cheung kong/hutch’s bold move -...

See important disclosures, including any required research certifications, beginning on page 46.

9 February 2015

Cheung Kong/Hutch’s Bold MoveQ&A on the prospect of the group becoming a global play, with a valuation to match

Cheung Kong/Hutch’s Bold Move 9 February 2015

Q1 What is the main motive behind this reorganisation? Why now?

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Q2 Does the reorganisation signal that the Li family is bearish on Hong Kong/China property or even Hong Kong/China overall?

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Q3 Why is there investment value to be unlocked in Cheung Kong Group?

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Q4 Does this reorganisation signal the beginning of Chapter 3 for Cheung Kong Group?

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Q5 What is Cheung Kong Group likely to do in its Chapter 3?

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Q6 Will the reorganisation unlock value for Cheung Kong Group?

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Appendix 39

Company section: Cheung Kong 41

Please also see:

Swire Properties: Initiation: a large ‘nurturing reward’ awaits

The Hong Kong Property Toolkit: A step-by-step guide to the past, present

and future of the Hong Kong Property Sector

22 May 2014 Autumn 2013

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

Contents

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/Swire_Properties_140522.pdf

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/TheHongKongPropertyToolkit_130916.pdf


Contributing Daiwa Analyst:

Jonas Kan, CFA (852) 2848 4439

[email protected]

Thoughts on the Cheung Kong Group

reorganisation

On 25 September 1979, at the close of trade in London, HSBC announced it was selling its stake in Hutchison Whampoa to Cheung Kong for HKD639m. The next day, one local newspaper ran the story under the headline, “A bomb has exploded at the heart of Central”, hinting at the impact this move was to have on the business landscape in Hong Kong.

Thirty-five years later, on 9 January 2015, Cheung Kong Group announced another radical reorganisation, which, while having no parallels with the historic event of 1979, has huge symbolic significance. This latest move is likely to have important implications for the group’s future direction, and could change the way the group, and possibly Hong Kong family business groups as a whole, are perceived and priced in the investing world.

This reorganisation marks the beginning of what we refer to as “Chapter 3” in the development of Cheung Kong Group, which will comprise Cheung Kong Hutchison Holdings and Cheung Kong Property assuming the group’s reorganisation proposal is approved by shareholders (25 February). We see the unlocking of value emerging as a major theme for this group in the years to come, and believe Cheung Kong Group is making a concerted attempt to become a truly premier global company, with a valuation to match.

As we see it, the investment implications of such a change have only just started to unfold. Our goal with this report is to share our thoughts on 6 inter-related questions raised by this move, and the implications for the group, as well as Hong Kong family business groups.

Jonas Kan, Head of Hong Kong and China Property


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Question 1

What is the main motive behind

this reorganisation? Why now?


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Is the outcome more important than the motive? Our read is that this reorganisation will allow several objectives to be achieved at the same time. From the perspective of investors and shareholders, we think the most important aspect of the reorganisation is the outcome rather than the motive. As we see it, the main significance of the reorganisation is that it will create a structure that will be conducive to unlocking value for shareholders of both Cheung Kong and Hutchison, as well as to the ensuring the sustained growth and development of the many businesses of Cheung Kong Group in various geographical areas for many years to come. In the press conference of 9 January, when the reorganisation was announced, Victor Li, deputy chairman of Cheung Kong (depicted in our cover image along with KS Li and Canning Fok, Group Managing Director of Hutchison) noted that management had been frustrated by the discounted valuation assigned to the group for such a long period, but had been uncertain as to how to remove such a discount. At some point in 2014, management hit upon the reorganisation idea. It took the senior managements of both Cheung Kong and Hutchison several months to work out the details and address all the issues involved in a group reorganisation, and after these had been resolved, the deal was announced in early 2015. Li’s description of how the reorganisation idea came about may appear a tad simplistic and undramatic to some, but it is not inconceivable that the real situation was as simple as that, in our view.

Transaction overview

Source: Company Note: (1) Calculated based on the average closing price of Cheung Kong and Hutchison shares for the five trading days up to and including 7 January 2015 and the average closing price of Husky for the five trading days up to and including 6 January 2015

Q1: What is the main motive behind this reorganisation? Why now?


