Peoples Leasing Company

The BIGGEST! Where size matters

200

Recommendation

BUY
FY12 Target price

Rs. 25.00
Issue price

PLC group total assets Rs. billion

150

Rs. 18.00
No. of shares offered

100

390,000,040
Amount to be raised

50

Rs. 7,020 m
0 2009 2010 2011 2012E 2013E 2014E

Issue opening date

03-Nov-11 CAL Research October 2011

See p. 30 for important disclaimers

Contents

Page I. Leasing and hire purchase sector primed for explosive growth on vehicle boom
5

II. Dominating the leasing and HP market, PLC is poised to prosper III. 2012 forecasts suggest a 40% upside to IPO price

10

22

IV. Appendices

27

IPO price of Rs.18 per share represents 7.2x PER and 1.4x PBV on FY12 forecasts
Figure 1: PLC group earnings 2010-14E

YEAR END 31 MARCH Net Interest Income (Rs.mn) Net Profit (Rs.mn) Recurring Net Profit (Rs.mn) Adjusted EPS* YoY EPS Growth PER (x)* PBV (x)* Growth in Lending Return on Avg. Equity Total shares prior to IPO (mn) : Share issued to the public (mn) : Total shares after IPO (mn) :

2010 3,454 1,153 1,153 0.78 18% 23.0 4.5 27% 20%

2011 5,014 2,605 2,149 1.84 135% 9.8 3.3 95% 36% 1,170 390 1,560

2012E 8,422 4,538 3,308 2.48 35% 7.2 1.4 77% 32%

2013E 12,475 5,012 4,848 3.11 25% 5.8 1.2 38% 23%

2014E 15,475 6,606 6,450 4.13 33% 4.4 1.0 23% 26%

*Foreca s t s ha re ca pi ta l cons i s t of the tota l s ha res i ncl udi ng the s ha res i s s ued for IPO
Source: Peoples Leasing Company Annual Reports Source: CAL Research estimates 3

Recommendation: BUY, FY12 target price - Rs.25/ Led by a forecast 81% increase in vehicle numbers, the leasing and hire purchase industry is likely to grow c.6x by 2018.

Dominating the leasing and HP sector at nearly twice the size of its closest peer, PLCs group assets are likely to grow c.3x by 2014, resulting in a recurring earnings Cagr of 44% FY2012-14E, including a c.54% growth in recurring earnings by FY12.
Given our 2012 forecasts, to be comparable to peers PLC should trade at c.Rs.25/- per share (2x FY12E book-value and 10.8x FY12E earnings), up 40% from the IPO price

I. Leasing and hire purchase sector primed for explosive growth on vehicle boom

Post-war Sri Lankas real GDP per capita could grow from US$2,400 today to US$3,900 by 2018
Figure 2: Forecast real GDP per capita (US$)
4,500

Actual
4,000 3,500 GDP per Capita (Current US $) 3,000

Forecast

US$3,900

US$2,400
2,500 2,000 1,500 1,000 500 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Estimated real GDP growth at: 2011 = 8.0% 2012 = 7.6% 2013+ = 6.9%

Source: CAL Research estimates Source: Frontier Research

Sri Lankas current GDP per capita suggests accelerated vehicle ownership growth if past trends hold true
Historically, US$1,000-5,000 GDP per capita drives vehicle growth of up to 2x GDP. SLs US$2,400 GDP per capita suggests vehicle growth of 1.3x GDP, or +8% p.a.
Figure 3: Long-run income elasticity of vehicle ownership

Source: Vehicle Ownership and Income Growth, Worldwide: 1960-2030, Joyce Dargay, Dermot Gately and Martin Sommer, Energy Journal, 2007, Vol. 28, No. 4 7

800k rise in vehicle sales since 2009 due to reduced import duties and lower interest rates further illustrates demand
Figure 4: Average weighted prime lending rate (weekly)
21 450,000

Figure 5: New vehicle registrations, Sri Lanka, 2006-2011 (July)

