cheung kong infrastructure: what’s...

See important disclosures, including any required research certifications, beginning on page 54.

21 July 2015

Cheung Kong Infrastructure: what’s cooking? Q&A on why we think a CKI/PAH merger should be on the menu for the CK Group.

Cheung Kong Infrastructure: what’s cooking? 21 July 2015

Q1 How will CKI celebrate its 20th birthday? 1

Q2 Why is there investment value to be unlocked in CKI and PAH? 5

Q3 How would a CKI/PAH merger unlock value for CK Group? 9

Q4 What would the role of CKI/PAH be in CK Group’s Chapter 3? 15

Appendix 1: The immediate benefits of PAH’s spin-off of HEC in 2014 25

Appendix 2: What has happened since the HEC spin-off? 29

Appendix 3: Would a yieldco create value for CKI in the long term? 35

Company section: 41

Cheung Kong Infrastructure 41

Power Assets 45

HK Electric Investments 48

Please also see:

Cheung Kong/Hutch’s Bold Move: Q&A on the prospect of the group becoming a global play,

with a valuation to match

HK Electric Investments: Initiation: yield appeal may wane

9 February 2015 20 February 2015

Jonas Kan, CFA (852) 2848 4439 ([email protected]) Scott Chui (852) 2848 4443 ([email protected])

Dennis Ip, CFA (852) 2848 4068 ([email protected])

Contents

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/CheungKongHutchsBoldMove_150209.pdf#page=1

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/HK_Electric_Investments_150220.pdf#page=1


Contributing Daiwa Analysts:

Dennis Ip, CFA (852) 2848 4068

[email protected]

Scott Chui (852) 2848 4443

[email protected]

Jonas Kan, CFA (852) 2848 4439

[email protected]

If we were Mr. Li, what would we do?

On 3 June 2015, led by Hong Kong tycoon Li Ka-shing, the reorganisation of Cheung Kong Holdings (CKH) and Hutchison Whampoa (HWL) was completed — a move we see as unlocking shareholder value by streamlining the property and non-property businesses.

The next question is this: will Mr. Li further unlock the value of the assets under the group’s non-property investment vehicle, CK Hutchison (CKHH), and, if so, how might he do it?

In our view, a merger of Cheung Kong Infrastructure (CKI) and Power Assets (PAH) is likely, and would mark the beginning of what Jonas Kan, Daiwa’s Head of Hong Kong/China Property Research, refers to as Chapter 3 in the development of Cheung Kong Group (CK Group). Jonas sees this third chapter being a phase of asset realisation following completion of the business-building phase in 1990-2010.

In our view, a merger of CKI and PAH (Chapter 3.2 for CKI), after the spin-off of Hong Kong Electric Company (HEC) (Chapter 3.1 for CKI), would have the following immediate benefits:

1. Maximise the value of the existing overseas energy infrastructure assets co-owned by PAH and CKI.

2. Support a potential rerating of CKI, from its prevailing 14x 2016E PER (vs. PAH’s 18x).

3. Make more efficient use of the HKD69bn cash raised from the HEC spin-off, given CKI has more M&A opportunities open to it than PAH.

4. The Li family would benefit from a merger, given their effective stake in PAH’s HKD69bn of cash would rise from 8.9% to 13.8-14.3% (assuming CKI offers 1.15-1.27 new shares for each PAH share).

We believe a merger will be only the first step in Mr. Li’s move to unlock the value of the group’s global infrastructure investments. In this report, we look at what CKI, which listed on 17 July 1996, might be celebrating in the year of its 20th anniversary.

And we ask whether it could be the world’s biggest global infrastructure company by the time of its 30th birthday in 2026.

Dennis Ip, HK/China Power, Utilities, Renewables & Environment (PURE) Research


- 1 -

Question 1

How will CKI celebrate its 20th

birthday?


- 2 -

From its humble origins as a plastics manufacturer in the 1950s, CK Group has grown to become a global conglomerate with a footprint in 6 major sectors: property, ports, retail, energy, telecom and infrastructure. According to Jonas Kan, Daiwa’s Head of Hong Kong and China Property Research, the group’s development should be seen in terms of 3 chapters: Chapter 1 (1971-1992): Emergence as the largest business group in Hong Kong Chapter 2 (1993-2014): Massive business building on a global scale revolving around 6 business sectors, and Chapter 3 (2015 onwards): A period of asset realisation and building strong market positions in its core businesses.

The 3 chapters of the CK Group Chapter Period Remarks Focus

Chapter 1 1971-1992 Emergence as the largest business group in Hong Kong. Hong Kong

Chapter 2 1993-2014 Massive business building on a global scale, creating a global conglomerate with significant market positions in 6 industries while establishing itself as a strong residential property developer in Hong Kong and China, and one of the largest owners of hotel rooms in Hong Kong.

Global

Chapter 3 2015 and beyond

Asset realisation and creation of global players in at least 6 major industries (ports, retail, property and hotel, energy, infrastructure and telecom).

Global aspirations

Increasingly recognised by the stock market as a global company with at least 6 core businesses, as well as a veteran business builder and investor, savvy at capitalising on opportunities related to mis-pricing of its group companies.

Greater attention paid to gain market recognition as a premier global corporation

Continuous group re-organisation and M&A to unlock and create value.

Using the 2 listed vehicles as the flagships for expanding its core businesses.

Source: Daiwa

We look at Chapter 3 in terms of the group crystallising the businesses it built up during Chapter 2. On the infrastructure side, since establishing Cheung Kong Infrastructure (CKI; 1038 HK, Buy [1]) in 1996, Cheung Kong/Hutchison has grown CKI by injecting into it Hong Kong Electric (HEC) (later renamed Power Assets [PAH] [6 HK, Outperform (2)]), such that CKI has a sufficient capital base to acquire overseas infrastructure (electricity, gas and waste-to-energy, etc) by co-investing with PAH. Prior to the reorganisation of Cheung Kong Holdings (CKH, formerly 1 HK) and Hutchison Whampoa (HWL, formerly 13 HK) into Cheung Kong Hutchison [CKHH, now 1 HK, Buy (1)] and Cheung Kong Property (CKP, now 1113 HK, not rated) on 3 June 2015, the infrastructure arm completed a spin-off from PAH to unlock the value of its HEC business, to form Hong Kong Electric Investment (HKEI, 2638 HK, Hold [3]) as a separate listed share stapled unit, on 29 January 2014. This move, which we name Chapter 3.1, has resulted in a 9% (or HKD14bn) fair value enhancement for PAH, recycled HKD56bn of cash, generated a HKD52.9bn disposal gain for PAH, and reduced its exposure to Hong Kong electricity assets for which the permitted return could be cut from 9.99% upon the next revision of the Scheme of Control (SoC) agreement (2023). See Appendix 1 for the immediate effects of the spin-off of 50.1% of HEC. However, after two rounds of PAH’s spin-off of HEC, CK Group now faces 2 dilemmas:

1. PAH has fewer M&A opportunities than CKI yet has HKD69bn in cash, a situation that is destroying its ROE (from 16.8% in 2013 to 6.2% in 2015E) and implies a HKD5bn opportunity cost for cash that used to earn a 9.99% SoC return rather than 1.5% interest at the bank.

2. CKI has more M&A opportunities, given its board is targeting infrastructure asset classes that are not limited to energy (gas, power), unlike PAH, but has only HKD7bn in cash and is subject to dilution risk.

Most importantly, though PAH’s chairman, Canning Fok, stated during HKEI’s IPO EGM that PAH might need to pay a special dividend, we believe this is not an option favoured by the Li family (with only a c.8.9% effective stake in PAH). For more discussion of the shortcomings of PAH and CKI as standalone listed companies following the HEC spin-off, see Appendix 2.

Why a CKI/PAH merger is likely to be the next move for CK Group


- 3 -

Therefore, we argue that the next reorganisation on the menu could be a merger of CKI and PAH, which we refer to as Chapter 3.2. Following such a move, we believe the 19-year-old global infrastructure vehicle would have a strong balance sheet (HKD76bn cash) to grow further its overseas infrastructure assets (Chapter 3.3). Thereafter, we would expect another corporate restructuring, whereby CKI, with the establishment of a yieldco, would be a growing dividend cow, ideally one controlled directly by the Li family (Chapter 3.4). From 1996-2015, in order to grow its asset base, CKI needed group companies to co-invest in overseas assets. During that time, its market capitalisation grew 7-fold from c.USD2bn to USD19bn. We believe that a CKI/PAH merger could pave the way for it to become one of the largest global infrastructure companies in the world by the time of its 30th birthday, ie, 2026. There is a Confucian saying: “A man should stand on his own feet by the time he is 30 years of age (三十而立).” And we would not be surprised to see CKI end up with a market capitalisation of USD50-100bn while delivering a growing dividend stream to its father, Mr Victor Li, in the years to come.

Our thoughts on CKI’s development Chapter Period Action Rationale

Chapter 3.1 29-Jan-2014 Spin-off of HEC under PAH To unlock the value of the electricity business, which faces the risk of its SoC returns being cut after 2023.

Chapter 3.2 Short term (by 2016, CKI’s 20th birthday)

Merger of CKI and PAH To transfer the HKD69bn of cash recycled through PAH’s spin-off of HKE. In the meantime, CKI would be re-rated to PAH’s current valuation while having a larger business and capital base.

Chapter 3.3 Medium term CKI continuously acquires overseas infrastructure assets

Armed with a strong balance sheet (HKD76bn of cash) post its merger with PAH, CKI pursues overseas infrastructure asset M&A while relying less on group companies’ support going forward.

Chapter 3.4 Long term

(by 2026, CKI’s 30th birthday)

Yieldco set up after deploying the HKD76bn of cash on overseas M&A

The yieldco could lower CKI’s cost of equity, allowing it to pursue lower-return projects while earning a fair real return.

Re-organisation of CKI, whereby it is controlled directly under the Li family rather than CKHH

CKI is favoured by the Li family, given infrastructure assets are regulated and so offer defensive earnings and dividends. Therefore, CKI’s valuation should be higher than that of its parent, CK Hutchison. A directly controlled CKI under the Li family would also offer more visibility on dividends and buybacks for the family.

Source: Daiwa

-

0.50

1.00

1.50

2.00

2.50

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

July-96 July-99 July-02 July-05 July-08 July-11 July-14 July-17 July-20 July-23 July-26

Dividend per share - RHS Market capitalisation - LHS

CKI’s estimated market cap if it were to merge with PAH:USD35bn

Star t of Chapter 3:

2014.1.29 – spin-off of HK

Electr ic under PAH

(Chapter 3.1)

1996.7.17 – Listed on HKEx

Chapter 2:

co-investment in over seas

infr astr uctur e assets with gr oup

companies PAH and CKG

Medium ter m – CKI

continuously acquir es over seas

infr astr uctur e assets

(Chapter 3.3)

Long ter m – yieldco is set up

after spending the HKD76bn

cash on over seas M&A

Long ter m – r eor ganisation of

CKI , wher eby it is contr olled

dir ectly by the Li family, r ather

than CKH utchison (Chapter

3.4)

Shor t ter m (2015-16) –

Mer ger of CKI and PAH

(Chapter 3.2)

(USDm) (HKD/share)


- 4 -


- 5 -

Question 2

Why is there investment value to be

unlocked in CKI and PAH?


- 6 -

We highlight 3 potential positives from a CKI-PAH merger: 1) it would maximise the value of the existing overseas assets co-owned by CKI and PAH, 2) it could lead to a rerating of CKI from its current 14x 2016E PER (versus PAH’s 18x), given the potential increase in its free float and elimination of its holding-company discount, and 3) it would clear the way for the cash raised from the spin-off of HEC to be used more efficiently by CKI, whose strategy encompasses all infrastructure assets, as opposed to PAH, with its remit of energy-related infrastructure assets only.

In forward PER terms, CKI has traded at average discounts of 15% to PAH and 24% to peer CLP Holdings (not rated) since 2009, despite having a superior EPS CAGR of 7.5% for 2009-15E (2.4% for PAH, 4.6% for CLP) and being more active in M&A (CKI’s M&A activity for 2014 to January 2015 totalled HKD14bn for 3 deals; PAH’s totalled HKD5bn for 1 deal co-invested with parent CKI). We attribute CKI’s historical valuation discount to its smaller market cap (10.7% below CLP’s), lower free float (61-66pp lower than its peers’) and thin trading volume (56-68% lower than its peers’). Hong Kong utilities: comparison of market cap, free float, trading volume and forward PER

Hong Kong utilities: forward PER comparison

CKI PAH CLP

Market cap (USD m) 18,759 18,272 21,010

Premium over CKI -3% 12%

Free float 24.11% 61.12% 71.46%

Premium over CKI 154% 196%

Free float market cap (USD m) 4,522 11,167 15,015


3M average trading volume (USD m) 15.21 23.66 25.59


Current forward PER 14.1x 17.8x 15.0x


Source: Company, Bloomberg, Daiwa

Source: Bloomberg, Daiwa forecasts Note: Data for CLP is Bloomberg consensus

Hong Kong utilities: market cap and free float

Hong Kong utilities: 3-month average trading volume

Source: Company, Daiwa


7

14

21

28

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

(x )

CKI PAH CLP

18,759 18,272

21,010

24.1%

61.1%

71.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

16,500

17,000

17,500

18,000

18,500

19,000

19,500

20,000

20,500

21,000

21,500

CKI PAH CLP

(USDm)

0

10

20

30

40

50

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

(USDm)

CKI PAH CLP

Why is there investment value to be unlocked in CKI and PAH? (Chapter 3.2 assuming a merger)

CKI: cheap valuation due to low market cap, free float, and trading liquidity, plus holding-company discount


- 7 -

Following PAH’s spin-off of HEC, the earnings profiles of CKI and PAH are broadly similar, as the two have been co-investing in overseas assets, such as UKPN, Wales & West Utilities, Northern Gas, Seabank Power, AVR and the recently privatised Envestra. On this basis, we believe CKI’s 14x forward 2016E PER represents an unjustified discount to PAH’s 18x. Meanwhile, PAH has arguably become a redundant investment vehicle armed with a HKD69bn cash pile that is missing out on 8.5pp of yield (assuming it is now earning a bank interest rate of 1.5% rather than the 9.99% return under the SoC agreement). PAH and CKI: overview of overseas assets

Assets name Countries Assets type CKI's stake

Company classification

PAH's stake

CKI's effective stake

CKI's effective stake after merging with PAH


HK Electric Investment HK Integrated Hong Kong power generation, distribution and transmission

0.00% NA 33.37% 12.97% 33.37% Associate

Seabank Power UK Power plants 25.00% Associate 25.00% 34.72% 50.00% Associate

Northern Gas Network UK Regulated gas distribution 50.00% Subsidiary 50.00% 69.44% 100.00% Subsidiary

UK Power Network UK Regulated power distribution 40.00% Associate 40.00% 55.55% 80.00% Subsidiary

Northumbrian Water Group UK Regulated water utilities 40.00% Associate 0.00% 40.00% 40.00% Associate

WWU UK Regulated gas distribution 30.00% Associate 30.00% 41.66% 60.00% Subsidiary

Eversholt UK Rolling-stocks leasing 50.00% Associate 0.00% 50.00% 50.00% Associate

Aqua-tower Australia Regulated water utilities 49.00% Associate 0.00% 49.00% 49.00% Associate

Envestra Australia Regulated gas distribution 44.98% Associate 27.51% 55.67% 72.49% Subsidiary

Victoria Power Networks Australia Regulated power distribution 26.99% Associate 27.93% 37.85% 54.92% Subsidiary

SA Power Networks Australia Regulated power distribution 26.99% Associate 27.93% 37.85% 54.92% Subsidiary

Barra Topco Australia Regulated power transmission 100.00% Subsidiary 0.00% 100.00% 100.00% Subsidiary

Wellington Electricity New Zealand Power plants 50.00% Subsidiary 50.00% 69.44% 100.00% Subsidiary

EnviroWaste New Zealand Waste collection 100.00% Subsidiary 0.00% 100.00% 100.00% Subsidiary

AVR The Netherlands Waste-to-energy 35.00% Associate 20.00% 42.77% 55.00% Subsidiary

Stanley Power Canada Power plants 50.00% Subsidiary 50.00% 69.44% 100.00% Subsidiary

Park'N Fly Canada Car park operation 50.00% Associate 0.00% 50.00% 50.00% Associate

Power plants in China China Power plants 0.00% NA 100.00% 38.87% 100.00% Subsidiary

Toll roads and bridges in China China Toll roads 100.00% Subsidiary 0.00% 100.00% 100.00% Subsidiary

Ratchaburi Power Thailand Power plants 25.00% NA 0.00% 25.00% 25.00% Associate

Source: Companies, Daiwa research Note (1): Highlighted projects are acquisitions completed since the spin-off of HEC on 29 January 2014 Note (2): CKI, PAH and ultimate parent CKH privatised Envestra on 5 September 2014, with CKI increasing its stake from 17.47% to 44.98% and PAH and CKH each holding a 27.51% stake

PAH and CKI: earnings distribution by market (2016E), after 2 rounds of HEC spin-offs

PAH

CKI

Source: Companies, Daiwa forecasts

HK20.9%

Australia13.1%

UK59.8%

Mainland China3.2%Canada, New

Zealand and others3.1%

HK8.7%

Australia11.9%

UK70.3%




- 8 -


- 9 -

Question 3

How would a CKI/PAH merger

unlock value for CK Group?


