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Daily
14th October 2011
Market Performance
ASPI MPI Turnover (bn) Foreign Purchases (mn) Foreign Sales (mn) Traded Companies Market PER (X) Market Cap (LKR bn) Market Cap (US$ bn) Dividend Yield (%) Price to Book (X) 14.10.2011 6,550 5,878 1.0 122.1 157.8 268 16.8 2,353 21.2 1.6 2.1 13.10.2011 6,586 5,911 1.2 161.2 95.1 227 16.9 2,366 21.3 1.6 2.1 %Chg. -0.5 -0.5 -17.7 -24.3 65.9 18.1 -0.6 -0.5 -0.5 0.0 0.0

DNH MARKET WATCH

Market Indices
6,900 6,700 6,500 6,300 6,100 5,900 5,700 7/10/2011 10/10/2011 12/10/2011 13/10/2011 14/10/2011

ASI MPI

Market Outlook
The market continued to drift lower with both the ASPI and MPI down by 0.5% each to close at 6550 and 5878 at the end of the session. Losers outpaced gainers with Infrastructure developers, Associated Motor Finance and SMB Leasing (W0015) declining by 26.7%, 14.3% and 7.7% offsetting gains in Samson International, Union Chemicals and City Housing & Real Estate which advanced by 18.5%, 12.8% and 10.5% respectively.Turnover fell below the LKR1 bn mark with trading in Distilleries, John Keells Holdings and Seylan Developments accounting for 27% of the days total. Global markets traded mostly lower today after Standard & Poor's cut Spain's long-term credit rating by one notch to "AA-" from "AA" with a negative outlook, in turn renewing concerns about the extent of Europe's fiscal woes. 3Q2011 Earnings Outlook Although the bulk of the domestic 3Q2011 corporate results are unlikely to start rolling in until at least the next couple of weeks, we would like to summarize our earnings outlook as follows; While we dont rule out the possibility of a marginal decline on the back of retail selling in some counters, we are nevertheless sufficiently convinced that the 3Q2011 results should garner interest from select institutional and foreign investors who may adopt a handpicking approach focusing on counters that present strong and sustainable value in high growth and defensive sectors. Consequently we recommend an asset allocation strategy focusing on key sectors such as Banking & Finance, manufacturing, Diversified and Hotels which we believe would outperform the market and generate alpha on a sustainable basis.

Gainers /Losers (%)

Softlogic Finance
SMB Leasing (W0015)

-7.2

-7.7 -14.3 -26.7 6.6

10.5

Associated Motor Finance

While earnings growth will be broadly similar to 2Q2011, we expect the quality of earnings to improve during the 3Q2011 with greater contribution from core operations spearheading the earnings drive while non-core activities will largely play second fiddle. Top line revenues will grow by 30-40% during the quarter on the back of an acceleration in the domestic consumption cycle notwithstanding headwinds in the global markets.

Infrastructure Developers The Finance City Housing & Real Estate

Union Chemicals

12.8
18.5

Samson International

Consolidated margins will improve both on a YOY and QoQ basis on the back of core growth in operations which would smoothen out relatively lower other income generation. Overall earnings will be up by 25-30% spearheaded by growth from the banking, diversified, manufacturing and tourism sectors. Descending to the 6500 support level, it is easy to shy away from the market on the conviction that it may lose further ground due to the lack of any relevant support.

Significant Trades (Turnover in LKR Mn)

120 100 80 60 40 20 0 DIST JKH CSD SEYB

Global Markets
Sri Lanka - ASPI India - Sensex Pakistan - KSE 100 Taiwan Weighted Singapore - Straits Times Hong Kong - Hang Seng Index 6550 17083 11992 7358 2744 18502 %Chg. -0.55 1.18 0.27 -0.95 0.37 -1.36

Interest Rates & Currencies

Prime Lending Rate (Avg. Weighted) Deposit Rate (Avg. Weighted) Treasury Bill Rate (360 Days) Dollar Denominated Bond Rate LKR/US$ (Avg. Rate) LKR/EURO (Avg. Rate) 22.08.2011 14.10.2011 9.1% 6.5% 7.3% 6.3% 111.1 153.7

Disclaimer
This Review is prepared and issued by DNH Financial (Pvt.) Ltd. (DNH) based on information in the public domain, internally developed and other sources, believed to be correct. Although all reasonable care has been taken to ensure the contents of the Review are accurate, DNH and/or its Directors, employees, are not responsible for the correctness, usefulness, reliability of same. DNH may act as a Broker in the investments which are the subject of this document or related investments and may have acted on or used the information contained in this document, or the research or analysis on which it is based, before its publication. DNH and/or its principal , their respective Directors, or Employees may also have a position or be otherwise interested in the investments referred to in this document. This is not an offer to sell or buy the investments referred to in this document. This Review may contain data which are inaccurate and unreliable. You hereby waive irrevocably any rights or remedies in law or equity you have or may have against DNH with respect to the Review and agree to indemnify and hold DNH and/or its principal, their respective directors and employees harmless to the fullest extent allowed by law regarding all matters related to your use of this Review. DNH Financial is a fully owned subsidiary of Environmental Resources Investment PLC (ERI).