500,000

19 Average weighted prime lending rate (%)

17

400,000

15

350,000

From April 2011, excise duty on petrol vehicles was increased by 38-43% and hybrid cars were assigned a duty between 8-100%

13

300,000

11

250,000

200,000

From June 2010, excise tax on motor vehicles was reduced by approx 50%
2006 2007 2008 2009 2010 1H 2011

150,000

Source: Department of Motor Traffic Source: Central Bank of Sri Lanka

An expected 81% growth in vehicle numbers could deliver a c.6 fold increase in the leasing and HP sector by 2018, mainly due to increasing values and refinancing
We believe vehicle population will grow 81% by 2018 (8% Cagr 2011-18E) Vehicle growth is expected to lead the leasing and HP sector to a six-fold increase, which translates to a 25% Cagr 2011-18E. Historical trends suggest that 50% of all new vehicle registrations go through leases (83% of new buses & lorries are leased)

Figure 6: Vehicle forecast

8

Figure 7: Leasing and HP forecast

7.3 mn

78

Number of total vehicles (millions)

7.2 mn

67 5 4

US$11.2 bn (Rs.1,236 bn)

Number of vehicles (million)

6 5 4 3 2

4.0 mn 4.0 mn

US$1.9 bn (Rs.213 bn)

11 00

2010 2010

2018 2018

2010

2018 est.

Others Motor Others Motor cars Motorcycles Motorcycles cars

Source: CAL Research estimates

II. Dominating the leasing and HP market, PLC is poised to prosper

10

PLC accounts for nearly twice the leasing and HP assets of its closest competitor
Figure 8: Leasing and HP asset base of the largest players in the industry, 2011

60

Lease & hire purchase assets Rs. billion

50

40

30

20

10

PLC

LOLC

LFIN

CFIN

Source: Annual Reports of the companies

11

Funding a diversified set of income-generating vehicles reduces PLCs concentration risk and allows it to capitalise on economic prosperity
75% of leasing advances and 73% of hire purchase advances as of 31 March 2011 have been extended to income-generating vehicles (lorries, buses and dual purpose vehicles).

Figure 9: Vehicle mix of leasing and hire purchase advances, 2011 Leasing Advances
Dual Purpose 9% Bikes & Three Wheelers

Hire Purchase Advances

Bikes & Three Wheelers Dual Purpose 27%

Lorries 34% Motor Cars 24%

Buses

20%

Motor

Cars 22% Buses 32%

Lorries

26%

Source: Peoples Leasing Company Annual Reports

12

PLC is well positioned to take advantage of growth in the sector and increase its assets by c.3 fold through FY14
Figure 10: PLCs total assets, 20092014E
200 180 160 Total Assets Rs. billion 100% 90% 80%

140
120 100 80 60 40 20 0 2009 2010 2011 2012E 2013E 2014E

70%
60% 50% 40% 30% 20% 10% 0%

Asset Base

Asset Growth

Source: CAL Research estimates

13

A large asset base and a credit rating of A allows PLC to source funds lower than its peers...
Figure 11: Decline in cost of funding among RFCs and SLCs

18% People's Leasing Company 16% 14% Average cost of funding (%) 12% 10% 8% 6% People's Leasing Finance (Subsidiary of People's Leasing)

70 60 50 40 30 20

4% 2% 10

0%

BB-

BB

A-

BBB+ BBB- BBB BBB+ BBB BBB-

A-

BBB+

A+

Total assets

Avg cost of funding

Linear (Avg cost of funding)

Source: Annual Reports of the companies

Total Assets Rs. billion

14

...which enables the company to maintain margins whilst increasing its asset base
From 2009 to 2011, PLCs Net Interest Margin ranged between c. 11-13% due to favourable interest rate movements. We expect margins to hold at a respectable 9-10% from 2012 to 2014.

