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BLUE CHIP JOHN KEELLS RECORDS STAGGERING 142% GROWTH FOR CUMULATIVE 3QFY11
JOHN KEELLS HOLDINGS
INTERIM RESULTS UPDATE
Nuwan De Silva: [email protected]
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JOHN KEELLS
HOLDINGS INTERIM RESULTS UPDATE Heavy weight John Keells Holdings is a Premier large cap
counter in the Colombo Bourse amounting to a circa 7.4% of the
total market capitalization. The market gaint is a fully fledged
diversified organization holding leading positions in Sri Lanka’s key
sectors.
The benchmark counter surpassed FY10 earnings by a healthy
10% over the 9 month period for FY11 backed by strong earnings
from the transport sector and via capital gains on investments.
Given the expected economic upturn together with strong tourist
arrivals and a higher activity levels in the country the heavy weight
giant acts as a benchmark for the local economy whilst deriving
value through growth.
JKH OUTLOOK
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BLUE CHIP JOHN KEELLS TO RECORD
STAGGERING 142% GROWTH FOR
CUMULATIVE 3QFY11.
Heavy weight John Keells Holdings is a preimere large cap counter
in the Colombo Bourse amounting to circa 7.4% stake of the totalmarket capitalization. The benchmark company is a fully fledged
diversified organization holding leading positions in Sri Lanka’s key
sectors. JKH holds business interest across the economy with
holdings in the Leisure, Transportation, Food & Beverage, Property
Development, IT and Financial Services. The blue chip counter
which acts a beacon for investors recorded healthy earnings of
LKR2,027.1 mn by the end of 3QFY11, edging up 63% on a YoY
basis.
The entity boasts of being the only private port terminal operator
via the ownership of SAGT. The transport sector which include
Bunkering facilities contributed a profit of LKR570.5 mn for
3QFY11 as opposed to an earnings figure of LKR485.8mn the
previous year amidst volatility of oil prices and interenal work
stoppages. In addition the highly reputed chain of hotels spread
well across the country, plus within Maldives which caters towards
the up-market tourist segment emerged as the highest earnings
contributor for the diversified group with a profit figure of LKR627.2
mn in 3QFY11.
Further, Property, Food & Beverage and Financial Services
registered net earnings of LKR220.9 mn, LKR58.3 mn and
LKR401.0 mn respectively for the quarter under review. Albeit, the
IT segment witnessed a minute loss of LKR9.4 mn from a previous
loss of LKR6.6 mn YoY.
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QUARTERLY RESULTS
QUARTERLY FINANCIAL PERFORMANCE
A GLANCE AT 3QFY11 PERFORMANCE
REVENUE TO SPIKE UP WITH THE ECONOMIC
UPBEAT
Consolidated revenue of JKH’s 3QFY11 gained by circa 22% YoY
to LKR15,615.6 mn spearheaded by the high volume Consumer
Foods and Retail segment which contributed 31% of the top-line
on the back of the improved disposable income in the country.
This top-line growth was further shouldered by the healthy turnover
levels of the Leisure sector on the back of the high tourist influx
and the Transport sector activity levels. Also, over the 9 month
period the group turnover witnessed a 25% hike shouldered by the
high geared macro economic climate in the country.
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31%
12%
6%5%
Revenue Contribution
Transport Leisure
Property Consumer Foods & Retail
Financial Services IT
Other
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GROSS PROFIT MARGIN WITNESSED A HEALTHY
SPREAD OF 26%
With the leisure sector seen a revival the cost of sales witnessed a
condensed growth pattern by gaining lesser than the revenue
incline. The cost reduction in transport sector and higher efficiency
level in the consumer food segments strengthened the gross profit
margin whilst recording a gross profit figure of LKR4,115.2 mn in3QFY11 in comparison to LKR3,156.1 mn in 3QFY10 (a YoY gain
of 30%). Further the cumulative 3QFY11 gross profit grew by 24%
YoY to LKR9,349.2 mn.
OTHER INCOME THROUGH HEAVY INVESTMENTS
Albeit the 9% YoY dip in other income to LKR918.7 mn the heavy
balance sheet assets generated a bountiful yield over the past
year. The increase in short term investments to circa LKR15,578
mn together with the doubling impact of cash, fetched high levels
of interest income amidst the lower policy rates prevailing in the
country. Over the cumulative FY11 the other income segmentstaggered due to the disposal of 11.6mn shares held in Asian
Hotels and Properties together with the sale of 37.3mn John
Keells Hotels PLC shares at a total consideration price of LKR2.8
bn.
