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Portfolio Analysis

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Investment Policy Statement
Investors Information
Investor Profile 01
Name; Miss; H.A.Wanamali
Birth Date; 31 May 1988
Relationship; Retail Investor
Gender; Female

Investor Profile 02
Name; Miss; W.D.D.M. Rathnasiri
Birth Date; 19 Nov 1988
Relationship; Retail Investor
Gender; Female

Investor Profile 03
Name; Miss; P.D.S.S.Wetthesinghe
Birth Date; 17 Oct 1988
Relationship; Retail Investor
Gender; Female

Statement of Objective
Risk Aversion
Our intention is gaining high return while controlling the risk level of the investment. Though the high return level implied the high tolerance for risk of investors, our objective is to maximize the return while minimizing the overall risk level of the investment to accomplish the maximized wealth. The major reason behind high level tolerance for risk is the return expected through the investment is high.
Always we tried to maintain better relationship between the expected return and cost of investment. Except our main objective there are some co-objectives those are, * Mitigation of Risk
To construct efficient and well diversified portfolio three persons are joined together through that we can manage and bear risk among us. On the other hand single marital status, young age and relax feeling of family responsibilities rub up the high tolerance level for risk. * Maintain an appropriate degree of portfolio diversification
We will maintain efficient diversification portfolio at all time and it should be matches with the reasonable sector allocation. * Rebalancing of strategic allocation
Assets allocation must matches the portfolio risk tolerance

But as rational investors we cannot rely upon the stable objectives and time to time based on economic conditions objectives may differ. Therefore we have to alter our objectives according to economic condition to obtain highest return while maintaining lower risk.

Investment Constraints
In the process of investment, the key constraint that we have identified is the sum of capital available for the intention of investment. That is for three members available cash balance is 3mn which restrict the opportunities to invest in real assets or in securities as wish in order to attain satisfactory level of returns. As well as when planning to have an investment decision, have to evaluate so many options such as saving, buying securities from the secondary market, invest in a business, building a house, lending for individual or a company etc. When selecting one or more two options, other options we have to dedicate while bearing opportunity cost. Therefore when evaluating investment decisions opportunity cost also should take into account.
But hear since we are basically considering invest in a securities, when investing should comply with the regulations imposed by the Securities and Exchange Commission (SEC). And the investment horizon starts from 8th August to 09th September. But before place our investment we have observed the market behavior from 11th July to 5th August.

Preferences
The investment policy mainly depends upon the preferences of the investors. When establishing our investment policy statement we have applied individual preferences in order to achieve combined and effective investment goal. Accordingly individual preferences of among three of us have segregated into two categories as Risk preferences and Psychological preferences.
As rational investors we have laid our concentration more on optimizing the expected return given level of risk or Minimizing the risk given level of return. Therefore acting as Risk averse investors has significantly affected to decided on effective asset allocation and to adopt a flexible weightings approach (strategic asset allocation) involving the periodic adjustments of the weights for each category on technical analysis. A new allocation therefore may be constructed to capture greater returns in a changing market.
When Considering the Psychological preferences it implies the psychological factors affecting the selection of portfolio basically Brand Loyalty and Customer recognition. Though we acted as investors we are customers who consumed a particular product or service. The satisfaction involves with utilization of the product or service depends upon the customer services offered by the company.
As a result when the company appreciate and recognized their customers’, preferences towards invest on that company may slightly increase. Consequently the volatility of our preferences have affected by the customer recognition when selecting the portfolio asset base.

Asset Allocation
As a Risk Averse Investors we need to minimize our risk in order to achieve higher return in the future. Therefore we have planed to invest our assets in a sector wise in accordance with the current market situation. Here we are mainly focusing on the market conditions, market performance of particular sectors, share price behaviors and etc. To accomplish the investment objectives, based on time horizon and risk tolerance we have identified target assets allocation schedule as follows. Target Assets Allocation
Sector Target
(Asset weight %)
Government 20%
Banking 20%
Hotel and Tourism 15%
Plantation 10%
Manufacturing 10%
Gas and Oil 8%
Foods and Beverage 6%
Finance and Investment 5%
Telecommunication 3%
Information and Technology 3%

Security Analysis
In order to enhance our investment objective we have to select efficient portfolio that maximize our current wealth while minimizing portfolio risk. There are many different ways to value stocks. The key is to take each approach into account while formulating an overall opinion of the stock. To get better opinion regarding stocks what we should purchase we have implemented Top Down Approach.
According to Top Down Approach first we analyzed Economy then Industry and finally Company. In order to get broader idea about company performance in the market and identify miss priced securities implemented Fundamental and Technical analysis.

Top Down Approach

Technical Analysis
Technical analysts track price movements and trading volumes in various securities to identify patterns in the price behavior of particular stocks. And it believes that the current price fully reflects all information because all information is already reflected in the price.
Fundamental Analysis
Basically measure the intrinsic value of the stocks instead of tracking the historical price movements. This analysis can identify company’s performance in deeply. Also it contrasts true value of the securities with the current market price.
Economic Analysis
The end of Sri Lanka's long-running civil war in May 2009 has opened a new era of economic opportunities. The Government of Sri Lanka has set motivated goals for economic development. Sri Lanka also provides very strong prospects in tourism and infrastructure with a dynamic policy environment and cumbersome bureaucracy. Nonetheless, compared to other South Asian countries, Sri Lanka is relatively open to foreign investment. It offers a relatively open financial system, moderately good infrastructure, and generally capable workers. Therefore foreign investors have realized worthwhile returns on investment in Sri Lanka. Although government is a major player in many economic sectors, there is a strong private sector that plays a key role across the economy including in banking and finance, exports, tea, apparel, IT and tourism.

Review of Sri Lanka Economy in 2010
Population 20.2 million
GDP 96 billion
Growth 3.5%
Unemployment 5.9%
Inflation 3.4%
Interest rate 9.35%
Exchange rate 1 US Dollar = 110 SLR
Budget deficit 7.9% GDP

* Gross Domestic Production
According to preliminary data for 2010, Sri Lanka's exports (mainly apparel, tea, rubber, gems and jewelry) were $8.0 billion and imports (mainly oil, textiles, food, and machinery) were $14 billion. * Inflation
Inflation has been high but declining, averaging 9.2 percent between 2007 and 2009. The government influences prices through regulations, state-owned enterprises, and subsidies for a wide array of goods The Central Bank expects the economy to grow by 8.5% in 2011 aided by growth in all sectors of the economy. The Central Bank forecasts inflation to remain at single digit levels, although inflationary pressures are building up once again. * Financial Stability
Sri Lanka’s financial system remains vulnerable to government influence. Banking dominates the financial sector, but a high credit cost which was 34% discourages more dynamic business activity. Regulations permit 100 percent foreign control of banks, insurance companies, and stockbrokerages. The banking sector is dominated by two state-owned banks, although the presence of foreign banks is considerable. The two state banks, which have accumulated considerable bad debt, account for around 40 percent of total assets. The central bank is not fully independent. The government influences the allocation of credit and uses domestic financial resources to finance government borrowing. Capital markets are centered on the Colombo Stock Exchange, which is modern but relatively small. * Unemployment
Sri Lanka unemployment level is 5.96% although our country has rigid labor regulations, and enforcement of the labor code remains inefficient. Sri Lanka's labor laws include many model protections, but can make it nearly impossible for companies to lay off workers even when market conditions fully warrant doing so. The cost of dismissing an employee in Sri Lanka is, percentage-wise, one of the highest in the world, * Budget deficit
The budget deficit reached almost 10% of GDP in 2009, but is forecast to fall to around 8% in 2010. The 2011 budget forecasts a deficit of 6.8%. The 2011 budget seeks to simplify the tax structure, reduce a number of taxes, and rationalize investment incentives. Due to consistently high budget deficits the public debt has at times reached close to 100% of GDP. It was 85% of GDP in 2010 * Foreign Investment
Foreign investors can purchase up to 100% of equity in Sri Lankan companies in numerous permitted sectors. In order to facilitate portfolio investments, country funds and regional funds may obtain SEC approval to invest in Sri Lanka's stock market. These funds make transactions through share investment external Rupee accounts maintained in commercial banks. * Political Stability
Sri Lanka is a stable parliamentary democracy. In 1978, it shifted away from a socialist orientation and opened to foreign investment, Mahinda Chintana seeks to reduce poverty by steering investment to disadvantaged areas; developing small and medium enterprises; promoting agriculture; and expanding the already enormous civil service.
Sri Lanka has established strong economic ties with Asian countries such as China and India. China has increased its political influence and is a major player in infrastructure development, building ports, power stations and roads.

