bangladesh growth report 2013

8/13/2019 Bangladesh Growth Report 2013

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Bangladesh Growth Report 2013

Prepared bySajid Huq Amit : Director - Strategic Sales : [email protected]

Research support bySaleh Chowdhury : Assistant Manager - Strategic Sales : [email protected]


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Glossary

ACU Asian Clearing UnionASEAN Association of Southeast Asian

NationsBDT Bangladesh TakaBERC Bangladesh Energy Regulatory

CommissionBPDB Bangladesh Power Development

BoardBSEC Bangladesh Securities Exchange

Commission (Note: SEC is more

frequently used)DESCO Dhaka Electric Supply CompanyDGEN DSE General IndexDSE Dhaka Stock ExchangeEU European UnionFDI Foreign Direct InvestmentsFX Foreign ExchangeGCC Gulf Cooperation Council

GDP Gross Domestic ProductGNI Gross National IncomeIPP Independent Power ProducersJICA Japan International Cooperation

AgnecykWh Kilo Watt-Hour

mmcfd Million Cubic Feet per DayMSCI Morgan Stanley Capital International

MT Million TonsMW Mega WattMWh Mega Watt-HourNAFTA North American Free Trade

AgreementNBR National Board of RevenueOIC Organisation of Islamic CooperationOPEC Organization of the Petroleum

Exporting CountriesPPP Purchase Power ParityRMG Ready Made GarmentsS&P Standard & Poor'sSAARC South Asian Association for Regional

CooperationSIPP Small Independent Power ProducersUSD United States Dollar

YTD Year till Date


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Note to Investors

Greetings!

It is with great pleasure that we share with you our inauguralBangladesh Growth Report.

Bangladeshs sustained ~6.0% growth since 2004 appeared tohave caught worldwide media attention not too long ago. Ofcourse, if you are reading this, you are likely to have beenahead of the curve.

Growth, while not being an end in itself, has certainlytransformed the lives of tens of millions, lifting them out ofpoverty, inspiring ambitions, empowering the middle-class,and setting the stage for what appears to be even highergrowth. Growth, we believe, is a necessary condition for over-arching development, if not sufficient.

The story of ready-made garments is rather unique anddeserves the attention it has attracted. However, a less-toldstory that is increasingly significant is that of the Bangladeshi

consumer. As per latest income per capita estimates,Bangladeshis earn US$1,940 per year.

Now, according to the S-curve of consumption (or productadoption), that is not an arbitrary number, but one thatindicates an inflexion point after which, consumption increasesat an increasing rate.

Considering a middle-class base of ~60 million, a working-agepopulation of ~100 million, and 30 million more below the ageof 14, the growth dynamism that awaits us may catch a few bysurprise. Of course, demographic dividend in Bangladeshscase is one of many growth engines.

We believe, therefore, this is an opportune time to collate data,analysis and estimates on economic growth; monetary, fiscal,and FX policies; trade; migration; demography; consumption;

manufacturing; and equity market trends while acknowledgingthe challenges that lie ahead and opportunities lurkingunderneath. Infrastructural development or lack thereofconstitutes a significant challenge to and an opportunity forhigher growth. Effective planning to orchestrate investmentdecisions and operations is essential. In lieu of it, the countryseconomic potential will be unrealized.

We hope that you will find this report useful and even

insightful, and welcome you to share any feedback orquestion, in relation to or independent of your investmentpriorities.

Thanking you,Sajid Huq AmitFeb 27, 2013

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Meet Bangladesh

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Bangladesh : A Blurb

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Bangladesh is the eight largest country in the worldpopulation-wise: 150.49 million as of 2011. At 130,170 sq.km., it is about the size of Iowa.

Despite a low GNI/capita (PPP, current) of $1,940 the growthfundamentals of the economy has received widespreadinternational attention, e.g., Goldman Sachs inclusion in thenext eleven or N-11 economies as well as JP MorgansFrontier Five. Guardian has enlisted Bangladesh among theeconomies that have the potential of overtaking the west by2050.

Located between China and India, two of the largest andfastest engines of global growth, not to mention nearness toSouth-east Asia, Bangladesh offers unique diplomatic andcommercial opportunities.

The Bay of Bengal and the planned deep sea port in thesouth-east; the extensive riverine network; a large andyouthful population, fertile land, and a 99% mobile networkcoverage have set the stage for speedier flows of capital,people, tradable products and services, and ideas.


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Growth Path : Beginnings

Bangladeshs steady and in fact rising growth rate over a 25-year horizon surpasses in various country clusters (asdefined by the World Bank).

Despite concerns regarding connectedness to US andEurozone markets via trade the BD economy was resilientthrough the 2008-09 financial crisis and 2011 Eurozone debtcrisis.

In 2010, GDP GR peaked at 6.7%, and in 2011, it was at6.5%.

8

-3.0

-1.0

1.0

3.0

5.0

7.0

9.0

1985 1988 1991 1994 1997 2000 2003 2006 2009

Real GDP Growth (%) Low income Middle income World Bangladesh

For 2012, provisional estimates are in the 5.5-6.0% range,notwithstanding a methodological revision expected toindicate ~6.0% GR.

While exports have sustained, other pillars of growth havebeen inward remittances, consumption, SME growth anddevelopment, and agricultural self-sufficiency.

The outlook indicates more of the same plus increasingmanufacturing output, export diversification, and increasedconnectivity internally and regionally via air, road, rail, andmaritime links.


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Comparative : Frontier Markets

9

3.24.2 3.7

2.2

5.9

3.34.6 4.9

5.4 5.9 5.34.4

6.36.6

6.2 5.76.7

-5

0

5

10

15

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Bangladesh Kenya Lao PDR Nigeria Pakistan

-15

-10

-5

0

5

10

15

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Bangladesh Indonesia

Malaysia Thailand

Vietnam

Looking at specific high-growth economies in Africa, SouthAsia and South East Asia that are grouped with Bangladeshon account of similar investment risk profiles and comparableincome levels - Bangladeshs economic output has enjoyed asteadier and more resilient trajectory. Certain high-growthcountries have had higher highs but also 300-500 bpvariations in two years or less.

Bangladeshs economic stabi li ty fares well even incomparison with the Emerging Asia, i.e., more mature high-growth South East Asian countries such as Thailand,Malaysia, and Indonesia, whose growth rates plunged500-1000 bp in two years.


