TEEJAY LANKA PLC CSE: TJL.N0000 Bloomberg: TJL SL EQUITY | SRI LANKA | CONSUMER DURABLES AND APPAREL Current Price: LKR 43.0

Best Is Yet To Come!!!!

INITIATING WITH A BUY Fair Value: FY21E LKR 53.0 [+23%] Total Return with DPS: FY21E - 32% [AER 22%]

CORPORATE UPDATE | 15 NOV 2019 FIRST CAPITAL RESEARCH Hiruni Perera +94 11 263 9864 [email protected] Disclosure

Minimum Return for BUY: Buy Below [AER of 13.38% with DPS]: LKR 47.7 for FY21E TJL categorized as ‘Grade A’ counter (Refer slide 45 for Recommendation criteria of Grade A, B & C Stocks)

Disclosure on Shareholding: First Capital Group does not hold shares in TJL. First Capital Group has not traded in the shares in the three trading days prior to this document and will not trade in the shares for three trading days following the issue of this document.

First Capital Research Nov 2019 2 Content Briefing

1.0 Summary and Key Data……………………………………………...... 4 2.0 Investment Thesis…………………………………………………………………………………………………………………………………………………………………………………………….. 7 2.1 TJL’s revenue to grow at a three-year CAGR of 16% to LKR 49.5Bn by FY22E………………………………………………………… 9 2.2Diversification into lace, expanding synthetic segment and stabilized cotton prices to help sustain GP margins …………………………………………………………………………………………………………………………………………………………… 17 2.3 Transformation through continuous Expansion and strategic acquisitions…....…………………………………………………… 22 2.4 Backing by its parent companies to drive the strategic thinking……………………………………………………………...... 24 3.0 Attractive valuations; Recommend Buy with TP of LKR 53.0………………………………………………………………………………………………………………………………26 4.0 Company Profile………………………………………………………………………………………………………………………………………………………………………………...... 31 5.0 Appendices…………………………………………………………………………………………………………………………………………………………………………………………...... 34 5.1 Financial Statements…………………………………………………………………………………………………………………………………………… 35 5.2 Management Credentials……………………………………………………………………………………………………………………………………. 39 5.3 Analysis of top 20 shareholders…………………………………………………………………………………………………………………………… 43 5.4 Recommendation Criteria…………………………………………………………………………………………………………………………………….44 Disclaimer……………………………………………………………………………………………………………………………………………………………………………………………………………….46

First Capital Research Nov 2019 3 1.0 Summary and Key Data

First Capital Research Nov 2019 4 Investment Summary

TJL, the fabric manufacturer is likely to see a 20%YoY growth in topline during FY21E. The 60.0 3.7 growth in topline is expected to mainly be driven by emerging demand that is likely to arise due 50.0 to the change in global landscape with the U.S-China trade war which offer Sri Lankan apparel 10.0 companies immense opportunities. Moreover, likely demand from Nike and strategic 40.0 partnership with Uniqlo are expected to drive the next phase of growth for TJL, setting the 30.0 stage for the fabric maker to achieve the revenue target of LKR 49.5Bn by FY22E. GP margins 20.0 43.0 43.0 are expected to sustain at c.13.0% as TJL benefits by expansion into higher margin synthetics and stabilised cotton prices. First Capital upgrades the earnings forecast for FY21E to LKR 3.2Bn 10.0 with a +17%YoY growth while target price is estimated at LKR 53.0. At the current market 0.0 price of LKR 43.0, TJL provides an annualised return of 22%.INITIATING WITH BUY Current FY21E

P/E 31 March FY16 FY17 FY18 FY19 FY20E FY21E FY22E Current Price Expected Capital Gain Dividends upto 31.03.2021 Estimates (LKR 'Mn) Revenue 17,820 22,138 24,647 31,747 36,974 44,494 49,529 Gross profit 2,995 3,076 2,911 3,686 4,807 5,784 6,439 Fair Value: FY21E LKR 53.0 [+23%] EBIT 2,185 1,992 1,811 2,345 3,313 3,871 4,316 Total Return with DPS: FY21E - 32% [AER 22%] Net Profit 2,171 1,959 1,596 1,859 2,784 3,268 3,646 Adjusted EPS (LKR) 3.1 2.8 2.3 2.6 4.0 4.7 5.2 YoY Growth (%) 63% -10% -19% 16% 50% 17% 12% Valuations PER (x) 13.9x 15.4x 18.9x 16.2x 10.8x 9.2x 8.3x PBV (x) 3.0x 2.7x 2.6x 2.2x 2.0x 1.9x 1.8x DY (%) 3.7% 5.2% 3.7% 4.5% 6.2% 7.4% 8.0%