Industry Analysis
The pure competition exists where there has a constant risk adjusted return across firms and industries. However numerous economist analysts indicated that different industries sustained different profitability and part of this difference explained by the industry structure. Michal porter‘s framework that models a five forces which influence the industry structure.
According to our investigation the selected 21 companies are belong to the ten industry categories specifically banking and finance, hotel, manufacturing, food and beverage, land and property, motors, plantations, and Tele-communication. Therefore we have applied porters five forces model in order to identify industry structure and their position as whether they have being leader or follower, how they develop edge over rival firms etc . Hence this model has assisted in gaining a better understand on the industry context on which firm operates.

Banking and finance sector
Banking and Finance sector deal with the oligopoly market where there has a high entry barrier for new entrants. Also capital and investment requirements very high and it has proved as a major challenge they face since they have to attract tier 1 and tier 2 capital to support growth and maintain capital adequacy ratios.
The firms within the industry produces similar commodity (service would be same; borrowing and saving). Therefore the risk of threat of substitutes may low since customers willing to buy the similar service from different firm. However the internet banking makes the customers to seek low cost services. Also customer will due to convenience, low cost and high efficiency to change the service to other bank. Real-time money transfer (i.e. Western Union), real-time payment (i.e. Paypal), they through Internet to provide a high quality but low service charge service. Simply when the Sampath bank has firstly introduced internet banking to the Sri Lankan market and therefore other banks has laid their concentration on internet banking in order to compete with the market.
When considering the buyer bargaining power, more specifically the Buyer concentration to firm concentration ratio in a Bank industry is a high. Because it has a high buyer concentration and many people use bank service, such as deposit money, mortgage, loan, investment, insurance and currency exchange (HIGH). The concentration ratio of international bank industry is medium, many large bank exist in the world, such as Standard Chartered, HSBC.
Also the Buyer information availability and price sensitivity is high. Because Interest Rate and service charge is sensitive indicator for customer in bank industry, customer may due to those indicators to draw out all or a lot amount of capital from bank to bank/ other financial institution. The switching cost of this action is low. Furthermore availability of existing substitutes products have increased in recent year, such as currency exchange, insurance and loan. They mainly provided by other financial institution.
However banking industry has a lower supplier bargaining power. This was mainly because of the bank capital supplier, depositor also is capital supplier of bank, will compare with other financial products to see whether draw out capital or not. Also the medium concentration given by the credit card supplier has impact on the supplier bargaining power. Credit Card industry is a high concentration ratio industry, VISA, Master Card and American Express is the most popular credit card in the world and their market share in the world is much higher than the other credit card organizations. Moreover, these three organizations brand name is louder than other organizations, so the switching cost from these organizations to others may be too large. Also there has high completion between the firms in the banking industry. This was mainly due to the technology improvement which has led to create less stringent financial controls. Also change in the environment of the society has given a significant impact on generating aggressive competition between the banks. Therefore this competitiveness force banks to find other profit continuously.
Mainly the HNB and Commercial bank consider as industry norms in the Banking industry. Because their increased profitability has become strength to the industry may caused to grab market shares than other banks.
However the year 2011 is more prospective for the banking industry. Because the reduction in VAT and cooperate tax rates will positively contribute towards the bottom line of banks.
Also the major issue on liquidity could not be seen because currently the banking sector excess liquidity amounts to more than Rs 100 billion. Further, due to a fair growth in the deposit base during 2010, there was no major issue on liquidity seen in the short to medium-term. However, the huge excess liquidity currently seen in the market will be absorbed by the anticipated loan growth.
Loans by the Sri Lankan’s listed commercial banks will grow 25% in 2011, up from 22.5% in the bad loans and also interest rate remaining low despite rising inflation. It is supposed that the positive macro economic outlook will translate to higher demand for credit aided by the low interest rates. Also despite a high loan growth forecast, it is anticipate that the gross non- performing loans to reside around 6 % in financial year 2011 due to improving debt servicing capacity of borrowers.
Strong credit demand is likely to come from small and medium enterprises in construction and agriculture, large firms in leisure, energy, construction, trade and in personal lending in pawing and leasing. Also gold backed lending and housing loans were seen giving a boost to loan growth of many commercial banks.
Also it is remarkable that loans by commercial banks rose 23% to 862 billion rupees by December 2010 against 6% contraction year earlier. Because the falling interest rates has coupled with the increasing demand for credit resulted in a healthy loan growth. PABC reported highest loan growth 80% and Sampath bank it was 30%. However Seylan with 21.3% and DFCC with 7.5% had performed the highest bad loan ratio.
Asset quality of commercial banks had improved with bad loans falling to 6.7% in 2010 from 10.58%.
Despite the rising inflation and other external factors, it is anticipated that government is unlikely to raise policy rates significantly which could hamper the growth of the economy. Also it is forecast the deposits at listed banks to grow 12% with the expectation on low interest rates to continue.

Hotel sector
The vital barriers for the hotel industry would be differentiation and expertise. The hotel sector can differential itself by location service or some other quality has a potential to attract and keep its customers. It is in the areas of expertise and of differentiation that a hotel can make the greatest impact on its customers there by on its bottom-line. Also the initial investment in the hotel industry creates quite a barrier to entry but certain to entering the hotel market are reduced by the internet. Because it reduces the invisible portion of marketing costs and gives new competitor access to potential suppliers and resources. Switching costs are usually nil for customers.
In the hotel industry there is usually another hotel just around the corner. The constant challenge will always be to get the customer over the competitor. After getting the peace the tendency to improve the tourism industry in Sri Lanka has increased and it has proved in the Tourist arrivals has been rose by 19.9 percent in June to 53,636. Also tourism has a great multiplier effect and at least 20% of the population of Sri Lanka dependent on the tourism. This has led to create a huge competition among the hotel sector and as a result hotel chain may erode customer base of their competitors with newly marketing campaign.
Also there has high bargaining power of buyers in a hotel sector. Because improvement in the technology assist in creating developed information base to the customer. Therefore customer may not wait until the agent comes to book a hotel and by going through the internet they simply book a hotel. Customer Loyalty is the one thing that hotel sector need to establish in order to create differentiate within the industry. When considering the supplier bargaining power it is not much influential than buyers bargaining power. But it can have an impact on the areas of labor. With an aging population, there are fewer people to fill service industry jobs and hotels which can attract excellent staff have a chance on providing exceptional service to their customers.
The competition among competitors in the hotel industry is brutal. Because technology advancements develop new competitors in the market and people tend to seek best price for best experience and the tendency is to reduce price to be competitive. Also hotel sector covers wide geographical areas so that variable and fixed costs can be different in areas. As a result fixed and variable cost vey high for hotel that is more expensive to live such as Galadari, Taj samudra they incur a huge variable cost than the hotels located in the outside Colombo.
The year 2011 is expected to be a landmark year in putting Sri Lanka on the road to economic development on the back of a booming tourism drive during the year while providing employment for 1.2 million youth. With the prevailing peace the hotel industry hopes to accelerate tourists’ arrivals high of 700,000 by the utilization of its natural resources. Also online visa requirement to obtain prior to coming Sri Lanka indicate that government introduces customer friendly legislations from time to time to their tourists.
With international companies like Shangri La interested in building hotels in Sri Lanka, tourism development should accordingly be done in a sustainable manner. This creates a potential market for hotel industry in the Sri Lanka. Also the simplification of the taxes and less burden on the hoteliers certified that tourism devolpment should be a manner as to encourage investors.Also this is just the start of the growth in the hotel sector. There are still lots of hotels that are undervalued in book valuations like Ceylon Hotel Corporation.
Tele-communication
It comes as no surprise that in the capital-intensive telecom industry the biggest barrier to entry is access to finance. To cover high fixed costs, serious entrants typically require a lot of cash. When capital markets are generous, the threat of competitive entrants rises. When financing opportunities are less readily available, the speed of entry slows. Meanwhile, ownership of a telecom license can represent a huge barrier to entry.
Also with increased choice of telecom products and services, the bargaining power of buyers is rising. This translates into customers seeking low prices from companies that offer reliable service. At the same time, buyer power can vary somewhat between market segments. While switching costs are relatively low for residential telecom customers, they can get higher for larger business customers, especially those that rely more on customized products and services. It is proved that when the Airtel has come to field in the telecommunication their customer switching cost was very high.
It might look like telecom equipment suppliers have considerable bargaining power over the telecom operators. Indeed, without high tech broad brand switching equipment, soft wares, telecom operators would not be able to do their job. Recently there are number of large equipment makers available to weaken the supplier barraging power. Especially dialog company use talented mangers those who well versed in the latest technology.
Dialog has built a healthy international network, having acquired capacity on all submarine fibre optic cables landing in the country. Its network delivers optimum cable and landing station diversity out of Sri Lanka to customers ensuring minimum service disruption at all times. The network is strengthened via its own Points of Presence (PoP) in key global locations in Singapore, UK and Hong Kong. Within Sri Lanka, Dialog has continued to expand fibre optic connectivity to customer premises in Colombo and continues to expand its reach to other parts of the country. It runs the largest domestic MPLS network in the country and offers excessive customer connectivity using both fibre and wirless solutions. Also in order to enhance global network dialog has get the partnership with multinet co which gives a landmark for the telecommunication industry.
Threat of substitutes in the telecommunication industry takes place to the nontraditional products like satellite, cable TV which compete for the buyer. As a result SLT; Peo TV and Dialog TV are the most competitive products compete for the Sri Lankan buyers. However telecommunication industry tends to drive a lower profilitability since customer expect low price with more exciting services. In addition to low profits, the telecom industry suffers from high exit barriers, mainly due to its specialized equipment.
As per the statistics, there were to be significant challenge in the mobile market. Sri Lanka’s mobile market has reached maturity, with penetration rates of around 85% as of September 2010. Also the number of net additions has been slowing, and we attribute this to poor economic growth and net losses in Dialog and Airtel’s subscriber bases during 2010. With the current market mature and competition remaining aggressive, operators have sought to acquire new subscriber growth by expanding their network reach to north-east of the country where infrastructure is weak, following the end of hostilities in the region. Also the SLT fibre optic cable project that links the former war zone may contribute to continuing nationwide network investment to cope with the growing demand for telecom services.
Ultimately it is implied that Telecommunication stocks are less attractive due to high level of penetration and intense industry competition.