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Monetary Fiscal Performance

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Growth, Inflation & Monetary Aggregates

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12.113.7

15.5

12.612.9

14.8

19.317.1 17.6

19.2

22.4

21.3

7.2 7.2

9.9

6.7 7.38.8

2006 2007 2008 2009 2010 2011

Broad MoneyGrowth

Nominal GDPGrowth

Average AnnualInflation

3.8X 4.7X 5.9X 7.7X 8.4X9.6X 12.4X 13.0X

39.8X

61.9X

109.0X

T h a i l a n d

M a

l a y s i a

P h i l i p p i n e s

K e n y a

P a k i s t a n

S r i L a n k a

B a n g l a d e s h

I n d o n e s i a

N

i g e r i a

V i e t n a m

G h a n a

M2 Growth 1995-2011

Central banks around the world try to keep M2 GR in line withnominal GDP GR and an optimal inflation level. In Bangladesh,Broad Money grew 12.4X in 1995-2011. In the same time period,GDP on PPP basis grew ~3X from US$90.7bn to US$267.4bn.

The above growth multiples are line with other economies that

have enjoyed sustained growth and those in which the bankingsector growth had internal liquidity generation had a relativelyslower start.

In 2006-2012, bank deposits (excluding inter-bank) grew at anaverage 19.4% per year. During the same period, total advances(excluding inter-bank) grew by 20.0% on an average.

After a slowdown in 2007-08 on political impasse, M2growth rate picked up in 2009. There was excess liquidityin the money market, which eventually entered the stock

market, leading to 2010s rally.

In 2011, the Bangladesh Bank (BB) turned a corner andput in place a contractionary monetary policy. Since 2011,repo and reverse repo rates have been hiked by 225bp.Meanwhile, M2 GR which had peaked at 21.7% in Dec10fell to 13.7% in May12, in line contractionary targets.

Other than mopping up the excess liquidity and correctionof asset prices consequently raised BBs monetary policyhas also aligned closely with stipulations of a US$1.0bnExtended Credit Facility (ECF) loan that the IMF approvedfor BoP support.


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Stipulations for disbursements of successive tranches of the loan,included sustaining single-digit inflation and re-classification ofasset quality measurement guidelines as per best practices. Inline with inflation control, the ECF also stipulated curbing publicsector borrowing from banks to finance subsidies. The prevalentfiscal policy of financing subsidies via bank borrowing wasdiscouraged, and rightly so, given its crowding out effect onprivate sector credit was quite evident.

Subsidizing energy costs enabled lower pricing ofelectricity. However, given limited revenue and absence ofa secondary market for treasuries subsidy financing viatreasury sales to primary-dealer banks and NBFIs had theunintended consequence of raising bank rates. Increasedlending rates i.e., higher cost of capital economy-widenaturally pushed up consumer prices.

In 2012, lending and deposit rates were higher than five-year averages peaking at 13.8% and 8.2%, respectively.On time deposits, leading private commercial banks(PCBs) double-digit rates.

-10%

10%

30%

50%

70%

Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12

Total Domestic CreditGrowth (YoY)Pvt. Sector Credit Growth(YoY)Public Sector Credit Growth(YoY)

Fiscal-Monetary Nexus

12.8 12.3 11.911.3 12.4

13.8

6.9 7.0 7.0

6.0

7.3

8.2

0

5

10

15

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Commercial Lending RateBank Deposit Rate


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External Sector Performance

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Trade & Exports

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65.0% 64.2% 67.3% 68.1% 66.1% 71.1% 67.6%

27.2% 28.4% 25.4% 25.1% 27.8% 24.4% 27.7%

0%

25%

50%

75%

100%

2005 2006 2007 2008 2009 2010 2011

Breakdown of Export by Commodity

RMG Fish Leather Jute Others

In 2012, and 1H in particular. the ready-made garments (RMG)export power-house, as Bangladesh was referred to by a recentNew York Times article, experienced a lagged slowdown on

reduced demand from the US and the EU. However, trade deficitswere lowered from 2011-levels thanks in part to the monetaryausterity program in place, one of the consequences of which wasa curbing of non-essential imports.

Exports grew 8.0% in 2012, which is respectable and also higherthan in countries with comparable export industries, e.g., Pakistanand Vietnam. In fact, in 2012, Bangladesh became the second-largest exporter of garments and textiles products after China.

Diversification of export destinations sustained growth rates in2012, especially in 2H, during which which the newer destinationscontributed ~US$1.0bn of US$9.94bn exports. The US is,however, likely to remain an attractive destination for Bangladeshexports. India is also expected to become a larger exportdestination.

To be sure, Singapore, Malaysia, South Korea, Japan, China,Turkey, Australia, Mexico, Russia as well as several countries inthe MENA region are expected to become larger export marketsfor Bangladesh. Another trend worth a mention is the steadygrowth of high-value products (HVPs). Their share in thegarments export basket rose from 7-8% to 15-16% in 2012.

-1750

-750

250

1250

2250

3250

Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12

Trade Balance in USD mn Export in USD mn (fob)

Import in USD mn (foB)


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Imports & Outlook

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11.5% 12.8% 12.2% 12.0% 10.9% 10.2% 11.9%

68.1% 66.6% 65.6% 65.6% 70.0% 71.0% 64.5%

0%

20%

40%

60%

80%

100%2005 2006 2007 2008 2009 2010 2011

Breakdown of Import by Commodity

Textile and Articles Capital MachineryPetroleum and Products Food GrainsOthers

The largest category in imports comprises miscellaneous productsincluding dairy, spices, oil and oil seeds, pulses, sugar, clinker,

chemical and pharmaceutical products, fertilizers, dying andtanning materials, cotton, yarn, staple fibers, and iron and steel.

As for import markets - India, China, Vietnam, Turkey, Poland andEgypt are expected to contribute significantly in the future., This isin addition to the traditional raw material suppliers in the OIC(Singapore, Malaysia and Kuwait for minerals, fuels, and oils;Indonesia for animal and vegetable fat oils; Pakistan, India, Chinaand Uzbekistan for cotton (India also for vehicle and China formachinery); Saudi Arabia for plastic articles and Korea for iron,steel, and floating structures.

2,894.5

1,975.4

1,270.41,250.8

1,384.3

748.2

533.7

299.3182.3

Regional Import 2012 Q2 (USD)

Other Asian Countries

OIC

Asian Clearing Union (ACU)

SAARC

ASEAN

OPEC

EU

NAFTA

Other European Countries

In FY 2012, Bangladesh spent US$6.17 billion on import of liquid fuels,more than twice FY 2011 levels, primarily to run quick-rental powerplants set up to address interim electricity generation gaps.

However, monetary austerity, weak demand for exports in the EU andUS, not to mention bumper harvest of food grains, saw liquid fuelimports decline in 2H 2012. New L/C opening for petroleum imports fell22.4% in July-October 2012.

Monetary tightening also led to a decline in import of consumer goods,industrial raw materials and capital machinery. In July-November 2012,import GR was -6.9% compared to 21.6% in the same period in 2011.