- 10 -

PAH: more M&A, more efficient use of HKD69bn of cash Based on the current market value of PAH, we estimate CKI would have to issue 1.50-1.65m of new shares to PAH’s minority shareholders (61.13%), assuming a 0-10% merger premium. We believe the minority shareholders would likely accept a merger proposal, since a merger would give PAH’s shareholders more exposure to M&A opportunities, and carry the promise of a more efficient use of the HKD69bn of cash, which would enhance its ROE. CKI: improved free float, bigger market cap, HKD69bn of cash for M&A without need for equity financing A merger of CKI and PAH would theoretically create a global infrastructure giant with a HKD280bn market cap (c.USD35bn). Apart from the elimination of the holding-company discount, CKI’s current shareholders would benefit from a merger through a HKD130bn market capitalisation enhancement, with the free float increasing from 24.33% as at 20 July 2015 to 52.57-54.28%. As a result, we believe CKI’s 2015E PER could be rerated from 16x to 19x. By way of comparison, its local peers are trading at the following 2015E PERs currently: PAH (19x), CLP (15x) and HKCG (23x); and its global utilities peers have the following 2015E PER multiples: United Utilities (UU LN; 20x), Duet Group (DUE AU; 30x), and Ausnet Services (AST AU; 17x). We would expect a rerating to flow from the likely doubling of market of CKI’s market cap, together with an enhanced share trading volume. At the same time, CKI would inherit HKD69bn of cash from PAH, allowing it to pursue further M&A opportunities without the need for equity financing. The Li family: HKD69bn in cash closer to the family. Through a merger with PAH, CKI would inherit the HKD69bn of cash from PAH, with the Li family’s effective stake in this sum rising from 8.87% (30.15% x 75.67% x 38.87%) to 13.79-14.30% (30.15% x 45.72-47.43%). In the case of CKI paying a special dividend, the Li family would enjoy a c.5pp higher stake in the dividend. Overview of Li Ka-shing’s Hong Kong-listed assets following reorganisation of CKH and HWL, and merger of CKI and PAH

Source: Daiwa research

The Li family

Cheung Kong

(Holdings)

(1 HK)

Hutchison

(13 HK)

CKI

(1038 HK)

Power Assets

(6 HK)

43.42%

49.97%

(Effective stake: 21.70%)

75.67%


38.87%


The Li family

CK Hutchison

(1 HK)

CKI

(1038 HK)

Power Assets

(6 HK)

30.15%

75.67%


38.87%


CK Property

(1113 HK)

30.15%

Before CKI merges with PAH

The Li family

CK Hutchison

(1 HK)

CKI + Power

Assets

30.15%

45.72-47.43%

(Effective stake: 13.79-14.30%)

Before reorganising Cheung Kong and HutchisonAfter reorganising Cheung Kong and Hutchison

After CKI merges with PAHAfter reorganising Cheung Kong and Hutchison

Before 9-June-2015 Current Our thoughts

How PAH’s privatisation could unlock value for CKI, PAH, CKHH and the Li family


- 11 -

Positive impact on PAH, CKI, CKHH and the Li family of a CKI/PAH merger

PAH

More exposure to M&A opportunities as the target assets are not limited to energy projects

More efficient use of its HKD63bn cash to enhance its ROE from 7% to 14-17%

Enhancement of its market capitalisation from c.HKD150bn (or c.USD19bn) to c.HKD280bn (or c.USD35bn)

CKI

Elimination of the holding company discount

Enhancement of its market capitalisation from c.HKD150bn (or c.USD19bn) to c.HKD280bn (or c.USD35bn)

Increase of its free float from 24.33% to 54-56%

Potential forward-PER rerating from 14x to 19x

Transfer of the HKD69bn cash from PAH to CKI for further M&A, without the risk of equity dilution

Li family HKD69bn in cash is closer to the family, from an 8.87% effective stake to c.14% effective stake

CKHH Effective stake of CKI would drop from 75.67% to 45.72-47.33%, and hence it would not need to consolidate the debt under CKI as CKI would become an associate

Source: Daiwa research

CKI: financial impact of potential merger with PAH

(Unit: HKDm unless otherwise stated)

Merger premium 0.0% 5.0% 10.0%

PAH/CKI share-price ratio 1.15 1.15 1.15

CKI shares offered for each PAH share 1.15 1.21 1.27

PAH's total number of shares 2,134 2,134 2,134

PAH's free float percentage 61.13% 61.13% 61.13%

PAH's number of shares to be merged 1,305 1,305 1,305

CKI's new issued number of shares 1,500 1,575 1,650

CKI's number of shares before merging with PAH 2,520 2,520 2,520

CKI's number of shares after merging with PAH 4,020 4,095 4,170

CKI's dilution 37% 38% 40%

Free float impact on CKI

CK Hutchison's number of share in CKI before merging with PAH 1,907 1,907 1,907

CK Hutchison's shares of stake in CKI before merging with PAH 75.67% 75.67% 75.67%

CKI's free float before merging with PAH 24.33% 24.33% 24.33%

CK Hutchison's share of CKI after merging PAH 47.43% 46.56% 45.72%

CKI's free float after merging PAH 52.57% 53.44% 54.28%

EPS impact on CKI

2015E CKI's recurring earnings before merging with PAH 10,001 10,001 10,001

2015E PAH's recurring earnings before being merged with CKI 7,711 7,711 7,711

Additional PAH's earnings for CKI 4,714 4,714 4,714

2015E CKI's recurring earnings after merging with PAH 14,715 14,715 14,715

2015E CKI's EPS before merging with PAH 3.97 3.97 3.97

2015E CKI's EPS after merging with PAH 3.66 3.59 3.53

2015E CKI's EPS dilution after merging PAH -8% -9% -11%

Valuation impact on CKI

PAH's current market cap (HKDbn) 148 148 148

PAH's 2015E PER 19.2x 19.2x 19.2x

PAH's merger 2015E PER valuation 19.2x 20.1x 21.1x

CKI's current market cap (HKDbn) 149 149 149

CKI's 2015E PER 14.9x 14.9x 14.9x

CKI's 2015E PER after merging with PAH 19.0x 19.0x 19.0x

CKI's market cap after merging with PAH 280 280 280

CKI's market cap enhancement after merging with PAH 130 130 130

CKI's implied share price after merging with PAH (HKD/share) 69.55 68.27 67.05

Daiwa’s target price for CKI 68.00 68.00 68.00

CKI's current share price (HKD/share) 59.20 59.20 59.20

CKI's share price upside 17% 15% 13%

Source: Company, Daiwa estimates


- 12 -

One key issue regarding the merger of PAH and CKI is that it would significantly increase CKI’s net-debt-to-equity gearing, given CKI would need to consolidate the off-balance sheet debt associated with merging the minority stakes of the overseas assets it co-owns with PAH, because the shareholdings of these assets would exceed 50% upon the merger. We estimate there would be a combined HKD149bn in off-balance sheet debt under overseas assets for CKI and PAH post a merger. Following a CKI/PAH merger, we estimate the combined entity’s reported net-debt-to-equity ratio would be 36-38% (see-through gearing: 50-52%), with HKD76bn in cash (HKD69bn from PAH and HKD7bn from CKI) available for M&A (2014-1H15: HKD19bn total for CKI and PAH). We believe the rating agencies have already taken into account the off-balance sheet debt in their existing ratings for CKI. Looking at the consolidated balance sheet after a merger, we estimate that CKI’s 2015E net-debt-to-equity ratio would rise from 11% pre-merger to 50-52% afterwards. However, we believe the rating agencies took the off-balance sheet debt into account when assigning their credit ratings to CKI, as CKI had a “lower” A- credit rating (PAH: A+) with a “stronger” 9% (PAH: 21%) reported 2014 net-debt-to-equity ratio prior to the spin-off of HEC. This strong reported balance sheet is because all the debt of the overseas assets, in which CKI and PAH have stakes of 30-40%, is not consolidated and is off CKI’s and PAH’s balance sheets. Therefore, we do not believe that a rise in the reported net-debt-to-equity ratio, after consolidating the off-balance sheet debt, would affect CKI’s existing A- credit rating by Standard & Poor’s. CKI and PAH: selected overseas assets overview

Assets name Countries Assets type CKI's stake


PAH's stake

CKI's effective stake

CKI's effective stake after merging with PAH


HK Electric Investment HK Integrated HK power generation, distribution and transmission

0.00% NA 33.37% 12.97% 33.37% Associate

Seabank Power UK Power plants 25.00% Associate 25.00% 34.72% 50.00% Associate

Northern Gas Network UK Regulated gas distribution 50.00% Subsidiary 50.00% 69.44% 100.00% Subsidiary

UK Power Network UK Regulated power distribution 40.00% Associate 40.00% 55.55% 80.00% Subsidiary

Northumbrian Water Group

UK Regulated water utilities 40.00% Associate 0.00% 40.00% 40.00% Associate

WWU UK Regulated gas distribution 30.00% Associate 30.00% 41.66% 60.00% Subsidiary

Eversholt UK Rolling-stocks leasing 50.00% Associate 0.00% 50.00% 50.00% Associate

Aqua-tower Australia Regulated water utilities 49.00% Associate 0.00% 49.00% 49.00% Associate

Envestra Australia Regulated gas distribution 44.98% Associate 27.51% 55.67% 72.49% Subsidiary

Victoria Power Networks

Australia Regulated power distribution 26.99% Associate 27.93% 37.85% 54.92% Subsidiary

SA Power Networks Australia Regulated power distribution 26.99% Associate 27.93% 37.85% 54.92% Subsidiary

Barra Topco Australia Regulated power transmission 100.00% Subsidiary 0.00% 100.00% 100.00% Subsidiary

Wellington Electricity New Zealand

Power plants 50.00% Subsidiary 50.00% 69.44% 100.00% Subsidiary

EnviroWaste New Zealand

Waste collection 100.00% Subsidiary 0.00% 100.00% 100.00% Subsidiary

AVR The Netherlands

Waste-to-energy 35.00% Associate 20.00% 42.77% 55.00% Subsidiary

Stanley Power Canada Power plants 50.00% Subsidiary 50.00% 69.44% 100.00% Subsidiary

Park'N Fly Canada Car park operation 50.00% Associate 0.00% 50.00% 50.00% Associate

Power plants in China China Power plants 0.00% NA 100.00% 38.87% 100.00% Subsidiary

Toll roads and bridges in China

China Toll roads 100.00% Subsidiary 0.00% 100.00% 100.00% Subsidiary

Ratchaburi Power Thailand Power plants 25.00% NA 0.00% 25.00% 25.00% Associate

Source: Companies, Daiwa research

Would balance-sheet debt be a concern for CKI under a merger?


- 13 -

CKI and PAH: off-balance sheet debt Off balance sheet debt in 2015 (unit: m) Net debt in LC CKI's stake Net debt in HKD PAH's stake Net debt in HKD Combined CKI and PAH stake Net debt in HKD

HK Electric Investment HK 43,239 0.0% - 33.4% 14,429 33.4% 14,429

Northern Gas Network UK 1,389 47.1% 8,354 41.3% 7,324 88.4% 15,678

UK Power Network UK 3,491 40.0% 17,836 40.0% 17,836 80.0% 35,673

Northumbrian Water Group UK 2,567 40.0% 13,116 0.0% - 40.0% 13,116

WWU UK 2,180 30.0% 8,355 30.0% 8,355 60.0% 16,711

Eversholt UK 1,732 50.0% 11,062 0.0% - 50.0% 11,062

Victoria Power Networks Australia 4,212 23.1% 6,799 27.9% 8,231 51.0% 15,030

SA Power Networks Australia 3,327 23.1% 5,370 27.9% 6,501 51.0% 11,871

Envestra Australia 2,140 45.0% 6,735 27.5% 4,119 72.5% 10,854

AVR The Netherlands 670 35.0% 2,414 20.0% 1,380 55.0% 3,794

Park'N Fly Canada 111 50.0% 391 0.0% - 50.0% 391

Total off balance sheet debt CKI 80,433 PAH 68,176 CKI + PAH 148,609


Impact on CKI’s net-debt ratio from a potential merger with PAH


CKI's 2015E net debt before merging with PAH, net of off-balance sheet debt 11,773 11,773 11,773

PAH's 2015E net debt, net of off-balance sheet debt (58,818) (58,818) (58,818)

CKI's off balance sheet debt to be consolidated before merging with PAH 80,433 80,433 80,433

CKI's off balance sheet debt to be consolidated after merging with PAH 148,609 148,609 148,609

CKI's total net debt before merging with PAH 92,206 92,206 92,206

CKI's total net debt after merging with PAH 101,564 101,564 101,564

CKI's reported net debt after merging with PAH 74,020 74,020 74,020

CKI's equity including perpetual securities – before merging with PAH 106,298 106,298 106,298

CKI's equity including perpetual securities – after merging with PAH 195,120 199,561 204,002

CKI's net-debt-to-equity gearing before merging with PAH 11% 11% 11%

CKI's reported net-debt-to-equity gearing after merging with PAH 38% 37% 36%

CKI's see-through net-debt-to-equity gearing before merging with PAH 87% 87% 87%

CKI's see-through net-debt-to-equity gearing after merging with PAH, including off-balance sheet debt 52% 51% 50%


Another concern should CKI merge with PAH would be that CKHH could drop its stake in CKI to below 50%, and as a result CKHH would not be able to transfer its tax credit from the loss of the 3G business to CKI.


- 14 -


- 15 -

Chapter 4

What would the role of CKI/PAH be

in CK Group’s Chapter 3?


- 16 -

As the architect of a potential CKI/PAH merger, Victor Li seems to be marking the beginning of his journey towards taking over Li Ka-shing’s business empire, established in 1960. As discussed in the previous chapter, Cheung Kong/Hutchison were in their Chapter 2 phase – massive business building on a global scale across six sectors – when CKI was listed in 1996 while Victor was 31 years old and eager to prove his ability to establish a new global business. Among the 6 businesses (ports, property, retail, infrastructure, energy, telecoms) under CKHH, CKI offers CKHH the following benefits, in our view:

1. A high proportion of net assets, at c.25-30% of CKHH’s overall assets, except for the period from 2005-10 when CKI struggled to acquire significant overseas energy and infrastructure projects amid keen competition from major infrastructure funds.