Manufacturing
Sri Lanka manufacturing industry has a more diversified outlook than other sectors. This may turn to expect more new entrants to the industry. Indeed, high capital requirement can be consider as a huge barrier as to recover a huge fixed cost. But cost advantage powerfully affect to new entrants to seek the potential market. However the government has taken a strategy on imposing CESS on all exports of raw and semi processed form, where all exports of finished goods will free from such CESS. This would encourage manufacturing organizations to focuss more on value added exports. At the same time new entrants may get a chance approaching to the industry.
Also the bargaining power of buyers and suppliers has increased due to the increase in the suppliers and standardized products. This may indicate a high competiveness with in the manufacturing industry. When considering availability of substitutes it may highly affected to the raw materials which are used. Simple for the textile manufacturer has no more substitutes for clothes.
However the industry competition structure would be different since companies has different costs and objectives. Simply the Royal ceramic and ACL plastics have different cost structures and objectives.
Country’s manufacturing sector is enjoying a stronger speed in earnings growth post war. Because December aggregate earnings of manufacturing sector listed companies grew by 175.9% YoY on back of a 19.7% revenue growth. This margin expansion is mostly attributable to a sharp reduction in operational costs due to belt tightening in reaction to revenue falls as well as lower finance costs due to monetary reduction.
It should appreciate that the current economy started increasing earnings at a stronger speed than its historical averages with companies starting to improve utilization of their capacity. Also simplification of taxes (reduce income tax from 15%to 10%) and duties have given a significant contribution enhance domestic trade which enable to increase the potential export market.
Also twenty of the largest companies in the sector amount to 93% of the sector market capitalization and Impressive quarterly results came from Bogala Graphite, Piramal Glass, Grain elevators and Tokyo cement.
As new entrant, the orient garment has shown a potential growth within the industry. For the eleven month period ended February 28, 2011, the revenue was Rs. 3.3 billion and profit attributable to shareholders was Rs. 98.2 million.Net asset value of the Group as at March 31, 2010 was Rs. 512.3 million which had improved to Rs. 603.7 million by end of February 2011.
Orient is a part of the Finco group and this is the first instance of an apparel manufacturer obtaining listing although the sector represents almost half of the export earnings. This might encourage other players in the apparel industry to share their success by listing their shares on CSE.

Plantation Sector
Historically there has growth momentum in the plantation sector. Because of the global competition has reduced the demand for tea and rubber exports. Therefore the potential market for plantation has a slower growth.
Indeed, the initial fixed cost for stabilization within the industry is high. However the economics of scale may give impact to new entrants to approach the market. It is no surprise that threat of substitutes with in the industry has huge impact which results to increase the competition among the companies.
When considering the buyer’s bargaining power there has a high influence with growing increase in the substitutes. However supplier barraging power has a lower impact to the industry as the number of supplier are small.
The government policies such as the proposed CESS fund may highly impact to the industry’s performance as it impact to the both bulk tea and rubber exports. Industry competition structure would be as the companies have similar objectives. However the environmental factors give a significant impact on the industry especially for coconut and tea. Therefore cost of stabilize within the market very high.
However it is good to see this sector as wage increase and drop of tea production in the plantation has impact to their profitability. Since the market is now positive, it is good to analyze plantation sector as well in order to explore the opportunities for investment. Though certain sectors such as Finance, investment and manufacturing already started a run investor’s attraction on plantation sector is yet to come.
Price earnings ratio for plantation sector is 10 according to cse.lk on 29th July. Though the wage issue impact on profitability on this sector there are some companies with major contribution to the profit is coming from rubber or oil farm. For instance larger portion of profit of Watawala plantation is from oil farm and number 02 is rubber. In Elpititya plantation too rubber and oil farm contribute a lot to profit than tea.

Construction and land and property
The construction sector contributes approximately 6% of the country’s GDP. Recently industry has a growing trend. With the peaceful surroundings it is expected to develop the infrastructure facilities such as reconstruction in electricity, construction bridges and roads, reconstruction schools and health facilities. At the same time tax releases given for the construction, custom duties for selected raw materials may also boomed construction sector. Also the country’s focus on the global event such as common wealth games has favorably affected to the construction sector. In addition to that increase in tourist arrivals has impact on increasing the capacity in hotel sector which given potential market for construction sector.
In Sri Lanka there are fewer players involve in the construction sector. Also there has ales probability to get cost advantage from this industry. However supplier bargain power is very high which result to give a high impact to the industry.
It might look that industry cost structure very high. And customer would not be able to expect lower prices. Also this industry based on the oligopoly market and ultimately impact on higher competition cost.
Land and property segment foresee a growth in value as a result of the recent developments taking place in the construction sector together with the lower interest rate and inflation. However since there has a complementary effect profilibility on this sector might be varied.
There are too many players with in land sector and industry completion would be high. Therefore players have to incur somewhat completion cost to stabilize within the industry. Also there has low bargain power for buyers due to lower amount of substitutes.

Food and Beverage
Currently there has slight growth in the potential market for food and beverage. It is important to notice that industry has significant contribution to the economy around 10% of the GDP. However, small and medium enterprises in the food and beverage industry are becoming less competitive. Cost of production is increasing due to cost of materials, Energy and water. In addition to that industry is not fully complying with international standards and food safety regulations.
When considering the industry competiveness there has a high bargain power from the buyers due to the number of substitutes. Indeed, threat of substitutes for this industry is very high especially for soft drink sector. This industry plays their role within a monopolistic competition market. Therefore the enterprises have to incur huge competition cost within the industry. Specifically differenciation between the products is mostly required to attract the customers as well as compete within the industry. However there has specific barrier to approach to this industry mainly the government licenses are required from new entrants. This has led to create huge competition within the industry as to many enterprise prefer to offer safety and healthy products for their customers.
Automobile industry
Sri Lanka auto industry is an oligopoly market. The players with in industry are very few therefore competition cost may increase if they follow a priced based completion. It should notice that price based competition not necessarily increase the market capacity. Micro car and united motors are the main leaders in the Sri Lanka auto mobile industry.
As in the international market Sri Lanka doesn’t have potential growth market for auto mobile industry. This was mainly due to increase in tariffs and duties imposing on vehicles.
However the bargaining power of buyer in this industry is unchallenged. Many of products are imported from certain automakers to offer for buyers. It is best example the releases taxes and duties on 2010 for Hybrid cars to encourage their consumption.
Sri Lanka is a developing country and the automobile consumption has slower growth than other countries. It is no surprise that threat of substitutes especially from the general transport has a higher impact on this industry.
However, still the existing enterprises expect to increase the growth of the auto mobile industry. It is important to notice that the numbers of vehicle registrations and vehicle imports has increased since last years. Also the transport sector has posted a record of 11.4% for the 2010 which led to forecast slight increase in the auto mobile market.
Ultimately we can anticipate that with real economic growth rates expected to be in the 8% range, the whole range economic activity would be driven by the financial sector. Also the corporate earnings should show significant improvement, particularly in the tourism and construction sectors, as well as in sectors related to consumer spending like retail and consumer durables.