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Remittance & Other inflows

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The Bangladeshi expatriate population estimated at around eightmillion remitted back US$14.2bn in 2012, marking a 16.5% YoYGR. This was noteworthy given the high base remittance dollar

volumes had achieved in 2011, and surpassed man-powerexporting countries that had higher volumes until 2011.

Estimated at ~US$405.0bn in 2012, remittance to developingcountries are expected to grow ~7.9%, 10.1% and 10.7% in 2013,14, and 15, respectively, reaching US$534.0bn. Even ifBangladesh maintains average growth rates for developingcountries, it could reach US$19.6bn in 2015.

564

391 376276

800743 793

650

961913

768

995

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Foreign direct investment (FDI) picked up 2009-onwards and in 2012, reached US$909mn. In2005-08 and 2001-04, average FDI-levels were US$747.0mn and US$402.0mn, respectively.

Attracting FDI is particularly important for a growingeconomy like Bangladesh as it involves transfer oftechnical and managerial knowledge.

However, other frontier economies like Vietnam andCambodia have still higher average FDI levels both inabsolute dollar volume as well as share of GDP (~5%for the two countries).

The year 2012 also saw foreign-currency term loansof US$1.49bn, about 82% higher YoY and 393%higher than in 2010.

1,089 1,4751,706 1,882

3,0623,848

4,802

5,978

7,915

9,68910,987

11,650

12,843

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1993-94 1996-97 1999-00 2002-03 2005-06 2008-09 2011-12

No. of persons left for abroad

Remittances (Million US. $)

FDI (US$mn)


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FX Reserves & Exchange Rate

17

0

15

30

45

60

75

90

0

5

10

15

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13

Reserve (USD bn) BDT-USD (End of Period) In January 2013, the Bangladesh Banks foreignexchange reserve surpassed the US$13bn threshold

for the first time. Strong remittance inflow, negativeimport growth, quicker collection of export proceeds,FDI growth, and other foreign currency inflows werethe primary drivers.

As of January 08, foreign exchange reserves stood atUS$13.1bn, up from US$9.6bn in December 2011.Current reserves are equivalent tofour-month importbill coverage.

On escalating FX reserves, the dollar rate, which hadbeen stable in March-November 2012 around theBDT 81.0-82.0 range, dropped below the BDT 80.0level in December. BDT appreciated thereafter.

After the free fall of 2011, when BDT depreciated12.8% against the dollar, the 2.6% appreciation sinceDecember is commendable, and is presently at alevel where it retains export competitiveness without

importing inflation into the economy.


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Consumerism Manufacturing

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Bangladesh : The Next Emerging Consumer Market

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15,650

8,360

5,520

4,500

4,140

3,250

2,870

2,580

2,290

1,940

1,810

1,710

Malaysia

Thailand

Sri Lanka

Indonesia

Philippines

Vietnam

Pakistan

Lao PDR

Nigeria

Bangladesh

Ghana

Kenya

GNI

p er C a pi t a

i n2 0 1 1

( P P P C ur r en t U S D

)

Bangladeshs per capita income, although higher than Kenyasand closer to Nigerias, is still much lower than in Lao PDR,

Thailand and less than 20% of Malaysias per capita income.However, at US$1,940, Bangladeshs per capita on the vergeof the US$2,000-2,500 inflexion range on the S-curve ofconsumption.

Experience from South Asian, South East Asian and Africancountries with similar economic fundamentals indicates thatGDP/GNI per capita accelerate around the time it reaches US$2,000.

0

4,000

8,000

12,000

16,000

1980 1985 1990 1995 2000 2005 2010

Bangladesh Ghana

Indonesia Kenya

Lao P.D.R. Malaysia

Nigeria Pakistan

Philippines Sri Lanka

Thailand Vietnam

US$2,000 income/capita line

Even modest assumptions on GR indicate Bangladesh isabout the enter a high-growth threshold for consumption.The consumer market in the offing is significant when onerealizes that 57% if the population or about 92.0 million areunder 25 years.


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Discretionary Spend : Mobile Phones & Durables

20

Mobile subscription doubled in the past five years. Driversfor subscription growth have been increasing per capitaincome, migration to cities and overseas, delays in availingland line connections, and so on.

Bangladesh at present has ~62% mobile penetration, whichis certainly a larger market than its frontier market peerssuch as Ghana, Kenya, Lao PDR, Nigeria, Pakistan, SriLanka and Vietnam. However, penetration is higher for theother frontier markets, especially for Ghana at 85%, SriLanka 87%, Lao PDR at 87% and Vietnam XYZ%. OnlyNigeria and Pakistan have similar levels of penetration. 798,571

1,000,000

100,000

55,000

- 400,000 800,000 1,200,000

Electronic Goods Sales (Units)2009

2010

2011Microwaves

Air Conditioners

Televisions

Refrigerators

45

24

90

62

0

10

20

30

40

50

60

7080

90

100

Mobile Phone Subscribers (mn) Mobile Penetration (%)

Mobile Phones, 2008-12The market for discret ionary consumer products inBangladesh is approximately ~95.000 for air conditioners,50,000 for microwaves, about 900,000-1.0mn for televisions,

and ~800,000 for refrigerators. Refrigerator sales areincreasing at ~25% a year, television sales at 10-12% a year,while air conditioners and microwave consumption growthrates are still in high single-digits.

Growth rates for refrigerators and televisions for India andChina were similar in the 1990s, ie the first decade of highdiscretionary spending, following which consumer spendincreased further. The case for Bangladesh ought to besimilar in the coming decade.


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Manufacturing Pathways

At current prices, Bangladeshs annual imported car market isaround 30,000 units. Imported cars constitute ~80% of thesmall and medium motor vehicle market of which Toyota has69% share.

The imported car market has altered however as duties haveescalated to 250% for 1600-2000 cc vehicles, 350% for2750-4000 cc, and 821% for 4000 cc or larger. Meanwhile,equity-loan ratio on car loans have risen ~6-8 times. With ashrinking of the imported car market, opportunity is rife for low-and medium-priced car manufacturers.

Automobile manufacturers entering the Bangladesh marketestimate an annual demand six to seven times larger forlocally manufactured cars. South Korean Tagaz and IndianTATA are the other significant foreign players looking to enterthe lower-priced automobile segment.

Clearly, as borne by price differentials in refrigerator,television, motor cycle and automobile markets betweenimports and local manufactured products - consumerism isdriving an expansion of the manufacturing industry.

In fact, in the previous 50 years, countries that have sustainedperiods of consistent 7 percent or higher growth over a horizonof 25 years or longer, manufacturing and services weredominant contributors. Of course, the agriculture sector doesnot diminish in absolute policy importance given the scope forincreasing yields and high global food prices.