EXPENSES IN LINE ALBEIT HIGH TURNOVER
A marginal increase of 3.7% YoY was witnessed in the operating
cost segment during 3QFY11 albeit, a healthy revenue growth of
22% YoY. Yet on a cumulative perspect the operating costs grew
by circa 10% YoY on the back of heavy advertising expenditure on
lieu of many new product launches throughout FY11.
RELIEF IN FINANCE EXPENSES
The overall finance cost witnessed a significant reduction of 46%
YoY as a result of the rate cut by the Government of Sri Lanka.
The payment of a debenture over the 3Q period further reduced
the interest burden of the group. This in turn has increased the
entity’s interest cover from a lower range of 4.0X to 12.5X by the
end of 3QFY11. Further, apart from the local borrowings,
retirement of the IFC loan is due within next quarter, which is
definitely achievable based on the group’s high liquidity position. -2000 2000 6000 10000
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TAX BURDEN EFFORTLESS
Even though the tax burden increased by a 44% YoY on a
cumulative basis the effective tax rate remained at a low figure of
16% for the diversified entity throughout the period. The 3QFY11’s
tax expense growth of 26% was as a result of the increase in
taxable components of the company.
3QFY11 CUMULATIVE TO SURPASS FY10 EARNINGS
The benchmark counter surpassed FY10 earnings by a healthy
10% over the 9 month period for FY11 backed by strong earnings
from the transport sector and via capital gains on investments. The
sprouting economy further shouldered the 142% YoY growth to
LKR6,142.3 mn in cumulative 3QFY11. Over the latest quarter the
predominent earnings contribution came from the leisure sector
backed by the tourism hype.
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A High Flying Transport Sector
JKH's key sector, transportation, is mainly represented by the fully
owned subsidiary Lanka Marine Services (LMS) and 42.2% owned
associate South Asia Gateway Terminals, (SAGT); reported a 17%
YoY gain in the bottom line to LKR570.5 mn in line with the top line
growth of circa 17%. On a cumulative perspect for FY11 the
earnings of the sector recorded a figure of LKR8,872.1 mncompared to LKR6,790.6 mn in the previous year.
LMS, the bunkering arm of JKH spearheaded the sector revenue
despite the volatile oil prices together with the added competition.
(Subsequent to the Supreme Court ruling on a Fundamental Rights
Application on the bunkering unit LMS. Further, currently there are
3 active players in the bunkering business). With the court orders
in place LMS currently has 40% market share whilst LIOC acts as
a strong competitor with a similar market share.
The high level of performance via the port operator SAGT backed
the strong transport sector earning of the organization. Theaverage monthly throughput increased by circa 14% to 166,028
TEU’s per month whilst further heavy activity levels was witnessed
on the back of the improving logistics and airline units.
Furthermore, Board of Investment (BOI) of Sri Lanka has affirmed
that SAGT has fully complied with the BOI agreement and that the
tax exempted status of it remains. We believe that this segment of
the group holds great potential with the increase in the foreseen
improvement in port services, airline operations and logistic
activities in the country.
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TEU Throughput
2010 2009 2008
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Revival of Leisure Sector
Leisure sector witnessed a doubling of the previous years quarterly
performance to LKR627.2 mn in 3QFY11 on the back of the 46%
increase in the tourist arrival to the nation. Of the leisure income a
bulk of circa 40% was derived through the city hotel segment,
further, JKH was positioned to charge a premium on its high end
clients after the complete refurbishment of the city hotel cluster.Amidst this the leisure sector contributed LKR863.1 mn in
cumulative 3QFY witnessing an impressive hike of 525% YoY.
Despite the full or partial closure of some hotels for upgrading and
refurbishment over the said period the sector managed to perform
exceptionally over time.
During 2QFY11 the company also exited one of its loss making
operations in Maldives – Cinnamon Alidhoo and instead acquired
the head lease of Chaaya Island, Dhonveli. The three Maldivian
resorts that were operational during the quarter registered lower
occupancy levels. Therefore, the Maldivian market was not in par
with its expected earnings due to the adverse weather climatetaking a toll on the occupancy levels.