Company Analysis

Dividend Based Valuation
Our main objective is to obtain maximum return for selected portfolio at a given level of risk. That’s mean gaining capital gain. For that we need highest future price than the purchasing price. Before investing the particular stock we have estimated potential prices for particular companies by using the Dividend Based Valuation
When we are going to develop estimated prices for stocks, we have to figure out the proper Market Capitalization Rate, based on stocks of equivalent risk. That means we need to calculate the discount rate for stocks that are of equivalent risk to the one we are thinking about investing.
Reckoning of Market Capitalization Rates for Companies
Discount Rate (R) = Dividend Yield+ Dividend Growth Rate (G)

Company | Dividend Yield % | Growth Rate % | Discount Rate % | HNB | 2.34 | 10.6 | 12.4 | Ceylon Gurdian | 0.48 | 23.36 | 23.84 | Amaya Lesiure | 5.68 | 11.21 | 16.89 | Chevron Lubricants | 5.39 | 21.65 | 27.04 | Three Acre | - | 75.96 | 75.96 | United Motors | 2 | 18.61 | 20.61 | Sampath | 2.74 | 18.79 | 21.53 | Onally | 1.6 | 5.31 | 6.37 | Bairaha | 2.35 | 43.57 | 45.92 | Dialog | 1.72 | 5.52 | 7.24 | Distileries | 2.97 | 1.29 | 4.26 | Richard Peires | 2.97 | 21.52 | 24.49 | Malwatta Plantation | - | 23.96 | 23.96 | Orient Garment | - | - | - | Touch Wood | 8.89 | 14.32 | 23.21 | Horana Plantation | 9.59 | 25.26 | 34.85 | Royal Ceremics | 1.44 | 24.95 | 26.39 | ACL Plastic PLC | 3.7 | 14.73 | 18.43 | Cargo Boat Development | 3.33 | 19.61 | 22.93 | Dockyard | 3.08 | 21.8 | 24.83 |

Based on the Dividend Based Valuation we have forecasted prices for shares which we were selected as follows,
Price = Dividend (1+Growth Rate) Discount Rate – Growth Rate

Here we have used Constant Growth Model to calculate share prices while assuming dividends are growing at constant growth rate and to get a intelligible information regarding the future prices and also we discounted dividend cash flows at related Market Capitalization Rate that we have calculated to build superior judgment regarding our investment process.

Company | Share Price | HNB | 45.11 | Ceylon Gurdian | 456.75 u | Amaya Lesiure | 12.92 | Chevron Lubricants | 33.25 | Three Acre | 0 u | United Motors | 34.51 | Sampath | 45.14 | Onally | 10.53 u | Bairaha | 70.72 | Dialog | 0.75 | Distileries | 2.08 | Richard Peires | 2.27 | Malwatta Plantation | 0 u | Orient Garment | - | Touch Wood | 0 u | Horana Plantation | 10.98 | Royal Ceremics | 36.04 | ACL Plastic PLC | 22.31 | CargoBoat Development | 24.83 | Dockyard | 60.19 |
Expected Future Prices Based on Dividend Valuation

The above table has indicated of expected prices that are anticipated from upcoming month. Ultimate outcome of Dividend Based Valuation is only five companies are under priced. Those are, Ceylon Gurdian, Three Acre, Onally, Malwatta Plantation and Touch Wood. In other word their market price of shares are lower than the intrinsic value of shares. Investing in under priced shares, as investors we can put high expectation regarding those shares.
But there were some criticism regarding the Dividend Based Valuation. If companies are not paying dividend for their shareholders or not maintain dividend policy, expected share price of that company will become zero because that method mainly depend on the dividend of the company that they are paying.
According to our selections, Three Acre farms expected Share price is 0 Rs/= because Three Acre Farms is not maintain dividend policy and their payout is zero. But their market price is around 103 Rs/= and expected to grow this share price 75.96% in upcoming period.
Therefore Dividend Based Valuation is worse method for valuing future share price. To avoid weakness of this we have implemented another valuation method.

Asset Based Valuation
Asset Based Valuation is another technique we implemented to calculate future forecasts based on the asset of particular company. There are four type of ratios, those are,

1) Price to Sales (P/S).
This figure is useful because it compares the current stock price to the annual sales. In other words, it tells how much the stock costs per rupee of sales earned. To compute it, the current stock price divided by the annual sales per share. Cargo Boat Development, Onally, Amaya Leisure earned highest price to sales ratio which were 28.5%, 14.3% and 7.3% respectively.
2) EV to Sales.
This ratio measures the total company value as compared to its annual sales. A high ratio means that the company's value is much more than its sales. To compute it, divide the EV by the net sales for the last four quarters. The highest EV to sale ratio was 12.9% pertaining to Onally.
3) Price to Cash
The price/cash flow ratio is used by investors to evaluate the investment attractiveness, from a value standpoint, of a company's stock. This metric compares the stock's market price to the amount of cash flow the company generates on a per-share basis.
HNB, Sampath Bank, Chevron Lubricants, Dialog, Royal Ceremics, Onally, Richard Peiries generate more cash flows per shares based on market price of the company.

The summary of 20 companies Asset Based Valuation as follows,

Evaluation of Asset Based Valuation Company Name | Price/ Sales | Price/ Cash | Price/ Book | TEV/ Sales | HNB | 2.9 | 11.3 | 2.2 | 0.4 | Ceylon Gurdian | 4.6 | 6.9 | 2.2 | 3.6 | Amaya Leisure | 7.3 | 11 | 3.1 | 6.8 | Chevron Lubricants | 1.9 | 12.3 | 6.8 | 1.9 | Three Acre Farms | 1.9 | 9.8 | 5.3 | 0.8 | United Motors | 0.8 | 8.6 | 2.6 | 0.7 | Sampath | 2.3 | 8 | 1.8 | | Onally | 14.3 | 13.4 | 1.2 | 12.9 | Bairaha | 1.6 | 9.1 | 3.2 | 1.5 | Dialog | 1.5 | 12.5 | 2.2 | 0.8 | Distileries | 2.1 | 5.9 | 1.6 | 1.4 | Richard Peries | 0.6 | 13.6 | 4 | 0.2 | Malwatta vally | 0.5 | 4.2 | 0.8 | 0.3 | Touch Wood | 1.4 | 4.6 | 0.6 | 0.8 | Horana Plantation | 0.5 | 3.2 | 1 | 0.2 | Royal Ceremics | 2.6 | 10.6 | 3 | 1.7 | Dockyard | 1.2 | 8.1 | 2.3 | 0.8 | ACL Plastic ltd | 0.78 | 8.7 | 1.2 | 0.6 | Cargoboat dvp | 28.5 | 7.3 | 1.7 | 24 |
Earning Based Valuation
Earning Based Valuation is the valuation that people use to justify stock prices. This form of valuation is based on historic ratios and statistics and aims to assign value to a stock based on measurable attributes. This form of valuation is typically what drives long-term stock prices. We have conducted four Earning Based Valuation techniques for our investment process to select best performance companies’ n the market to obtain maximum return. Those are, 1) Earnings per Share (EPS).
Through EPS we can realize how much of portion of a company's profit allocated to each outstanding share of common stock. EPS is the total net income of the company divided by the number of shares outstanding. The most important thing to look for in the EPS figure is the overall quality of earnings and the company is not trying to manipulate their EPS numbers to make it look like they are more profitable.
According to the our preferred companies, Ceylon Gurdian Investment earns highest EPS which was 68.65 Rs/= and lowest EPS offered by Dialog Axiata value of 0.50 Rs/= 2) Price Earning (P/E)
P/E gives investors an idea of how much they are paying for a company's earning power. To compute this ratio, the stock price should divide by the annual EPS amount. Lowest price earning ratio implies the better image for investor decision. Therefore we have chosen companies price earning ratios which were less than or around the 15%. This is because we need to maximize our utility by sacrificing low amount of wealth. 3) Growth Rate.
Valuations rely very heavily on the expected growth rate of a company. However, companies are constantly changing, as well as the economy, so solely using historical growth rates to predict the future is not an acceptable form of valuation.
We are short term investors, by investing in short term period we expect high return. When growth rates are increases we can obtain highest capital gain within the time horizon.
According to our analysis highest growth rate pertaining to the Three Acre farms because their retention ratio was 100% therefore it will leads to the high capital gain in the future * Performance of Price Earnings Ratios of 20 Companies

