Colombo bourse reflected a volatile market with both gougers closing red at the outset whilst an upward trend was witnessed during the close of the week amidst low turnover levels. Uncertainties in the macro environment kept participation levels in check following limited local retail/corporate activities. However strategic investments led by foreign participation propelled turnover levels whilst accounting for over 70% to the week’s total turnover. Further retail investors crunched in with significant interest in second liners to support turnover levels as the week progressed. During the week interest was seen in Sri Lanka Telecom, Dialog Telekom, Commercial bank, NDB Bank, and Kotagala Plantations whilst a change of hands in controlling stake in Walker and Greig caught the eye of the investor community.

All Share Price Index declined by 16.7 points to close at 2,572.2 (-0.6%WoW) points, whilst the Milanka Price Index also declined by 41.5 points to close at 3,583.9 (-1.1%WoW) points.
The total turnover for the week was at LKR938.4 mn (-0.8%WoW), whilst average daily turnover levels also declined to LKR187.7 mn (-0.8%WoW).

Main gainers for this week were headed by plantations stocks such as Dankotuwa Plantations (+13.9%), Kotagala Plantations (+6.1%), Asian Hotels & Properties (+4.8%), Commercial Bank (+3.6%), Colombo Dockyard (+3.1%), HNB (+2.6%), Sampath Bank (+1.6%) and Hemas Holdings (+1.5%). Main losers for the week were John Keells Hotels (-7.7%), Colombo Dockyard (-4.8%), CIC (-3.0%), Dialog Telekom (-2.0%) and Lanka IOC (-1.9%).


Heightened security situation impact anticipated tourist arrivals

Expected injection in tourist arrivals.
February (-18.3% YoY to 43,051), March (-36.0% YoY to 35,031), and April (-33.6% YoY to 33,039) recorded a significant decline whilst May recorded the worst blow (-40.0% YoY to 26,307). All major tourist markets contributed to the dip in arrivals in may whilst the Indian market being no exception. Further cumulative figures indicated a decline of 23.4% YoY to 193,981 from January to May backed by a drop in arrivals from Western Europe (-30.5% YoY to 74,544), East Asia (-34.7% YoY to 21,414) and South Asia (-14.8% YoY to 62,644). However arrivals from Russia grew by 41.6% YoY to 5,212 in January-May boosting up arrivals from Eastern Europe by 48.8% YoY to 10,333.
Overall tourist arrivals at this juncture have plummeted as experienced in 2002 (following the terrorist attack to the Colombo Air Port) despite the absence of any significant travel advisories. Thus we believe the falling trend could be reversed towards end FY08 given the industry has neared its bottom. Going forward the softened travel advisories from Western Europe bodes well for total tourist arrivals, as the influx from non-traditional markets are likely to supplement the impending winter season arrivals from the major European markets. Further the revived marketing campaign carried out in the Far East and the Middle East is expected to boost arrivals from their non traditional markets whilst recognising Sri Lanka as a destination beyond beaches.

Tourist Arrivals – expected to bottom out

Following lower occupancy rates cumulative earnings (trailing) in the industry have plunged by 30% YoY to LKR1,264 mn in FY07. Whilst the resort hotels being the worst hit with earnings dipping 28% YoY to LKR827.1 mn in FY07 on the back drop of weakening arrivals from Western Europe. City Hotels too suffered modestly with earnings of LKR1,417 mn (-13% YoY). However, the industry shows signs of recovery with business travellers and arrivals from non-traditional markets to show modest growth whilst arrivals from traditional markets could be bumped up due to sports tourism ahead of the winter season.
UNDERWEIGHT sector weighting. The tourism sector now trades on a composite PER of 15.9X (4 quarterly trades earnings) still pricey in contrast to other sectors trading at a cheap 0.8(X) P/BV.
Though too early to evaluate, given a strong recovery in tourist arrivals we could see an upside within the sector whilst Asian Hotels & Properties, John Keells Hotels and Ait. Spence Hotel Hold., are poised to benefit the most. Further John Keells Hotels and Ait. Spence Hotel Hold., would easily withstand any earnings scares from its local properties since the Maldivian operation (Maldivian tourist arrivals up 15% YoY, January to May) enjoying over 90% occupancy is expected to beef up earnings.