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Removal of the layered holding structure

Source: Company Note: (1) Based on Husky Share Exchange and Hutchison Proposal exchange ratios

That said, the reorganisation will not be a small and easy exercise. It will involve the reshuffling of a sizeable amount of assets within the Cheung Kong Hutchison Group (totalling over HKD800bn in terms of asset value on the books) and the formation of a new holding company in the Cayman Islands to hold all of the group’s businesses. It will also require Cheung Kong (or CKH Holdings) to issue 1.5bn new shares to the current minority shareholders of Hutchison Whampoa to buy out their interests, which will result in the Li family & Trust’s stake in Cheung Kong (or CKH Holdings) being diluted from 43.4% to 28% – although the trust’s stake would be restored to above the 30% takeover threshold (30.15% to be exact) through the Li family swapping some 6.2% in Husky Energy for 84.4m shares in the future CKH Holdings. This whole exercise will engage many senior managers of Cheung Kong and Hutchison Whampoa, and, as such, should throw light on a number of issues related to Cheung Kong Group, in our view. In this report, we present our thoughts on some of them. Finally, it’s done. As controversial as this reorganisation exercise may be, we believe that from the perspective of a Cheung Kong investor, they could use the word “finally” to describe this deal, in that it is a welcome, albeit long-time-coming, development. For investors and the global investment community, we think the deal makes a lot of sense, though in substance, it amounts to merely a rearrangement of assets (the only thing added to the Cheung Kong Hutchison business portfolio is a 6.2% additional stake in Husky Energy). By organising the total assets owned by Cheung Kong and Hutchison into two separate and distinct entities, the group will become more transparent and, thus, appealing more to institutional investors. We see at least 5 outcomes from the reorganisation – gifts, if you like – that would be of value to institutional investors:


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1. A more focused and streamlined corporate structure

Source: Company Note: 1) Hutchison holds 78.16% stake in CKI as at 7 January 2015, hence interests in certain JVs with Cheung Kong 2) Based on the exchange ratio for Husky Share Exchange

2. Enhanced size and scale for the whole group

Source: Company Notes: 1) total assets as at 30 June 2014. 2) See later chart. 3) Calculated as Husky’s market capitalisation as at 6 January 2015 of c.CAD25bn * the exchange rate as at 6 January 2015 of HKD6.5782 per CAD * 6.24%. 4) Announced on 4 November 2014: Consideration of c.USD1.89bn acquisition of up to 45 aircraft and c.USD0.73bn acquisition of up to 15 aircraft through 60-40 venture with MCAP. 5) As at 31 December 2013. 6) As of 30 June 2014.


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3. Significant expansion in the size and scale of the group’s property business

Source: Company Notes: 1) For FY13, 2) as at 30 November 2014, 3) for rental properties, excluding hotels, 4) for development properties, excludes agricultural land and projects under planning stages, 5) on attributable basis, 6) in terms of GFA, including hotels, and 7) in terms of number of rooms

4. Greater financing flexibility

Source: Company Note: the proposals will result in certain financial creditors being entitled to require the repayment or mandatory pre-payment of certain indebtedness of Cheung Kong Group and the Hutchison Group. The relevant companies have available sufficient resources to effect any such repayment or pre-payment. The proposals are not therefore expected to have any adverse effect on Cheung Kong Group, the Hutchison Group or their respective creditors, according to the company.


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4. Greater financing flexibility (cont’d)

Source: Company Notes: 1) Exchange rate: 1GBP = 12.9052 HK$ (as at 31 March 2014), 1AUD = 7.3010HK$ (as at 30 June 2014), 1CAD = 6.9572HK$ (as at 30 September 2014). 2) CKI effective = CKI’s direct shareholding + CKI’s indirect interest through its 38.87% stake in Power Assets. 3) Hutchison effective = Hutchison’s indirect shareholding through 78.16% stake in CKI. 4) CKH Holdings effective = Cheung Kong’s interest + Hutchison’s effective interest as a result of the Merger Proposal.

5. Expected increase in dividend payout ratios

Source: Company Note: 1) Assuming existing Cheung Kong and Hutchison shareholders continue to hold both CKH Holdings and CK Property shares after the completion of the Merger Proposal and Spin-off Proposal.

A strong signal. We think this reorganisation sends a strong signal about management’s commitment to unlocking value in the group for all shareholders. Instead of trying to wait for a low enough price to privatise the business, it appears that Cheung Kong Group has done precisely the opposite – organising the group along more focused business lines, eliminating layers in the corporate structure to make it easier for investors to buy what they want to get exposure to. In this sense, we think this allows for greater transparency in disclosing the operating performances of its different business lines. And in this case, the reorganisation should heighten the group’s appeal as an investment proposition for global investors, in our view.