The leisure sector, which represents the entity’s single largest net
asset exposure encompasses 2 city hotels which holds 40% of the
5-Star room capacity in Colombo and 7 resorts spread across the
nation. The well renowned city hotels attracted a high occupancy
rate of circa 80% over the period whereas the peak season kept
the resorts working at near full capacity.
Coral Gardens which is currently under heavy renovation is
targeted to be re-open in early next year branded as Chaaya Tranz
with an investment of LKR1 bn. Chaaya Bay – Beruwala iscurrently under construction with a capital inflow of circa USD25
mn with operations to be commenced by 2013. Further, the most
recent addition Chaaya Blue, with a refurbishment cost of
LKR450mn is said to attract a high flow of guests to the Eastern
region.
The leisure sector with its refurbished infrastructure has opened up
stronger avenues to maximize future prospects of the emerging
industry. With the Government envivaging to make Sri Lanka a
prime tourist destination, JKH is bound to be a key benificiary.
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Disposable Income Shouldering
Consumer Demand
Backed by well renowned brands and listed subsidiaries such as
Ceylon Cold Stores (CCS:LKR590.1) and Keells Food Products
(KFP:LKR140.0) the sector attained a profit figure of LKR57.9
mn in 3QFY11 from a previous loss figure of LKR1.8 mn. Withstrong local demand empowered by increased disposable income
and higher consumption patterns, the top-line of the segment
witnessed a healthy growth of circa 15% YoY to LKR4,940.6 mn in
3QFY11.
Over FY11 the group has introduced various new products to the
market such as KIK Cola which has won customer confidence in a
short period of time. Further, rebranding of the Elephant House
brand took place giving a new edge to the counter in the food and
beverage sector. The entity has also focused on strengthening the
distribution network throughout the nation whilst introducing a new
back office system to streamline the work process. Further, JKH is
equipped with a supermarket network of 46 and is cautious about
its expansion plans in the segment due to the high competition in
the industry.
The high volume yet low margin segment has also invested
LKR500mn in its factory capacity to increase the production of ice
cream in the island. With the island’s consumption patterns
changing together with income levels rising the sector is inlinefor
exponential growth.
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Property, a Turnaround Sector
JKH which is one of the largest private sector holders of real estate
in the island is the owners and promoters of Crescat City, the 30-
storey luxury apartment ‘The Monarch’, and the 35-storey luxury
apartment, ‘The Emperor’. Further the sector is in progress of
building a 475 apartment complex in Union Place, where interest
has been expressed for near 70% of the units. With the final call inFebruary the 1st tranch is proposed to be kicked off for the newly
launched project ‘On Three 20’ .
The property sector witnessed high growth levels of circa 246%
YoY for 3QFY11 on the back of the seasonality of the payment
structure. Further the sector recorded earnings of LKR483.4 mn for
cumulative 9 month period as opposed to LKR140.5 mn the
previous year.
With the land and property sector in a turnaround phase together
with the land prices set to rise with the expected economic growth
in the island we foresee that the property arm of JKH to have
immense prospects in the near future. Phrase
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Insurance to Back Financials
The financial services sector witnessed its bottom line doubling to
LKR401.0 mn in 3QFY11, with the inflow of life segment profit from
Union Assurance coming into play. Further, the cumulative
3QFY11 recorded an 69% YoY jump to LKR 758.3 mn backed by
the strong performance of John Keells Stock Brokers and the
group’s banking associate, Nation Trust Bank.
Information and Other Sector Adding
Strength
Even though the IT sector recorded an loss of LKR9.4mn for
quarter ended December 2010 The Other business segment of
JKH which include Plantation Services, Strategic investments,
Central Hospitals recorded a huge leap in profits driven by the gain
on the sale of shares of KHLs and AHPL during the trailing 3-
quarter period.
QUICK PERFORMANCE REVIEW
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FUTURE OUTLOOK
On a future perspective, we expect JKH to be spearheaded by the
Tourism sector by contributing higher earnings over the next few
years. With the sector being refurbished and renovated to carter
towards the highend tourists, the counter would be able to
strengthen the margin levels whilst maintaining high occupancy
levels. Further, the occupancy levels in the country would be
shouldered by the government initiatives of making Sri Lanka the
most sought after tourist destinantion in the Asian region attracting
2.5mn tourist by 2016. With a minimum room rate of USD125
according to the 2011 budget the hotel sector is poised to see a
growth in price levels. JKH with its portfolio of 2,000 rooms
comprising of 40% of the entire five star city-room capacity in
Colombo and 775 resort rooms in Sri Lanka, is well poised to reap
the benefits of the local tourism upside. Further the growth in
sector revenues in the future would be strenghthen by the heavy
upgrading and refurbishment carried out among the existingproperties together with ‘Chaya Tranz’ and Maldivian operations
generating return.