Agricultural yield will grow with dissemination among poorfarmers without access to information knowledge on optimal croprotation, usage of higher-yield varieties and hybrids, limitedexperimentation with pesticides, increased urea-usage, andeducation on weather and soil-quality-dependent farming.Increasing agricultural yield will accelerate the growth of thecountrys industrial sector by freeing up workers for the factories.

Bangladesh has the sixth largest work force in the world afterBrazil, Indonesia, US, India and China. On top of gains inemployment generation for an estimated workforce of around~80.0mn Bangladesh also enjoys one of the most favorabledemographic dividends globally (Vietnam comes close) with65.3% population bin the 15-64 age group and another 30.0%below.

22

30.0 65.3BangladeshGhanaKenya

Lao PDRLeast developed

Low incomeMiddle income

NigeriaPakistan

Sri LankaVietnam

World

Population ages0-14 (% of total)

Population ages15-64 (% oftotal)

Population agesabove 64 (% oftotal)


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Emerging Manufacturing Sectors

Bangladesh minimum wages are the lowest in Asia,30-100% lower than in Vietnam, Sri Lanka and India,

according to the ILO. While wages have recently and just ifiably increased, the existing (and signif ican t)comparative differential has enabled development of labor-intensive sectors, e.g., apparel, textiles, leather, footwear,and up-and-coming ones such as furniture, toys, bi-cycles,sports equipment, and ship building.

An example of how domestic manufacturing to meet agrowing consumer segment ! has begun to make small

inroads in exports !

is the furniture segment. The localmarket is ~US$1.38bn with around 19% sales growth.Meanwhile, export volume, albeit from a low base, haspicked up from US$27mn in FY 2012 to around US$40.0 inFY 2013.

In addition to demand from overseas buyers, significantmarket growth is expected on forward-linkage potential withthe domestic ship-building industry. A small ocean-goingvessel made in Bangladesh typically requires furniture of~US$100,000, which are presently imported. SinceBangladeshi ship-builders are increasingly competitive inthe global market for small- and medium-sized vessels,labor-cost arbitrage is expected to benefit both ship buildingand the furniture manufacture industries.

23

10

40

2010

2011

Shipbuilding Industry Sales (US$ million)

Labor-cost competitiveness is rather high for Bangladesh even

in comparison other low-cost manufacturers, e.g., Pakistan. Asof 2011, according to the World Bank, Bangladesh industry-wide net profit margins averaged ~16% compared to 3% inPakistan.

S ince this sector is like ly to incur future cost s f romenvironmental regulations, taxation, etc., Bangladeshs cost-advantage is expected to enable market share growth in the~US$200bn global industry. Single-digit percentage share ofthe global industry entails sizeable economic benefits.

In the coming years and decades, other sectors are likely toc a tc h p o li cy - ma ke r s a t te n ti o n f o r t h ei r l a bo r-c o stcompetitiveness. It is important, however, that sectors are notidentified only using a basic model of labor-cost arbitrage, butdetermined in consideration of other factors as well, e.g.,access to raw materials, leadership talent, low-cost energy,reliable infrastructure, favorable regulation, trade policies, andof course diplomatic imperatives.


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Infrastructure Gaps Opportunities

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Energy & Power

In 2012, peak electricity demand was 7,518MW/day, up from6,500MW/day in 2011, up by 16%. Meanwhile, peak supplywas 6,350MW/day and total electricity generation grew by

12% to stand at ~35,000GWh (CAGR ~9.0% in 2001-2011).The demand-supply gap came down to ~2,000MW to~1,2000MW in 2012, reflecting reduced load-shedding.

25

0

500

1000

1500

2000

1980 1985 1990 1995 2000 2005 2010

Per Capita Electricity Consumption (kWh)

Low incomeMiddle incomeBangladeshGhana

Electricity consumption in Bangladesh is one of the lowestregionally and globally, as evident from the accompanying linechart. Scarcity of power is possibly the most significant

infrastructural constraint inhibiting growth and development,and unlocking possible double-digit growth.

However electricity prices are among the least expensiveregionally at US 4.16-14.75/kWh for retail and US 5.88/kWhfor bulk users as of Sep 12 (Sri Lanka has highest retail tariffat US 28.35/kWh). These are prices post-adjustment to lowersubsidies on energy. The Bangladeshi Energy RegulatoryCommission (BERC) raised tariffs by 38.24% and 63.77%between 4Q 2011 and 3Q 2012. Further upward pricerevisions are expected: by 9% in 2013 and 30% in 2014.

8.6

12.2

18.6

12.411.512.111.1 9.5 9.4

12.7

0.2 0.1 0.9

5.46.9

11.212

6.6

J a n - 1

1

F e b

- 1 1

M a r - 1 1

A p r - 1 1

M a y - 1 1

J u n - 1

1

J u l - 1 1

A u g - 1

1

S e p - 1

1

O c t - 1

1

N o v - 1 1

D e c - 1 1

J a n - 1

2

F e b

- 1 2

M a r - 1 2

A p r - 1 2

M a y - 1 2

J u n - 1

2

Load-shedding (as % of peak generation)

However, the reduction in power generation has beendriven by quick-rental power plants which require expensiveliquid fuels. A more cost-optimized energy mix, to take theexample of JICAs proposed roadmap for 2030, The PowerSystem Master Plan (2010). recommends that 50%generation be coal-based. As of 2012, coal-generatedpower contributed ~2% of total power generated.


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Sea Ports & Maritime Transportation

26

With regard to maritime transport, Bangladeshs sea ports areperhaps the most crucial to growth-impact. The mainChittagong port in the south handles about 80% of the

countrys imports and exports. Its situated on the Karnaphuli,is close to the Bay of Bengal, and last year, handled morethan US$47mn tons of cargo and containers of 1.4 millionTEUs and given growth outlook, requires urgent capacityexpansion.

The Chittagong port is particular commercial significance tothe garments industry. Positive changes thus far includeallowing private berth operators to handle containers and

cargo. Turn-around-time for ships has lessened to two-and-a-half days but still short of global benchmarks.

The deep sea port in south Chittagong is however the biggestgame-changer in the horizon which will enable manifoldincrease in connectivity between countries east and west ofBangladesh as well as trade routes to and from land-lockedNepal and Bhutan. China, India, Myanmar, the UAE, and ofcourse, Nepal and Bhutan have shown interest in developingthe Chittagong port. Down the road, there will be competitionin the maritime transit business for Bangladesh; hence timelyaction is paramount.