4) Price Earnings to Growth (PEG) Ratio.
This valuation technique has really become popular over the past decade or so. It is better than just looking at a P/E because it takes three factors into account. Those are price, earnings, and earnings growth rates. To compute the PEG ratio, divide the Forward P/E by the expected earnings growth rate. The condition behind that was if PEG Ratio rises over 1 the stock becomes more and more overvalued, and as the PEG ratio falls below 1 the stock becomes more and more undervalued. The theory is based on a belief that P/E ratios should approximate the long-term growth rate of a company's earnings.
According to PEG ratios we have computed there are 14 companies less than 1. On the other hand those are undervalued. Investing in undervalue companies we can obtain highest return.
Evaluation of Earning Based Ratios
According to the Earning based Valuation the below highlighted companies performed better in the market. Company Name | EPS | Growth Rate% | PEG | HNB | 18.64 | 6.26 | 1.86 | Ceylon Gurdian | 68.65 | 23.37 | 0.44 | Amaya Leisure | 9.36 | 11.21 | 1.005 | Chevron Lubricants | 12.51 | 21.65 | 0.6 | Three Acre Farms | 9.73 | 75.96 | 0.14 | United Motors | 13.42 | 18.61 | 0.65 | Sampath | 30.08 | 18.79 | 0.53 | Onally | 30.37 | 5.13 | 3.01 | Bairaha | 0.59 | 43,57 | 0.21 | Dialog | 7.12 | 5.52 | 1.196 | Distileries | 7.12 | 1.29 | 0.4 | Richard Peries | 0.686 | 21.52 | 0.532 | Softlogig | - | - | - | Malwatta vally | 18.1 | 23.96 | 0.13 | Orient Garment | - | - | - | Touch Wood | 37.44 | 14.23 | 0.299 | Horana Plantation | 13.18 | 25.26 | 0.139 | Royal Ceremics | 12.40 | 24.95 | 0.431 | Dockyard | 29.44 | 21.8 | 0.399 | ACL Plastic ltd | 20.47 | 14.73 | 0.533 | Cargo Boat Development | 16 | 19.61 | 0.383 | both the conditions of the efficient set theorem met between portfolios C to portfolio F that is the Efficient Set.
When further considering these four efficient portfolios we have identified that portfolio E and F along with the investment policy. To select the best one among these two we have used comparative measure Coefficient of Variation (/r) which measures which portfolio gives lower amount of risk per unit of expected return. Our calculations provided 2.07 for portfolio E and 2.17 for portfolio F indicating that the portfolio E is the better. And also when selecting optimal portfolio we have addressed following main three issues: Selectivity
When constructing the portfolio we have included the securities which have positive forecasted price movements based on our calculations and the observed data.
Timing
And also when forecasting the price movements of individual securities we have considered how those securities’ prices can be vary relative to the treasury bills’ price movements.
Diversification
When create portfolio we have created the portfolio as it minimize the overall portfolio risk. Allocation of considerable weightage to the treasury bills also align with the objective of minimizing risk level when creating diversified portfolio as risk averse investors.

After addressing above three issues, to ensure that the selected portfolio is the optimal solution and to allocate weightages to each security, we have gathered more information relevant to the securities included in the selected portfolio. And have reconsidered technical and fundamental analysis done relating to the selected securities. Securities which are selected to construct the optimal portfolio with their weightages and significant information can illustrate as follows.

Security Name (Portfolio E) | Weight | Exp.Return | Standard Deviation | Growt.rate** | EPS | P/E ratio | Div Yield | Treasury Bill | 0.20 | 7.1% | - | - | - | - | - | HNB | 0.12 | 0.07% | 0.016904 | 10.6% | 18.64% | 11.68% | 2.34% | Ceylon Guardian | 0.21 | 0.68% | 0.042488 | 23.36% | 68.65% | 10.39% | 0.48% | Three Acre Farms | 0.30 | 1.99% | 0.110249 | 75.96% | 9.73% | 10.58% | - | Amaya Leisure | 0.03 | -0.003% | 0.042041 | 11.21% | 9.36% | 11.27% | 5.68% | Dockyard | 0.07 | 0.07% | 0.010097 | 21.8% | 29.44% | 8.1% | 3.08% | Malwatte Valley Plantationtion | 0.02 | -0.52% | 0.030586 | 23.96% | 18.1% | 3.05% | - | Orient Garment | 0.05 | 0.53% | 0.100537 | - | - | - | - | Portfolio Expected Return | 2.19% | Portfolio Variance | 0.0020643 | Portfolio Standard Deviation | 0.0454342 |
**(Growth Rate= ROE* Retention Ratio)

Sector Wise Allocations

Treasury Bills
The major purpose behind inclusion of treasury bills into portfolio is to minimize the overall portfolio risk while stabilizing the expected return of the portfolio since government securities are risk free and can earn stable income on it. Therefore for the purpose of securing our wealth we have allocated 20% into the treasury bills.
Hatton National bank
Sector :Banking and Finance
This is good time to discuss about banking sectors, as expected to see the first quarter results with the new improvement due to tax saving and economic growth. Here we have select the HNB to invest as good decision with different views.
HNB is industry norm as it relatively strength in the banking industry.
Vision:
To be the acknowledged leader and chosen partner in providing financial solutions through inspired people.
Mission:
Combining entrepreneurial spirit with empowered people and leading edge technology to constantly exceed stakeholder expectations.
Values:
* Treasure professional & personal integrity at all times * Demonstrate mutual respect in all our interactions * Passionate in everything we do * Committed to being customer centric * Courage to change, challenge and be different * Demonstrate unity in diversity

Key Indicators * Interest margin – Par with the industry * Percentage of other income out of operating income comparing with the other banks contribution is high, that is due to the capital gain of sales quoted investment amounts 600 million. * Operational cost to income ratio – reporting at 76% comparing with other banks, ratio high. * Percentage Loan loss provision out of total Non Performing Loan- well maintained at very low level. * NPL ratio reporting at 5% very Low level * PER trading at 11.68% * PBV line with Industry
HNB has become to make top 3 in the top 20 companies in 2009-2010. Also they have record a 35%growth in profit after tax and posted Rs 4.3 billion profit after tax by overcoming both external and internal hardships.
When analyses the financial stability of this bank it represent the less volatility. Therefore this is a more suitable with the expectation less volatility in the expected return while low standard deviation of 0.042488 implying low level of risk. As well banking industry as a growing in Sri Lankan economy we have decided to allocate considerable amount of wealth for HNB.