First Capital Research Nov 2019 5 Key Data

KEY DATA Price Performance 1 mth 3 mths 12mths

CSE Ticker TJL.N0000 TJL 13% 13% 28% ASPI 3% 2% 1% Bloomberg Ticker TJL SL Share Price (LKR) 43.0 140.0 52w High (LKR) 43.6 130.0

52w Low (LKR) 29.4 120.0

Avg. Daily Volume (Shares) 138,143 110.0

Avg. Daily Turnover (LKR) 4,946,926 100.0 Issued Share Capital (Shares 'Mn) 702 90.0 Market Cap (LKR 'Mn) 30,184 80.0 Market Cap (USD 'Mn) 168 70.0 *1 USD = LKR 180

TJL.N ASPI Source: CSE

First Capital Research Nov 2019 6 2.0 Investment Thesis

First Capital Research Nov 2019 7 Investment Thesis

2.1 TJL’s revenue to grow at a three-year CAGR of 16% to LKR 49.5Bn by FY22E.

2.2 Diversification into lace, expanding synthetic segment and stabilised cotton prices to help sustain GP margins

2.3 Transformation through continuous Expansion and strategic acquisitions

2.4 Backing by its parents to drive the strategic thinking

First Capital Research Nov 2019 8 2.1 TJL’s revenue to grow at a three-year CAGR of 16% to LKR 49.5Bn by FY22E

First Capital Research Nov 2019 9 Global apparel market to reach USD 2.6Tn at a CAGR of 18%

Global apparel market (excluding textiles) is expected to grow with US apparel imports from South East Asia has spiked relative a CAGR of 18% to China 3.0 12,100 CAGR of 2.6%

2.6 USD USD Tn

2.5 Metre 10,100

2.0 8,100 1.6

1.5 6,100 Equivalents) 1.0 4,100 CAGR of 9.3%

0.5 2,100 CAGR of 3.3% ApparelVolumes (Million Square 0.0 100 2019 2022E 2011 2012 2013 2014 2015 2016 2017 2018 China Vietnam Bangladesh Indonesia Cambodia Pakistan

Source: Bloomberg Source: Just Style apparel sourcing The current global apparel market (excluding textiles) is approximately USD 1.6Tn, which forms nearly 2.3% of the world GDP and growing at a rate of 5.7%. It is projected to reach about USD 2.6Tn by 2022E. American fashion brands and retailers are planning to reduce their reliance on Chinese apparel suppliers due to concerns over the growing trade dispute between the two countries. Although China remains the United States’ primary source of apparel imports, its market share has been falling steadily while manufacturers are shifting especially to South East Asian countries.

First Capital Research Nov 2019 10 Changes in global landscape to favor South East Asian countries

Higher % of US firms in China are considering to relocate its Low wages in Mongolia, Bangladesh and Sri Lanka will enable to production to South East Asian countries capitalise on this growing opportunity in the global apparel sector

% 30 45 40 40

25 35 CNY000s 35 29 20 30

25 15 19 20

10 15 10 10 7.5 7.5 5 5 4 4 4 4 5 3 3 2.5 2.5 2 1 0 0 South East Asia Elsewhere USA

Sep-18 May-19

Source: Rabo Bank Source: Rabo Bank Due to the accelerated US‐China trade war, there is ample evidence that international firms in China have started to move or are thinking about shifting production elsewhere. South East Asian countries are likely to absorb production while countries such as Bangladesh, Pakistan and Sri Lanka will gain from the shift in capacity from China due to relatively lower wages compared to countries such as Thailand, Malaysia and Indonesia etc.

First Capital Research Nov 2019 11 This provides better opportunities for Sri Lankan apparel firms

Exports of Textiles and Garments grew with CAGR of 6% since 2009 U.S is the single largest market for Sri Lanka’s garment exports and SL has an ambitious target of USD 8.0Bn by 2025E

9,000.0 9.3% 2.1% 8,000.0 USD USD Mn 2.6% 7,000.0 1.3% 6,000.0

5,000.0 14.8% 4,000.0 45.8%

3,000.0

2,000.0 5.3%

1,000.0

- USA Germany UK France Netherland Canada Italy 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2025E

Source: CBSL Source: Economic and Social Statistics of Sri Lanka The export figures in Dec 2018 saw Sri Lanka’s garments industry crossing the USD 5.0Bn mark for the first time in history. It is the first export industry that has achieved this number in Sri Lanka since the country was opened as a free economy in 1977. Sri Lanka's apparel sector which has an ambitious export target of USD 8.0Bn by 2025E, is working to expand its global footprint by aggressively competing in emerging markets and widening its presence in non-traditional countries. TJL as one of the largest fabric manufacturers in Sri Lanka is expected to benefit from the growth in the SL apparel industry.