The Bangladesh Power Development Board (BPDB) has beguncoal and gas-fired base-load power plant projects, but risks ofimplementation time-overrun and bureaucratic delays are

significant. Existing gas reserves (~2,250 mmcfd against demandof ~2,700mmcfd) are under pressure for lack of new discoveries.

A possible silver lining may lie in gas exploration in the Bay ofBengal, which, following an ITLOS verdict, allowed Bangladeshaccess to four deep-water gas blocks and partial rights over threeblocks. Bidding and subsequent exploration by international oilcompanies (IOCs) are expected this year.

Another positive development is the approval by ECNEC,Bangladeshs highest policy-making institution, for a cross-borderUS$196.0mn power transmission project. A US$252.5mn powergeneration project dedicated for greater Chittagong is alsoapproved, of which US$172.0mn will be provided by Saudi Arabia,Kuwait, the UAE, and OPEC. There are a few other power projectsin the pipeline.

Energy issues notwithstanding, there is also considerableinvestments to be made to develop Bangladeshs roads, railways,

bridge networks, airports, and waterways. The investment case forroads, railways and bridges is of course quite patent for adeveloping country, but in Bangladeshs case, waterways andaviation present relatively compelling cases as well, especially theformer and in the near-term.


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Aviation, Roads, Railways & Bridges

Mongla is the second sea port in Bangladesh. It has threeco nt ai ne r ye ar s o f 3 5, 75 2 sq . m et er s, a nd ca naccommodate 2,180 TUES containers in a single high; fivetransit sheds and two warehouses can store 33,258 m.t.cargo. To develop Mongla, projects worth US$70.0mn forequipment procurement and easier navigation of sea-goingvessels are in the pipeline.

Dredging will need to take place at a reasonably large scaleto deepen and widen riverine channels, which willsignificantly reduce transportation time of goods andservices and reduce land traffic congestion. A developedriverine transportation system will also enable renewableenergy generation from hydroelectricity. For purposes ofpolicy formulation, sophisticated synergies are possiblebetween policy programs aimed at sea port developmentand riverine transportation.

To c on t in u e o n t r an sp o rt a ti o n m o de s r e la ti ve lyunconventional to most frontier emerging economies atBangladeshs s tage of growth avia tion a lso has

considerable potential for growth and hence rationale forp ol ic y p ri or it iz at io n. T he m os t o bv io us d ri ve r i stransportation of RMG exports and the market, several largeRMG manufacturers. Given the scale, growth rate, andambitions of Bangladeshs garments industry, internationalcargo flights ought to be a logical next step to loweringcosts for the industry and enhancing its competitiveness.

.

Another substantial market for aviations growth is the largeBangladeshi expatriate population of mostly migrant workers, butseveral NRBs naturalized in countries such as the UK, US, Italy,

and so on, in total estimated at ~8.5 mn. Even by global standards,this implies a a fairly large market for international passengerflights. But the obvious bottle-necks to the sectors growth aretechnological know-how at various parts of the sector value chainincluding policy design (e.g., pricing) as well as the scale ofinvestments to generate meaningful returns. Aviations sustainedgrowth may necessitate transfer of technical and operationalknowledge at levels comparable to those witnessed in the early-stage Bangladesh telecommunications sector.

To return to most conventional infrastructure-growth priorities ofdeveloping nations, i.e., the building of roads, railways and bridges,the larger projects in the pipeline are as follows (dates ofcompletion inexact):- ~US$3.75bn multi-purpose bridge about 6.15 km-long to connectthe south and south-east with the impoverished south-west (lowerinitial estimates; may increase further with time)- US$2.75bn Dhaka Mass Rapid Transit Development (DMRTD)project for a 2.0 km-long metro-rail, of which JICA has pledged85% funding- US$2.0bn second Padma bridge to connect Dhaka with the westand south-west as well as the main land port with Mongla port- US$1.24bn elevated expressway about 26.0 km-long to connectthe primary airport, Shah Jalal International Airport, to the Dhaka-Chittagong Highway- US$400mn four-lane highway for Dhaka-Chittagong traffic

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Regional Connectivity : Sharing Costs & Spoils

However, building ports, river networks, expressways, anwidening roads into multiple-lanes are very expensiveinvestments. The size of total investment capital required forthe list of large projects is close to US$10.0bn, which doesnot include the many roads that need to be laid, unpavedpaths paved, smaller bridges to be built to say nothing ofdeep sea port development, investments in Chittagong andMongla ports, riverine network development, and aviationindustry development. The railway system also requires asizeable overhaul. The size of total investments required mayrun into ~US$40-60.0 bn.

This is clearly untenable without foreign direct investmentand other shared financing programs with regional anddistant sovereigns that have expressed interest. Since thecommercial gains from greater connectivity are inevitablyshared, investments ought to be. Large scale commercially-driven diplomacy is clearly the required ingredient toactualize Bangladeshs requisite transportation networkdevelopment.

A discernable benefits of the above is an inevitableemployment boom that results in construction and servicessectors from investing in infrastructure. The second and morelasting benefit is increased connectivity between South Asiancountries, since trade between the neighbors are on the riseand expected to accelerate. The travel time howeverbetween capital cities in South Asia are presently 100-200%higher. Optimizing travel time entails considerably highertrade volumes for Bangladesh and its neighbors.

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In fact, interest in developing Bangladeshs transportationsystem and various modes thereof involve business casesfor countries outside South Asia, and other than China, UAE,and Japan, all of whom have shown actionable interest.There is also the Emerging Asia, as represented by SouthEast Asia, Indochina, Korea, and even the CIS.

For instance, there is an organization known as BCIM(Bangladesh, China, India and Myanmar) that aims toincrease connectivity across the four countries whichconstitutes around 40% of the worlds population. Veryrecently, they organized the first four-nation joint-road survey

to accurately map road connectivity.There is yet another group called The Bay of Bengal Initiativefor Multi-sectoral Technical and Economic Cooperation(BIMSTEC) formed in 1997 in Bangkok and includesBangladesh, India, Myanmar, Sri Lanka, Thailand, Bhutanand Nepal. This consortium is intended to promote trade,investment and connectivity between South and South EastNations. Dhaka happens to be BIMSTECs head-quarters.

The commercial and diplomatic opportunities for Bangladeshas a result of its advantageous geographic location canfacilitate growth of various Bangladeshi service sectors. Asdemonstrated by Singapore, the growth-impact of investingin logistics and becoming a trading hub, can ensurecontinued prosperity, especially given Bangladeshs othergrowth fundamentals.


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The Internet of Things

Internet penetration should also drive an increase in newbusiness activity. Particularly in a country like Bangladesh, theInternet can help make up for shortages in other forms ofinfrastructure, such as roads, by enabling people to transactacross large distances.

