The Future of Bangladesh Capital Markets

- Mamun Rashid Managing Director, Citigroup Global Markets Bangladesh Private Ltd.

Presentation at 3rd CSE Capital Market Fair, Chittagong

Executive Summary
Global Outlook
Recovery reflected in increasingly positive economic data - Jobless claims at 10 month low, homebuilding and factory output on the rise in the United States - Growing exports, increasing manufacturing orders and retail sales in Europe - Slowing contraction and relatively low unemployment in Japan Regional outlook is positive based on strong exports, domestic demand - 7.9% growth in China in Q2 2009. Industrial production up 12% YoY as of August09 - 6.1% growth in India in Q2 2009. Industrial production up 6.8% as of July09

Bangladesh Outlook
Bangladesh economy has been mostly resilient to global turmoil - GDP growth forecast to be 5.88% in 2009, comparatively strong in the face of global contraction - Low cost exports continue to be in demand - Strong remittance inflow from Bangladeshis abroad

Bangladesh Capital Markets

Capital markets continue strong performance - Subprime crisis has left little impact on Bangladesh markets - Market capitalization is above US$20bn in 2009 from US$10bn in 2007 - Average daily turnover is approximately US$75mm in 2009 from US$24mm in 2007

Opportunities and Challenges

Key opportunities for future growth - Institutionalization of market brings greater liquidity and lower volatility - Attracting large corporates for listing provides investors with viable investment options Challenges ahead - Retail dominated market resulting in higher volatility from speculation - Large, well reputed companies prefer to source funds from traditional bank finance against capital markets

Global Markets and Economic Outlook

Global Economic Outlook

The global economy is in the process of recovery with most major markets expected to grow in Q3 2009 United States
Increasingly positive economic data indicates the US economy is beginning to grow - Jobless claims are on the decline, falling to 10 month lows. Unemployment remains high at 9.8% - Factory output and homebuilding are on the rise, wealth losses have declined - The S&P 500 has gained 57% since touching a 12 year low in March - Consumer spending is expected to remain slow, growing 1% in Q3 after gaining 2.4% in the previous quarter

Europe
Mixed activity data in the European economies outweighed by stronger exports, rising sentiment indicators - Rising incoming orders signal manufacturing recovery in industrial powerhouse Germany - France is expected to extend growth into Q3, despite rising unemployment (9.1% in Q2) - Rising exports, housing, retail sales and business surveys indicate returning growth in the UK economy

Japan
Election of new government in September 2008 expected to slow recovery as new policies are implemented - Real GDP declined 8.4% (YoY) in Q1 2009, 7.2% (YoY) in Q2 2009 - Contraction is expected at a slowing rate till Q1 2010 Core CPI remained stagnant in Q1 2009, falling 1.0% in Q2 2009 Unemployment rate rose from 4.4% in Q1 2009 to 5.2% in Q2 2009

Source: Citigroup Research, Bloomberg Bloomberg data as reported in October 2009

Regional Economic Outlook

Export driven growth and recovery momentum in US and Europe signal V shaped recovery in Asia Pacific China
Recovery continues at fast pace, driven by rising exports and strong domestic demand - Real GDP grew 6.1% in Q1 2009, 7.9% in Q2 2009 Industrial production rose 12.3% YoY as of August09 - Expected to grow 16% by the end of the year Minor increase in unemployment rate - Urban unemployment grew from 4.3% in Q1 to 4.5% in Q2 2009

Shanghai Composite Index

India
GDP grew 6.1% in Q2 2009, following 5.8% growth in Q1 Rainfall shortage expected to hit agricultural production Industrial production saw robust growth of 8.2% and 6.8% in June and July 2009 respectively 15% rise in food prices resulted in CPI growing 11.9% YoY Exports declined 27.7% YoY till July 2009 - Exports contracted 10 months in a row

BSE Sensex

Source: Citigroup Research, Yahoo Finance

Index graphs as of October 9,,2009

Bangladesh Economic Outlook

GDP Growth (YoY%) Remittance inflow has been resilient to global turmoil - Bangladeshis abroad sent home US$887.9mm in September09 Inflation continues to decline - Fell to 6.04% in July09, from 6.66% in June09 and 8.90% in December08 GDP growth forecast has been revised downwards to 5.88%, compared to 6.19% in the previous fiscal year Exports have been relatively sheltered due to low cost nature of Bangladeshi products - Recovery in the US and Europe, the major buyers, expected to boost export earnings

Inflation (YoY %)

Export as a % of GDP

Remittance by Region

Source: Citigroup Research, Bangladesh Bank

Bangladesh Capital Markets

Bangladesh Capital Markets Performance

Performance of Local Indices (2009YTD)
120% 116% 112% DS-GEN DSE-20 DSI

IPO and Direct Listing Issuance (YTD)