First Capital Research Nov 2019 12 TJL’s customers include 8 renowned global retail brands

Current customer profiles 0.20%

11%

11%

51% Source: Bloomberg 48.80% 78% Nike and UNIQLO to contribute more than 20% revenue in FY22E US Market while contributing USD 30.0Mn each while being strategically European Market important customers to TJL. Nike Uniqlo Other Asian Market Source: TJL Annual Report

First Capital Research Nov 2019 13 Penetration into Asian markets through UNIQLO

UNIQLO’s global presence with 2,234 stores across the globe will be a South East Asia & Oceania; UNIQLO’s new driver of Growth key winning factor for TJL to penetrate into Asian markets 2,500.0

2,000.0

1,500.0 1407 Numberofstores

1,000.0

500.0 827 519

0.0 2001 2019

UNIQLO Japan Stores UNIQLO International Stores

Source: UNIQLO Annual Report Source: UNIQLO Annual Report Uniqlo had 827 stores in Japan (including 43 franchise stores) and expanded up to 1,407 stores in other countries. It has been noted that Uniqlo’s new store openings have been rapid, especially in Southeast Asia and the partnership with UNIQLO is expected to enable TJL to penetrate into Asian markets.

First Capital Research Nov 2019 14 Partnership with UNIQLO to provide strategic opportunities

UNIQLO is among the Brand Finance’s top 10 Most Valuable TJL’s strategic relationship to UNIQLO to ensure more orders in Brands the future Rolex 8,047

Gucci 10,192 Strategic business USD USD Mn Hermes 10,920 partnership between UNIQLO UNIQLO 11,991 and Toray Louis Vitton 13,576 Purchased 28% of Industries, Inc since holdings 2006 Addition to Cartier 13,642 client H&M 15,876 portfolio Second largest Addidas 16,669 shareholder with a Zara 18,424 28% stake

Nike 32,421

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

Source: Brand Finance, Apparel 50 Source: UNIQLO Annual Report, First Capital Research UNIQLO the latest addition to the client portfolio may allow TJL to expand its footprint in South Asia. With Toray being a shareholder of Pacific Textiles while also being a long-term partner of UNIQLO, the TJL-UNIQLO collaboration is expected to set the stage for TJL to reach the USD 300Mn revenue target.

First Capital Research Nov 2019 15 Revenue of LKR 49.5Bn by FY22E with a 3-year CAGR of 16%

60,000 With Nike’s and UNIQLO’s contribution, TJL’s revenue is expected to reach LKR 49.6Bn LKR LKR Mn (approximately USD 275.0Mn) by FY22E. TJL 49,529 50,000 reached USD 100.0Mn mark in FY15 and the USD 150.0Mn mark in FY17. 44,494

40,000 36,974

31,747

30,000

24,647 22,138

20,000 17,820

13,678 12,364 12,725 10,951 10,000

- FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E

Source: TJL Annual Report and First Capital Research Estimates

First Capital Research Nov 2019 16 2.2 Diversification into lace, expanding synthetic segment and stabilized cotton prices to help sustain GP margins

First Capital Research Nov 2019 17 Diversification into lace to result in TJL as a one stop shop producer

TJL announced that it has entered into a MoU with Luen Fung Textiles of China to manufacture lace products, which is set to materially expand the company’s current product portfolio. TJL is initially set to purchase raw lace material from LFT, which is planned to be subsequently converted to finished lace products at TJL’s manufacturing facilities. TJL announced that revenue from lace production be added to the topline from Q1 of FY21E and is expected to generate significantly higher GP margins.

✓ Raw Lace Raw Lace Dyeing ✓ Finishing ✓ Scalloping

Luen Fung’s customers include popular international brands such as Target, JC Penny, Maidenform, Fruit of the Loom, Vanity Fair, Pacific Brands, Hanes, Existing functions Kmart, Walmart, Lidl, Bonds ✓ Dyeing, Finishing and printing of weft knit TJL selling the finished manufacturing. lace to the customers who ✓ Lace dyeing place orders with both ✓ Yarn dyeing Teejay and LFT. ✓ Synthetic fabric production

Source: CSE

First Capital Research Nov 2019 18 TJL’s expansion into synthetic from cotton to generate higher margins

The global synthetic market is expected to reach USD 90,000Mn in In line with the global trend, contribution from synthetic fabrics to revenue TJL’s revenue to increase gradually

