asiacapital.lk iresha@asiacapital.lk sharika@asiacapital.lk

Branches
CSE Floor CSE,01-04, World Trade Centre, Colombo 1. ThusharaAdhikari M G Suranjana AsankaSamarakoon GayanNishsanka SumedaJayawardena LalindaLiyanapathirana MaheshaMadurangi RuchiraHasantha UthpalaKarunatilake (011)-5735122 (011)-5763539 (037)-5628844 (037)-5642717 (041)-5677525 (041)-5677526 (041)-5620727 (091)-5629998 (031)-5676881 0773-688202 0773-954994 0773-690749 0777-105356 0773-687307 0778-628798 0773-687027 0773-691685 adhikari@asiacapital.lk Kurunegala Union Assurance Building, No.6,1stFloor,Rajapilla Rd, Kurunagala. asanka@asiacapital.lk nishshanka@asiacapital.lk sumeda@asiacapital.lk rishan@asiacapital.lk mahesha@asiacapital.lk ruchira@asiacapital.lk uthpala@asiacapital.lk

Matara

E.H.Cooray Building, Mezzanine Floor, No:24, AnagarikaDarmapala Mw, Matara Peoples Leasing Building,2nd Floor,No.118,Matara Road,Galle Asia Asset Finance, 171/1, Station Road, Negombo. Asia Asset Finance, No.18, New De Zoysa Rd, Moratuwa.

Galle Negombo Moratuwa

CharithPerera Panadura Asian Alliance Building, 293, Galle Road, Panadura RanganathWijetunga AsankaChaminda NilupulHettiarachchi RadhikaHettiarachchi TharinduPriyankara Ravi De Mel NalakaDhanushka

(011)-5238663 (038)-5670400 (038)-5670407 (081)-5628500 (081)-5625577 (081)-5625577 (063)-5679071 (063)-5679070 0715-120723 0713-559552 0777410164 0773692242 0777282586 0772-681995 0771-520376

charithn@asiacapital.lk ranganath@asiacapital.lk chaminda@asiacapital.lk nilupul@asiacapital.lk radhika@asiacapital.lk priyankara@asiacapital.lk ravide@asiacapital.lk nalaka@asiacapital.lk

Kandy

132 2/7, Hill City Complex, D. S .Senanayake Street, Kandy.

Ampara

Bandula Cinema Shopping complex, No-103,D S Senanayaka Street, Ampara.

Service Centers
Kiribathgoda Level 2-6,Udeshi City Shopping complex, No 94,Makola Rd,Kiribathgoda DanushkaBoteju KasunNavoda SherminRanasinghe SamithEdirisinghe GratianNirmalan S.Puviraj (011)-5634803 0716-270527 boteju@asiacapital.lk Hambantota Hambanthota Chamber of Commerce, ThangalleRoad,Hambantota. (047)-5679240 0777681866 0775-486869 0777-567933 0775-096969 shermin@asiacapital.lk samith@asiacapital.lk nirmal@asiacapital.lk puviraj@asiacapital.lk

Jaffna

62/20, First Floor, Stanley Road, Jaffna

(021)-5671800 (021)-5671801

ASIA WEALTH MANAGEMENT CO.(PVT) LTD 21-01 West Tower, World Trade Centre, Echelon Square, Colombo 01, Sri Lanka Tel: +94 11 5320000 Website: www.asiacapital.lk

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Asia Wealth Management Co. (Pvt) Ltd