2. Steady EBIT growth, despite 7-8% YoY falls in 2006 and 2009, due to the asset disposal of three Australian electricity grids to Spark Infrastructure in 2006, and the lowering of the permitted returns for power companies under Hong Kong’s SoC in 2009. The standard deviation of its YoY 2001-13 EBIT growth is one of the lowest among the 6 businesses under CKHH, at 18% versus a range of 16-501% for the 5 other business segments (19% for CKHH’s established business).

3. Steady increase in the asset return rate from 12% in 2001 to 20% in 2013, on an EBIT/net asset basis. The standard deviation of its EBIT/net assets over 2001-13 was only 3%, below the 4-42% for other 5 business segments, which shows its defensive nature and immunity to the macroeconomic cycle.

What would the role of CKI/PAH be in CK Group’s Chapter 3?


- 17 -

CKHH: EBIT

EBIT (HKDm) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2001-13 CAGR

Ports 5,791 6,626 7,597 8,956 10,219 11,395 12,849 13,236 10,406 7,207 8,226 7,681 7,358 2.0%

Property 1,717 2,570 3,121 3,003 3,939 5,667 4,060 8,087 6,430 8,847 9,517 10,521 13,659 18.9%

Retail 537 1,031 2,305 3,202 3,261 2,720 3,711 4,384 5,692 7,866 9,330 10,357 11,771 29.3%

CKI 4,589 4,990 5,605 5,921 6,675 6,136 7,353 7,404 6,905 8,454 13,478 16,643 17,528 11.8%

Husky 1,899 2,084 3,462 2,793 6,140 8,305 10,523 13,316 4,010 3,073 8,614 7,427 7,208 11.8%

Telecom 719 969 1,195 162 2,789 2,648 3,218 6,467 493 (1,598) 254 898 958 2.4%

Others - - - - - - - (791) (145) - - - - NA

Finance and investment 6,457 6,200 6,250 8,989 5,491 6,920 13,851 3,261 4,079 810 470 1,914 1,259 -12.7%

Established businesses 21,709 24,470 29,535 33,026 38,514 43,791 55,565 55,364 37,870 34,659 49,889 55,441 59,741 8.8%

3 Group - (2,070) (18,310) (38,449) (26,880) (19,996) (17,938) (15,792) (8,922) 2,931 1,481 3,145 4,856 NA

Consolidated EBIT 21,709 22,400 11,225 (5,423) 11,634 23,795 37,627 39,572 28,948 37,590 51,370 58,586 64,597 9.5%

EBIT proportion 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Ports 38% 36% 33% 37% 31% 31% 31% 25% 31% 21% 17% 14% 13%

Property 11% 14% 13% 12% 12% 15% 10% 15% 19% 26% 19% 20% 23%

Retail 4% 6% 10% 13% 10% 7% 9% 8% 17% 23% 19% 19% 20%

CKI 30% 27% 24% 25% 20% 17% 18% 14% 20% 25% 27% 31% 30%

Husky 12% 11% 15% 12% 19% 23% 25% 25% 12% 9% 17% 14% 12%

Telecom 5% 5% 5% 1% 8% 7% 8% 12% 1% -5% 1% 2% 2%

EBIT YoY growth 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 StandardDeviation

Ports

14% 15% 18% 14% 12% 13% 3% -21% -31% 14% -7% -4% 16%

Property

50% 21% -4% 31% 44% -28% 99% -20% 38% 8% 11% 30% 34%

Retail

92% 124% 39% 2% -17% 36% 18% 30% 38% 19% 11% 14% 39%

CKI

9% 12% 6% 13% -8% 20% 1% -7% 22% 59% 23% 5% 18%

Husky

10% 66% -19% 120% 35% 27% 27% -70% -23% 180% -14% -3% 68%

Telecom

35% 23% -86% 1622% -5% 22% 101% -92% -424% -116% 254% 7% 501%

Established businesses

13% 21% 12% 17% 14% 27% 0% -32% -8% 44% 11% 8% 19%

Consolidated EBIT

3% -50% -148% -315% 105% 58% 5% -27% 30% 37% 14% 10% 111%

Source: Company, Daiwa research

-10,000

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Ports Property Retail CKI Husky Telecom

CKI still saw an EBIT CAGR of 11.8% over 2001-13 (other business segments: 2-29.3% ), representing a 30% EBIT proportion for 2013 (other business segments: 2-23% ). Its EBIT volatility (the standard deviation of

its EBIT growth is 18% ) is also one of the lowest among the 6 businesses under CK Hutchison (16-501% )


- 18 -

CKHH: net assets distribution and asset return

Net asset (HKD m) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2001-13 CAGR

Ports 27,430 29,910 33,232 32,672 34,124 29,949 33,991 39,831 44,434 44,942 45,566 44,981 48,448 4.9%

Property 54,892 55,032 52,214 54,932 58,771 62,755 63,431 68,329 65,296 71,020 86,362 87,565 88,614 4.1%

Retail (3,645) 5,168 4,101 (3,649) 3,902 14,138 8,174 23,239 25,214 22,491 23,402 19,585 19,211 NA

CKI 39,233 37,085 41,271 40,558 42,817 45,052 46,946 44,065 47,720 58,971 64,927 78,477 85,569 6.7%

Husky 10,834 11,734 14,246 16,783 20,241 23,923 32,353 37,190 41,019 43,493 48,552 54,023 51,833 13.9%

Telecom 27,089 (10,291) 8,525 9,829 6,759 7,043 54,066 20,926 21,933 19,520 21,361 26,640 26,672 -0.1%

Others 23,664 35,747 22,582 66,086 27,068 49,676 72,330 66,399 8,616 30,254 23,275 40,059 24,527 0.3%

Finance and investment - - - - - - - 11,235 8,647 - - 11,879 4,799 NA

Established businesses 179,497 164,385 176,171 217,211 193,682 232,536 311,291 311,214 262,879 290,691 313,445 363,209 349,673 5.7%

3 Group 75,480 99,356 117,092 62,583 59,947 58,029 47,367 40,677 58,065 66,568 85,338 75,332 126,559 4.4%

Consolidated EBIT 254,977 263,741 293,263 279,794 253,629 290,565 358,658 351,891 320,944 357,259 398,783 438,541 476,232 5.3%

Net asset proportion 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Ports 18% 23% 22% 22% 20% 16% 14% 17% 18% 17% 16% 14% 15%

Property 35% 43% 34% 36% 35% 34% 27% 29% 27% 27% 30% 28% 28%

Retail -2% 4% 3% -2% 2% 8% 3% 10% 10% 9% 8% 6% 6%

CKI 25% 29% 27% 27% 26% 25% 20% 19% 19% 23% 22% 25% 27%

Husky 7% 9% 9% 11% 12% 13% 14% 16% 17% 17% 17% 17% 16%

Telecom 17% -8% 6% 7% 4% 4% 23% 9% 9% 7% 7% 9% 8%

EBIT over net asset 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 StandardDeviation

Ports 21% 22% 23% 27% 30% 38% 38% 33% 23% 16% 18% 17% 15% 8%

Property 3% 5% 6% 5% 7% 9% 6% 12% 10% 12% 11% 12% 15% 4%

Retail -15% 20% 56% -88% 84% 19% 45% 19% 23% 35% 40% 53% 61% 42%

CKI 12% 13% 14% 15% 16% 14% 16% 17% 14% 14% 21% 21% 20% 3%

Husky 18% 18% 24% 17% 30% 35% 33% 36% 10% 7% 18% 14% 14% 10%

Telecom 3% -9% 14% 2% 41% 38% 6% 31% 2% -8% 1% 3% 4% 16%

Source: Company, Daiwa research

Based on CKI’s corporate Powerpoint presentation, we understand its investment mandate is “essential services/assets with regulatory regimes or with long term offtake arrangements”. For non-regulated assets, we note that “exclusivity” seems to be CKI’s key criteria when seeking target assets, given CKI recently co-invested in Eversholt (one of the 3 rolling-stock leasing companies in the UK, with a 28% market share), but passed up an opportunity to co-invest with parent CKH in an aircraft leasing business, which has over 10,000 aircraft owners around the world. Therefore, it is no surprise that CKI’s earnings are the most defensive in the CKHH. In view of net asset additions since 2001, we believe CKI is one of the most preferred business segments for the Li family, given its 2001-13 net asset addition CAGR was 6.7%, compared with 0.0-4.9% for the other businesses (except Husky at 13.9%). Therefore, we believe infrastructure is one business that the Li family would like to grow further globally; and we conclude that CKI will open up Chapter 3.3, ie, further business building on a global scale, after the completion of a CKI/PAH merger (Chapter 3.2) through the HKD69bn cash recycled from the spin-off of HEC. In the meantime, CKI should provide stable dividends for parent CKHH to grow other businesses.

(100%)

(80%)

(60%)

(40%)

(20%)

0%

20%

40%

60%

80%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Ports Property Retail CKI Husky Telecom

CKI provides a steady return, at 20% EBIT/net assets, and sees less variance in its asset returns than that for the other business segments under CK Hutchison. The standard deviation of its EBIT/net assets over 2001-13 was only 3% , versus 4-42% for ports,

property, retail, Husky (energy) and telecoms


- 19 -

Instead of co-investing in overseas assets with parent CKH, such as its previous deals involving Eversholt, Australian Gas Network (previously known as Envestra), Park N’ Fly, AVR, Wales & West Utilities, and Northumbrian Water, CKI would likely explore overseas projects alone after a merger with PAH, given its total HKD76bn in cash it stands to gain from the merger with PAH. During the Chapter 2 massive business-building phase of CKH/HWL, CKI was too small to shoulder the burden of heavy investment in multi-billion-dollar-scale projects, such as UK Power Network and the Australian electricity grids, and needed to co-invest with other group companies (PAH and CKH) in order to share the financial obligations and risks. After growing its capital base almost 7-fold from around a USD2bn market capitalisation (since listing on 17 July 1996) to USD19bn currently, and potentially to USD35bn in the case of a CKI merger with PAH, we think a newly merged CKI would be mature enough to secure overseas M&A growth opportunities on its own, armed with HKD76bn in cash and a market capitalisation of USD35bn.

CKI: market capitalisation since listing in 1996

Source: Bloomberg, Daiwa research

Therefore, the difference between the Chapter 2 and Chapter 3.3 business-building phases for CKI would be the structure of the deals it strikes. In Chapter 3.3, CKI would likely seek more M&A opportunities on its own, especially given that the 19x forward PER valuation of the merged CKI would be superior to parent CKHH’s, at 14x. However, we do not discount the possibility that CKHH co-invests in overseas infrastructure projects with CKI should: 1) CKHH not have attractive investment opportunities open to it in other business segments, and/or 2) the Li family seeks more exposure to infrastructure assets, and hence prefers direct 30.15% exposure through CKHH to only 13.8-14.3% exposure through CKI. Nevertheless, based on our sensitivity analysis, discounting any merger, we estimate an additional HKD60bn (or HKD36bn in equity, assuming a 60% equity:40% project debt) would translate into 92% in additional earnings for CKI (HKD10.3bn) for 2015, assuming: 1) a cash yield of 10% for the first 2 years of a project’s operation, 2) a project equity IRR of 12%, 3) CKI co-invests with PAH on a 50-50 basis, and 4) a full-year earnings contribution for 2016. Such a scenario could boost our fair-value estimate of CKI by 40% to HKD101/share.

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

July-96 July-98 July-00 July-02 July-04 July-06 July-08 July-10 July-12 July-14 July-16

(USDm)

CKI's estimated market cap if it w ere to merge with PAH:USD35bn

CKI’s likely action: Chapter 3.3 – Further business building on a global scale


- 20 -

CKI: potential deal structure for Chapter 2 and Chapter 3 of CK Group’s corporate development


CKI: 2015E overseas M&A capex sensitivity analysis

2015 overseas capex sensitivity analysis

NAV (HKD/share)

% change in NAV from base

case 2016E earnings

(HKDm)

% change in profit from base

case 2016E ROE

2016E Net-debt-to-equity

gearing

2016E See-through net-debt-to-equity

gearing

Base case 72.0 0% 11,185 0% 11% 10% 82%

15,000 80.9 12% 13,881 24% 12% 18% 88%

30,000 88.8 23% 16,407 47% 13% 26% 93%

45,000 96.6 34% 18,933 69% 14% 33% 99%

60,000 104.9 46% 21,489 92% 15% 40% 105%

Source: Companies, Daiwa estimates

CKI: Chapter 2 CKI: Chapter 3 – after the merger with PAH

CK Holding

(1 HK) /

LKS Foundation

20%

CKI

(1038 HK)

Overseas

infrastructure

assets

PAH

(6 HK)40%

0-40%

38.87%

CK Hutchison

(1 HK) /

LKS Foundation

CKI+PAH

(1038 HK)

Overseas

infrastructure

assets

80-100%

LKS Foundation

0-40%

Energy infrastructure assets: PAH 40%, CKG 0%

Other infrastructure assets: PAH 0%, CKG 40%

LKS Foundation co-investing in large assets

LKS Foundation co-investing

in large assets

LKS Foundation

0-20%


- 21 -

In the long term, we believe CKI will act as a strong and growing cash-cow, able to distribute steady dividends to the Li family. Daiwa’s Head of HK/China Property, Jonas Kan, believes the Li family will ultimately create a principal listed vehicle for each of its core businesses, such as:

1. A separately listed global telecom company called CK Telecom, if CKHH’s acquisition of O2 goes ahead; so that 3 UK would emerge as the largest telecom operator in the UK, with the credentials for a separate listing.

2. A separately listed global retail company called CK Retail, if the Li family sees a value opportunity to re-start its proposal to divest its A.S. Watson stake.

Major listed companies within Cheung Kong Group

Effective stake (%) Effective stake (%) Effective stake (%)

CKH level Next layer The next layer Remarks

Property

Hong Kong 30.15% - - Unlisted, under CK Property

China 30.15% - - Unlisted, under CK Property

Overseas 30.15% - - Unlisted, under CK Property

Hotels 30.15% - - Unlisted, under CK Property

Infrastructure

CK Infrastructure 78% - -

Power Asset Holdings 30% 39% -

HK Electric Investment 10% 13% 34%

Energy

Husky Energy 40% - - The family still has 29.3% stake in Husky Energy

Ports

Hutchison Port Holdings 80% - - Unlisted. PSA in Singapore has a 20% stake in it

HPH Trust 28% - - HPH owns 35% of HPH Trust

Telecom

3 UK 100% - - Now pursuing to acquire O2 in the UK

3 Italy 97% - - Unlisted

3 Sweden and 3 Denmark 60% - - Unlisted

3 Austria 100% - - Unlisted

Hutchison Telecom (HK) 65% - -

Hutchison Telephone (HK) 49% 75.9% -

Vodafone Hutchison Australia 44% - -

Hutchison Telecom Vietnam 100% - - Unlisted

Hutchison 3 Indonesia 65% - - Unlisted

Retail

AS Watson 80% - - Unlisted. Temasek has a 20% stake


In the long term, CKHH is likely to hold 5 major non-property listed companies for the Li family – CKI (infrastructure), Husky Energy (energy), Hutchison Port Holdings (ports), CK Telecom (a listed global telecom company potentially to be established based on the existing 3 UK), and CK Retail (a listed global retail company potentially to be established based on the existing A.S.Watson). In a final move, the Li family might pursue another restructuring exercise similar to the one involving CKH and HWL in early 2015, with the goal of further reducing the holding company discount given to CKHH as a conglomerate of 5 major listed companies.