100,000 100% 90,000 4%

90,000 95% 10% USD USD Mn 80,000 90%

70,000 62,688 85% 60,000 80%

50,000 75% 96% 40,000 70% 90%

30,000 65%

20,000 60%

10,000 55%

0 50% 2017 2026E Current FY22E Cotton Synthetic Source: Bloomberg Source: First Capital Research The latest study conducted by Transparency Market Research reveals that the global market for synthetic fiber is set to exhibit a growth of 4.1% CAGR as its physical properties such as lightweight, high durability and elasticity makes it an apt material for the textile industry. Some of the leading global clothing brands like Nike, Victoria’s Secret and Decathlon are strategically moving towards Sri Lanka for synthetic apparel production, as SL has come up with a wide range of synthetic raw material options over the last couple of years. TJL initial investment in synthetics already yielded phenomenal product capabilities with orders from PVH and Intimissimi while we further expect growth in demand from new strategic customers Nike and Uniqlo. Accordingly, synthetic is expected to contribute 10% to the revenue in FY22E relative to the current contribution of 4%. First Capital Research Nov 2019 19 Cotton to be a key component in cost of sales and soft cotton prices to favor TJL to sustain its GP margins Cotton accounts for 65% of the raw material costs making it a Cotton prices declined to nearly 3-year low in August 2019 and significant component slightly picked up during last two months

90 lb

USD/ 85 35% 80

75 65% 70

65

60

55 Cotton Other

Source: TJL Annual Report Source: Bloomberg Cost of raw materials, accounts for 65% of raw materials cost. Cotton prices are expected to remain nearly flat in 2019 as ongoing trade war between China and the US has affected cotton prices which have taken a hit of more than 17% in the international market in the past one year. The first half of FY20 saw cotton prices stabilizing and we expect to see this trend to continue during the short to medium term. We expect stable cotton prices to support TJL to hold GP margins at healthy levels.

First Capital Research Nov 2019 20 GP Margins to be sustained at 13.0% FY20E-FY22E

7,000 Relative to previous two years we expect TJL’s 18.0% GP margins to be sustained at 13.0% for the

LKR LKR Mn next forecasted three years mainly led by the 16.8% 17.0% 6,000 better product mix, stabilized cotton prices and operational excellence initiatives that will be carried out by TJL. 16.0% 5,000 15.0%

4,000 13.9% 14.0%

13.0% 13.0% 3,000 13.0% 13.0%

11.8% 12.0% 11.6% 11.7% 11.6% 11.9% 2,000 11.4%

11.0%

1,000 10.3% 10.0%

1,089 1,275 1,270 1,456 1,621 2,995 3,076 2,911 3,686 4,807 5,784 6,439 0 9.0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E Gross Profit GP Margins

Source: TJL Annual Report and First Capital Research First Capital Research Nov 2019 21 2.3 Transformation through continuous Expansion and strategic acquisitions

First Capital Research Nov 2019 22 Transformation through continuous Expansion and strategic acquisitions

FY22E FY20E To grow the capacity to 2018 Revenue target 100Tn/day from of USD the current 2016 Expansion at 200.0Mn and level of TJL India 2015 Commercial establishing an 75Tn/day over doubling the launch of the office in the next two 2014 Acquisition of capacity which first synthetic Bangladesh years with the Ocean India enhanced 2008 Third phase Fabric revenue target Private Ltd Group’s of USD 2006 Second phase expansion manufacturing 10 -12% of 300.0Mn by of expansion Acquisition of capacity to USD First phase of capacity FY22E. 100% of Quenby Lanka 210.0Mn expansion capacity Prints (Private) 100% of Ltd capacity

TJL is not looking at heavy infrastructure investments but looking more into modernization of machinery. Increasing capacity is expected to be funded through internal cash balance of nearly LKR 5.0Bn and from the profits that TJL will make in the future. Accordingly, we do not factor any debt for expansion. Moreover, as the next significant boom in the apparel sector is expected in Africa and Bangladesh, TJL is also preparing to use the strategic location proximity to their advantage through vendor partnerships. With the support of its key vendors Brandix, MAS, Hirdaramani and Omegaline, TJL is seeking to venture into these new and exciting locations and capitalize on potential opportunities.

First Capital Research Nov 2019 23 2.4 Backing by its parent companies to drive the strategic thinking

First Capital Research Nov 2019 24 Backing by its apparel parent companies to drive the strategic thinking

The largest plastic manufacturer in Sri Lanka

Pacific Textiles Ltd is a leading manufacturer of customized knitted fabric in Brandix one of SL’s largest textile industry with apparel exporter with an headquarter located in annual turnover exceeding Hong Kong USD 600.0Mn 28% 33%

With Brandix and Pacific Textiles being largest two parents of TJL having 33% and 28% shareholding respectively, we expect it to enable TJL to drive its strategic thinking in the future.