The improvement of future earnings potential would be
strengthened by the transport sector on the back of the high
performance by SAGT coupled by improved competition of LMS.
Volumes at the Sout Asian Gate Terminal is expected to grow at
double digit figures of circa 10%-12% during the coming year
backed by competitive rates and the regional trade gathering an
upward momentum amidst high economic growth.
The decrease in the risk rating in Sri Lanka would also be working
in favour of JKH whereby the insurance costs of ships docking has
reduced drastically than earlier. Due to the expected change in the
mix between domestic container volumes (which gives thrice the
revenue of transshipment containers) and the transshipment
containers (contributes 78% of total volume) we expect profitability
of SAGT to improve.
Land and property sector in Sri Lanka, which is at a turnaround
stage in Sri Lanka is poised to grow on the back of the
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high geared economy coupled with the construction and
infrastructure boom. JKH holding being the largest private land
bank, has over 33 acres of prime land in Colombo and a further
133 acres outside the capital, the sector is in-line to benefit from
the land and property sector turnaround. Further, with the per
capita income levels soaring and demand for luxury apartments
increasing, the expected earnings via The Monrach, The Emperor
and The One Three 20 would stagger in the near future.
Furthermore, with the declined policy rates in the island the sector
is poised to grow.
Backed by a high turnover equity market and a strong banking
sector the conglomarates financial sector would reap hefty yields
over time. The Nation Trust Bank’s (NTB:LKR84.50 ) aggressive
banking activity is set to increase earnings levels in the near future.
Further, the 4th largest insurer in the country, Union Assurance is
inline for a growth based on its current market share of 11.5% and
9.5% in the life and general insurance sector respectively.
With the demand and consumption patterns augmenting on the
back of higher disposable income and the economic uptrend the
Consumer Food and Retail arm of John Keells Holdings is set to
gain with higher volume levels. With the counter backed by
additional capacity and a strong distribution network, JKH has
created a strong value chain. Further, with the introduction of new
products and rebranding taking place the counter is set to edge up
in the near future.
Furthermore, the newly implicated BPO segment is expected to
generate profit over the years once the Indian operation covers its
initial operating expenses.
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VALUATIONS
On an analysis of the recent performance measures and the
potential opportunities in the Sri Lankan economy as well as the
global market we strongly believe that JKH has a definite upside
potential backed by its high earnings growth rate. In the current
market context with high levels of activities we expect JKH to posta profit figure of LKR8,166.3 mn in FY2011 edging up 57% YoY
whilst in FY2012 to pertain an earnings figure of LKR9,061.2mn
(11% growth)
Share is priced at 22.5X forecast FY11E earnings. With the
counter peaking at LKR358.00 during early 3QFY11 witnessed a
declining momentum to saturate at the current market prices.
Following a volatile price movement for JKH which has gained over
60% in the current period is currently trading at a project 22.5X
projected FY11E net profit whilst on an earnings potential of 20.5X
for FY12E. Based on an analysis of a historic 1 year price
movement, we derive a price volatility of +/-55.6 on a mean of
LKR238.70. hence, the flux is circa +/-23%. Furthermore, if it is
assumed that the same upside momentum is witnessed pushing
the price to LKR362.9 (from a current level of LKR295.0), the
forward PE multiples would increase to a figure of 27.7X and 25.0X
for FY11E and FY12E respectively. [LEAF OVER TO REFER PRICE
ASSIMILATION]
Further, on an adjustment of JKH’s returns to its risk (deviation of
the share price), the derived Sharpe ratio of the counter is at 2.32
whilst the Diversified sector and the market records a Sharpe ratio
of
3.1 and 3.9 respectively below the market risk. JKH’s risk adjusted
risk is lower due to the counters deviation of returns has been
much higher than at 23.1% as opposed to 19.3% and 15.6% for
the diversified sector and the market respectively. Hence JKH
display a lower risk adjusted return when compared to the
diversified sector and the market. [LEAF OVER TO REFER
VALUATION DASH BOARD]
Given the expected economic upturn together with strong
tourist arrivals and a higher activity levels in the country the heavy weight giant acts as a benchmark for the local
economy whilst deriving value through high earnings growth.