For starters, internet-based business can contribute toagriculture. With small household farms in rural areasdominating production, there is great scope to increase valueadded using the internet. It can be a useful tool with which todisseminate information on planting times, methods, use offertilizers, etc.

In Bangladesh, where urban centers are inhabited by 30% ofthe population - the bank sectors physical penetration islimited by the countrys terrain, lack of road networks, energysupply gaps and infrastructure bottle-necks.

Despite such challenges, banks have built up impressivebranch networks. The next mile for financial inclusion of theunbanked hinges on mobile banking, which in turn requires acheapening of internet access as well as affordable 3G-enabled mobile devices. The auction for 3G licenses isexpected to take place around mid-2013.

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However, 3G will not immediately translate to increasedinternet penetration because of licensing and CAPEX costs

involved for mobile operators (latter due to significantnetwork swap costs for 3G).

In the longer run, internet-based business are expected tocontribute significantly to the economy via sectors such asagriculture, health, education, commerce, retail and a varietyof service-oriented sectors.


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Capital Markets

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DSE : Upside despite Macro-Financial Stability

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0

100,000

200,000

300,000

400,000

500,000

Jun-04 Jun-06 Jun-08 Jun-10 Jun-12

Dhaka Stock Exchange MCAP and Liquidity

Total Volume (thousands)

Total Turnover in USD (thousands)

Total Market Cap. in USD (mn)

0

5,000

10,000Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12

DSE General Index

After a brief impasse in economic and trading activities in2007-8, pent-up liquidity entered the stock market via marginloans and re-purposed bank debt, fueling record retail anddomestic institutional investor participation. In 2010 alone,DGEN appreciated ~94%. In a densely-inhabited capital citywith scarce investible asset classes and rather early-stagefinancial-literacy levels (among investors as well as licensedintermediaries), speculation became rife which ultimately droveDGENs relentless rally.

The bull market turned a corner in Dec 2010 as BB raised bankcash-reserve ratios. A multi-phase correction set in, initially

quicker but slowing gradually, largely on investor panic,downsizing of bank portfolios and drying up of trade thereof.

Retail investor confidence waned, as did dollar values ofaverage daily turnover. Regulatory changes turned a corner forthe better in 2012 after a phase of policy trial-and-error in 2011.A series of policy initiatives were put in place aimed at curbingmanipulation and volatility risks; simultaneously strengtheningmarket fundamentals; in part on prescriptions from InternationalFinancial Institutions.

The boldest policy initiative was setting in motion the de-mutualization of the bourse. So far we understand, this involves anoverhaul of the bourses ownership structure towards greaterrepresentation of independent owners than stock-brokers; revenuemodel changes; and overall , improved accountability andgovernance. Thereafter, surveillance software was launched todetect and deter fraud and manipulation. Regulators also pushedthrough a new free-float adjusted market-capitalization-weightedindex.

In sum, the countrys primary bourse, the DSE has become a safermarket in which to invest. More importantly, it has become an

attractively valued market uncorrelated to macroeconomic resultsor outlook; which is a good thing because the market would not bewhat it is to value investors now, had it priced in economicperformance past or expected.


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Market Fundamentals: MCAP Growth

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24.2

18.4

1.4

4.8

22.5

2.0

32.8

30.3

21.0

16.1

15.6

7.9

Sri Lanka

Kenya

Bangladesh

Nigeria

Pakistan

Ghana

Total Market Capitalization (% of GDP)

2011

1993

In 19 years, DGENs Market Capitalization to GDP ratioincreased 15x surpassing MCAP growth rates of comparablefrontier markets. Although it is true that DGEN MCAP probablyhad a far lower base in 1993 than its frontier marketcounterparts, its MCAP GR is still indicative of the underlyingdomestic investor interest in the stock market even at arelatively early stage of its history.

In fact, the external drivers of the staggering rally of a hithertolittle-known market in 2009-10 are also reasons for DSEsdouble-digit multiple growth rate in market cap.

First, for the median retail investor, there is a dearth ofinvestable asset categories. Real estate is usually expensive.In the more upscale parts of the capital city, real estate pricesare comparable to Mumbai, which is occasionally higher thanthose in developed market capital cities. Prohibitivelyexpensive real estate, an under-developed fixed-incomemarket, and until recently, single-digit returns on deposits have fueled retail investor interest in the stock market throughtime.

Dhakas high populat ion densi ty also lends to rapidinformation flows. The dynamics are just right for highmultiplier effects of both positive and negative feedback oninvestable securities. Lastly, high M2 growth rate alsoIndicates high return-potential and high liquidity. Overallmarket size is positively correlated with the ability to mobilizecapital and diversify risks across the economy.


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Market Fundamentals: Liquidity Ratios

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92.6

1993 2002 2011

Total Turnover to Market Cap Ratio (%)Least developedcountriesLow income

Middle income

World

Bangladesh

Liquid markets are naturally preferred because they are likelierto have lower bid-ask spreads, enable more efficient pricediscovery and are less prone to long-term bubbles andcorrections.

Liquidity also significantly predicts future returns. Moreover, alack of liquidity causes asset markets to dry up or render tradesdifficult to execute when prices are falling, particularly when aninvestor might want to exit.

1993 1999 2005 2011

Total Turnover to GDP Ratio (%)

Bangladesh GhanaKenya Nigeria

Sri LankaDespite Bangladeshs equity markets relatively early stage ofdevelopment, dollar volume of turnover levels (as evident fromthe adjacent pictorial) are generally higher than dollar volumetrends for the least developed, low-income and middle-incomecountry groups.

Turnover to Market Cap and Turnover to GDP are both usefulindicators of liquidity as the first represents the liquidity of themarket and the second of both the market and wider economy.

When liquidity risks of investing in markets are dispersedsystemically it is easier to manage portfolio risks as long as aneconomys financial services sector is well-governed andregulated, as is turning out to be the case with Bangladeshsbanking sector in light of asset quality and risk capitaladjustments underway.


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Indicators of an Under-valued Market?

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-

1,000

2,000

3,000

4,000

-

100

200300

400

500

600

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

Monthly Imports and Stock Turnover

Stock Market Turnover (BDT bn) Import (USD mn)

17.8x

0x

5x

10x

15x

20x

25x30x

35x

2003 2006 2009 2012

Market P/E

Market P/E Market P/E (Avg. 2003-2012)

Despite debates about its utility for valuation of an entire market historical P/E is a more useful indicator of an undervalued market thanan overvalued market. By this metric, DSE is under-valued givencurrent single-digit P/E ratios.

The next chart (top right-hand side) indicates the inverse relationshipbetween a high bank deposit rate and lower fund flows to the stock

market, which was clearly the case in 2011-12 as monetary tightening,and provision growth led to higher deposit rates for fund mobilization.