First Capital Research Nov 2019 25 3.0 Attractive Valuations; Recommend Buy with TP of LKR 53.0

First Capital Research Nov 2019 26 TJL’s FV for FY21E is LKR 53.0 yielding an AER of 22%

Fair value for TJL has been computed based on a DCF and Expected TJL price for FY21E PER valuations with equal weightage given for both PER Valuation based target price 55.9 methods. Our FV yields a target price of LKR 53.0 with an DCF Valuation based target price 50.1 annualised return of 22% Average Target Price 53.0 Target Price after Rounding off 53.0 Price, Capital gain and Dividends

60.0 3.7 Return 50.0 10.0 Target Price 53.0 Current Price 43.0 40.0

Capital Gain (LKR) 10.0 30.0 Dividends upto 31.03.2021 (LKR) 3.7 43.0 43.0 Capital Gain % 23% 20.0 Dividend Yield % 9% 10.0 Total Return % 32% 0.0 Annualized Return % 22% Current FY21E

Current Price Expected Capital Gain Dividends upto 31.03.2021

First Capital Research Nov 2019 27 DCF Based valuation estimates a TP of LKR 50.1 for FY21E

DCF based Valuation Key Assumptions Underlying Reason Enterprise Value 36,144 Rf Weighted average 1 Yr T-bill rate Debt (-) (4,072) considered for FD Ceilings Cash (+) 3,080 Total Value of Equity 35,153 Rm Rf+8% premium No. of Shares (Mn) 702 Kd TJL’s borrowing rate Target Price 50.1 Growth rate Rate at which TJL’s earning is assumed to grow after the WACC forecasted period Ke 15.6% Kd 8.8% COE D/E Assumption 40/60 Rf 8.4% Terminal Growth (%) 3.0% Rm 16.4% WACC 12.9% Growth % 3.0% β 0.90 Ke=Rf+β(Rm-Rf) 15.6%

First Capital Research Nov 2019 28 PER Based valuation derives a target price of LKR 55.9

PER based Valuation FY21E 120.00 FY21E Earnings (LKR 'Mn) 3,268 No. of Shares ('Mn) 702 100.00 FY21E EPS 4.7 80.00 Expected PER 12.0x

Price at 12.0x FY21E Earnings 55.9 60.00

40.00 PER Valuation method has used a price multiple

of 12.0x considering the past price behavior of 20.00 TJL.

-

9 12 15 18 21 Price

Source: CSE, Company Annual Reports, First Capital Research Estimates

First Capital Research Nov 2019 29 Valuation

Regional Peer Comparison - Asia Pacific Emerging Market Cap (USD Last Price (USD) P/E ROE Dividend Mn) 12M yield Teejay Lanka PLC (Sri Lanka) 165.42 0.24 12.47 15.29% 4.59%

Shandong Tongda Textile Machinery (Group) 206.74 2.33 39.21 5.87% 0.37% Co.,Ltd (China) Jinan Acetate Chemical Co Ltd (China) 208.54 4.08 26.25 22.31% 2.93%

Fujian Fynex Textile Science & Technology Co., 214.58 0.79 101.60 4.15% 0.72% Ltd (China) Hunan Huasheng Industrial & Trading Co Ltd 237.92 0.59 74.20 -8.46% - (China) Garware Technical Fibres Ltd (India) 371.11 16.96 20.95 20.04% 0.42%

Sri Rejeki Isman Tbk (Indonesia) 414.30 0.02 4.74 12.48% 1.06%

Ningxia Zhongyin Cashmere Co.,Ltd. (China) 472.09 0.26 - - -

Zhejiang Taihua New Materials Co., Ltd. (China) 724.24 0.94 23.65 7.67% 2.16%

Vardhman Textiles Ltd (India) 731.99 12.73 6.98 12.85% 1.94% Source: Bloomberg First Capital Research Nov 2019 30 4.0 Company Profile

First Capital Research Nov 2019 31 Company Profile

Teejay Lanka PLC Manufacturing of weft Products knitted fabrics ✓ Single Jersey ✓ Interlock ✓ Pique Teejay Lanka Prints (private) Limited Ocean Mauritius Limited ✓ Rib Rotary screen printing of Investment Holdings knitted & woven fabrics

Teejay India Private Limited Manufacturing of weft knitted fabrics TJL is one of the largest knit fabric mills in South Asia with manufacturing and printing facilities in Sri Lanka and India. TJL offers a wide range of products and services related to weft knit manufacturing which includes dyeing, finishing and printing. Over the recent years it also extended the portfolio to include lace dyeing, yarn dyeing and synthetic fabric production. Teejay’s fabrics portfolio includes a wide range such as Single Jersey, Interlock, Rib and Pique whilst the fabric is sourced by globally leading brands from intimates to sleep wear, lingerie and active wear. TJL customers comprise of world’s leading retail brands from Europe, USA to Asia and includes PVH, Calzedonia, L Brands, Decathlon, Marks & Spencer, Nike, Uniqlo and LIDL amongst others.