Figure 12: Net profit against net interest spread & net interest margin, 2009 14E
7 6 12% 5 Net Profit Rs. billion 4 3 2 1 5% 0 2009 2010 2011 2012E 2013E 2014E 4% 11% 10% 9% 8% 7% 6% 14% 13%

Net Profit

Net Interest Spread

Net Interest Margin

Source: CAL Research estimates

15

NPL ratio of 1.2% (lowest among peers) illustrates PLCs capability to grow assets whilst maintaining superior asset quality
Figure 13: NPL peer comparison
70 6%

60

5%

50 Total Assets Rs. billion 4% NPL (%) 40 3% 30 2% 20 1%

10

0%

CDB

MERC

LOFC
Total assets

LFIN
NPL

CFIN

PLC

Source: Annual Reports of the companies

16

PLCs mutually beneficial relationship with its parent, Peoples Bank (PB), is likely to allow PLC to leverage off PBs countrywide branch network for the foreseeable future
PLC is a 95% owned subsidiary of Peoples Bank (Post-IPO: 72%). PLCs asset base is 10% of PBs asset base, but it contributes 30% of PBs profits.

Figure 14: PLCs window offices as a proportion of PBs branches

350 No. of Branches/ Window Offices 300 250 200

Figure 15: PLCs total assets as a proportion of PBs total assets

100% % of People's Bank Total Assets 98% 96% 94% 92% 90% 88% 86% 84%

5%

6% 10%

200
150 100 50

124 51 63
2010 2011 2012E

0 2009

2009

2010

2011

People's Bank branches People's Leasing Company window offices

People's Leasing Company

People's Bank

Source: Peoples Leasing Company Annual Reports Source: Peoples Bank Annual Reports 17

Expanding branches and window offices beyond the Western province is likely to further help sustain low NPLs
Interest income has gradually shifted from the high-NPL Western province to the rest of the country, from 61% in 2009 to 55% in 2011. Substantial growth in window branches outside the West is likely to see future NPLs at the 2% level or below.

Figure 16: NPL by province, March 2011

Province
Central Eastern Northern

Figure 17: Asset base against NPL, 2009 2014E

250 4%

NPL Ratio
0.66% 0.37% 0.38%
Total Assets Rs. billion

200

3%

150 2% 100 1%

North Central
North Western Sabaragamuwa Southern Uva Western Company

0.86%
0.74% 0.82% 1.05% 0.43%

50

0% 2009 2010 2011 2012E 2013E 2014E

1.63% 1.21%

Asset Base

NPL Ratio

Source: Peoples Leasing Company Annual Reports Source: CAL Research estimates 18

Window offices in Peoples Bank (PB) branches ensure the lowest cost-to-income ratio compared to peers
PB is Sri Lankas second-largest bank in terms of asset base (Rs.619 bn) and has the biggest branch network, with 330 branches and 358 service centers. PLC has managed to open 121 window offices within PB branches, on top of its 37-branch network, and intends to increase window offices to over 200 in 2012. As a result, PLCs cost-to-income ratio is well below its peer group.

Figure 18: Cost-to-income ratio peer comparison

60% 50%

Figure 19: PLC cost-to-income ratio

31.0%

30.5% Cost to Income (%) 40% 30% 20% 29.5% 10% 0% CDB MERC LOFC LFIN CFIN PLC 29.0% 2009 2010 2011 30.0%

Source: Peoples Leasing Company Annual Reports Source: Annual Reports of the companies 19

High brand recognition coupled with expanding branch and window office network will make PLC a household name.
Parent company Peoples Bank ranks #2 in the top 100 brands in Sri Lanka

Figure 20: Finance & leasing companies in the top 100 most valuable brands in Sri Lanka (2011) against the number of branches*
0 10 20 Top 100 Rank, 2011 30 40 50 60 70 80 90 100 0 10 20 30 Number of Branches* 40 50 60

PLC LFIN

LOFC

CFIN

* Number of branches excludes service centres/kiosks, with bubble sizes scaled to assets
- Size of bubble indicates size of company based on total assets

Source: Brand Finance, 2011 Source: Annual Reports of the companies 20

A high-growth industry, the backing of a large parent, and proven management capability should give PLC an impressive 44% 2012-14E earnings Cagr
Figure 21: Earnings growth, 2009-11 historical and 2012-14 forecast
18 16 14 100% 12 10 8 6 40% 4 2 0 2009 2010 2011 2012E 2013E 2014E 80% Growth (%) 140%