Sri Lanka sees entry of UK-based hedge fund

(LBO) – A UK-based hedge fund is entering Sri Lanka and has sought a listing in the Colombo Stock Exchange through the purchase of a listed shell company.
Lionhart Investments Limited has purchased 13,043,804 million shares of Walker and Grieg Limited for prices between 5.75 and 7.00 rupees each, the company said in a stock exchange filing, Friday.
Lionhart is a fund describing itself as a “multi-strategy hedge fund” and is part of Lionhart Advisors Group, which specializes in arbitrage.
Arbitrage in its pure form is a low risk activity that seeks to profit from price anomalies in different markets for the same asset.
The group is headed by Terry Duffy, an investment strategist of Canadian origin. The firm has been expanding in Asia last year and has offices in Singapore and Hong Kong.
Lionhart Investments has now acquired 75.02 percent of Walker and Greig, an old-established distributor which was owned by another Sri Lanka listed firm, Brown and Company.
Lionhart is expected to make a mandatory offer for the rest of the shares shortly.


CPC to restart off-shore bunkering

By Santhush Fernando
Ceypetco Marine Services (Pvt) Limited - a wholly owned subsidiary of the state oil giant Ceylon Petroleum Corporation (CPC) will be formed shortly to engage in offshore bunkering activities.
The new amendments to CPC Act granting wide-ranging powers including recommencement of bunkering and lubricants operations and to commencement of oil exploration activities by the CPC is to be presented in parliament shortly.
CPC will start off with bunkering operations and will float a subsidiary- Ceypetco Marine Services (Pvt) Limited, with BoI status. A meeting between CPC and Board of Investment (BoI) along with Strategic Enterprise Management Agency (SEMA) held last April had been successful with officials giving the nod to recommence bunkering activities.
The Ministry has plans to commence offshore bunkering operations- supply of marine fuels to ships on sea- with the use of charter ships. Already several shipping agents have approached citing the importance of international shipping route just off Hambantota with nearly 300 to 400 ships passing by daily, Ministry sources said.
Both bunkering and lubricant arms of CPC, were profit making ventures, but were privatized in a bid to ‘liberalise’ the oil industry and to convert CPC’s so-called ‘loss-making’ arms into profitable ventures.
At the time, CPC was subsidising its loss making mainstream oil operations- wholesale and retail oil distribution, with the profits gained from bunkering services and lubricants ventures. However with the privatization of these operations in the nineties, CPC lost its profitable ventures and turned around into a white elephant.
Bunkering operation arm of CPC, Lanka Marine Services Ltd. was acquired by leading local conglomerate John Keells Holdings in 2002, while global oil giant, Chevron Texaco succeeded in acquiring the lubricants arm, Lanka Lubricants Ltd.
These legislative changes will also enable CPC to engage in oil exploration under a public-private partnership with a leading global oil drilling company which will undertake to bear the cost of oil drilling and in the event of commencing commercial production share the profits with the CPC.
Lubricants operations would also commence with the CPC tying up with a global firm and selling its products under the Ceypetco brand name, The Nation Economist learns.