Imports are a proxy for industrial production index. Clearly a leadingindicator for turnover, the widened gap in 2011-12 indicates the growthin fuel imports viz-a-viz non-fuel imports, since the formers effect onthe market is not discernible yet. However, an uptick in overall importsin 2H 2012 bodes well for the market, as does the de-growth indeposits after June 2012.

(100)

-

100

200

300

400

500

600

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

Monthly Deposits Flow and Stock Turnover

Change in Deposits (BDT bn)

Stock Market Turnover (BDTbn)


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Appendix: Sectors Stock Picks

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Tobacco & Footwear

The Tobacco industry in Bangladesh has an annual market sizeof ~135 billion. Tobacco spend/capita is BDT844/US$10.55 andconsumption 2.5 sticks/person per year. Market penetration in

Bangladesh is around 40%. Tobacco sales consist of 52%filtered cigarettes and 48% unfiltered varieties (local term: bidi).Bidi costs 1/6 the price of a low-end cigarette.

British American Tobacco (BATBC) is the only listed tobaccomanufacturer with about 99% market share in the high-end.BATBCs shareholding structure is as follows: 73% by the BATgroup; 11% by the Investment Corporation of Bangladesh(majority government-owned NBFI); and 16% free-float. Otherplayers in the tobacco industry are domestic conglomerates ofsignificant size: Dhaka Tobacco (under Akij Group) and AbulKhair Tobacco.

BATBCs low-segment market share increased from 20% in2006 to 60% in 2010. Net profits grew at double-digit rates in2006-11. Excises are high and const itute 11% of thegovernments tax revenue. Future profitability expected to bedriven by consumers upgrading to higher segments. Segmentsare classified as follows: high-end; medium end; low-medium;and low-end. BATBC has significant cash balance with minimalleverage.

Footwear industry generates annual sales of BDT 18.0bn or US$225.0mn. Footwear consumption is 0.8 pairs per capita per year. ata Shoe and Apex Adelchi are the only large players in an

otherwise fragmented industry. Bata has the largest market shareof ~20% and Apex ~5-7%. Bata has two manufacturing plants inTongi and Dhamrai with production capacity of 110,000 pairs/day.Apex has a production capacity of 15,000 pairs/day for export andanother 5000/day for domestic sales.

In Batas case, domestic sales contribute ~91% to revenue.Meanwhile, Apex is export-oriented with ~80.0% revenue comingfrom exports. Apex, however, plans to generate 40.0% fromdomestic sales by 2015.

The footwear market is poised to surpass historical growth ratesas churn increases with higher disposable income of thepopulation. This bodes well for Apexs re-purposing of export-quality footwear for domestic consumption while Bata shouldcontinue to do well with sustained focus on design and brandbuilding.

New entrants are also establishing operations encouraged by

industrys growth prospects. Pou Hung Industrial (Bangladesh)Limited owned by Pou Chen Group has set up a US$62.0mnfactory in the Karnaphuli Export Processing Zone (EPZ). Korea-based giant Youngone group has also set up a US$110mn shoefactory in the same EPZ with plans to increase their investment inthe coming years.

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Personal Care & Pharmaceuticals

Marico Bangladesh Limited is the largest listed company in theconsumer and household products space. They have a basket ofoils. Parachute, their flagship hair oil brand, has 50% marketshare of a total annual sales of a 100 million. Per capita

consumption of hair oil is 250 ml/year.

Marico has the ability to pass on a price increases, often bypacking lower volumes per unit of product sold. They are efficientat building brands and developing distribution networks. Theirniche is the grooming, health and wellness space within theconsumer products space. Parachute, for example, is made of100% herbal extracts whereas most of their competitors oils areblended. Parachute coconut oil is sold in India, Sri Lanka, andIndonesia.

Keya Cosmetics Limited is a key player in the cosmetics andconsumer products space. Its products include soap, shavingcream, toothpaste, with their flagship brand, Keya Beauty Soap, isone of the market leaders domestically. Keya Beauty Soap is alsoexported to India, Bhutan and the Middle East. In 2007-2011,Keyas sales doubled, reaching US$30.0mn with increasingoperating margins (CAGR 28% in the said horizon).

Despite backward linkage via acquisition of Keya Soap Chemicalsin 2010, raw materials account for 30% of costs, while exports are7.0% of revenue. In April 2012, Keya raised US$18.5mn through arights issue, to lower debt service obligations, which, until 2011,constituted 46% of assets. Keya is a relatively liquid stock, amongthe 20 most-traded of 2012 with an average daily turnover of US$0.78mn. Keya has a market cap of US$60.0mn and 66% freefloat.

Pharmaceuticals i s o ne o f t he f as tes t g row in g a nd m os ttechnologically-developed sectors in Bangladesh. The retail marketgrew at 17.2% annually in 2007-11, reaching US$1.0bn in 2011. Ofdrugs sold, generic to branded ratio is 85 to 15. Increasing life

expectancy, disposable income, information flow via mobileconnectivity and hospital sector penetration are growth drivers for thepharmaceuticals industry. As of 2011, average pharmaceutical spendwas about 3.4% of GDP/capita. Pharmaceutical exports constitute asmall share of the sectors business although it has increased from US$3.7mn in 2001 to US$50.4mn in 2011.

Square Pharmaceuticals is the largest pharmaceuticals company witha total revenue of BDT17.0bn and market share of 19.2% in 2010-11.Their nearest competitors are ncepta Pharmaceuticals and BeximcoPharmaceuticals with market shares of 9.1% and 8.6% respectively.Leading players enjoy elastic demand and can pass throughincremental costs on FX and inflation to consumers. Beximco Pharmasells its drugs to Southeast Asian and African countries and hasrecently entered the highly-regulated EU market to sell ophthalmicproducts. Renata, erstwhile Pfizer Bangladesh, and another leadingpharmaceutical player, exports to Sri Lanka.

The WTOs agreement on trade-related aspects of intellectual propertyrights (TRIPS) expires in 2016. Consequently, the 150-odd drugs

presently sold in the market without paying royalties may becomeexpensive. The medical profession and health care industry is thenlikely to resort to a rationalizing of prescription trends. Older off-patentdrugs may be brought back, and in rare cases, large players willsustain presence in export markets by sourcing domestically-producedAPI. There is however, a possibility of TRIPS being extended, so as toenable low-income countries like Bangladesh export of affordabledrugs to other low-income destinations in Africa.