120%

Rs. billion

60%

20%

0%

Net Interest Income

Net Profit

Net Interest Income Growth

Net Profit Growth

Source: Peoples Leasing Company Annual Reports Source: CAL Research estimates 21

III. FY12 forecasts suggest a 40% upside to IPO price

22

PLC has the best combination of trailing PBV (2.5x) and ROE (35%) compared to the closest peers
Figure 22: Return on equity against price to book value*, 2011
60%

50%

LFIN
Return on Equity (%) 40%

PLC
30%

LOFC**
20%

CFIN

10%

0% 0 1 2 3 4 5 6 7 8 9 10

*Price to Book Value - prices at 12.10.2011 ** Adjusted for an extraordinary item

Price/ Book Value*

- Size of bubble indicates size of company based on total assets

Source: Annual Reports of the companies

23

...and the lowest forward PER (7.2x) and PBV (1.4x) vs. most large RFCs and commercial banks
Figure 23: Comparative multiples in the Banking and Finance sector
4.0
Current year forecasts PER(x) Mar 2012E or Dec 2011E PLC NTB LFIN COMB CFIN HNB 7.2 9.0 7.2 10.7 11.9 12.0 PBV(x) 1.4 1.4 3.1 2.1 2.5 1.7

3.5

3.0

LFIN LFIN

2.5

CFIN COMB PLC NTB NTB HNB

2.0 PBV 1.5

1.0

0.5

0.0 6 7 8 9 PER 10 11 12 13 - Size of bubble indicates the attractiveness of the valuations (1/(PER*PBV))

Source: CAL Research/consensus estimates Source: Annual Reports of the companies 24

Therefore, we believe PLC should trade at c.Rs. 25 per share (2x FY12E PBV and 10.8x FY12E PER)
Figure 24: CAL Research forecast for PLC group

YEAR END 31 MARCH Net Interest Income (Rs.mn) Net Profit (Rs.mn) Recurring Net Profit (Rs.mn) Adjusted EPS* YoY EPS Growth PER (x)* PBV (x)* Growth in Lending Return on Avg. Equity

2010 3,454 1,153 1,153 0.78 18% 23.0 4.5 27% 20%

2011 5,014 2,605 2,149 1.84 135% 9.8 3.3 95% 36%

2012E

2013E

2014E

8,422 12,475 15,475 4,538 5,012 6,606 3,308 4,848 6,450 2.48 35% 7.2 1.4 77% 32% 3.11 25% 5.8 1.2 38% 23% 4.13 33% 4.4 1.0 23% 26%

*Forecast share capital consist of the total shares including the shares issued for IPO
Source: CAL Research estimates

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Other key ratios

Figure 25: Key forecast ratios for PLC group

YEAR END 31 MARCH Return on Average Equity Return on Average Assets Net Interest Spread Net Interest Margin Deposit Growth Borrowings Growth Net Lending Growth NPL Ratio Cost / Income Gross Lending / (Deposits+Borrowing)

2011 36% 5.4% 8.8% 11.4% 179% 107% 95% 1% 29% 126%

2012E 32% 5.1% 8.1% 10.4% 70% 70% 77% 1% 31% 128%

2013E 23% 3.7% 7.5% 10.1% 40% 40% 38% 2% 31% 128%

2014E 26% 3.8% 7.0% 9.7% 25% 25% 23% 2% 32% 126%
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Source: CAL Research estimates