First Capital Research Nov 2019 32 Milestones

First Capital Research Nov 2019 33 5.0 Appendices

First Capital Research Nov 2019 34 5.1 Financial Statements

First Capital Research Nov 2019 35 Financial Statements

Income Statement (LKR Mn) FY16 FY17 FY18 FY19 FY20E FY21E FY22E P/E 31st March Revenue 17,820 22,138 24,647 31,747 36,974 44,494 49,529 Cost of sales -14,825 -19,062 -21,736 -28,061 -32,168 -38,710 -43,090 Gross profit 2,995 3,076 2,911 3,686 4,807 5,784 6,439 Other income 110 195 238 246 355 423 477 Selling, Distribution & Admin expenses -937 -1,278 -1,338 -1,587 -1,849 -2,336 -2,600 Operating profit 2,168 1,992 1,811 2,345 3,313 3,871 4,316 Non operating income 18 0 0 0 0 0 0 EBIT 2,185 1,992 1,811 2,345 3,313 3,871 4,316 Finance Income 77 89 106 102 26 20 20 Less : Finance Cost -34 -70 -99 -189 -101 -92 -96 Net finance income 43 19 7 -88 -75 -71 -76 Profit before tax 2,229 2,011 1,818 2,257 3,238 3,800 4,240 Income tax expense -58 -52 -222 -398 -453 -532 -594 Profit for the Year 2,171 1,959 1,596 1,859 2,784 3,268 3,646 Profit attributable to Equity Holders 2,171 1,959 1,596 1,859 2,784 3,268 3,646

EPS 3.1 2.8 2.3 2.6 4.0 4.7 5.2 Source : Company Annual Reports, First Capital Research Estimates

First Capital Research Nov 2019 36 Financial Statements

Balance Sheet (LKR Mn) FY16 FY17 FY18 FY19 FY20E FY21E FY22E As at 31st March Assets Property, plant and equipment 5,954 6,961 7,534 8,408 9,176 9,997 10,537 Capital work-in-progress 283 338 445 119 460 460 460 Intangible Assets 84 66 54 94 61 39 25 Deferred tax assets 92 242 125 111 111 111 111 Inventories 2,641 2,878 4,091 4,494 5,875 7,070 7,870 Trade and other receivables 2,703 3,370 3,494 4,013 4,660 5,607 6,174 Cash and cash equivalents 967 1,494 2,743 4,290 3,488 3,080 3,372 Other Assets 2,253 1,531 1,078 856 856 856 856 Total Assets 14,977 16,879 19,565 22,386 24,686 27,220 29,404

Liabilities Trade and other payables 3,509 3,044 4,487 4,703 5,376 6,469 7,201 Borrowings 945 2,086 2,836 2,968 3,669 4,072 4,275 Tax liability 244 364 333 538 538 538 538 Retirement benefit obligations 191 208 208 252 252 252 252 Total Liabilities 4,889 5,702 7,864 8,461 9,835 11,331 12,267

Shareholders Funds Stated capital 3,853 3,943 4,057 4,057 4,057 4,057 4,057 Exchange equalisation reserve 2,090 2,446 2,587 4,172 4,172 4,172 4,172 Retained earnings 4,151 4,725 4,972 5,600 6,526 7,563 8,812 Share option scheme 42 64 86 97 97 97 97 Shareholders Funds 10,136 11,177 11,701 13,925 14,851 15,889 17,137 Total Liabilities & Shareholders' Funds 15,025 16,879 19,565 22,386 24,686 27,220 29,404

NAVPS 14.4 15.9 16.7 19.8 21.2 22.6 24.4 Source : Company Annual Reports, First Capital Research Estimates