Rebased to 100%

108% 104% 100% 96% 92% 88% 84% 80% 76% 1/1/2009 3/12/2009 5/22/2009 8/1/2009 10/11/2009

Daily Trading Volume Graph

Key Commentary
Local market has been relatively sheltered from the recent global meltdown in 2008 Market was volatile in early 2009 but has stabilized with high turnover and market capitalization FII interest to explore new front

Impressive growth in liquidity in recent years

Average Daily Turnover increased from US$24mm in 2007 to US$ 75mm in 2009 Highest recorded liquidity of US$166mm on July 2, 2009

Bangladesh Relative Liquidity

Market Capitalization of DSE in 2009 has been around US$20 bn, up from about US$10 bn in 2007

15 new issues in 2008 with 3 direct listings

7 new issues completed in 2009 Recently completed largest IPO in Bangladesh history

Source: Dhaka Stock Exchange website as of October 2009

Recent Bangladesh Issue Performance

There have been strong deal issuances in 2008 and 2009 despite weak global market conditions. Most of these have seen strong price performance since listing.
Total Subscription (US$mm) N/A Price Perf. (First Day Closing Price from Offer) N/A Price Perf. (+1 Week from Offer) N/A

Subscription Date Oct 2009

Issuer Grameenphone

Type of Transaction Size (US$mm) IPO 70

Over Subscription N/A

Aug 2009
Jun 2009 May 2009 Apr 2009 Jan 2009 Jan 2009 Nov 2008 Oct 2008 Oct 2008 Oct 2008 Oct 2008 Oct 2008 Sep 2008

Marico Bangladesh Limited

EBL First Mutual Fund Rupali Life Insurance Co. Ltd Asia Insurance Ltd. Bay Leasing Prime Finance 1stM.F. BSRM Steel Shinepukur Ceramics ACI Formulations Republic Insurance Maksons Spinning Mills National Housing and Finance Standard Insurance

IPO
IPO IPO IPO IPO IPO IPO Direct Listing Direct Listing IPO IPO IPO IPO

3.9
2.9 0.7 1.3 3.6 1.4 2.9 5.0 1.3 2.2 1.2 0.7 1.3

47.7
50.7 58.3 47.5 87.0 41.4 72.5 NA NA 52.8 27.6 54.6 27

13x
18x 89x 36x 24x 28.6 x 19.6 x NA NA 24.0 x 23.0 x 78.0 x 20.55 x

291%
251% NA NA 214% 616 % 430 % 13 % 10 % 185 % 320 % 830 % 150 %

355%
NA NA NA 206% 515 % 400 % (26 )% (24 )% 170 % 440 % 740 % 130 %

Sep 2008
Aug 2008 Aug 2008 July 2008 July 2008 June 2008 June 2008 Mar 2008 Average

Northern General Insurance

Takaful Islami Insurance Summit Alliance Port First Security Bank Titas Gas Grameen One Scheme2 ICB NRB Mutual Fund2 Delta BRAC Housing

IPO
IPO IPO IPO Direct Listing IPO IPO IPO

1.3
1.3 1.5 16.6 31.0 2.2 14.5 1.5 4.7

27
30 36 72 NA 39 58 75

20.62 x
23.22 x 25 x 4.3 x NA 17.5 x 4x 50 x

162%
237 % 779.3 % 92 % 50 % 330 % 47 % 1,450 % 340 %

38%
316 % 985 % 197 % 39 % 400 % 172 % 1,260 % 351 %

Source: Dhaka Stock Exchange. As of October 2009 Note: In case of direct listing, refer to as offer price.

Bangladesh Issuance Overview

Several private and public sector issuances are expected in 2009.

Visible Transaction Pipeline

Private Sector (IPOs)
Company Dacca Dyeing Asia Insurance Rupali Insurance Keya Cotton Mills Malek Spinning RAK Ceramics Vantage Electronics IDFC Ltd. Fareast Finance & Investment GSP Finance Company Sector Industrial Insurance Insurance Industrial Textiles Ceramics Manufacturing Financial Institutions Financial Institutions Financial Institutions Expected Size (US$mm) 2.43 1.30 NA NA NA NA NA 1.01 1.03 2.17

Public Sector (Direct Listings)

Issuer Jamuna Bridge BSRS Liquid Petroleum Gas Bakhrabad Gas Gas Transmission Company Pashchimanchal Gas Company Sector Service Financial Oil and Gas Oil and Gas Oil and Gas Oil and Gas

Expected Size (US$mm)

71.4 2.9 NA NA NA NA

Rupantarita Prakritik Gas Company

Sylhet Gas Company Bangladesh Gas Fields Company Bangladesh Petroleum Corporation BAPEX Rural Power Company BTCL Teletalk Biman Bangladesh Airlines