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VALUATION DASHBOARD
PRICE ASSIMILATION
*PRICE BAND LKR362.9 IS BASED ON AN UPSIDE GROWTH OF
23%, DERIVED VIA THE ANNUAL STANDARD DEVIATION OF THE
MARKET PRICE. THE PRICE RANGE OF LKR358.0 IS DERIVED BY
THE HIGHEST PRICE JKH HAS REACHED OVER TIME.
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RESEARCH.................................................................................................…………………… … Head of Research Saminda Weerasinghe Senior Analyst Amali Perera
(94-11)5320250 (94-11)5320256
[email protected] [email protected]
Corporates Economy
Akeela Rasheed (94-11)5320252 Umayangana Randeniya (94-11)5320254Nuwan De Silva (94-11)5320258 Dhanusha Pathirana (94-11)5320257
Crishani Perera (94-11)5320251 Nuwan Pradeep (94-11)5320257
Minoli Mallwaarachchi (94-11)5320360
Nirmala Samarawickrama (94-11)5320253
Shehara Fernando (94-11)5320253
SALES
....................................................................................…………………… INSTITUTIONAL SALES RETAIL SALES Sabri Marikar (94-11) 5320224, 077 3576868 [email protected] Shiyam Subaulla (94-11) 5320218, 0773502016 [email protected] Wijayakoon (94-11) 5320208, 0777 713645 [email protected] Gagani Jayawardhana (94-11) 5320236, [email protected] Aboobucker (94-11) 5320213, 0777-727352 [email protected] Priyantha Hingurage (94-11) 5320217, 0773502015 [email protected]
Andre Lowe (94-11) 5320223, 0777 230040 [email protected] Neluka Rodrigo (94-11) 5320214, 0777366280 [email protected] Hedigallage (94-11) 5320211, 0777 713663 [email protected] Subeeth Perera (94-11) 5320227, 0714042683 [email protected] Bibile (94-11) 5320238, 0777 352032 [email protected] Chelaka Hapugoda (94-11-5320240, 0777 256740 [email protected]
BRANCHESKiribathgoda Asian Alliance Building, No.04, Sirimawo Bandaranayake Mw, Kadawatha. Asiri Perera 011-5734773, 0773-692812 [email protected]
Kurunegala Asian Alliance Building, No.254, Colombo Rd, Kurunegala. Asanka Samarakoon 037-5628844, 0773-690749 [email protected]
Matara Asian Alliance Building, No. 312,Galle Road Nupe, Matara. Sumeda Jayawardena 041-5677525,0773-687307 [email protected]
Galle Capital Reach Building, 2nd Floor, No. 16A, Gamini Mw, Galle. Ruchira Silva 091-5629998, 0773-687027 [email protected] Wijewardena 091-5676766, 077-6681884 [email protected]
CSE Floor CSE,01-04, World Trade Centre, Colombo – 1. Thushara Adhikari 011-5735122, 0773-688202 [email protected]
Negombo Asia Asset Finance, 171/1, Station Road, Negombo. Uthpala Karunatilake 031-5676881, 0773691685 [email protected]
SERVICE CENTRESKandy Capital Reach Building, No.165, Katugodella Veediya, Kandy. Nilupul Hettiarachchi 081-5628500, 0773-691816 [email protected]
Radhika Hettiarachchi 081-5625577, 0777-810694 [email protected]
Hambantota Hambanthota Chember of Commerce, Thangalle Road, Hambantota. Gayan Sanjeewa 047-5679240, [email protected]
Anusha Muthumali 047-5679241, 0772-351716 [email protected] Ranasinghe 0772378352 [email protected]
Ampara 2nd Floor, T.K.S. Building, D.S. Senanayake Street, Ampara. Fawshan Mohamed 063-5679070, 0778-848870 [email protected]
Jaffna 11-8, First Floor, Stanley Road, Jaffna. Elilan Kugaval 0775-539137 [email protected] Sutharshan 021-5671800, 0772-395811 [email protected]
Nirmalan 021-5671801, 0778-449773 [email protected]
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