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Should the move be seen as part of the group’s succession plan? From the perspective of the group’s longer-term development, we think opening it up more to the scrutiny of the capital markets and global investors, and having more streamlined and focused business lines should help in terms of attracting and retaining professional talent. The new structure is probably more conducive to the group achieving sustained and balanced earnings and NAV growth over an extended period of time, in our view. Another issue worth pondering is this: after decades of building a significant business spanning over 50 countries and including at least 6 major businesses (plus a few others currently being nurtured), Cheung Kong Group has grown into a large and complex business entity, and it is likely to become even more international and global in the years to come. As things stand today, it has over USD110bn in business assets, over USD50bn in annual revenue, and well over 260,000 employees globally. It must be a daunting task to manage such a large business group. But it is still feasible to do so today because the group is still managed by its founder and a few people who have been closely involved in its development over the past few decades. Thus, we think how to create a platform/structure that is the most conducive to driving the group’s development probably carries considerable weight with the people who have worked hard to build the group into what it has become today. Accordingly, we think the reorganisation can also be seen as part of the group’s succession plan, and believe the plan should help in terms of ensuring that the group has the best chance of establishing itself as a major global company for many more years to come.

The many and diverse businesses of Cheung Kong Group across the globe Total assets* (HKDm) Operating performance** (HKDm)

Cheung Kong Hutchison CKH Revenue EBITDA EBIT Remarks

Ports - 99,125 99,125 34,179 11,447 7,358 One of the world's largest privately owned container terminal operators, holding interests in 52 ports in 26 countries and handling 78.3m TEUs in 2013

Property & hotels

138,675 95,326 234,001 56,578 27,746 27,410 17m sq feet of rental property and 170m sq ft of development landbank in Hong Kong, China, Singapore, London, etc.

Retail - 44,960 44,960 149,147 14,158 11,771 One of the world's largest health and beauty retailers, with over 10,500 retail stores in 25 markets worldwide.

Energy - 52,416 52,416 59,481 14,779 7,208 One of the largest energy companies in Canada, with operations in Canada, the US, China, Taiwan, Greenland and Indonesia.

Infrastructure 21,120 131,949 153,069 42,460 24,443 19,130 One of the leading investors in global infrastructure with operations in the UK, Canada, Australia, New Zealand, the Netherlands, Hong Kong and China.

Telecommunications

- 295,428 295,428 81,048 16,248 5,814 A leading global operator of mobile telecoms and other telecoms services, with operations in various other markets, such as Europe, Hong Kong, Australia, Hong Kong, Macau, Indonesia, Vietnam and Sri Lanka.

Total 159,795 719,204 878,999 422,893 108,821 78,691 A multinational conglomerate business group operating in 52 countries across the world with over 260,000 employees

Source: Companies * as at June 2014 ** based on the latest full-year results (2013)

Is capitalising on M&A opportunities in Europe’s mobile telecoms sector another important consideration for the managements of Cheung Kong and Hutchison? In our view, the crux of Hutchison’s strategy for its European telecoms business is to become an important player there, which would allow it to get a reasonable share of the industry revenue/cash flow, as well as profits, which stood at over USD70bn and USD25bn in 2000, on our estimates (based on just the mobile telecoms business in the 8 markets where Hutchison had a presence). Note that such revenue and profits were highly valued by the global stock markets before these operators made heavy investments in obtaining 3G licences – the mobile businesses of the listed European telcos commanded an equity market valuation of close to USD2tn in total in 1999, of which about over USD800bn was attributable to the 8 markets where Hutchison had a business presence, on our estimates.


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The combined equity market value of its Orange and VoiceStream businesses exceeded USD25bn in 2000, representing many times what Hutchison had put into them – the total equity investment attributable to Hutchison at the peak during 1994-2000 for these 2 businesses was under USD2bn, on our estimates (note that Hutchison’s investment in VoiceStream was effectively funded by the repayment of its shareholders’ loan extended to Orange after its IPO in 1996). The exceptionally high returns Hutchison realised from its investment in the European telecoms business were probably another important consideration in its USD38bn subsequent investment in the 3 Group, in our view. It is true though that the profitability and equity-market valuations of mobile telecoms businesses in Europe have declined considerably since the early 2000s. But is this because the wealth and income of many in countries in Europe have collapsed since then? Or have mobile phones become a lot less important to consumers than before? It is clear that mobile phones are now a necessity for many people in Europe and almost every other part of the world, and yet the aggregate profitability of the European mobile telecoms industry has not benefitted much, according to our industry research. In comparison, Verizon in the US appears to have done better than the telecoms companies in Europe over the past few years.