Top 20 Major Shareholders – Voting as at 31.12. 2010
Name % on total capital
1. Sri Lanka Insurance Corporation Ltd.(Life fund) 11.93
2. Employees Provident Fund 7.56
3. Milford Exports (Ceylon) Limited 6.44
4. Stassen Exports Ltd 5.59
5. Brown & Company Ltd. 5.54
6. HSBC Intl Nom Ltd - SSBT-Janus Overseas Fund 3.97
7. Mr.Sohli Edelji Captain 3.85
8. Sonetto Holdings Limited 3.54
9. Distilleries Company of Sri Lanka Limited 2.50
10. National Savings Bank 2.34
11. HSBC Intl Nom Ltd - SSBT-Janus Aspen Series Overseas Portfolio 1.80
12. Standard Chartered Bank Singapore S/A HL Bank Singapore Branch 1.69
13. SBI VEN Holdings Pte Ltd 1.60
14. HSBC Intl Nominees Ltd-BBH-GMO Emerging Markets Fund 1.50
15. FI-CIBLUX S/A Batterymarch Global Emerging Market Fund 1.11
16. BNY-CF Ruffer Investment Funds:CF Ruffer Pacific Fund 0.65
17. The Ceylon Investment Plc - A/c No. 02 0.62
18. The Bank of New York Mellon SA/NV-CF Ruffer Total Return Fund 0.55
19. Deutsche Bank Trust Company Americas 0.55
20. Employees Trust Fund Board 0.43

Ceylon Guardian investment trust
Sector : Investment trust
Colombo-based Guardian is a part of Sri Lankan diversified company Carson Cumberbatch and company which has interest in breweries, real estate and oil palm plantations.

Vision
Being truly regional holding company.
Mision
The emphasis has been towards the creation of sustainable long term shareholder value in all businesses and believe that the creativity, dedication and innovative spirit of our staff, will make the difference between the success or failure of our businesses, and hence we are committed to rewarding them based on merit and providing them the opportunities to grow and develop with the Company.
Key indicators
Guardian’s Rs 3.3 billion equity investment trust portfolio gained 128% in the nine months ended December 31, compared with a 77% rise in the All-Share.
PER trading at 10.39%
Price to book ratio at 2.2
Also the announcement by Ceylon guardian investment trust Plc and acuity partners’ ltd of a joint venture to tap opportunities in asset management business is expected to boost the unit trust industry.
And this company own comparatively high growth rate and have highest EPS of 68.65% indicating earnings available for common share holders is high which shows the financial strength of the company.

The twenty major shareholders as at 31.12.2010 1. Name of the Shareholder % on capital 2. Carson Cumberbatch PLC A/C No. 01 67.15 3. Thurston Investments Limited 6.72 4. Mr. M. Radhakrishnan 2.48 5. Pershing LLC S/A Averbach Grauson & Co 2.13 6. The Gilpin Fund Limited 1.92 7. Mr. G.J.W. De Silva 1.16 8. Miss. G.I.A. De Silva 1.06 9. Mrs. M.L. De Silva 1.04 10. Mr. K.C. Vignarajah 0.74 11. Miss. R.H. Abdulhussein 0.61 12. The Ceylon Desiccated Coconut & Oil Company Limited 0.47 13. Miss. G.N.A. De Silva 0.44 14. Waldock Mackenzie Ltd/Mr. H.M.S. Abdulhussein 0.43 15. Waldock Mackenzie Ltd/Mr. M.A.N. Yoosufali 0.42 16. Mr. O.D. Liyanage 0.32 17. Mrs. S. Vignarajah 0.30 18. DFCC Bank A/C 1 0.30 19. Mr. G N Russel 0.28 20. J.B. Cocoshell (Pvt) Ltd 0.28 21. Mr. A. C. Rizan 0.23 Amaya Leisure
Sector: Hotel and travels
Amaya Leisure PLC, formerly Connaissance Holdings Limited, is a Sri Lanka-based company engaged in investing and managing subsidiaries, and operating as tour operators. The Company, together with its subsidiaries, operates star class hotels, and provides services for management research and development of the hotel chain of the Company and its subsidiaries.
It is also engaged in servicing the Meetings, Incentives, Conferences and Exhibition (MICE) market. In Addition, the Company promotes and provides facilities relating to ecotourism. The Company operates through two segments: hotel segment, which includes revenue, assets and liabilities generated from the Company's hotels, and travel division, which includes income generated from travels and tours division. As of March 31, 2011, the Company had two subsidiaries, namely Culture Club Resorts (Private) Limited and Kandyan Resorts (Private) Limited.
Key Indicators
PER trading at 11.27%
Although the group has recorded losses since 2008, nearly all hotels excluding REEF have been operationally profitable. Further, the group has suffered from high interest cost due to its relatively large overdraft facility.
As per the most recent financial results released, the group returned to profitability with 12.7 million in earnings to equity for the first 9 months of financial year 2010. The growth in tourist arrivals with the beginning of the winter season benefited the group as earnings reached Rs 11 million for the 3rd quarter financial year 2010. However we believe that 4th quarter financial year 2010 results are likely to be more favorable as the company is currently experiencing higher occupancies in all 3 locations (Hikkaduwa, Kandy, Dambulla).
Amaya has high potential of delivering better performance in comparison with other top hotels which prevails at high PE levels.
The twenty major shareholders as at 31.12.2010
Name of Shareholder % on capital 1. Mr. K. D. D. Perera/Vallibel Holdings 42.15 2. Bank of Ceylon A/C Ceybank Unit Trust 9.98 3. Sbl/Mr. K. D. D. Perera 9.78 4. Wml/Mr. L. T. Samarawickrama 8.06 5. Mr. C. J. Wickramasinghe 3.64 6. Employees Provident Fund 3.29 7. Elles (Pvt) Limited 2.88 8. Mercantile Investment Limited 2.55 9. Bank of Ceylon A/C Ceybank Century Growth 2.38 10. Mr. S. Senaratne 1.01 11. Mr. L. T. Samarawickrama 0.39 12. Mas Capital (Pvt) Limtied 0.34 13. Bank of Ceylon A/C Eagle Growth Fund 0.31 14. Wml/Mr. K. I. Dharmawardane 0.30 15. Mr. G. L. A. Ondaatjie 0.24 16. Rubber Investment Trust Limited/Ac 01 0.24 17. Mrs.Nandani Chandralatha Madanayake 0.24 18. Deutsche Bank Ag-Pyramid Unit Trust 0.21 19. First Capital Markets/Mr.W.D.N.H Perera 0.18 20. Mr.Bertram Manson Amarasekera 0.15
Three Acre farms LTD
Sector: Beverage Food and Tobacco
Three Acre Farms provides selective breeding, hatching and sale of commercial day old chicks, both broiler (for chicken meat) and layer (for the production of table eggs). The company has two fully owned subsidiaries: Ceylon Pioneer Poultry Breeders Ltd (CPPBL) which operates a grandparent farm and Millennium Multibreeder Farms (Pvt) Limited (MMFPL) which employs advanced technology farming.
Vision
To achieve complete poultry integration synergies, ultimately gaining export market competitiveness.

Mission
To tap and harness business opportunities by expanding into various vertical integration projects. This will lead to increase in Agriculture, Aquaculture and Livestock production, thus encouraging national progress through nutritious protein-rich food to the people of this Nation.
At the forefront of CGE’s subsidiaries is Three Acre Farms PLC. (TAFL), the largest poultry player in Sri Lanka.
Key Indicators
PER trading at 10.58%
Going down with the overall sentiment that prevails at the moment we believe that three acre frames undervalued at this price and has incredible scope for growth. It is better to hold till at least December if not more will reap benefits that are booming. Also the prospectus on poultry shares is good.
It gives positive outlook as there was some anticipation that they were not going to declare a payout at all, so this is good and they will be reinvesting which augurs well for long-term players.
When compared with others we have allocated highest proportion from our wealth since this account for highest expected return of 1.99% and highest growth rate of 75.96%. As well highest return indicating higher degree of risk through 0.110249 of Standard Deviation. Therefore this has caused to increase the both return and risk of the portfolio.
The twenty shareholders as at 31.12.2010 Name of the shareholder Number of shares %
1. Ceylon Grain Elevators PLC 57.21
2. Prima Limited, Singapore 15.00
3. Japfa Comfeed International Pte Ltd, Singapore 4.22
4. Perpetual Capital (Private) Limited 1.88
5. Eka Limited, Singapore 1.33
6 .Supra Limited, Hong Kong 1.10
7. Mrs. D M Fernando 1.06
8. Mr. U C Bandaranayake 0.64
9. Mrs. C B Peiris 0.57
10. Miss. I K S Weerasekara 0.49
11. Mr. M M Fuad 0.47
12. J B Cocoshell (Private) Limited 0.33
13. Entrust Limited 0.28
14. Mr. D D W Chandradeva 0.26
15. Mr. K R U Gunawardena 0.25
16. Mr. S C Haputhanthree 0.25
17. Mr. H V M S De Silva 0.25
18. Perpetual Asset Management (Pvt) Limited 0.24
19. Mr. M M Mohamed Makeen 0.23
20. Mr. M K De Vos/Mrs. D J De Vos 0.22