Oil and Gas

Oil and Gas Oil and Gas Oil and Gas Oil and Gas Fuel and Power Telecom Telecom Airlines

NA
NA NA NA NA NA NA NA NA

Labaid Cardiac Hospital

Oman Bangladesh

Healthcare
Financial Institutions

2.54
1.85

Capital Markets Opportunities and Challenges

Bangladesh Capital Markets The Future

Institutionalization of the Market We expect to see more institutional investors bringing long term commitment and liquidity to the market - Longer investment horizons reduce market volatility - Institutional investment strategies are fundamental focused rather than speculative

Listing fundamentally sound, well-reputed companies With the improvement of corporate governance, we can attract sound corporates to come to capital markets - Quality scrips provide liquidity and motivation for educated investors to participate in capital markets - Listing of large, reputable corporates attracts foreign investments, increases liquidity - Introduction of new scrips in different sectors provides investors with broader options - Recent addition of telecom sector likely to generate interest among other large cap companies to list - Inclusion of well reputed, large cap companies will reduce ability of select investor syndicates to manipulate prices

Flotation of Mutual Funds

Strong pipeline for listing of mutual funds (US$300mm in mutual funds expected to enter the market by mid 2010) - Provide retail investors with safer, indirect market access, preventing wealth & capital losses - Reduces dependency on retail investors, allowing institutions to bring commitment and stability to the market - Bring much needed market stability that only institutional investors can provide

Facilitation of Private Equity Investments Recent introduction of certain foreign private equity investors in Bangladesh - Provide stable flow of capital given mid to long term investment horizon of PE investments - High risk hurdles and selective investments direct PE funding to quality local corporates

Inclusion in Global Indices Bangladeshi companies are now included in global indices - The Dow Jones SAFE Index already includes 5 Bangladeshi banks and a power company - Inclusion of high quality scrips in the index can result in inclusion of our index in global indices such as MSCI Emerging Markets, etc

Recent Regulations and Opportunity Space

Strengthening of Surveillance
Following the stock market crash of 1996, measures have been taken to prevent future incidents of the sort - Constant market surveillance by the SEC - Increasing standards of corporate governance - Demat Trading - Focus on investor education establishment of Capital Markets Institute

Introduction of BASEL II Guidelines

Introduction of BASEL II guidelines by Bangladesh Bank likely to encourage banks to raise capital through debt instruments in 2010 Issuance of debt and equity by banks through capital markets likely to generate increasing liquidity

Introduction of Book building / Price Discovery

Introduction of book building is a big step towards developing Bangladesh capital markets - Book building reduces risk of undervaluation for issuers - Ensures fair pricing by factoring in demand, likely to encourage listing of large, well-reputed companies - SEC qualifying conditions for book-building set certain criteria for companies to be eligible

Infrastructure Development through Capital Markets

Focus on infrastructure development may see Government of Bangladesh (GoB) seek capital markets as an avenue for financing - GoB plans to issue BDT 5.0 bn (US$72mm) in securitized bonds to fund Bangabandhu Bridge - Cabinet approval for the issue of BDT 42 bn (US$650mm) in bonds to fund Padma Bridge likely - Plans to construct second bridge over Padma at a cost of US$1.89bn signals potential financing needs - Further GoB funding requirements arise from needed development in the power sector and development - of roads and highways

Challenges Ahead
Information Asymmetry Access to credible information is restricted - Retail investors lack dedicated investment process infrastructure - Forced to look to brokers for advice that may consist of market rumors - Syndicate of large investors manipulate the market through price inflation, pump and dump strategies Supply Side Constraints Lack of fundamentally sound scrips as companies prefer traditional bank finance to capital markets - Need to encourage listing of good scrips in the market - Reducing supply side constraints generates liquidity, reducing scope for price manipulation Lack of Professional Portfolio Management Ratio of institutional-to-retail investors remains low - Institutional investors bring stability through non speculative long term investments - Listing of more mutual funds can be a starting point to increasing institutional activity Valuation Disparity Value of scrips is subject to speculative trading rather than sound fundamentals, resulting in market volatility - Education of investors, overall development of capital markets through time can address this issue Lack of a Formal Debt Market Bangladesh does not have established secondary debt market - Markets are unable to provide short term financing solutions to corporations, i.e., commercial paper - Listing of debt instruments from quality issuers and institutional trading can increase activity - Introduction of BASEL II guidelines by Bangladesh Bank likely to encourage banks to raise capital through debt instruments in 2010 Quality Research and Analysis Development of quality equity research in the country is yet to match the growth of local capital markets - Quality research increases investor awareness, reducing speculative trading and market volatility Central Co-ordination of Regulators Top down co-ordination between Bangladesh Bank, SEC and related bodies would: - Streamline regulatory processes - Reduce time required for quality issuers and new capital markets products to reach market

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