Share price performance of Verizon vs. Vodafone

Source: Bloomberg, Daiwa

The reasons for the decline in the profitability of the European mobile telecoms industry since 2010 are too complex to go into here. But we do wonder whether the operators in the mobile telecoms industry in Europe have fallen into a vicious competition cycle, which has resulted in them spending money on driving a large pool of unstable and low-ARPU customers from moving among different operators. This may have resulted in subscribers paying less to the industry despite the fact that mobile phones have become more important for consumers. In any case, it appears to us that one major aspect of Cheung Kong Group’s strategy in Europe is to focus on controlling costs and attracting more higher-quality post-paid customers to ensure that it has strong staying power and is in a strong position to take advantage of any industry consolidation/rationalisation opportunities as they arise. And it has been moving in this direction for quite some time, in our view starting with it acquiring Orange’s operation in Austria in 2012 and then O2’s Ireland operation in 2013.

Investments in M&A opportunities in the mobile telecoms sector in Europe by Hutchison

Date Remarks

February 2012 Acquired Orange's operation in Austria for EUR130m

August 2013 Acquired O2's operation in Ireland for Eur850m

January 2015 Has proposed to acquire O2's UK operation for GBP9.25bn (up to GBP1bn in profit sharing when the cash flow from the combined O2 and 3 UK has passed a certain pre-agreed level.

Source: Company, Hong Kong Economic Times

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(Rebased)

Verizon Vodafone


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Over the past 12 years, the 3 Group has gone from being a new entrant in Europe, with virtually no customer base, into a player with around 10% of the UK and Italy markets, and a cost and revenue structure that allows it to go marginally beyond the breakeven point (it has reported a modest positive EBIT since 2010 and modest EBITDA after capex since 2013). Given that the telecoms industry is characterised by large fixed costs and limited variable costs, it probably does not need a telecoms expert to point out there are likely to be significant benefits associated with having a much expanded subscriber base.

Financial performance of the 3 Group (HKDm) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1H14

Revenue - 2,023 15,742 37,502 50,668 59,909 60,372 57,590 64,205 74,288 58,708 61,976 31,063

Customer service operating cost - - - - - - - - - - (29,272) (26,343) (12,219)

Net customer service revenue - - - - - - - - - - 29,436 35,633 18,844

Other revenue - - - - - - - - - - 1,851 1,015 368

Other operating expenses (1,839) (14,591) (36,296) (47,192) (49,166) (56,671) (55,980) (40,108) (37,580) (39,461) - - -

Operating expenses - - - - - - - - - - (14,397) (17,364) (9,162)

Total CACs - (917) (8,423) (11,444) (5,494) (5,732) (3,457) (17,306) (17,909) (24,760) (7,677) (6,613) (3,546)

EBITDA/(LBITDA) (1,839) (13,485) (28,977) (21,134) (3,992) (2,494) 935 176 8,716 10,067 9,213 12,671 6,504

Depreciation & amortisation (231) (6,200) (14,454) (15,146) (16,004) (17,342) (14,737) (9,098) (9,544) (9,500) (6,515) (7,815) (4,222)

Exceptional gain/ (losses) - - 4,982 - - 1,898 2,945 - 3,757 457 447 - -

EBIT (2,070) (19,685) (38,449) (36,280) (19,996) (17,938) (10,857) (8,922) 2,929 1,024 3,145 4,856 2,282

Capex (29,842) (24,557) (33,515) (26,371) (28,360) (26,070) (29,661) (8,259) (9,894) (10,980) (11,346) (10,176) (4,876)

EBITDA capex (31,681) (38,042) (62,492) (47,505) (32,352) (28,564) (28,726) (8,083) (1,178) (913) (2,133) 2,495 1,628

EBITDA margin (%)

-667% -184% -56% -8% -4% 2% 0% 14% 14% 16% 20% 21%

EBIT margin (%)

-973% -244% -97% -39% -30% -18% -15% 5% 1% 5% 8% 7%

Source: Company, Daiwa * excluding Hutchison Telecom (Australia) from 2012

Given that the group has been working on building its presence in the mobile telecoms sector in Europe for such a long time, we do not think it is a surprise that it is interested in opportunities that will help it improve the profitability of its telecoms division. However, the UK and Italy are much larger markets than Austria or Ireland (where the group acquired its competitors in 2012 and 2013). Seizing new opportunities would require balance-sheet and capital strength, both of which are essential to ensuring that the group has the best bargaining position on issues relating to industry consolidation in Europe. We do believe that the group’s plans to reorganise should enhance its ability to capitalise on M&A opportunities in the European mobile telecom sector, and it may not be a coincidence that the group announced its proposed acquisition of O2 in the UK two weeks after it announced the reorganisation. Note that after acquiring O2, 3 UK should emerge as the largest mobile operator in the UK, with a much larger cash flow and earnings base. While GBP9.25bn (and GBP1bn as a deferred payment that is conditional upon the actual operating performance of O2 UK) is a large sum, it should translate to around a 6.5x EV/EBITDA multiple, based on Telefonica’s latest reported results, or around 4x EV/ EBITDA after adjusting for GBP3-4bn in synergy benefits expected by the group. Note also that the deal is likely to be funded by a GBP6bn loan and Cheung Kong Group has been negotiating to bring in private equity investors to take up to a 30% stake in this investment. As such, the equity proportion of this investment is not that large and the group should be able to further lower its risk exposure if it were to list 3 UK – a topic that we explore further in Question 4.