First Capital Research Nov 2019 37 Financial Statements

Cash flow Statement (LKR Mn) FY16 FY17 FY18 FY19 FY20E FY21E FY22E As at 31st Mar Profit before tax 2,229 2,011 1,818 2,257 3,238 3,800 4,240 Depreciation & Amortisation 750 963 1,110 1,284 1,440 1,555 1,554 Interest income -63 -87 -65 -102 -26 -20 -20 Interest expenses 34 70 99 160 101 92 96 Profit on disposal of PPE 0 7 1 3 0 0 0 Other 89 83 80 491 0 0 0 3,040 3,049 3,044 4,093 4,753 5,426 5,870 Inventories 446 -173 -1,257 215 -1,381 -1,195 -800 Trade and other receivables -174 -672 49 -170 -647 -948 -567 Trade and other payables 400 -424 1,275 -363 673 1,093 732 Cash generated from operations 3,744 1,780 3,111 3,774 3,399 4,377 5,235 Net Interest Income 29 16 -34 -58 -75 -71 -76 Income Tax paid 0 -129 -31 -96 -453 -532 -594 Retirement benefit obligations paid -5 31 -36 -35 0 0 0 Net cash generated from operating activities 3,768 1,698 3,010 3,585 2,870 3,774 4,566 Cash flows from investing activities: Purchase of PPE -1,754 -1,774 -1,673 -813 -2,515 -2,355 -2,080 Other -33 717 450 236 0 0 0 Net cash used in investing activities -1,787 -1,052 -1,223 -577 -2,515 -2,355 -2,080 Dividend paid -946 -1,397 -1,369 -1,228 -1,859 -2,230 -2,397 Net Borrowings -265 1,233 714 -251 701 403 204 Net Cash from financing activities -1,212 -75 -541 -1,479 -1,158 -1,827 -2,194 Net increase in cash and cash equivalents 769 571 1,247 1,529 -802 -408 292 Cash and cash equivalents at beginning of year 150 919 1,490 2,737 4,290 3,488 3,080 Cash and cash equivalents at end of year 919 1,490 2,737 4,266 3,488 3,080 3,372 Source : Company Annual Reports, First Capital Research Estimates

First Capital Research Nov 2019 38 5.2 Management Credentials

First Capital Research Nov 2019 39 Management Credentials

Name Directorship Credentials

Wing Tak Bill Lam Chairman / Non-Executive Director • Vice Chairman of the Board of the Board of Trustees of New Asia College • Honorary Fellow of the Chinese University of Hong Kong • Former CEO of Pacific Holdings Limited • MBA from the University of Macau • Bachelor of Business Administration from the Chinese University of Hong Kong

Mohamed Ashroff Omar Non-Executive Director • Group CEO of Brandix Apparel Limited • Founder Chair of the Joint Apparel Association Forum

Hasitha Premaratne Non-Executive Director • Group Finance Director of Brandix Group • Managing Director of Brandix India Apparel City • Committee member of Ceylon Chamber of Commerce • MBA in International Finance • B.Sc. In Computer Science • Fellow member of CIMA-UK and ACCA-UK • Former Head of Research at HNB Stockbrokers (Pvt) Ltd

Prof. Malik Kumar Ranasinghe Independent Non-Executive Director • Chairman of PLC • Independent Non-Executive Director of Sampath Bank PLC, PLC, United Motors Lanka PLC and Resus Energy PLC • Senior professor in Civil Engineering at University of Moratuwa • Fellow of the Institution of Engineers, Sri Lanka • Former Non-Executive Director of CSE, Hemas Power PLC and Lanka IOC PLC

First Capital Research Nov 2019 40 Management Credentials

Name Directorship Credentials

Amitha Lal Gooneratne Independent Non-Executive Director • Chairman of Bellvantage (Pvt) Limited, Melsta Logistics (Pvt) Limited; board member of Periceyl (Pvt) Limited, Balangoda Plantation PLC, Lanka Bell Limited, Telecom Frontier (Pvt) Limited, Bell Solutions (Pvt) Limited, Timpex (Pvt) Limited, Texpro Industries Limited, Continental lnsurance Limited, Bogo Power Limited, Melsta Tower (Pvt) Limited, Melts Health (Pvt) Limited, Melsta Pharmaceuticals (Pvt) Limited and Browns Beach Hotel PLC • Founder Chairman of the Financial Ombudsman Sri Lanka (Guarantee) Ltd • Former Managing Director of Commercial Bank of Ceylon PLC during 1996-2012 Kit Vai Tou Non-Executive Director • Executive Director and the Chief Financial Officer of Pacific Textiles Holdings Limited • Fellow member of the Hong Kong Institute of Certified Public Accountants and The Association of Chartered Certified Accountants Wai Loi Wan Non-Executive Director • Chairman of Pacific Textiles Holdings Limited and the Founder of the Group • Over 48 years of experience in the textile industry • Bachelor of Science Degree in Chemical Engineering from Taiwan National Cheng Kung University