Action CKI could take: Chapter 3.4 – Li’s direct ownership of CKI, with yieldco/trust holdings of assets


- 22 -

Apart from CKP, which is directly owned by the Li family, we would expect the likes of CKI and CK Telecom to be directly owned by Li Ka-shing, based on the valuation and size of the businesses, while CKHH would hold immature business segments and develop new segments on its own. These arrangements would allow for more effective buybacks and dividend distribution for the Li family, as well.

Li family empire: current organisational structure


Li family empire: future organisational structure

Source: Companies, Daiwa estimates

Apart from a corporate reorganisation to eliminate CKHH’s holdings of CKI for the Li family, we see CKI potentially establishing a yieldco once the merged CKI has exhausted its HKD76bn in cash. As a result, CKI could own a listed trust, HKEI, for its electricity businesses in Hong Kong, which are stable (limited asset growth, mature market), and form another yieldco for its infrastructure business overseas, which would expand continuously through acquisitions. We envisage CKI being a strong dividend cow for the Li family in the long term, given its defensive regulated and “exclusive” infrastructure assets, demonstrated by its low 3% EBIT-over-net-asset compared with 4-42% for other assets, over 2001-13. We see the Li family establishing more trusts or yieldcos for its assets, apart from HKEI, HPH Trust and Fortune REIT, etc. (See Appendix 3 for our take on the benefits of a yieldco.) After its incubation as an emerging business segment under Cheung Kong Group, CKI, a ‘baby’ 19 years ago, appears now ready to enter its Chapter 3 as a strong global infrastructure firm, through exciting independent M&A from recycling the cash from HEC, with further corporate restructurings. We believe we will witness a bright Chapter 3 for this 19-year-young giant.

The Li Family

CK Hutchison

(1 HK)

30.15%

CK Property

(1113 HK)

30.15%

Energy –

Husky Energy

(HSE CN)

Ports – Hutchison

Port Holdings

(not listed)

Telecoms – 3 UK

(not listed)

Retail – AS Watson

(not listed)

Others –

life science,

aircraft leasing, etc

75.67%

Infrastructure –

CKI

(1038 HK)

38.87%

33.37%

HKEI

(2638 HK)

Power Assets

(6 HK)

Accumulating a stake through

a buyback, at 2% per annum

under the “creeper” rule

The Li Family

CK Hutchison

(1 HK)

30.15%

CK Property

(1113 HK)

30.15%

Other mature businesses with

valuations higher than CK Hutchison

Infrastructure –

CKI

(1038 HK)

Other mature businesses with

valuations that are cheaper than CK

Hutchison

Other incubated

businesses

Ownership based on the Li Family’s preference Ownership based on Mr. Li’s preference

HKEI

(2638 HK)

Yieldco for

overseas assets


- 23 -

We offer our investment opinion based on 2 scenarios: one is assuming a merger of CKI/PAH, the other assuming no merger. As discussed in the previous section, PAH is a essentially a redundant entity for the infrastructure arm of CK Group, having suffered an 8.5pp opportunity cost on the HKD69bn in idle cash it has, while parent CKI has more M&A opportunities on global infrastructure assets and is a more leveraged play given its 38.87% stake in PAH. Under a no-merger scenario, PAH would have a lower ROE of 7% versus CKI’s 10%. With a merger, CKI would offer a 0-10% merger premium to PAH’s minority shareholders, on our estimates. However, CKI’s value enhancement would be higher, at 13-17%, on our calculation. In conclusion, we think a CKI/PAH merger could create value for both CKI’s and PAH’s shareholders, similar to the reorganisation of CKH and HWL on 9 January 2015. CKI’s shareholders would enjoy a higher 13-17% value enhancement than PAH’s 0-10%, on our assumptions. We believe the merger premium would be capped at 10%, so that CKI could enjoy around 13% value enhancement at a later stage. If there were no merger, then CKI would be more investable than PAH on M&A growth and from an ROE perspective, in our view. As such, merger or no merger, CKI remains our top pick.

CKI: financial impact of potential merger with PAH (Unit: HKDm unless otherwise stated)


CKI's new issued no. of shares 1,500 1,575 1,650

CKI's number of shares before merging with PAH 2,520 2,520 2,520

CKI's number of shares after merging with PAH 4,020 4,095 4,170

CKI's dilution 37% 38% 40%

EPS impact on CKI

2015E CKI's recurring earnings before merging with PAH 10,001 10,001 10,001

2015E PAH's recurring earnings before being merged with CKI 7,711 7,711 7,711

Additional PAH's earnings for CKI 4,714 4,714 4,714

2015E CKI's recurring earnings after merging with PAH 14,715 14,715 14,715

2015E CKI's EPS before merging with PAH 3.97 3.97 3.97

2015E CKI's EPS after merging with PAH 3.66 3.59 3.53

2015E CKI's EPS dilution after merging with PAH -8% -9% -11%

Valuation impact on CKI

PAH's current market cap (HKDbn) 148 148 148

PAH's 2016E PER 19.2x 19.2x 19.2x

PAH's merger 2016E PER valuation 19.2x 20.1x 21.1x

CKI's current market cap (HKDbn) 149 149 149

CKI's 2015E PER 14.9x 14.9x 14.9x

CKI's 2015E PER after merging with PAH 19.0x 19.0x 19.0x

CKI's market cap after merging with PAH 280 280 280

CKI's market cap enhancement after merging with PAH 130 130 130

CKI's implied share price after merging with PAH (HKD/share) 69.55 68.27 67.05

Daiwa’s CKI's target price 68.00 68.00 68.00

CKI's current share price (HKD/share) 59.20 59.20 59.20

CKI's share price upside 17% 15% 13%

Source: Company, Daiwa estimates

What is our investment recommendation over the next 12 months?


- 24 -


- 25 -

Appendix 1

The immediate benefits of PAH’s

spin-off of HEC in 2014


- 26 -

On 29 January 2014, PAH spun off 50.1% of HEC for a consideration of HKD56bn, or HKD5.50 per share stapled unit. We believe PAH has benefited in the following ways:

1) Has unlocked HEC’s value by enhancing the fair value of PAH by 9% (or HKD15bn), from HKD142bn to HKD157bn.

2) It has recycled the HKD56bn cash.

3) It has recognised a disposal gain of HKD52.9bn from this deal, as Hong Kong’s electricity assets are aged

with a low book value of HKD5.6bn as at the end of 2012.

4) It has disposed of its Hong Kong electricity assets, as there have been market concerns that the ROA could be cut from the current 9.99% in the next revision of the SoC agreement scheduled for 2023. Given the current low-interest-rate environment, HEC’s real return of 7% has been criticised by the public as being too high (see Hong Kong Electric: yield appeal may wane, published on 23 February 2015).

PAH: fair value accretion calculation for the spin-off of HEC on 29 Jan 2014

2013

HKDbn 50.1% disposal of HEC

Priced at payout yield 7.26%

PAH's market cap at the time of spin-off 142

HEC's share of PAH's NAV (from SOTP) before spin-off 13%

HEC's market value at the time of spin-off 19

HEC's stake being spin-off 50.1%

PAH’s value post spin-off, excl. HEC 133

HEC’s EBITDA 6.6

HEC’s target debt level 52.0

Interest rate 2.5%

HEC’s finance cost with additional HKD52bn of debt, at 2.5% interest rate (1.3)

Depreciation and amortisation (2.0)

HEC’s PBT 3.3

Tax rate 16.5%

HEC’s tax (0.5)

HEC’s net income 2.8

HEC’s capex and working capital 1.0

HEC’s distributable income 3.7

Additional management cost as a trustee manager 5%

HEC’s distributable income after management fee 3.5

Yield 7.26%

HEC: fair value 49

Cash recycled from HEC for PAH through the IPO 24

PAH’s value post-spin-off 157

Value enhancement for PAH 15

Value enhancement for PAH (%) 9%


The immediate benefits of PAH’s spin-off of HEC in 2014

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/HK_Electric_Investments_150220.pdf#page=1


- 27 -

PAH: cash received and balance-sheet impact of the spin-off of HEC on 29 Jan 2014

2013


7.26%

Gross debt before the spin-off (1H13) (26)

Cash recycled from HEC for PAH through the IPO 24

Repayment of shareholder's loan 21

Total cash received 45

Gross cash for PAH in 2H13 11

Total net cash/(net debt) post the spin-off 56

Additional cash recognised in balance sheet 82


PAH: disposal gain from the spin-off of HEC on 29 Jan 2014 2013


7.26%

Capital and reserve for HEC as of end 2012 5.6

HEC’s stake being spin-off 50.1%

HEC’s book value at the time of spin-off 2.8

Cash recycled from HEC for PAH through the IPO 55.7

Disposal gain 52.9


On 8 June 2015, PAH disposed of a 16.53% stake in HKEL to Qatar Holding LLC, for a consideration of HKD7.7bn, or HKD5.26 per share stapled unit. Following the stake disposal, PAH’s equity stake in HKEI fell to 33.37%. We believe the disposal clearly shows PAH’s/CKI’s preference for overseas investments over the traditional Hong Kong business, which has limited earnings growth potential due to the risk of a cut in the SoC return (currently 9.99%) post 2023. The further disposal will likely lead to a HKD455m loss on PAH’s income statement, given that its selling price of HKD5.26 per unit is lower than HKEI’s IPO price of HKD5.45/share, plus its post-listing profit and less the distribution received. However, the loss is non-cash in nature, and PAH recognised a HKD52.9bn disposal gain from the IPO last year.


- 28 -


- 29 -

Appendix 2

What has happened since the HEC

spin-off?


- 30 -

Since the spin-off on 29 January 2014, 3 major events have happened over past 19 months:

1) CKI has spent c.HKD14bn on M&A, while PAH has spent only c.HKD5bn.

2) CKI has placed 80m new shares, raising HKD4.6bn to fund the M&A, with a 3.2% EPS dilution effect, while PAH has suffered a c.HKD4bn opportunity cost over same period on the HKD69bn cash sitting on its balance sheet.

3) PAH disposed of a further 16.53% stake on 9 June 2015 to recycle a further HKD7.7bn in cash.

As a result, we forecast PAH’s ROE to drop to 6.2% in 2015E from 16.8% in 2013, while CKI’s should drop to 9.6% in 2015E, from 15.1% in 2013 (mostly due to the impact of a significant drop in the ROE of its 38.89%-owned PAH). CK Group now faces a dilemma: which of the following 2 options to go for:

1) Pursue fewer M&A opportunities for PAH, with its HKD69bn in cash, and bear the opportunity cost of HKD6bn per year for not using that cash.

2) Find more M&A opportunities for CKI, which has HKD6bn in cash, but accept the dilution risks. PAH is similar to CKI, but has a higher valuation. Following the spin-off of HEC, PAH’s most significant assets are UK Power Network (40% stake), Northern Gas (40% stake), Wales and West Utilities (30% stake), and power-distribution assets in Australia, all of which are joint ventures in which parent CKI is the major shareholder. With HEC having been spun off in phases over 2014-15, PAH’s sources of earnings are now similar to those of CKI, with the contribution from PAH’s overseas businesses increasing from about 51% in 2013 to about 78% in 2016 (CKI: about 88%). However, PAH is trading currently at a 2016E PER of 18x, which marks a 26% premium to CKI’s 14x.

What has happened since the HEC spin-off?


- 31 -

PAH and CKI: organisational structure


PAH and CKI: overseas assets overview Assets name Countries Assets type CKI's stake PAH's stake

HK Electric Investment HK Integrated HK power generation, distribution and transmission 0.00% 33.37%

Seabank Power UK Power plants 25.00% 25.00%

Northern Gas Network UK Regulated gas distribution 50.00% 50.00%

UK Power Network UK Regulated power distribution 40.00% 40.00%

Northumbrian Water Group UK Regulated water utilities 40.00% 0.00%

WWU UK Regulated gas distribution 30.00% 30.00%

Eversholt UK Rolling-stocks leasing 50.00% 0.00%

Aqua-tower Australia Regulated water utilities 49.00% 0.00%

Envestra Australia Regulated gas distribution 44.98% 27.51%

Victoria Power Networks Australia Regulated power distribution 26.99% 27.93%

SA Power Networks Australia Regulated power distribution 26.99% 27.93%

Barra Topco Australia Regulated power transmission 100.00% 0.00%

Wellington Electricity New Zealand Power plants 50.00% 50.00%

EnviroWaste New Zealand Waste collection 100.00% 0.00%

AVR The Netherlands Waste-to-energy 35.00% 20.00%

Stanley Power Canada Power plants 50.00% 50.00%

Park'N Fly Canada Car park operation 50.00% 0.00%

Power plants in China China Power plants 0.00% 100.00%

Toll roads and bridges in China China Toll roads 100.00% 0.00%

Ratchaburi Power Thailand Power plants 25.00% 0.00%

Source: Companies Note (1): highlighted projects are recent acquisitions completed since the spin-off of HEC on 29 Jan 2014 Note (2): CKI, PAH and their ultimate parent CKH privatised Envestra on 5 September 2014, with CKI increasing its stake from 17.47% to 44.98%. PAH and CKH each own a 27.51% stake in Envestra

27.51%

10%

23.07% 23.07% 23.07% 50% 47.1% 25% 40% 30% 35%

40% 44.98%

8.5%

49% 100%4.75%

Li Ka-Shing

Cheung Kong Holdings (1 HK)

Hutchison Whampoa Limited (13 HK)

Cheung Kong Infrastructure (1038 HK) Power Assets Holdings (6 HK)

Li Ka Shing Foundation

The Hong Kong

Electric

Company, Limited

Power Assets

Investments

Limited

Associated

Technical

Services Limited

Other

Subsidiaries

ETSA Utilities

(AU)

PowercorAustralia

(AU)

CitiPower(AU)

Wellington Electricity

(NZ)

Northern Gas

Networks(UK)

SeabankPower

(UK)

UK Power Networks

(UK)

Wales & West Utilities

(UK)AVR (NL)

Zhuhai

Power

(CN)

Zhuhai

Jinwan

(CN)

Jilin Siping

(CN)Laoting Wind Power (CN)

Dali Wind Power

(CN)

RatchaburiPower (TH)

Stanley

Power

(CA)

Southern

Water

(UK)

Northumbrian Water (UK)

Envestra

Limited

(AU)

Aqua-

tower (AU)

Cement & Infra

(HK & CN)

Barra

Topco

(AU)

Enviro

Waste

(NZ)

49.97%

75.67%

38.87%

33.67% 100% 100%

27.93% 27.93% 27.93% 50% 41.29% 25% 40% 30% 20%

45% 45% 45% 45% 45% 25% 50%

50%

100%

40%

30%

20%

35%

43.42%

10%20%

Property sales, Rental, Hotel and serviced suites, etc.

Ports, Property and hotels, Retail, Husky Energy, 3 Group

Europe, etc.

Spark

Infra

(AU)

50-100%

49.0% 49.0% 49.0%

Seven toll roads and

bridges(CN)

30-51%

27.51%

Park’N Fly

(CA)

50%50%

Eversholt(UK)

50%50%


- 32 -

PAH and CKI: earnings distribution by market (2016E), after 2 rounds of PAH’s spin-off of HEC

PAH

CKI

Source: Companies, Daiwa forecasts

PAH not as strong as CKI in M&A performance since the spin-off. In terms of future overseas M&A activity, PAH will likely focus its HKD69bn on energy (power and gas) projects. It will target the same types of assets as before, meaning it will continue to focus on either regulated assets or assets that are guaranteed under an offtake contract in developed countries. Although the market expects PAH to focus on more M&A activity after the spin-off, immediate parent CKI outperformed PAH in terms of M&A deals between February 2014 and January 2015, with 3 projects (Park’N Fly, Envestra, Eversholt) acquired for a combined cash consideration of HKD14.2bn, vs. PAH’s 1 project (Evenstra) for a cash consideration of HKD4.8bn. CKI has broader infrastructure investment criteria that are not limited to energy assets, as is the case for PAH. In terms of overseas energy assets, CKI has in the past submitted a joint bid with PAH on several deals, such as UK Power Network, West & Wales Utilities, AVR and Envestra. Because CKI owns 38.89% of PAH, CKI automatically enjoys a 38.89% share of the profit from PAH’s present and future overseas assets. Thus, we see CKI as the more profitable option – it posted a 2008-13 recurring net profit CAGR of 21% vs. PAH’s 7%, on our estimates.