Zoellick approved as World Bank seeks to emerge from scandal

AFP) The World Bank on Monday approved Robert Zoellick as its next president as the 185-country development lender moved to turn a page after a scandal that undermined its credibility around the world.
Zoellick, 53, who has been a vice chairman at investment bank Goldman Sachs, is to take office Sunday and faces the task of rebuilding trust in the development lender that cracked under current president Paul Wolfowitz.
Wolfowitz was forced to resign following a troubled two-year tenure after the bank found he had violated rules in arranging a lavish pay-and-promotion package for his female companion, a bank employee. He steps down Saturday.
Zoellick, a former deputy secretary of state and US trade representative in the administration of US President George W. Bush, was nominated by Bush on May 30 to succeed Wolfowitz, an ex-US deputy defense secretary and an architect of the Iraq war.
“Once I start at the World Bank, I will be eager to meet the people who drive the agenda of overcoming poverty in all regions, with particular attention to Africa, advancing social and economic development, investing in growth, and encouraging hope, opportunity, and dignity,” Zoellick said in a statement.
Zoellick was unanimously approved for a five-year term as the 11th president of the bank, the 24-member executive board said in a statement.
Under an unwritten agreement, the United States chooses the head of the World Bank and European countries select the leader of its sister institution, the International Monetary Fund.
Bush welcomed the announcement.
“Bob Zoellick is a dynamic leader who is deeply committed to the mission of the World Bank in helping struggling nations to defeat poverty, grow their economies, strengthen transparency and accountability in governance, and offer their people the prospect of a better life,” the US president said in a statement.
The president of the World Bank serves a renewable, five-year term.
The incoming president has acknowledged the daunting challenges of his appointment.
“There is no doubt that the institution has been through a period of turmoil and I think that one of the tasks of a new president will be to try to calm the waters,” Zoellick said in Berlin this month on a “listening” trip to Africa, Europe and Latin America.
The lengthy scandal that led to the resignation of Wolfowitz had divided the staff and cast a cloud over the credibility of the development lender.
But the crisis of confidence also revived broader questions about the very mission of the institution to fight poverty through development aid, defined shortly after World War II and which now some see as outdated.
The day of his nomination Zoellick acknowledged the deep staff divisions over the Wolfowitz scandal: “There is a lot of anxiety, some frustration and anger that’s been built up,” he said at a news conference.
The president oversees about 10,000 staff serving in the bank’s Washington headquarters and in more than 100 country offices around the world.
Some World Bank critics said the next president needs to undertake a sweeping reform of the institution.
“Zoellick must begin a series of reforms in his first 100 days to create a new deal between the bank and the world’s poor,” said Jeremy Hobbs, executive director of Oxfam International.
“We can’t continue with business as usual.”
Zoellick said he would be “eager to meet the people who drive the agenda of overcoming poverty in all regions, with particular attention to Africa, advancing social and economic development, investing in growth, and encouraging hope, opportunity and dignity.”
Noting the considerably changed world since the creation of the bank some 60 years ago, he said the World Bank “must lead the way to achieving sustainable globalization, founded upon inclusive growth, opportunity, and respect for personal dignity.”


IMF chief Rato to quit early as reform effort struggles

(AFP) The head of the International Monetary Fund, Rodrigo Rato, said Thursday he will step down in October for personal reasons, casting a cloud over the major internal reform effort he launched.
The IMF chief’s announcement comes as the 185-nation financial institution faces criticism that it serves the interests of wealthy nations by trying to impose free-market practices.
It also follows this week’s forced change of leadership because of scandal at the IMF’s sister institution, the World Bank.
Rato informed the IMF executive board that he will not be able to serve the full length of his five-year term as managing director, the Washington-based multilateral institution said.
He “intends to leave the Fund in October following the conclusion of the 2007 annual meetings of the boards of Governors of the IMF and World Bank Group,” the IMF said in a statement.
The statement quoted Rato’s explanation of his decision to the board:
“I have taken this decision for personal reasons. My family circumstances and responsibilities, particularly with regard to the education of my children, are the reason for relinquishing earlier than expected my responsibilities at the Fund,” Rato said.
The 58-year-old Rato, separated and the father of three children, is a former Spanish finance minister credited with that country’s economic “miracle.” He succeeded Horst Koehler of Germany in June 2004 for a five-year term after Koehler resigned to stand for the German presidency.
The IMF post traditionally goes to a European and the presidency of the World Bank is reserved for an American under an unwritten agreement forged at the creation of the institutions after World War II.
The IMF is struggling to maintain its role as the stabilizer of the international monetary system after being shunned by many of the countries it had previously helped financially.
Rato is stepping down in the midst of a massive reform program he launched and as the Fund faces a growing budget deficit. The shortfall is forecast to balloon to 224 million dollars in the fiscal year 2008 to April 30.









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