First Capital Research Nov 2019 41 5.3 Analysis of top 20 shareholders

First Capital Research Nov 2019 42 Analysis of Top 20 Shareholders

Top Voting 20 shareholders - (% held) 2QFY20 1QFY20 QoQ 2QFY19 YoY Brandix Lanka Ltd-Number 1 Account 33.1% 33.1% - 33.1% - Pacific Textured Jersey Holdings Limited 27.9% 27.9% - 27.9% - HSBC Intl Nom Ltd - BBH - Fidelity Funds 5.1% 4.9% 0.2% 4.4% 0.7% HSBC Intl Nom Ltd-BBH-Matthews Emerging Asia Fund 4.2% 4.2% - 2.7% 1.5% Citibank Newyork S/A Norges Bank Account 2 3.0% 3.0% - 3.0% - Bnymsanv RE-LF Ruffer Investment Funds : LF Ruffer Pacific 2.7% 2.7% - 2.3% 0.4% JPCMB NA-Fidelity Asian Values PLC 2.1% 2.1% - 0.0% 2.1% PLC 1.8% 1.8% - 1.8% - Mr. L.K.M.Fernando 0.7% 0.7% - 0.7% - State Street Luxembourg C/O SSBT - Alliance bernstein 0.7% 0.7% - 0.7% - Deutsche Bank AG-National Equity Fund 0.7% 0.7% - 0.6% 0.1% JPMBL SA-KAPITALFORENINGEN INSTITUTIONEL INVESTOR 0.7% 0.4% 0.2% 0.0% 0.7% East India Holding (Pvt) Ltd 0.6% 0.6% - 0.6% - Sri Lanka Insurance Corporation Ltd-Life Fund 0.5% 0.5% - 0.0% 0.5% Union Assurance PLC/Account No. 05 (Unit-Linked Life Insurance Fund) 0.5% 0.7% -0.2% 0.8% -0.4% J.B. Cocoshell (Pvt) Ltd 0.5% 0.6% -0.1% 0.7% -0.3% Periceyl ( Private ) Limited A/C No. 03 0.4% 0.4% - 0.4% - Nuwara Eliya Property Developers (Pvt) Ltd 0.3% 0.3% - 0.3% - Mcsen Range (Pvt) Ltd 0.3% 0.3% - 0.0% 0.3% South Asian Investment (Pvt) Ltd 0.3% 0.0% 0.3% 0.0% 0.3%

First Capital Research Nov 2019 43 5.4 Recommendation Criteria

First Capital Research Nov 2019 44 Recommendation Criteria

Categorization Company Category Buy Hold Sell

Grade A S&P SL20 Companies T.Bill + 5% & Above T.Bill + 1% & Above Below T.Bill + 1%

Grade B Rest of the Companies T.Bill + 8% & Above T.Bill + 3% & Above Below T.Bill + 3%

Grade C Companies less than LKR 1Bn Market Cap T.Bill + 11% & Above T.Bill + 6% & Above Below T.Bill + 6%

Weighted Average 1-year T-bill rate during Oct 2019: 8.38%

Categorization Company Category Buy Hold Sell

Grade A S&P SL20 Companies 13.38% 9.38% 9.38%

Grade B Rest of the Companies 16.38% 11.38% 11.38%

Grade C Companies less than LKR 1Bn Market Cap 19.38% 14.38% 14.38%

First Capital Research Nov 2019 45 Disclaimer

This Review is prepared and issued by First Capital Holdings PLC based on information in the public domain, internally developed and other sources, believed to be correct. Although all reasonable care has been taken to ensure the contents of the review are accurate, First Capital Holdings PLC and/or its Directors, employees, are not responsible for the correctness, usefulness, reliability of same. First Capital Holdings PLC may act as a Broker in the investments which are the subject of this document or related investments and may have acted on or used the information contained in this document, or the research or analysis on which it is based, before its publication. First Capital Holdings PLC and/or its principal, their respective Directors, or Employees may also have a position or be otherwise interested in the investments referred to in this document. This is not an offer to sell or buy the investments referred to in this document. This Review may contain data which are inaccurate and unreliable. You hereby waive irrevocably any rights or remedies in law or equity you have or may have against First Capital Holdings PLC with respect to the Review and agree to indemnify and hold First Capital Holdings PLC and/or its principal, their respective directors and employees harmless to the fullest extent allowed by law regarding all matters related to your use of this Review. No part of this document may be reproduced, distributed or published in whole or in part by any means to any other person for any purpose without prior permission.

First Capital Research Nov 2019 46 Contact Us

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First Capital Research Nov 2019 47