CKI and PAH: recurring net profit (excluding one-off disposal gain/loss items)


HK20.9%

Australia13.1%

UK59.8%



HK8.7%

Australia11.9%

UK70.3%



(20%)

(10%)

0%

10%

20%

30%

40%

50%

60%

0

2,000

4,000

6,000

8,000

10,000

12,000

2008 2009 2010 2011 2012 2013 2014 2015E 2016E

(HKDm)

CKI's earnings - LHS PAH's earnings - LHS yoy growth of CKI's earnings - RHS yoy growth of PAH's earnings - RHS


- 33 -

Near-term substantial M&A activity to use up PAH’s HKD69bn is unlikely at this stage. According to Bloomberg in November 2013, CKI/PAH were reported to have submitted a bid for power grids in Sweden (for EUR4-5bn, or HKD40-50bn), while Queensland and New South Wales were reported to be planning to privatise their grid networks in early 2015. Given that PAH has HKD69bn cash on its balance sheet, it should be ready to take on substantial M&A, and there are less equity dilution risks. However, we see growing competition when it comes to bidding on sizeable infrastructure projects amid currently low interest rates globally. We believe the reason PAH was able to spend HKD30bn (HKD15bn in cash) on overseas M&A in 2010 was due to it buying distressed energy assets from European owners, such as EDF and E.ON, during the initial stages of the global financial crisis in 2008. However, given the subsequent quantitative easing and low-cost financing globally, owners of infrastructure assets are no longer willing to sell assets cheaply. And even if the privatisation plans of various governments (ie, the UK and Australia) do provide more M&A opportunities, we see CKI and PAH facing more competition amid the current low interest-rate environment, as media reports indicate the pair failed to win some bids for assets (power grids in Finland owned by Fortum [FUM1V FH, not rated] in 2014. In addition, Queensland has decided not to privatise its electricity grid assets, which should be positive for CKI, given that Queensland is likely to sell other infrastructure assets to maintain its expenses in the government budget and hold on to its “AAA” S&P credit rating. Even if PAH were able to go back to the M&A momentum it saw in 2010-12, it would still take over 8 years (we assume PAH can repeat its M&A record of 2010-15) to fully digest the HKD69bn cash, mainly received from the HEC spin-off. We think PAH is likely to sit on its mountain of cash, complete with the opportunity cost of 8.5pp (10% ROA minus 1.5% bank interest income), similar to CKI’s situation over 2003-10.

10-year treasury yield since 2008

Source: Bloomberg, Daiwa

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Sep

-08

Dec

-08

Ma

r-09

Jun-

09

Sep

-09

Dec

-09

Ma

r-10

Jun-

10

Sep

-10

Dec

-10

Ma

r-11

Jun-

11

Sep

-11

Dec

-11

Ma

r-12

Jun-

12

Sep

-12

Dec

-12

Ma

r-13

Jun-

13

Sep

-13

Dec

-13

Ma

r-14

Jun-

14

Sep

-14

Dec

-14

Ma

r-15

Jun-

15

(% )

Credit crunch

Further quantitative easing


- 34 -

PAH: total consideration spent on M&A over 2010-Jan 2015

CKI: total consideration spent on M&A for 2010-Jan 2015

Date Type Cash spent

Corporate debt

Total consideration

Jun-10 Seabank Power Network GBP211.7m 2,508 NA

GBP211.7m

Oct-10 UKPN GBP1bn 12,120 GBP1.31bn 15,877 GBP2.3bn

Sep-12 West and Wales Utilities GBP204m 2,452 GBP404mn 4,856 GBP608m

Sep-13 AVR EUR112m 1,159 EUR77m 797 EUR189m

Sep-14 Envestra AUD667m 4,667 NA

AUD667m

Total HKD22.9bn 22,906 HKD21.5bn 21,530 HKD44.4bn

Source: Company, Daiwa forecasts

Date Type Cash spent

Corporate debt

Total consideration

Jun-10 Seabank Power Network GBP211.7m 2,508 NA

GBP211.7m

Oct-10 UKPN GBP1bn 12,120 GBP1.31bn 15,877 GBP2.3bn

Apr-11 Meridian Cogeneration Plant CAD45.7m 359 NA

CAD45.7m

Oct-11 Northumbrian Water GBP880m 11,275 GBP905mn 11,595 GBP1.8bn

Sep-12 West and Wales Utilities GBP204m 2,452 GBP404mn 4,856 GBP608m

Apr-13 EnviroWaste NZD340m 2,208 NZD150m 974 NZD490m

Sep-13 AVR EUR198m 2,050 EUR133m 1,377 EUR331m

Jul-14 Park'N Fly CAD381m 2,676 NA

CAD381m

Sep-14 Envestra AUD667m 4,667 NA

AUD667m

Mar-15 Eversholt GBP570m 7,281 GBP730m 8,945 GBP1.3bn

Total HKD47.6bn 47,596 HKD44.0n 43,625 HKD91.6bn

Source: Company, Daiwa forecasts

We conclude that CKI has more M&A opportunities open to it than does PAH, but it has insufficient cash to facilitate any purchase. Meanwhile, we think PAH is very likely to sit on its HKD69bn in idle cash, at an 8.5pp opportunity cost (HKD5.9bn a year). Due to the corporate structure whereby CKI owns 38.89% of PAH, CKI would automatically enjoy 38.89% of any earnings resulting from any M&A activity by PAH should PAH spend its HKD69bn on M&A. Special dividend? During HKEI’s EGM at the time of the IPO, PAH’s chairman, Mr. Fok, said PAH might pay a special dividend if it has not spent most of the HKD69bn on M&A activity by January 2016. We believe a special dividend is not an option favoured by the Li family (as the family only has a c8.9% effective stake in PAH currently).

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2010 2011 2012 2013 2014 1Q15

(HKDm)

Cash spent for M&A Corporate debt raised for M&A

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2010 2011 2012 2013 2014 1Q15

(HKDm)

Cash spent for M&A Corporate debt raised for M&A


- 35 -

Appendix 3

Would a yieldco create value for

CKI in the long term?


- 36 -

A yieldco is essentially a company created by renewable energy or utilities operators to hold long-term contracted utilities assets. It offers the characteristics of infrastructure investment, which are predictable and with growing dividends, to its shareholders. Usually a yieldco is established in the form of a dual-class share structure, with Class A shares being issued to external shareholders, whereas Class B shares remain held by the parent company for controlling voting interests (refer to the following simplified illustration).

Illustration of a yieldco structure

Source: Daiwa

The idea of a yieldco is not new. It originated from the master limited partnerships (MLP) structure, a capital-formation mechanism that funds energy infrastructure investments in North America. The reason renewable energy companies cannot adopt an MLP structure is because the criteria to be legally classified as an MLP require over 90% of cash flow to come from real estate, natural resources and commodities. As such, a yieldco structure is also called a “synthetic MLP”.

100% Class A Units

X% Economic Interest

100% Class B Units

100-X% Economic

Interest

Class B Common Stock

100-X% Voting Interest

0% Economic Interest

Class A Common Stock

X% Voting Interest

X% Economic Interest

Parent company

Operating

subsidiaries

Operating

assets

Public

shareholders

100%

YIELDCO

What is a yieldco?


- 37 -

Compared with other financing channels, using a yieldco as a form of financing has multiple benefits for the utilities operators, including:

1) Unleashing value through faster cash recycling to create a “multiplier effect”. By disposing of mature infrastructure assets into the yieldco, CKI would essentially sell its minority stakes to third-party investors at a premium (an IRR above the company’s current WACC of 8%). As such, the company could capture the value enhancement once it sells the infrastructure assets, which would be much earlier than realising the value over the lifetime. By cashing out, the company could use the recycled cash to invest in new assets, and again at a later stage, dispose of the new assets into the yieldco at a premium. The NPV would be enhanced accordingly, ie, through the “multiplier effect”. On our estimates, setting up a yieldco could enhance the NPV of CKI’s overseas infrastructure assets by 43%, assuming a 100% dividend payout and that CKI sells a 51% stake of its assets to this yieldco. Or, we would see 82% value enhancement if CKI were to distribute only 70% of its cash flow and reinvest the remaining 30% in additionally acquired overseas infrastructure assets.

Daiwa’s assumptions for the yieldco Value enhancement from a yieldco structure Assumptions

Capex 100

IRR 12.2%

Cost of equity 10%

Dividend payout 70%

Percent of stake sold 51%

Reinvest until Year 10

Additional value when sold after year 1 13

Source: Daiwa

Source: Daiwa

0

50

100

150

200

Assuming holding100% stake to

maturity

Assuming selling51% stake forreinvestment

Assuming 70%dividend payout

Value enhancementpotential

NPV (capex = 100)

What are the benefits of setting up a yieldco?


- 38 -

Value enhancement calculation of a yieldco VALUE ENHANCEMENT OF SETTING UP A YIELDCO WITH 100% PAYOUT / 0% REINVESTMENT

Year

0 Year

1 Year

2 Year

3 Year

4 Year

5 Year

6 Year

7 Year

8 Year

9 Year

10 Year

11 Year

12 Year

13 Year

14 Year

15 Year

16 Year

17 Year

18 Year

19 Year

20 Year

21 Year

22 Year

23 Year

24 Year

25 Year

26 Year

27 Year

28 Year

29 Year

30

Assuming holding to maturity

Capex 100

FCFE -100 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5 13.5

IRR 13.2%

VALUE ENHANCEMENT OF SETTING UP A YIELDCO WITH 70% PAYOUT / 30% REINVESTMENT

Year

0 Year

1 Year

2 Yea

r 3 Yea

r 4 Yea

r 5 Yea

r 6 Yea

r 7 Yea

r 8 Yea

r 9 Year

10 Year

11 Year

12 Year

13 Year

14 Year

15 Year

16 Year

17 Year

18 Year

19 Year

20 Year

21 Year

22 Year

23 Year

24 Year

25 Year

26 Year

27 Year

28 Year

29 Year

30

Assuming reinvesting from cash recycled through 51% project sales

Project returns (assuming 51% sales after one year)

Year 0 13.5 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6 6.6

Year 1 - 8.3 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1

Year 2 - - 5.7 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.8

Year 3 - - - 4.4 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2

Year 4 - - - - 3.8 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9

Year 5 - - - - - 3.7 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8

Year 6 - - - - - - 3.7 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8

Year 7 - - - - - - - 3.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9

Year 8 - - - - - - - - 4.1 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0

Year 9 - - - - - - - - - 4.5 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2

Year 10 - - - - - - - - - - 4.8 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4

Total return

13.5 21.9 27.6 32.0 35.8 39.4 43.2 47.0 51.2 55.7 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5

Dividend payout

9.5 15.3 19.3 22.4 25.0 27.6 30.2 32.9 35.8 39.0 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5 60.5

Residual

4.1 6.6 8.3 9.6 10.7 11.8 12.9 14.1 15.4 16.7 - - - - - - - - - - - - - - - - - - - -

Return to company

13.5 15.0 16.4 17.9 19.5 21.2 23.0 25.0 27.2 29.6 32.1 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6

Dividend payout

9.5 10.5 11.5 12.5 13.6 14.8 16.1 17.5 19.0 20.7 32.1 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6

FCFE -100 9.5 10.5 11.5 12.5 13.6 14.8 16.1 17.5 19.0 20.7 32.1 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6 29.6

IRR 16.5%

NPV 182

Multiplier 1.43

Source: Daiwa

Due to the high valuations, yieldcos in the US are mostly paying 4-6% 2016E dividend yields under current market conditions (refer to the table on the following page), which is considered a relatively cheap source of equity funding for the parent company compared with similar asset classes. Also, a growth premium is embedded in the valuation, resulting in a reduced average cost of capital for the parent company. 2) Deleveraging of the parent’s balance sheet without equity dilution. In the case of CKI, if it were to deploy all

of its HKD76bn cash on M&A activity in the future, it could then spin off its overseas assets to effectively increase the company’s equity base without diluting existing shareholders’ interests. In addition, with respect to CKI, a yieldco would allow it to raise additional debt or shareholders’ loans to finance its acquisition of assets from CKI, which would then allow CKI to lower its the consolidated debt.

3) New investment opportunities. Given that global infrastructure asset companies usually have high costs of equity (above 9%), many global infrastructure operators are highly geared to pursue projects offering equity IRRs of 9-12%. If CKI were to lower its cost of equity, many previously unattractive opportunities could become more attractive, allowing it to capture a wider spectrum of global infrastructure assets than its peers currently have.

4) A tax shelter: Both MLPs and yieldcos enjoy a single layer of taxation, meaning that profits are only taxed at the shareholder level and not at the corporate level. Given that the yieldco usually has high depreciation versus revenue in the first few years of operations, a yieldco is usually in a tax-loss position initially. Combined with possible tax credits, accelerated depreciation, and continuous acquisitions, a yieldco could serve as a tax shelter for many years.


- 39 -

CKI could capture more M&A opportunities than its peers as its cost of capital is lower

Source: Daiwa

Overseas-listed yieldcos

Dividend yield (%)

Stock code

Listing date

Market cap (USD m)

Type of assets Total capacity

(MW) (end-2014) Parent company 2014 2015E 2016E

NRG Yield, Inc. NYLD US 7/17/2013 3,931 Solar/Wind/Thermal 2,985 NRG Energy Inc. 3.01 3.40 4.05

Pattern Energy Group, Inc. PEGI US 9/27/2013 2,023 Wind 1,636 Pattern Development 5.27 4.94 5.63

Abengoa Yield Plc. ABY US 6/13/2014 2,731 Solar/Thermal 2,246 Abengoa (ABGB US) - 4.87 6.28

TransAlta Renewables, Inc. RNW CN 8/9/2013 1,148 Hydro/Wind 1,376 TransAlta Corp. 5.59 6.12 6.17

NextEra Energy Partners, LP NEP US 6/27/2014 4,114 Solar/Wind 10,351 NextEra Energy (NEE US) 0.58 2.35 2.86

TerraForm Power, Inc. TERP US 7/18/2014 4,763 Solar/Wind 1,507 SunEdison (SUNE US) - 3.40 4.19

Source: Bloomberg, Daiwa forecasts

7% 9% Global infrastructure assets IRR

CKI’s

WACCOther companies’

WACC

CKI’s

Monopoly

Assets


- 40 -

See important disclosures, including any required research certifications, beginning on page 54

■ What's new

In our view, a potential merger of CKI and PAH, together with CK/Hutchison entering the next phase of their development, would be key events for CKI in its 20th year. And we could see more exciting developments, eg, the setting-up of a yieldco, a Li family buyback, and a spin-off from CK Hutchison, providing further value realisation. ■ What's the impact

The key is the roadmap post CKI’s 20th anniversary in 2016. For the Li family, the infrastructure assets are the dividend cow, and one of the most favoured business segments under Hutchison, given their stable returns and relative lack of reliance on the macro picture. In the preceding 19 years, CKI needed group companies PAH and CK Holding (now CK Hutchison) to

grow its asset base through co-investments. In our view, a merger with 38.87%-owned associate PAH would provide CKI with HKD69bn for its future self-development. Chapter 3 has begun for CKI. We believe the asset realisation phase for infrastructure investments for CK/Hutchison began with the spin-off of HEC from PAH (Chapter 3.1) in 2014. In the accompanying thematic report, we outline 3 steps Victor Li may take in the coming years, all of which would be positive for shareholders and the Li family. ■ What we recommend

We reiterate Buy (1) on CKI, with our new SOTP-based 12-month TP of HKD72 (previous: HKD74) reflecting a higher WACC assumption on a potential interest-rate upturn in 2H15-1H16. The stock is trading at 14x 2016E PER, vs. its peers’ 15-18x. We forecast 83% of CKI’s 2016E earnings (PAH: 74%, CLP: 0%) will be from regulated assets where tariff-setting is based on a WACC determined by the risk-free rate; hence, any potential interest-rate rises from 2H15 should have a minimal impact on earnings. ■ How we differ

We are 5% below the consensus on 2015E EPS after cutting 2015-16E EPS by 5-12%, on incorporating an

AUD60m one-off settlement fee with the Australian Tax Office and a 4.1-5.5% depreciation of the GBP and AUD vs. the HKD.