Dockyard PLC
Sector: Construction
Established in 1982
Sector: construction and engineering
A unit of Japan’s Onomichi Dockyard Company
Mission
We Strive * To be most competitive and viable business entity in South Asia in Ship building, ship repair, heavy engineering and allied activities. * To efficiently and effectively manage all our resources * To achieve sustainable growth * To enhance the interests of our stakeholders and thereby contribute to the pursuit of our vision.
Key Indicators
PER trading at 8.1%

According to the 2010 Financials:
March 2010 EPS: 3.86
June EPS: 8.76 2010 Annual EPS Rs 30.40
Spt EPS: 11.35
Dec EPS: 10.80
There was small dip from overall profits from annual EPS: 31.45.
Price History
As at April 15th 2010: Rs 288.75
At April 12th 2011: Rs 282 * Price has stagnated over a year * Ship repair revenue which bring higher margin of profit went down in 2010 compared to 2009. This was mainly due to the tough competition especially from Chinese yards in the repair business. * Revenue from ship repair fell sharply to 4.2 billion rupees in the 2010 financial year from 6.7 billion rupees the previous year. * Also as transactions are mainly done in US dollar, appreciation of rupee to a dollar is bad for the company.
Positive growth prospect * Revenue from ship building shot up to 9.6 billion rupees from 5.6 billion rupees. * With port expansions in Sri Lanka more ship can be attracted helping profitability of Dockyard in the long run * Ship repair order books full until 2012. * Also Sri Lanka Dockyard lays Keels for new supply vessel.

* It has undertake over US$ 4 million worth repairs * Sri Lanka Dockyard wins order for supply
Also getting down the company’s annual report we got understand that they have laid their concentration more on the niche markets.
Top twenty Shareholders as at 31.12.2010
Mainly institutuional interest with HNW investors.
Name of the Shareholder % on issued Capital 1. Onomichi Dockyard Company Ltd. 51% 2. Employers Provident Fund 14.54% 3. Sri lanka Insurance Coperation Ltd. General Fund 5.00% 4. Sri Lanka Insurance Corporation.Life Fund 4.99% 5. Sri Lanka Ports Authority 3.04% 6. Paints and General Industries Ltd 2.40% 7. Mr.S.E Captain 2.10% 8. Employees Trust Fund Board 1.675 9. Pershing LLC S/A Averbach Grausan and Co 0.90% 10. Aviva NDB Insurance PLC A/c No 7 1.67% 11. National Saving Bank 0.55% 12. Mr.M.M.Udeshi 0.55% 13. Bank of Ceylon No 2 A/C 0.46% 14. PABC PLC/Mr Morarj Meghj 0.35% 15. DFCC Bank A/C 1 0.34% 16. HSBC INTL Nom Ltd.JPMCB-J.P.Morgan Clraring Corp 0.32% 17. Lanka Milk Foods (CWE) Ltd. 0.30% 18. Union Assurance PLC No 01 A/C 0.22% 19. Mr. A.P.Somasiri 0.21% 20. David Peiris Motor Co Ltd 0.21%

Malwatte valley Plantation
Sector: Plantation
Malwatte Valley Plantations PLC engages in the cultivation, manufacture, and sale of black tea, rubber, coconut, and other crops in Sri Lanka. It is cultivating and processing tea and rubber through 20 tea estates and 6 rubber estates located in the planting region of Bandarawela, Badulla, and Avissawella. The company was founded in 1992 and is based in Colombo, Sri Lanka. Malwatte Valley Plantations PLC is a subsidiary of Wayamba Plantations (Pvt) Ltd.
Mission
Malwatte Valley Plantations PLC (MVPLC) is committed to achieve excellence in every sphere of activity. We will become an increasingly profitable, stable and growth oriented model private sector corporate entity whilst affording the highest priority to the environmental and social needs by: * maintaining highest standard of ethics in dealing with our most valued employees, Shareholders, competitors, business associates and general public: * Consolidating tea and rubber production with increased productivity and improved value addition in order to enhance the overall profitability of the company: * Maximizing utilization of land through the adoption of modern agricultural practices by venturing into high value added export oriented products and services: * Developing all profitable diversification opportunities, in-crop as well as non-crop sectors;
Key indicators
PER trading at 3.05%
Malwatte valley plantations PLC has seen its sustained net profit soar over the past few years. Its strategy to rationalize tea manufacture to better garden marks and the buoyant rubber prices have brought about this year’s profit.
However the company is not ready to relax and new strategies are in the pipeline.
The company has recorded a net profit before tax of nearly Rs 470 million for the financial year ended December 31. This is an increase of 476 % on the previous year computes at approximately 1.3 million per day.
Malwatte valley is now among the key players in the industry. With an EPS of 18.98 it is among the highest earners in the industry. The company considers diversification to exploit Sri Lanka’s rapidly expanding economy. Management of plantations will continue and with the fine mix of tea and rubber estates the company has, 2011 should be a successful year in the event prices are favorable with the wages being related to the performance.
However the drop in tea output in June and the wage hike had given significant impact on the Malwatte plantation performance recently.it is true that there were a split couple of months ago and the right announcement for both voting and nonvoting shares.( 2 for 10 voting at 6.75 and nonvoting at 5.50. Ex right date is 5th of august) but the right announcement was made price started to drop from about 9.10 to now 6.90. Further this is the best plantation stock in terms of PE. So it is better to hold this share

The twenty shareholders as at 31.12.2010
Name of the shareholder % of Issued Shares Capital
1. Wayamba Plantation (Private) Limited 62.82
2. Mr.Willem Lucas Bogtstra 5.96
3. Pershing LLC S/A Averbach Grauson & Co. 5.73
4 .Mr. Mariapillai Radhakrishnan 1.61
5. Gulf East Finance Limited 1.26
6 .Mr. Sarhank Kader 1.24
7. Cocoshell Activated Carbon Company Ltd 0.49
8 .Mr. Semasinghe Navaratne Chandrasekera Wanni 0.44
Kandegedara
9 .Employees Provident Fund 0.35
10. Mr. Arya Keerthi Kumarasena 0.31
11. Mr. Duleep Nissanka Daluwatte 0.24
12. Tranz Dominion, L.L.C. 0.22
13. Asian Finance Ltd 0.22
14 .Mr. Shwan Mustafa Saieed 0.22
15 .Dr. Niranjan Deepal Gunawardena 0.22
16. First Capital Markets Ltd 0.17
17. J B Cocoshell (Pvt) Ltd 0.17
18. Bhadra Investments Limited 0.17
19 .Mr. Danushka Maduranga Jayalath 0.17
20. Q ualitea Ceylon (Private) Limited 0.16
21 .DPMC Financial Services (Pvt) Ltd 0.16
22 .Mr. Krishantha Sanjeewa Jinadasa 0.15
23 .Waldock Mackenzie Ltd/HI-Line Trading 0.13
24 .Mr. Thamby Lebbe Mohamed Imtiaz 0.12
25 .Mr. Don Felix Karlinga Jayamaha 0.12

Orient garment PLC
Sector: Manufacturing
Orient Garments Ltd’s (OGL) 54.9 million ordinary shares will be listed and commence trading on the Colombo Stock Exchange from June 29, 2011. Orient Garments Limited, part of the Finco Group of companies, will be the first apparel manufacturer to be listed on the CSE and will be classified under the manufacturing sector on the Diri Savi Board. A stock exchange filing said the reference price would be Rs. 23 per share.
Vision
To nuture the values of aworld-class manufacturing organization, who would be the preferred partner to our customers.
Embed professionalism and honesty in our efforts, while always aspiring for greater acheivment in our industry.
Consistently exceed our own expectations, delivering the best value to our shareholder and employess, while always being responsible to our community and the environment.
Key indicators
OGL shares will be introduced at Rs. 23.00 which was the same price at which the private placement was carried out in December 2010. At the introductory price, the company will have a market capitalization of Rs 1.2 billion at a PE of 10.00. Maintaining PE at that stage is good point for this company which indicates its potential growth.
Also OGL Group has posted Rs. 2.8 billion revenue and earned Rs. 125.7million profit attributable to shareholders during the financial year 2009/2010. For the eleven month period ended February 28, 2011, the revenue was Rs. 3.3 billion and profit attributable to shareholders was Rs. 98.2 million.Net asset value of the Group as at March 31, 2010 was Rs. 512.3 million which had improved to Rs. 603.7 million by end of February 2011.
The Company operations are expected to gather a steady upward momentum with its moves to reinforce its position in its niche market capitalizing on its competitive strengths such as design capabilities, skilled workforce and the level of service.
As a newly stabilized, growing company in Sri Lankan economy we have selected this company to be included in the portfolio with the expectation of future steadiness according to our personal preferences. Though it is newly stabilized company, it own 0.53% of positive expected return and 0.100537 of standard deviation indicating relatively low level of risk.