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Telecommunications

The Bangladesh telecom industry has six operators in a highlycompetitive environment. Mobile subscriber penetration is at present~57-58%. Pre-paid customers are 90% of the market and sector

ARPU is around US$2.0. New customers, outside of urban zones,generate lower ARPUs. Drivers of industry growth will be increasingdispensable income, spread of wealth, availability of inexpensivemobile phones, and so forth. Grameenphone (GP) is the largest listed company on the DhakaStock Exchange and the only billion-dollar public company (MarketCapitalization of ~US$2.3bn). It has ~45% of market share countingdual SIMs and 38% on single SIMs. Their network covers 99% of thecountry.

GP is also the largest internet service provider (ISP) in the country,owing to its Edge internet services on mobile phones. The nextstage of growth for GP will come from 3G-based business. However,having paid market-share-determined 2G license renewal fees andundergone network swap for 3G, the business case for 3G is notimminent. It will depend on a cheapening of the internet, recoupinglicensing fees over time and availability of low-cost of 3G-enabledphones. GP has completed a year-long network swap to make it 3G-enabled.

Its primary competitors are gaining market share of late throughaggressive pricing, which is eroding the premium GP enjoyed onARPU. GP is presently focused on operational efficiency andproduct diversification after the headwinds of 2012 in the form of 2G-license-related payments, SIM-registration and 10-second pulse.

Bangladesh Submarine Cable Company (BSCCL) , incorporated inJuly 2008 and publicly listed in June 2012, operates the onlyinternational submarine cable connectivity in Bangladesh. BSCCL

is 74% government-owned and has 26% free-float.

The cable is 20,000km-long and crosses 17 landing points inSingapore, Malaysia, Thailand, Bangladesh, India, Sri Lanka,Pakistan, UAE, Saudi Arabia, Egypt, Tunisia, Italy, Algeria andFrance. The Bangladesh landing station is at Coxs Bazar. BSCCLis mandated to handle the submarine cable connectivity as amember of the SEA-ME-WE-4 (SMW-4) international submarinecable consortium. BSCCL has earned membership to the SEA-ME-WE-5 consortium as well which allow it to handle a secondsubmarine cable connectivity through the country, scheduled togo live in 2014.

The company provides bandwidth access to all the telecomoperators (e.g. IIG, IGW, mobile operators, ISP etc.) and with non-cash depreciation being the major expense item, it is able togenerate significant margins. In 2011, BSCCLs EBITDA Margin,Gross Margin, Operating Margin, and Profit Margin were 90%,84%, 73%, and 36%, respectively. Their business will be volumedriven and with internet penetration growth rate increasingexponentially, BSCCL is well poised to grow sustains highmargins.

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Cement

Cement is a growth sector in Bangladesh growing at 88% in2005-12 on low base of per capita consumption; multiplier effectof GDP growth; annual development program (ADP) spend.However, future growth rates ought to surpass historicalaverages given larger scale and count of infrastructure projectsin the pipeline, as well as affordable housing projects. Double-digit annual growth rates are in the offing 2013-21.

The sectors current installed capacity is 22 mmt and actualcapacity ~17 mmt. The industry uses a 95% to 5% mix ofPortland Composite Cement (PCC) to Ordinary Portland Cement(OPC). Per capita cement consumption is 78kg per capita,

compared with 150kg for India, world average of 260kg, andChinas 1000kg per capita (highest globally).

As of 1H 2012, consumption breakdown by retail : real estatedevelopers : public sector is 45% : 25% : 30%. The unit price isaround US$5.5 per bag. Clinker, the primary raw material, is~70% of production cost. Clinker imports exposes the sector toFX-volatility while lowering capacity utilization. CAPEX additionsare anticipated 2014 onwards.

The top five players and respective market share are ShahCement (14%); Heidelberg (11%); Holcim (8%); Meghna (8%)and Lafarge (~7%). *

*as of most recently available figure

Lafarge Surma Cement is the only exception to the sector in thatthey have backward-linkage. They have a limestone quarry inMeghalaya, India, from which they transfer limestone via a 17-kmconveyor belt to their production plant in Bangladesh. However,following a legal petition filed on grounds of environmentalconcerns, Lafarge was unable to access its limestone until theIndian Supreme Court ruled in Lafarges favor, after 17 months.Lafarge regained access to its quarry in Aug 2011. Other thancost savings from in-house clinker production, backward-linkagehedges Lafarge against oil price increases, which increasesimport costs on depreciating BDT. Lafarge, prior to operationaldisruption in most of 2010-11, earned 39% gross margins.

Heidelberg Cement is our top pick in the cement sector. It hadannual capacity of 2.1m tons as of 2011 with 30% additionalcapacity expected in 2012. Its flagship cement brands are Rubyand ScanCem. In 9M 2011, due to dollar rate depreciation, rawmaterial import costs (~48% of sales over the last five years),reduced gross margins by 7.2% YoY. However, Heidelberg wasable to pass through ~100% of the cost increase in 2012, andprices have held even as taka has appreciated against the dollar driving our estimates of ~20% gross margins.

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Building Materials

Linde Bangladesh , erstwhile Bangladesh Oxygen Company(BOC) , i s the leading industr ia l gas manufacturer inBangladesh. Lindes BD operations reports to Singapore. The

company operates in three segments: are gases, wielding,and electrode manufacturing. Lindes basket of gasescontains bulk gas, processed gas, and medical gas. Despiteexchange rate exposure translating to raw-material-importcosts to sales ratio of 3:10, Lindes gross margins grew 15% in2011, reflecting their significant pricing power. Our estimatesindicate higher growth rate for 2012, on BDT appreciation andsustained demand, and 190% growth by 2015. In the bulk,processed and medical gas segments, Linde is a clear marketleader with 40%, 80% and 70% share, respectively. Itscompetitors are local ship-breakers. Lindes gas prices are35% higher than in other markets Berger Paints , a 275-year-old company operating in SouthAsia for 65 years, is considered the pioneer of paint inBangladesh. Berger has a relatively stable market share of52% despite competition from Asian Paints and localmanufacturers. Berger has a band of prices for productsdepending on quality. On this band, grade A contributes 70%;

grade B 25%, and grades C and D ~5% to Bergers revenue.Bergers products are popular in the retail segment (residentialuse) and automobile workshops, although the industrialsegment at large is expected to drive future growth. Bergeralso exports to the seven sister states in north-east India.

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Contact Us

Mohammed Rahmat Pasha Chief Executive Officer [email protected] +88 01755 540040

Sajid Huq Amit DirectorStrategic Sales [email protected] +88 01730 727949

Saleh ChowdhuryAssistant Manager

Strategic [email protected]

m +88 01730 727946

BRAC EPL Strategic Sales 121/B Gulshan AvenueGulshan-2, DhakaBangladesh

bangladesh growth report 2013

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