Utilities / Hong Kong 1038 HK

21 July 2015

Cheung Kong Infrastructure

Entering its 20th year

After PAH’s spin-off of HKEI, CKI could enter its 20th year by merging

with PAH and further establishing its own empire

A CKI-PAH merger, Li family buyback and separation from CK

Hutchison could be the path before its 30th year

Even though CKI’s 14x 2016E PER is lower than PAH’s 18x, a merger is

still possible given PAH’s ex-cash PER of 13x; Buy (1)

Source: Daiwa forecasts

Source: FactSet, Daiwa forecasts

Utilities / Hong Kong

Cheung Kong Infrastructure1038 HK

Target (HKD): 74.00 g 72.00

Upside: 15.2%

20 Jul price (HKD): 62.50

Buy (unchanged)

Outperform

Hold

Underperform

Sell

1

2

3

4

5

Forecast revisions (%)Year to 31 Dec 15E 16E 17E

Revenue change (6.1) (16.3) n.a.

Net profit change (11.6) (5.4) n.a.

Core EPS (FD) change (11.6) (5.4) n.a.

95

103

110

118

125

52

57

61

66

70

Jul-14 Oct-14 Jan-15 Apr-15

Share price performance

CK Infra (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 53.95-68.70

Market cap (USDbn) 20.32

3m avg daily turnover (USDm) 15.58

Shares outstanding (m) 2,520

Major shareholder CK Hutchison (75.7%)

Financial summary (HKD)Year to 31 Dec 15E 16E 17E

Revenue (m) 6,014 6,184 6,343

Operating profit (m) 2,334 2,360 2,386

Net profit (m) 10,001 11,185 11,466

Core EPS (fully-diluted) 3.977 4.439 4.551

EPS change (%) (67.2) 11.6 2.5

Daiwa vs Cons. EPS (%) (5.1) 3.5 3.0

PER (x) 15.7 14.1 13.7

Dividend yield (%) 3.5 3.7 4.0

DPS 2.168 2.340 2.506

PBR (x) 1.5 1.4 1.3

EV/EBITDA (x) 20.8 16.7 12.8

ROE (%) 9.6 10.3 10.0

Dennis Ip, CFA

(852) 2848 4068

[email protected]

Scott Chui(852) 2848 4443

[email protected]

How do we justify our view?How do we justify our view?


- 42 -

Key assumptions

Profit and loss (HKDm)

Cash flow (HKDm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Average net electricity tariff in HK (HK

cents per kWh) - for HEC 119.80 123.10 130.90 134.60 134.90 134.90 134.90 134.90

HK SoC fixed assets (HKD m) - for

HEC 47,976 48,848 49,345 49,137 52,134 52,277 52,787 53,472

Total HK SoC capital expenditure

(HKD m) - for HEC2,427 2,887 2,613 1,934 2,167 2,317 2,750 3,000

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales of infrastructure material 1,743 2,082 2,192 2,642 2,704 2,762 2,808 2,856

EnviroWaste 0 0 0 886 1,362 1,531 1,643 1,755

Other Revenue 1,071 1,411 1,913 1,490 2,034 1,722 1,733 1,732

Total Revenue 2,814 3,493 4,105 5,018 6,100 6,014 6,184 6,343

Other income 539 580 439 544 2,420 309 308 309

COGS (2,152) (2,546) (3,028) (4,369) (3,999) (3,752) (3,896) (4,029)

SG&A 0 0 0 0 0 0 0 0

Other op.expenses (79) (69) (54) (169) (262) (236) (236) (236)

Operating profit 1,122 1,458 1,462 1,024 4,259 2,334 2,360 2,386

Net-interest inc./(exp.) (450) (575) (732) (765) (906) (906) (906) (906)

Assoc/forex/extraord./others 4,503 7,382 9,326 11,995 28,993 8,729 9,887 10,142

Pre-tax profit 5,175 8,265 10,056 12,254 32,346 10,158 11,341 11,623

Tax (8) 6 19 58 (26) (26) (26) (26)

Min. int./pref. div./others (139) (526) (648) (673) (538) (131) (131) (131)

Net profit (reported) 5,028 7,745 9,427 11,639 31,782 10,001 11,185 11,466

Net profit (adjusted) 5,028 7,745 9,427 11,639 29,534 10,001 11,185 11,466

EPS (reported)(HKD) 2.230 3.381 3.930 4.771 13.027 3.977 4.439 4.551

EPS (adjusted)(HKD) 2.230 3.381 3.930 4.771 12.106 3.977 4.439 4.551

EPS (adjusted fully-diluted)(HKD) 2.230 3.381 3.930 4.771 12.106 3.977 4.439 4.551

DPS (HKD) 1.330 1.562 1.689 1.860 2.048 2.168 2.340 2.506

EBIT 1,122 1,458 1,462 1,024 2,011 2,334 2,360 2,386

EBITDA 1,201 1,527 1,516 1,193 2,273 2,571 2,596 2,622

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Profit before tax 5,175 8,265 10,056 12,254 32,346 10,158 11,341 11,623

Depreciation and amortisation 79 69 54 169 262 236 236 236

Tax paid (8) 6 19 58 (26) (26) (26) (26)

Change in working capital 408 341 469 1,228 334 (212) 89 83

Other operational CF items (3,825) (7,059) (8,686) (10,957) (30,030) (7,823) (8,981) (9,236)

Cash flow from operations 1,829 1,622 1,912 2,752 2,886 2,333 2,659 2,680

Capex (141) (353) (680) (405) (292) (292) (292) (292)

Net (acquisitions)/disposals (14,051) (9,697) (2,681) (5,445) (6,345) (5,114) 0 0

Other investing CF items 2,683 3,544 4,113 4,746 6,139 4,739 4,754 4,769

Cash flow from investing (11,509) (6,506) 752 (1,104) (498) (667) 4,462 4,477

Change in debt (30) 6,142 (3,495) 3,040 7,195 0 0 0

Net share issues/(repurchases) 0 3,411 4,604 0 0 4,600 0 0

Dividends paid (2,727) (3,108) (3,760) (4,294) (4,599) (4,997) (5,452) (5,895)

Other financing CF items 8,569 (1,052) 1,020 (1,419) (3,839) (1,505) (1,505) (1,505)

Cash flow from financing 5,812 5,393 (1,631) (2,673) (1,243) (1,902) (6,957) (7,400)

Forex effect/others 0 0 0 0 0 0 0 0

Change in cash (3,868) 509 1,033 (1,025) 1,145 (236) 164 (243)

Free cash flow 1,688 1,269 1,232 2,347 2,594 2,041 2,367 2,388

Financial summary


- 43 -

Balance sheet (HKDm)

Key ratios (%)


Company profile

Cheung Kong Infrastructure Holdings (CKI) is an infrastructure and utilities conglomerate with investments in Hong Kong (via Power Assets Holdings), the UK, Australia, mainland China, New Zealand, the Netherlands and Canada. Its core assets are involved in power generation, power distribution, gas distribution, water utilities, toll roads, car parks, waste treatment facilities, rolling-stocks leasing and infrastructure materials.

As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Cash & short-term investment 5,438 5,947 6,980 5,958 7,108 6,864 7,027 6,784

Inventory 143 223 150 215 175 192 198 203

Accounts receivable 529 524 1,014 1,162 1,204 1,204 0 0

Other current assets 186 262 47 1,443 825 825 0 0

Total current assets 6,296 6,956 8,191 8,778 9,312 9,085 7,225 6,987

Fixed assets 1,276 845 1,477 2,408 2,452 2,216 1,980 1,743

Goodwill & intangibles 151 0 0 2,966 2,877 1,439 0 0

Other non-current assets 56,537 69,022 78,874 85,756 111,429 118,128 125,851 135,893

Total assets 64,260 76,823 88,542 99,908 126,070 130,867 135,056 144,624

Short-term debt 1,228 11,342 24 44 1,690 1,690 1,690 1,690

Accounts payable 1,670 2,086 2,972 4,413 4,749 4,517 4,644 4,763

Other current liabilities 160 99 295 583 132 132 132 132

Total current liabilities 3,058 13,527 3,291 5,040 6,571 6,339 6,466 6,585

Long-term debt 7,259 3,126 11,089 12,985 16,947 16,947 16,947 16,947

Other non-current liabilities 256 398 781 1,285 806 1,206 (24) 4,273

Total liabilities 10,573 17,051 15,161 19,310 24,324 24,491 23,389 27,805

Share capital 2,254 2,339 2,496 2,496 2,440 2,520 2,520 2,520

Reserves/R.E./others 51,352 57,338 70,796 78,018 99,229 103,778 109,067 114,219

Shareholders' equity 53,606 59,677 73,292 80,514 101,669 106,298 111,587 116,739

Minority interests 81 95 89 84 77 78 79 80

Total equity & liabilities 64,260 76,823 88,542 99,908 126,070 130,867 135,056 144,624

EV 109,326 102,646 89,283 83,804 61,948 53,464 43,414 33,515

Net debt/(cash) 3,049 8,521 4,133 7,071 11,529 11,773 11,610 11,853

BVPS (HKD) 23.780 25.517 29.359 33.003 41.674 42.265 44.288 46.332

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) 28.8 24.1 17.5 22.2 21.6 (1.4) 2.8 2.6

EBITDA (YoY) 116.4 27.1 (0.7) (21.3) 90.5 13.1 1.0 1.0

Operating profit (YoY) 128.5 29.9 0.3 (30.0) 96.4 16.1 1.1 1.1

Net profit (YoY) (9.7) 54.0 21.7 23.5 153.8 (66.1) 11.8 2.5

Core EPS (fully-diluted) (YoY) (9.7) 51.6 16.2 21.4 153.8 (67.2) 11.6 2.5

Gross-profit margin 23.5 27.1 26.2 12.9 34.4 37.6 37.0 36.5

EBITDA margin 42.7 43.7 36.9 23.8 37.3 42.7 42.0 41.3

Operating-profit margin 39.9 41.7 35.6 20.4 33.0 38.8 38.2 37.6

Net profit margin 178.7 221.7 229.6 231.9 484.2 166.3 180.9 180.8

ROAE 10.5 13.7 14.2 15.1 32.4 9.6 10.3 10.0

ROAA 8.7 11.0 11.4 12.4 26.1 7.8 8.4 8.2

ROCE 2.0 2.1 1.8 1.1 1.9 1.9 1.8 1.8

ROIC 2.3 2.3 2.0 1.2 4.2 2.0 2.0 1.9

Net debt to equity 5.7 14.3 5.6 8.8 11.3 11.1 10.4 10.2

Effective tax rate 0.2 n.a. n.a. n.a. 0.1 0.3 0.2 0.2

Accounts receivable (days) 65.3 55.0 68.4 79.1 70.8 73.1 35.5 0.0

Current ratio (x) 2.1 0.5 2.5 1.7 1.4 1.4 1.1 1.1

Net interest cover (x) 2.5 2.5 2.0 1.3 2.2 2.6 2.6 2.6

Net dividend payout 59.6 46.2 43.0 39.0 15.7 54.5 52.7 55.1

Free cash flow yield 1.1 0.8 0.8 1.5 1.6 1.3 1.5 1.5

Financial summary continued …


- 44 -


■ What's new

The countdown is on for the second anniversary (January 2016) of HKEI’s listing, with chairman Canning Fok having said PAH may pay a special dividend if it has not spent most of its HKD69bn of idle cash by then. We believe a CKI/PAH merger is likely over 6-12 months. ■ What's the impact

Why would a merger be favoured by the Li family? 1. To maximise the value of overseas assets co-owned by the 2 companies. 2. It could lead to a potential rerating of CKI, from its current 14x 2016E PER (vs. 18x for PAH). 3. It would likely mean that the HKD69bn cash recycled from the 2 sales of HKEI’s holdings (total disposal of a 66.63% stake) will be more efficiently used, as we think CKI has more acquisition

opportunities open to it than PAH. The Li family would also benefit from a merger, as its effective stake in PAH’s HKD69bn cash pile would rise from 8.87% to 13.79-14.30% (assuming CKI offers 1.15-1.27 new shares for each PAH share). ■ What we recommend

We cut our SOTP-based 12-month TP to HKD75, reflecting our higher WACC assumption, on potential rate hikes in 2H15-1H16. But we upgrade our rating on PAH to Outperform (2) given the potential merger premium that we expect CKI to offer PAH’s minorities as a sweetener. Excluding the HKD69bn cash on its balance sheet, the stock is trading currently at 13x 2016E PER, 1SD below its past 7.5-year average, or at a 10% discount to CKI. Key downside risk: if the merger does not happen, and if PAH is reluctant to distribute a special dividend (if no M&A is confirmed). Our 2015E EPS are 11% lower than consensus as we have cut our 2015E EPS by 19% to incorporate a AUD69m one-off settlement fee with the Australian Tax Office, the disposal of a further 16.53% stake in HKEI, and a greater-than-expected depreciation in the GBP and AUD vs. HKD (of 4.1-5.5% YoY; 2015 YTD: down 10-11% for both).

■ How we differ

For 2015, we are more bearish than the market as we have factored in the forex weakness.


21 July 2015

Power Assets

The clock is ticking

Another 6 months for PAH to spend its HKD69bn idle cash on M&A

before the mentioned special dividend is paid

Given the competition to buy global energy assets, merging with parent

CKI seems a more effective way of pursuing M&A

13x 2016E (ex-cash) PER looks attractive from a merger angle.

Upgrading to Outperform (2) on potential merger premium




Power Assets6 HK

Target (HKD): 82.00 g 75.00

Upside: 5.4%


Buy

Outperform (from Hold)

Hold

Underperform

Sell

1

2

3

4

5


Revenue change 64.9 64.9 n.a.

Net profit change (19.4) (11.9) n.a.

Core EPS (FD) change (19.4) (11.9) n.a.