The twenty shareholders
Name of the Shareholder No of Shares %
1. Mr. S.H.Jayasuriya 0.09%
2 .Mr. D.A.Priyantha 0.09%
3 .Adam Apparels (Private) Limited 0.18%
4 .Mr. C.P. De Silva 0.18%
5. Mr. M.Raaymakers 0.18%
6 .The Regent Group (Private) Limited 0.18%
7 .Mr. H.A.S.Madanayake 0.36%
8.Almar Trading Company (Private) Limited 0.40%
9. Mr. W.S.L.Coonge 0.40%
10. Mr. R.M.P.Dias 0.40%
11. Mr. S.C.Weerasooria 0.43%
12. Mr. M.S.I.Marikar 0.55%
13. Nikan (Private) Limited 0.63%
14. Mr. N.E.Weerasooria 1.00%
15. Mrs. S.Weerasooria 1.00%
16 .Mr. N.D.Samarawickrema 1.19%
17. Mr. M.M.Fuad 1.82%
18. Mr. H. De Silva 4.05%
19. Finco (Private) Limited 5.77%
20 .Finco Holdings (Private) Limited 15.87% Portfolio E
Optimal Portfolio
Wealth Allocated (Rs)
Weight

360000

0.12

0.30
Cey.Guard.
HNB
Three Acre
Malwatte
Dockyard
Amaya Leis.
HNB
Three Acre
Cey.Guard.
HNB
Cey.Guard.
Three Acre
Cey.Guard.
HNB
Orient
Cey.Guard.
Three Acre
Amaya Leis.
HNB
Dockyard
Malwatte
T.Bills
630000

900000

90000

210000

60000

150000

600000

0.20
0.05
0.02
0.07
0.03
0.21

Portfolio Revision
Portfolio management become would be incomplete exercise without periodic review. Our portfolio revision undertake a time period from Aug 05 to Sep 09. With this time horizon the portfolio review has include the careful examination of the our Fundamental objective of maximizing the expected return with a given level of risk level, target a for portfolio performance, analysis reasons for the variations
At this stage we have laid our concentration whether to change fundamental objectives based on periodical reviews. As Risk averse investors to secure our objective further we have reviewed our portfolio time to time. Consequently this has recognized some of key price variations and significance performance of the selected securities included in the efficient portfolio. Ultimately based upon these key factors it has emphasized that there is no necessitate to repetition of previous steps.
When considering the past period performance of our selected portfolio that expected to earn highest profitability during the next period. As we have illustrated earlier HNB is the one of systematically important bank which owned sound asset base in the banking sector. Also than the other competitive banks HNB grab the market share and Commercial bank is the only one competitor that threat to the HNB when considering industry performance. In addition to that, Three acre farm which posted around 75% growth rate which was the highest growth rate we have identify in accordance with the security analysis. Going down with time they expected to maintain zero payout policy as they reinvested their earnings for future potential growth. The positive expectation on Three Acre Farms throughout the last five weeks has laid our concentration to recover on expected losses from risky assets, mainly from the Malwatte and Amaya leisure. Mainly the wage issue has negatively impact on the Malwate valley to perform downward price variation within the time period.
Since we are at initial stage of the share market investment horizon believes that we need much more time to build up decision regarding the speculation. Also our optimum portfolio satisfied our current market expectation and our overall investment policy. Therefore it is revealed that there is no further indication to alter our fundamental objective. Simply we focus on passive management throughout the investment process as to hold a well diversified portfolio for long-term with the buy and hold approach which resembles the overall market returns. This has led to keep us with the current portfolio as we already recover from the expected losses of risky assets. Putting the 20% on treasury bills and Three Acre farms on more weight-age has assist on recovering from expected losses. Also we believe that this positive expectation on three Acre will continue.

Sector wise allocation: Target Vs Actual
Sector Target Actual
(Asset weight %)
Government 20% 20%
Banking 20% 12%
Hotel and Tourism 15% 3%
Plantation 10% 2%
Manufacturing 10% 5%
Gas and Oil 8% -
Foods and Beverage 6% 30%
Finance and Investment 5% 21%
Telecommunication 3% -
Information and Technology 3% -

Here the target asset allocation of the expected portfolio has varied as when observing the performance of particular industries have considerably impact on our Fundamental objective. For instance tele-communication sector has less attractive shares recently due to high penetration which was unable to comply with our key goal of maximizing the expected return. Also we have increased target allocation of Food and Beverage sector due to high growth performed by the Three Acre.

Portfolio Performance Evaluation
In the process of investment in order to determine whether we have attained our objective, we have performed evaluation for the efficient portfolio. At this stage we have observed the periodical changes in the risk and return of the securities included in the portfolio. To measure the periodical performance gathered information regarding to securities and for the easiness of understanding the performances, those information has plotted into the line charts.

From 8 Aug to 12 Aug
HNB Ceylon Gurdian

Amaya leisure Three Acre

Dockyard

With regard to this week Ceylon guardian and Three acre farms performed well than we expected and Malwatte valley, HNB and Amaya leisure price has increased at the end of week. However rest of the companies fails to raise their market prices. When considering the dockyard they have high price variations within the week which has caused to experience a high risk in the portfolio.

From Aug 15 to Aug19

HNB Ceylon Guardian

Three acre Malwatte Valley

Amaya leisure

Though there has decreased in HNB share prices all the other companies has reported high share prices within the week. However all the companies’ have performed well than the price we expected. Also this performance has given significant impact on the risk level of the portfolio when considering the risk level it has decreased when compared to the previous week.
From August 22 to 26
HNB Ceylon Gurdian

Amaya Leisure Three Acre

Malwatta Valley When analyzing this week all the company’s prices has dropped except the three acre farms. The performance of these companies can be seen volatile movement and the performance of Amaya Lesiure and Ceylon guardian have given negative impact on the portfolio as their prices has decreased than we expected. Also the risk level has slightly increased with theses price variations.

From August 29 to September 2
HNB Ceylon Gurdian

Amaya Leisure Malwtta Valley

Three Acre

When considering the performance of this week Ceylon guardian and HNB have high price variations than other weeks. Also Malwatte Valley has a significant performance posted during the week. The risk level of the portfolio is high due to the considerable movements in the price variations of HNB and Ceylon Guardian. However three Acre Farms posted a significant price behavior which caused to minimize the high risk level of the portfolio.
From September 5 to 9
HNB Ceylon Gurdian

Amaya Leisure Three Acre

Malwatta Valley

This is the last week of the performance evaluation. In this week HNB and Amaya leisure, Three acre and Ceylon Guardian posted a negative performance. It is noticeable that a Three acre farm has given a considerable performance during the last four weeks. However the price has dropped within the week has caused to increase the expected risk level of the portfolio. When considering the portfolio performance has decreased than we expected as well as risk level.
As a whole the overall performance of the last five weeks have given a significant impact on the risk and expected return level of the portfolio. In our policy statement we have indicated that as risk averse investors that try to maximize return with an given level of risk. In order to achieve this we have diversified our portfolio among risk free assets, mainly Treasury Bills, and risky assets. When considering Risky assets we further diversified with high price movements assets to recover the loss of low price movements’ assets. Malwatte Valley which has posted low price movements due to the wage hike and drop tea output in June. The collapse of Malwatte plantation has been recovered through the investment of the three acre farms. Therefore this recovering might contribute to minimize the risk level of the portfolio.
When considering the risk level we have experienced high risk levels due to the negative movements of the Amaya leisure and Malwatte plantation. Though risk level has been increased the expected return has increased due to the positive moments in the Ceylon guardian and three acre during period. Ceylon guardian and Three acre performance was good at that time and price has increased than we expected.
We think that it is better to hold this portfolio since it has met our expectation than we expected and positive expectation on Three acre and Ceylon Guardian will continue further.…...

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