IV. Appendices

A. Income Statement

B. Balance Sheet

27

Appendix A: Income Statement

Figure 26: Income Statement PLC group
Profit & Loss Statement Period Ending 31 March Gross Income Interest Income Less : Interest Expenses Net Interest Income Non-Interest Income Net Income Less : Non-Interest Expenses Operating Profit before Provisioning Less : Loan loss Provisioning Operating Profit before Taxes Less : VAT Operating Profit before Corporate Tax Less : Corporate Tax Investment fund income Profit for the Period for Group Minority Interest Profit attributable to Equity Holders Recurring Profit for the Period Recurring EPS 2009 6,527 5,744 3,339 2,405 783 3,188 981 2,207 55 2,151 270 1,882 843 0 1,039 0 1,039 1,039 0.82 2010 7,428 6,776 3,323 3,454 652 4,105 1,232 2,873 540 2,333 275 2,058 906 0 1,152 0 1,153 1,153 0.78 2011 9,986 8,916 3,902 5,014 1,071 6,084 1,788 4,296 52 4,244 401 3,843 1,231 0 2,612 7 2,605 2,149 1.84 2012E 15,903 14,841 6,419 8,422 1,062 9,484 2,905 6,579 -913 7,492 786 6,706 2,146 0 4,560 23 4,538 3,308 2.48 2013E 24,104 22,635 10,161 12,475 1,469 13,943 4,303 9,640 1,704 7,936 654 7,282 2,330 85 5,037 25 5,012 4,848 3.11 2014E 31,015 29,841 14,366 15,475 1,175 16,650 5,328 11,322 716 10,606 996 9,610 3,075 104 6,639 33 6,606 6,450 4.13
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Source: CAL Research estimates

Appendix B: Balance Sheet

Figure 27: Balance Sheet PLC group
Balance Sheet Period Ending 31 March Assets Cash and short term securities Inventories Net Loans and Advances Net Leases Property, Plant & Equipment Other Assets Equity and Liabilities Liabilities Deposits Borrowings Other Liabilities Shareholders Funds Stated Capital Statutory Reserve Fund Total Other Reserves Minority Interest Total Liabilities & Shareholders' Funds NAVPS 2009 1,704 163 1,063 21,471 628 509 25,538 2010 2,469 45 1,770 26,739 980 887 32,890 2011 3,323 269 3,345 52,284 1,624 3,006 63,852 2012E 9,125 269 6,000 92,288 2,457 3,315 113,455 2013E 12,083 269 8,332 127,469 3,395 3,119 154,667 2014E 16,371 269 10,242 156,680 4,173 3,781 191,517

0 17,132 2,968 20,099 1,850 166 3,423 5,439 0 5,439 25,538 4.65

1,667 20,370 4,674 26,711 1,850 226 4,098 6,173 6 6,179 32,890 5.28

4,647 42,088 8,634 55,369 1,850 376 6,086 8,383 100 8,482 63,852 3.35

7,900 71,549 14,214 93,663 12,758 604 6,307 19,670 123 19,792 113,455 12.61

11,060 100,169 19,616 130,845 12,758 856 10,060 23,674 148 23,822 154,667 15.18

13,825 125,211 24,343 163,380 12,758 1,188 14,010 27,956 181 28,137 191,517 17.92

Source: CAL Research estimates

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Disclaimer
This document has been prepared and issued on the basis of publicly available information, internally developed data and other sources, believed to be reliable. Capital Alliance Securities (Private) Limited however does not warrant its completeness or accuracy. Opinions and estimates given constitute a judgment as of the date of the material and are subject to change without notice. This report is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The recipient of this report must make their own independent decision regarding any securities, investments or financial instruments mentioned herein. Securities or financial instruments mentioned may not be suitable to all investors. Capital Alliance Securities (Private) Limited its directors, officers, consultants, employees, outsourced research providers associates or business partner, will not be responsible, for any claims damages, compensation, suits, damages, loss, costs, charges, expenses, outgoing or payments including attorneys fees which recipients of the reports suffers or incurs directly or indirectly arising out actions taken as a result of this report. This report is for the use of the intended recipient only. Access, disclosure, copying, distribution or reliance on any of it by anyone else is prohibited and may be a criminal offence.

Contacts
Research Team Tel No: +94 11 2317777 (General) Email : teamresearch@capitalalliance.lk Head of Research Kishan Gunawardena Tel No : +94 11 2317784 Email : kishang@capitalalliance.lk Dimantha Mathew Tel No : +94 11 2317746 Email : dimantha@capitalalliance.lk Udeeshan Jonas Email : udeeshan@capitalalliance.lk
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