85

93

100

108

115

66

71

76

80

85



Pwr Assets (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 66.35-82.25




Major shareholder Cheung Kong Infrastructures (38.9%)


Revenue (m) 2,190 2,190 2,190


Net profit (m) 7,711 8,544 8,682


EPS change (%) (87.4) 10.8 1.6

Daiwa vs Cons. EPS (%) (10.6) 0.1 1.5

PER (x) 19.7 17.8 17.5


DPS 2.710 3.042 3.132

PBR (x) 1.2 1.2 1.2

EV/EBITDA (x) 4.1 3.2 2.3

ROE (%) 6.2 6.8 6.8

Dennis Ip, CFA

(852) 2848 4068

[email protected]

Scott Chui(852) 2848 4443

[email protected]



- 46 -

Key assumptions


Cash flow (HKDm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Average net electricity tariff in HK (HK

cents per kWh) - for HEC 119.80 123.10 130.90 134.60 134.90 134.90 134.90 134.90

HK SoC fixed assets (HKD m) - for

HEC 47,976 48,848 49,345 49,137 52,134 52,277 52,787 53,472

Total HK SoC capital expenditure

(HKD m) - for HEC2,427 2,887 2,613 1,934 2,167 2,317 2,750 3,000

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales of electricity in Hong Kong 10,338 10,140 10,364 10,176 676 0 0 0

Other revenue 25 45 36 46 16 2,190 2,190 2,190

Other Revenue 0 0 0 0 0 0 0 0

Total Revenue 10,363 10,185 10,400 10,222 692 2,190 2,190 2,190

Other income 1,063 1,625 1,515 1,567 55,127 586 671 672

COGS (2,159) (2,239) (2,341) (4,228) (307) 0 0 0

SG&A 0 0 0 0 0 0 0 0

Other op.expenses (814) (1,482) (1,292) (1,504) (941) 0 0 0

Operating profit 8,453 8,088 8,282 6,057 54,571 2,776 2,861 2,862

Net-interest inc./(exp.) (391) (617) (648) (692) (434) (434) (434) (434)

Assoc/forex/extraord./others 1,899 4,193 4,665 6,226 6,961 5,370 6,118 6,255

Pre-tax profit 9,961 11,664 12,299 11,591 61,098 7,712 8,545 8,683

Tax (937) (858) (835) (814) (13) (1) (1) (1)

Min. int./pref. div./others (59) 45 71 388 (80) 0 0 0

Net profit (reported) 8,965 10,851 11,535 11,165 61,005 7,711 8,544 8,682

Net profit (adjusted) 8,965 10,851 11,535 11,165 61,005 7,711 8,544 8,682

EPS (reported)(HKD) 4.200 5.084 5.404 5.231 28.584 3.613 4.003 4.068

EPS (adjusted)(HKD) 4.200 5.084 5.404 5.231 28.584 3.613 4.003 4.068

EPS (adjusted fully-diluted)(HKD) 4.200 5.084 5.404 5.231 28.584 3.613 4.003 4.068

DPS (HKD) 2.110 2.320 2.450 2.550 2.680 2.710 3.042 3.132

EBIT 8,453 8,088 8,282 6,057 54,571 2,776 2,861 2,862

EBITDA 10,244 9,923 10,200 8,038 54,722 2,776 2,861 2,862

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Profit before tax 9,961 11,664 12,299 11,591 61,098 7,712 8,545 8,683

Depreciation and amortisation 1,791 1,835 1,918 1,981 151 0 0 0

Tax paid (937) (858) (835) (814) (13) (1) (1) (1)

Change in working capital 162 1,462 (329) 608 374 0 0 0

Other operational CF items (3,934) (6,672) (5,829) (5,103) (59,417) (4,936) (5,684) (5,821)

Cash flow from operations 7,043 7,431 7,224 8,263 2,193 2,775 2,860 2,861

Capex (2,238) (2,480) (2,613) (1,973) (86) 0 0 0

Net (acquisitions)/disposals (13,954) 2 (2,471) (2,277) 26,313 7,683 0 0

Other investing CF items 1,008 1,039 3,146 2,281 18,616 2,993 2,999 3,005

Cash flow from investing (15,184) (1,439) (1,938) (1,969) 44,843 10,676 2,999 3,005

Change in debt 13,320 (2,857) 497 (1,181) 0 0 0 0

Net share issues/(repurchases) 0 0 0 0 0 0 0 0

Dividends paid (4,503) (4,503) (4,951) (5,292) (5,485) (5,720) (5,783) (6,493)

Other financing CF items 72 53 38 61 10 0 0 0

Cash flow from financing 8,889 (7,307) (4,416) (6,412) (5,475) (5,720) (5,783) (6,493)

Forex effect/others 0 0 0 0 0 0 0 0

Change in cash 748 (1,315) 870 (118) 41,561 7,731 75 (628)

Free cash flow 4,805 4,951 4,611 6,290 2,107 2,775 2,860 2,861

Financial summary


- 47 -


Key ratios (%)


Company profile

Power Assets Holdings (PAH) is a utilities conglomerate with a 49.9% stake in Hongkong Electric Company, one of the two integrated power utilities in the city regulated by the government. It also owns energy assets such as power-generation, power-distribution and gas-distribution businesses in the UK, Australia, Mainland China, New Zealand, the Netherlands, Canada and Thailand.

As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Cash & short-term investment 5,839 6,121 6,140 7,894 61,291 69,022 69,097 68,469

Inventory 747 1,115 1,114 948 0 0 0 0

Accounts receivable 1,182 1,101 1,740 1,647 810 0 0 0

Other current assets 569 1,037 827 5 0 0 0 0

Total current assets 8,337 9,374 9,821 10,494 62,101 69,022 69,097 68,469

Fixed assets 43,533 43,727 44,408 44,063 14 0 0 0

Goodwill & intangibles 0 0 0 0 0 0 0 0

Other non-current assets 40,833 41,629 47,417 50,680 74,159 81,743 83,862 87,113

Total assets 92,703 94,730 101,646 105,237 136,274 150,765 152,959 155,582

Short-term debt 8,459 617 5,311 500 0 0 0 0

Accounts payable 1,702 3,451 3,760 4,109 2,698 0 0 0

Other current liabilities 165 218 339 343 2 2 2 2

Total current liabilities 10,326 4,286 9,410 4,952 2,700 2 2 2

Long-term debt 17,312 23,009 19,282 21,845 10,204 10,204 10,204 10,204

Other non-current liabilities 8,381 9,064 9,492 8,963 282 15,543 15,687 16,313

Total liabilities 36,019 36,359 38,184 35,760 13,186 25,749 25,893 26,519

Share capital 2,134 2,134 2,134 2,134 6,610 6,610 6,610 6,610

Reserves/R.E./others 54,550 56,237 61,328 67,343 116,478 118,406 120,456 122,453

Shareholders' equity 56,684 58,371 63,462 69,477 123,088 125,016 127,066 129,063

Minority interests 0 0 0 0 0 0 0 0

Total equity & liabilities 92,703 94,730 101,646 105,237 136,274 150,765 152,959 155,582

EV 136,329 133,661 128,795 121,693 26,700 11,292 9,097 6,475

Net debt/(cash) 19,932 17,505 18,453 14,451 (51,087) (58,818) (58,893) (58,265)

BVPS (HKD) 26.559 27.350 29.735 32.553 57.672 58.576 59.536 60.472

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) (0.0) (1.7) 2.1 (1.7) (93.2) 216.4 0.0 0.0

EBITDA (YoY) 25.1 (3.1) 2.8 (21.2) 580.8 (94.9) 3.1 0.0

Operating profit (YoY) 28.7 (4.3) 2.4 (26.9) 801.0 (94.9) 3.1 0.0

Net profit (YoY) 34.4 21.0 6.3 (3.2) 446.4 (87.4) 10.8 1.6

Core EPS (fully-diluted) (YoY) 34.4 21.0 6.3 (3.2) 446.4 (87.4) 10.8 1.6

Gross-profit margin 79.2 78.0 77.5 58.6 55.6 100.0 100.0 100.0

EBITDA margin 98.8 97.4 98.1 78.6 7,907.8 126.8 130.7 130.7

Operating-profit margin 81.6 79.4 79.6 59.3 7,886.0 126.8 130.7 130.7

Net profit margin 86.5 106.5 110.9 109.2 8,815.8 352.1 390.2 396.5

ROAE 16.4 18.9 18.9 16.8 63.4 6.2 6.8 6.8

ROAA 10.7 11.6 11.7 10.8 50.5 5.4 5.6 5.6

ROCE 11.5 9.8 9.7 6.7 48.5 2.1 2.1 2.1

ROIC 11.2 9.8 9.8 6.8 70.0 4.0 4.3 4.1

Net debt to equity 35.2 30.0 29.1 20.8 n.a. n.a. n.a. n.a.

Effective tax rate 9.4 7.4 6.8 7.0 0.0 0.0 0.0 0.0

Accounts receivable (days) 39.5 40.9 49.9 60.5 648.0 67.5 0.0 0.0

Current ratio (x) 0.8 2.2 1.0 2.1 23.0 34,510.8 34,548.4 34,234.7

Net interest cover (x) 21.6 13.1 12.8 8.8 125.7 6.4 6.6 6.6

Net dividend payout 50.2 45.6 45.3 48.7 9.4 75.0 76.0 77.0

Free cash flow yield 3.2 3.3 3.0 4.1 1.4 1.8 1.9 1.9



■ What's new

We expect the government to consolidate the results of its 2 public consultations and decide on any policy changes by end-2015. Ultimately we believe HKEI will enjoy a stable operating environment until 2023. ■ What's the impact

Status quo to rule. First, under the Scheme of Control (SoC), the government has the option to extend the agreement by 5 years, and we believe it may want to do so in order to buy time to formulate a more comprehensive plan. Second, the power companies have ample negotiating power, which may make it hard to bring about an immediate reduction in the permitted return. Long-term pressure on profitability likely to persist.

The government will likely improve interconnections between the 2 companies in order to pave the way for the longer-term introduction of competition. As such, we expect HKEI and CLP Holdings to face structural headwinds in the long term, including: 1) competition from the Mainland China grid or new local players once interconnections improve, 2) the further development of renewable energies challenging the IPP model, and 3) weak electricity demand from Hong Kong due to limited GDP growth and ongoing energy savings. ■ What we recommend

Hold (3) maintained. HKEI offers a 7.5% dividend yield for 2015E, which appeals relative to its regional peers’ 5.8-8.4%. However, given the risks associated with the consultations, as well as the long-term headwinds we have highlighted, we consider the stock to be fairly valued and hence stick with our DCF-based target price of HKD5.50. The key downside risk: unfavourable changes in the SoC structure; the key upside risk: a milder-than-expected cut in the permitted return. ■ How we differ

We are 3.5%/0.5% below the Bloomberg consensus on 2016-17E

EPS, likely due to our view of an increase in finance costs.


21 July 2015

HK Electric Investments

All eyes on consultation results

HKEI should maintain its stable operating environment until at least

2023E

But increasing competition, the rise of renewable energy, and weak

electricity demand could impact long-term profitability

Hold (3) rating unchanged; 7.5% dividend yield at the top end among

peers, but justified by increasing risks and uncertainties




HK Electric Investments2638 HK

Target (HKD): 5.50 g 5.50

Upside: 1.6%


Buy

Outperform

Hold (unchanged)

Underperform

Sell

1

2

3

4

5


Revenue change - - -

Net profit change - - -

Core EPS (FD) change - - -

80

86

93

99

105

5.0

5.3

5.5

5.8

6.0



HKEI (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 5.03-5.52




Major shareholder Power Assets Holdings Limited (33.7%)


Revenue (m) 11,197 11,069 11,051


Net profit (m) 3,335 3,188 3,155


EPS change (%) (3.8) (4.4) (1.0)

Daiwa vs Cons. EPS (%) 0.1 (3.5) (0.5)

PER (x) 14.3 15.0 15.2


DPS 0.404 0.385 0.385

PBR (x) 1.0 1.0 1.0

EV/EBITDA (x) 11.6 11.6 11.5

ROE (%) 6.8 6.5 6.5

Scott Chui

(852) 2848 4443

[email protected]

Dennis Ip, CFA(852) 2848 4068

[email protected]



- 49 -

Growth outlook HKEI: electricity sales trend (2003-17E)

We foresee limited growth potential for HKEI’s earnings over our forecast horizon, or group distributable income, given the mature structure of the power market in Hong Kong, as well as the stable net tariff outlook (pre-determined in the 2014-2018 Development Plan). In our view, the key drivers to HKEI’s group distributable income are: 1) abrupt changes to fuel costs, 2) finance costs, and 3) capital expenditure.

Source: Company data, Daiwa estimates

Valuation HKEI: 2015E dividend yield versus peers

HKEI currently offers a 7.5% forward dividend yield, compared with HKT Trust’s (6823 HK, HKD9.23, not rated) 5.8%, Langham’s 8.4% (1270 HK, HKD3.35, not rated), the Hong Kong REITs’ average of 5.3%, and the Singapore REIT’s average of 5.8%. That said, given our expectation that HKEI’s dividend will likely peak in 2015E and then decline until at least 2018E, we believe the stock’s current inexpensive valuation is justified. Our 12-month target price of HKD5.50 implies a 2016E dividend yield of 7.3%, equivalent to HKEI’s historical trading average one-year forward dividend yield.

Source: Bloomberg, Daiwa estimates

Earnings revisions HKEI: earnings forecast trends

The Bloomberg consensus EPS forecast for 2015 has gradually moved towards our forecast of HKD0.377. Our 2016/17E forecasts are 3.5%/0.5% below the consensus, suggesting we have a slightly higher interest-rate-hike assumption that increases financing costs.

Source: Bloomberg

How do we justify our view?

Growth outlook

Valuation

Earnings revisions

(3%)

(2%)

(1%)

0%

1%

2%

0

2,000

4,000

6,000

8,000

10,000

12,000

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

E

2016

E

2017

E

(m kWh)

Electricity sold - commercial Electricity sold - residential

Electricity sold - industrial YoY growth (RHS)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

HKEI HKT Trust Langham -SS

HK utilities -avg

HK REIT -avg

SG REIT -avg

AU SS -avg

Dvd yld (%)

Average yield: 6.1%

0.30

0.32

0.34

0.36

0.38

0.40

Jan-

14

Feb

-14

Mar

-14

Apr

-14

Apr

-14

May

-14

Jun-

14

Jun-

14

Jul-1

4

Aug

-14

Aug

-14

Sep

-14

Oct

-14

Oct

-14

Nov

-14

Dec

-14

Dec

-14

Jan-

15

(HKD)

2014E EPS 2015E EPS 2016E EPS

Buy

Outperform

Hold (unchanged)

Underperform

Sell

1

2

3

4

5


- 50 -

Key assumptions


Cash flow (HKDm)


Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Electricity sold (mn kWh) n.a. n.a. n.a. n.a. 10,955 10,897 10,943 10,991

Basic tariff (HK cents per kWh) n.a. n.a. n.a. n.a. 101.8 102.6 101.0 100.4

Fuel clause charge (HK cents per

kWh) n.a. n.a. n.a. n.a. 33.1 32.3 33.9 34.5

Unit fuel costs (HKD per kWh) n.a. n.a. n.a. n.a. 0.484 0.483 0.486 0.484

Capex (HKD mn) n.a. n.a. n.a. n.a. 2,167 2,317 2,750 3,000

Permitted rate of return (%) n.a. n.a. n.a. n.a. 9.96 9.96 9.96 9.96

Effective interest rate (%) n.a. n.a. n.a. n.a. 2.1 2.4 2.8 3.0

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales of electricity n.a. n.a. n.a. n.a. 10,489 11,180 11,053 11,034

Electricity-related income n.a. n.a. n.a. n.a. 21 23 23 23

Other Revenue n.a. n.a. n.a. n.a. (6) (6) (6) (6)

Total Revenue n.a. n.a. n.a. n.a. 10,504 11,197 11,069 11,051

Other income n.a. n.a. n.a. n.a. 74 74 74 74

COGS n.a. n.a. n.a. n.a. (4,832) (5,322) (5,237) (5,234)

SG&A n.a. n.a. n.a. n.a. (766) (823) (818) (817)

Other op.expenses n.a. n.a. n.a. n.a. 0 0 (0) 0

Operating profit n.a. n.a. n.a. n.a. 4,980 5,126 5,088 5,074

Net-interest inc./(exp.) n.a. n.a. n.a. n.a. (891) (1,112) (1,292) (1,384)

Assoc/forex/extraord./others n.a. n.a. n.a. n.a. 0 0 0 0

Pre-tax profit n.a. n.a. n.a. n.a. 4,089 4,014 3,797 3,690

Tax n.a. n.a. n.a. n.a. (709) (696) (658) (640)

Min. int./pref. div./others n.a. n.a. n.a. n.a. (179) 17 49 105

Net profit (reported) n.a. n.a. n.a. n.a. 3,201 3,335 3,188 3,155

Net profit (adjusted) n.a. n.a. n.a. n.a. 3,201 3,335 3,188 3,155

EPS (reported)(HKD) n.a. n.a. n.a. n.a. 0.392 0.377 0.361 0.357

EPS (adjusted)(HKD) n.a. n.a. n.a. n.a. 0.392 0.377 0.361 0.357

EPS (adjusted fully-diluted)(HKD) n.a. n.a. n.a. n.a. 0.392 0.377 0.361 0.357

DPS (HKD) n.a. n.a. n.a. n.a. 0.364 0.404 0.385 0.385

EBIT n.a. n.a. n.a. n.a. 4,980 5,126 5,088 5,074

EBITDA n.a. n.a. n.a. n.a. 7,698 7,964 7,992 8,052

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Profit before tax n.a. n.a. n.a. n.a. 4,089 4,014 3,797 3,690

Depreciation and amortisation n.a. n.a. n.a. n.a. 2,718 2,838 2,903 2,978

Tax paid n.a. n.a. n.a. n.a. 3,055 (696) (658) (640)

Change in working capital n.a. n.a. n.a. n.a. 429 41 (12) 1

Other operational CF items n.a. n.a. n.a. n.a. 1,508 1,128 1,308 1,400

Cash flow from operations n.a. n.a. n.a. n.a. 11,799 7,324 7,337 7,429

Capex n.a. n.a. n.a. n.a. (2,167) (2,317) (2,750) (3,000)

Net (acquisitions)/disposals n.a. n.a. n.a. n.a. 0 0 0 0

Other investing CF items n.a. n.a. n.a. n.a. (33,775) 110 110 110

Cash flow from investing n.a. n.a. n.a. n.a. (35,942) (2,207) (2,640) (2,890)

Change in debt n.a. n.a. n.a. n.a. 8,951 0 0 0

Net share issues/(repurchases) n.a. n.a. n.a. n.a. 48,420 0 0 0

Dividends paid n.a. n.a. n.a. n.a. (3,218) (3,571) (3,404) (3,403)

Other financing CF items n.a. n.a. n.a. n.a. (26,434) (1,132) (1,312) (1,404)

Cash flow from financing n.a. n.a. n.a. n.a. 27,719 (4,703) (4,715) (4,807)

Forex effect/others n.a. n.a. n.a. n.a. 0 0 0 0

Change in cash n.a. n.a. n.a. n.a. 3,576 414 (19) (269)

Free cash flow n.a. n.a. n.a. n.a. 9,632 5,007 4,587 4,429

Financial summary


- 51 -


Key ratios (%)


Company profile

HKEI is an investment trust that was established in 2013 and listed on the Hong Kong Stock Exchange in the form of share-stapled units (SSU) in January 2014. HKEI’s principal asset (acquired in January 2014) is its 100% ownership of Hongkong Electric Company (HEC), which is one of Hong Kong’s 2 power-generation companies. HEC has an installed capacity of 3,737MW and provides electricity to Hong Kong Island, Ap Lei Chau, and Lamma Island.

As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Cash & short-term investment n.a. n.a. n.a. n.a. 4,630 5,050 5,032 4,763

Inventory n.a. n.a. n.a. n.a. 933 942 927 926

Accounts receivable n.a. n.a. n.a. n.a. 1,135 1,109 1,096 1,095

Other current assets n.a. n.a. n.a. n.a. 0 0 0 0

Total current assets n.a. n.a. n.a. n.a. 6,698 7,101 7,055 6,784

Fixed assets n.a. n.a. n.a. n.a. 64,802 64,361 64,288 64,390

Goodwill & intangibles n.a. n.a. n.a. n.a. 40,288 40,098 39,908 39,718

Other non-current assets n.a. n.a. n.a. n.a. 1,023 1,023 1,023 1,023

Total assets n.a. n.a. n.a. n.a. 112,811 112,584 112,275 111,916

Short-term debt n.a. n.a. n.a. n.a. 520 900 300 0

Accounts payable n.a. n.a. n.a. n.a. 2,488 2,512 2,472 2,470

Other current liabilities n.a. n.a. n.a. n.a. 850 850 850 850

Total current liabilities n.a. n.a. n.a. n.a. 3,858 4,262 3,622 3,320

Long-term debt n.a. n.a. n.a. n.a. 49,286 48,906 49,506 49,806

Other non-current liabilities n.a. n.a. n.a. n.a. 10,476 10,461 10,407 10,298

Total liabilities n.a. n.a. n.a. n.a. 63,620 63,629 63,535 63,425

Share capital n.a. n.a. n.a. n.a. 8 9 9 9

Reserves/R.E./others n.a. n.a. n.a. n.a. 49,183 48,947 48,730 48,482

Shareholders' equity n.a. n.a. n.a. n.a. 49,191 48,955 48,739 48,491

Minority interests n.a. n.a. n.a. n.a. 0 0 0 0

Total equity & liabilities n.a. n.a. n.a. n.a. 112,811 112,584 112,275 111,916

EV n.a. n.a. n.a. n.a. 92,980 92,559 92,578 92,847

Net debt/(cash) n.a. n.a. n.a. n.a. 45,176 44,756 44,774 45,043

BVPS (HKD) n.a. n.a. n.a. n.a. 5.567 5.540 5.516 5.488

Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E

Sales (YoY) n.a. n.a. n.a. n.a. n.a. 6.6 (1.1) (0.2)

EBITDA (YoY) n.a. n.a. n.a. n.a. n.a. 3.4 0.4 0.8

Operating profit (YoY) n.a. n.a. n.a. n.a. n.a. 2.9 (0.7) (0.3)

Net profit (YoY) n.a. n.a. n.a. n.a. n.a. 4.2 (4.4) (1.0)

Core EPS (fully-diluted) (YoY) n.a. n.a. n.a. n.a. n.a. (3.8) (4.4) (1.0)

Gross-profit margin n.a. n.a. n.a. n.a. 54.0 52.5 52.7 52.6

EBITDA margin n.a. n.a. n.a. n.a. 73.3 71.1 72.2 72.9

Operating-profit margin n.a. n.a. n.a. n.a. 47.4 45.8 46.0 45.9

Net profit margin n.a. n.a. n.a. n.a. 30.5 29.8 28.8 28.5

ROAE n.a. n.a. n.a. n.a. 13.0 6.8 6.5 6.5

ROAA n.a. n.a. n.a. n.a. 5.7 3.0 2.8 2.8

ROCE n.a. n.a. n.a. n.a. 10.1 5.2 5.2 5.2

ROIC n.a. n.a. n.a. n.a. 8.7 4.5 4.5 4.5

Net debt to equity n.a. n.a. n.a. n.a. 91.8 91.4 91.9 92.9

Effective tax rate n.a. n.a. n.a. n.a. 17.3 17.3 17.3 17.3

Accounts receivable (days) n.a. n.a. n.a. n.a. 19.7 36.6 36.4 36.2

Current ratio (x) n.a. n.a. n.a. n.a. 1.7 1.7 1.9 2.0

Net interest cover (x) n.a. n.a. n.a. n.a. 5.6 4.6 3.9 3.7

Net dividend payout n.a. n.a. n.a. n.a. 92.8 107.1 106.8 107.9

Free cash flow yield n.a. n.a. n.a. n.a. 20.1 10.5 9.6 9.3



- 52 -

Daiwa’s Asia Pacific Research Directory

HONG KONG

Takashi FUJIKURA (852) 2848 4051 [email protected]

Regional Research Head

Kosuke MIZUNO (852) 2848 4949 / (852) 2773 8273

[email protected]

Regional Research Co-head

John HETHERINGTON (852) 2773 8787 [email protected]

Regional Deputy Head of Asia Pacific Research

Rohan DALZIELL (852) 2848 4938 [email protected]

Regional Head of Product Management

Kevin LAI (852) 2848 4926 [email protected]

Chief Economist for Asia ex-Japan; Macro Economics (Regional)

Christie CHIEN (852) 2848 4482 [email protected]

Macro Economics (Regional); Banking; Insurance (Taiwan)

Junjie TANG (852) 2773 8736 [email protected]

Macro Economics (China)

Jonas KAN (852) 2848 4439 [email protected]

Head of Hong Kong and China Property

Cynthia CHAN (852) 2773 8243 [email protected]

Property (China)

Leon QI (852) 2532 4381 [email protected]

Banking (Hong Kong/China); Broker (China); Insurance (China)

Anson CHAN (852) 2532 4350 [email protected]

Consumer (Hong Kong/China)

Jamie SOO (852) 2773 8529 [email protected]

Gaming and Leisure (Hong Kong/China)

Dennis IP (852) 2848 4068 [email protected]

Power; Utilities; Renewables and Environment (Hong Kong/China)

John CHOI (852) 2773 8730 [email protected]

Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap

Becky HAN (852) 2848 4464 [email protected]

Small/Mid Cap (Regional)

Kelvin LAU (852) 2848 4467 [email protected]

Head of Transportation (Hong Kong/China); Transportation (Regional)

Brian LAM (852) 2532 4341 [email protected]

Transportation – Aviation (Hong Kong/China); Railway; Construction and Engineering (China)

Jibo MA (852) 2848 4489 [email protected]

Head of Custom Products Group

Thomas HO (852) 2773 8716 [email protected]

Custom Products Group

PHILIPPINES

Bianca SOLEMA (63) 2 737 3023 [email protected]

Utilities and Energy

SOUTH KOREA

Sung Yop CHUNG (82) 2 787 9157 [email protected]

Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel

Mike OH (82) 2 787 9179 [email protected]

Banking; Capital Goods (Construction and Machinery)

Iris PARK (82) 2 787 9165 [email protected]

Consumer/Retail

Jun Yong BANG (82) 2 787 9168 [email protected]

Oil; Chemicals; Tyres

Thomas Y KWON (82) 2 787 9181 [email protected]

Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game

TAIWAN

Rick HSU (886) 2 8758 6261 [email protected]

Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design (Regional)

Steven TSENG (886) 2 8758 6252 [email protected]

IT/Technology Hardware (PC Hardware)

Christine WANG (886) 2 8758 6249 [email protected]

IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer

Kylie HUANG (886) 2 8758 6248 [email protected]

IT/Technology Hardware (Handsets and Components)

Helen CHIEN (886) 2 8758 6254 [email protected]

Small/Mid Cap

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected]

Head of India Research; Strategy; Banking/Finance

Saurabh MEHTA (91) 22 6622 1009 [email protected]

Capital Goods; Utilities

SINGAPORE

Ramakrishna MARUVADA (65) 6499 6543 [email protected]

Head of Singapore Research; Telecommunications (China/ASEAN/India)

Royston TAN (65) 6321 3086 [email protected]

Oil and Gas; Capital Goods

David LUM (65) 6329 2102 [email protected]

Property and REITs

Shane GOH (65) 64996546 [email protected]

Small/Mid Cap (Singapore)

Jame OSMAN (65) 6321 3092 [email protected]

Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)


- 53 -

Daiwa’s Offices

Office / Branch / Affiliate Address Tel Fax

DAIWA SECURITIES GROUP INC

HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661

Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726

Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129

Daiwa Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

Daiwa Capital Markets America Inc. New York Head Office Financial Square, 32 Old Slip, New York, NY10005, U.S.A. (1) 212 612 7000 (1) 212 612 7100

Daiwa Capital Markets America Inc. San Francisco Branch 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. (1) 415 955 8100 (1) 415 956 1935

Daiwa Capital Markets Europe Limited, London Head Office 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600

Daiwa Capital Markets Europe Limited, Frankfurt Branch Neue Mainzer Str. 1, 60311 Frankfurt/Main, Germany (49) 69 717 080 (49) 69 723 340

Daiwa Capital Markets Europe Limited, Paris Representative Office 17, rue de Surène 75008 Paris, France (33) 1 56 262 200 (33) 1 47 550 808

Daiwa Capital Markets Europe Limited, Geneva Branch 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441

Daiwa Capital Markets Europe Limited, Moscow Representative Office

Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, Russian Federation

(7) 495 641 3416 (7) 495 775 6238

Daiwa Capital Markets Europe Limited, Bahrain Branch 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, Manama, Bahrain

(973) 17 534 452 (973) 17 535 113

Daiwa Capital Markets Hong Kong Limited Level 28, One Pacific Place, 88 Queensway, Hong Kong (852) 2525 0121 (852) 2845 1621

Daiwa Capital Markets Singapore Limited 6 Shenton Way #26-08, OUE Downtown 2, Singapore 068809, Republic of Singapore

(65) 6220 3666 (65) 6223 6198

Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, Victoria 3000, Australia

(61) 3 9916 1300 (61) 3 9916 1330

DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City, Republic of the Philippines

(632) 813 7344 (632) 848 0105

Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638

Daiwa Securities Capital Markets Korea Co., Ltd. 20 Fl.& 21Fl. One IFC, 10 Gukjegeumyung-Ro, Yeongdeungpo-gu, Seoul, Korea

(82) 2 787 9100 (82) 2 787 9191

Daiwa Securities Co. Ltd., Beijing Representative Office Room 301/302，Kerry Center，1 Guanghua Road，Chaoyang District， Beijing 100020, People’s Republic of China

(86) 10 6500 6688 (86) 10 6500 3594

Daiwa (Shanghai) Corporate Strategic Advisory Co. Ltd. 44/F, Hang Seng Bank Tower, 1000 Lujiazui Ring Road, Pudong, Shanghai China 200120 , People’s Republic of China

(86) 21 3858 2000 (86) 21 3858 2111

Daiwa Securities Co. Ltd., Bangkok Representative Office 18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road, Lumpini, Pathumwan, Bangkok 10330, Thailand

(66) 2 252 5650 (66) 2 252 5665

Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra East, Mumbai – 400051, India

(91) 22 6622 1000 (91) 22 6622 1019

Daiwa Securities Co. Ltd., Hanoi Representative Office Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, Hoan Kiem Dist. Hanoi, Vietnam

(84) 4 3946 0460 (84) 4 3946 0461

DAIWA INSTITUTE OF RESEARCH LTD

HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603

MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

New York Research Center 11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. (1) 212 612 6100 (1) 212 612 8417

London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550


- 54 -

Disclaimer

This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures.

Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship

Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co. Ltd (1107 HK); econtext Asia Ltd (1390 HK); Neo Solar Power Corp (3576 TT); Accordia Golf Trust (AGT SP); Hua Hong Semiconductor Ltd (1347 HK); GF Securities Co Ltd (1776 HK).

*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.

Hong Kong

This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. DHK market making DHK may from time to time make a market in securities covered by this research.

Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.

Australia This research is distributed in Australia by Daiwa Capital Markets Stockbroking Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

India This research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to, or use by any person, citizen or entity which is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analyst’s personal views about the securities and issuers that are subject of the Report, and that no part of the analyst’s compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non – US affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited.

Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.

Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE Link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.

Thailand

This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”).

This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. While the information is from sources believed to be reliable, neither the information nor the forecasts shall be taken as a representation or warranty for which Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees incur any responsibility. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any

https://daiwa3.bluematrix.com/sellside/Disclosures.action



http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf%20and%20http:/www.pse.com.ph/


- 55 -

direct or consequential loss arising from any use of this research or its contents.

The information and opinions contained herein have been compiled or arrived at from sources believed reliable. However, Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user.

Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.

United Kingdom This research report is produced by Daiwa Capital Markets Europe Limited and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and/or its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and/or its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory . Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

Bahrain

This research material is distributed by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent.

United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000).

Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report.

"1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months. Disclosure of investment ratings

Rating Percentage of total

Buy* 60.4%

Hold** 26.0%

Sell*** 13.6%

Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 June 2015. * comprised of Daiwa’s Buy and Outperform ratings.

http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory








- 56 -

** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings. Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.

In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.

In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.

For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.

There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.

There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.

Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

cheung kong infrastructure: what’s...

Documents