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Impact of potential O2 acquisition on the relative market position of various operators in the UK

Before acquiring O2 After acquiring O2

No. of Market No. of Market 3Q14

subscribers share subscribers share EBITDA

Brands Owners (m) (%) (m) (%) (GBPm)

Everything Everywhere Deutsche Telekom/ France Telecom 31.0* 36.8% 31.0 36.8% Not disclosed

O2 Telefonica 24.0 28.5% 0 0.0% 362

Vodafone Vodafone 19.5 23.2% 19.5 23.2% 645

3 UK Hutchison Whampoa 9.7 11.5% - 0.0% Not disclosed

New 3 UK CKH Holdings - - 33.7 40.0%

84.2 100% 84.2 100%

Source: Companies, Hong Kong Economic Times, Daiwa Note:*Including subscribers from MVNOs, totalling about 5m

The Cheung Kong/Hutchison valuation gap has allowed the reorganisation to take place. Over the past 14 years, the relative valuation of Cheung Kong versus Hutchison has narrowed, and this will allow the share swap to work. Had Hutchison been trading at a higher valuation at the time the deal was announced, the Li family & Trust’s stake in the new CKH Holdings would have fallen to well below 30% – although such a scenario was prevented by the family swapping its Husky Energy shares for CKH shares. Had the Cheung Kong/Hutchison relative valuation changed in Hutchison’s favour, the deal would have been a lot more difficult to finalise. (Note: while some investors may worry that the deal has undervalued Hutchison shares, we think Hutchison’s underperformance relative to Cheung Kong may well continue. After all, investors do not appear to be favouring oil and European telecoms plays at this point. With the plunge in oil prices over recent months, we think the Li family & Trust has not chosen the best time and the best price to swap its stake in Husky Energy.)

Cheung Kong and Hutchison: relative share price performance since 2000


All in all, we believe that investment value in the group is there to be unlocked, and that this is central to the reorganisation exercise. As we see it, this is the most important factor, after which comes the need for a succession plan, the relative valuation gap between Cheung Kong and Hutchison over the past 14 years, the group’s determination to capitalise on M&A opportunities in the European telecoms sector, among others.

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(Rebased)

Cheung Kong Hutchison


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Question 2

Does the reorganisation signal that

the Li family is bearish on Hong

Kong/China property or even Hong

Kong/China overall?


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This has been one popular interpretation of the announcement by some media outlets and commentators. It is difficult to comment on the motives, but we think the following will help put into perspective the seemingly notable reduction in the Li family & Trust’s stake in the group’s property businesses.

Redistribution of assets among Cheung Kong and Hutchison shareholders

Pre-transaction Effective stake

Li family & Trust Other Cheung Kong shareholders Other Hutchison Shareholders

Cheung Kong 43.42% 56.58% -

Hutchison 24.22% 28.27% 47.52%

Post-transaction Effective stake


Cheung Kong 30.15% 33.95% 35.90%

Hutchison 30.15% 33.95% 35.90%

Change Effective stake


Cheung Kong -13.3% -22.6% 35.9%

Hutchison 5.9% 5.7% -11.6%

Source: Company, Daiwa

From the numbers above, Li family & Trust’s relative exposure to the HK China property business will be reduced, as its stake in Cheung Kong’s assets will go from 43.3% to 30.15%. That said, if we look more closely, the extent of the reduction in the family’s stake in property assets is less than it appears. Yes, the family’s stake in property assets has been reduced to 30.15%, from 43.42%, but the deal would also result in the family and Cheung Kong shareholders raising their exposure to Hutchison’s property components. Effectively, the Li family & Trust’s exposure to Hutchison’s rental properties, as well as its China and overseas landbank, rises from 24.2% to 30.15% (see following table).

Changes in various parties’ effective exposure to various assets Pre-transaction Effective stake

Li family & Trust Other Cheung Kong

shareholders Other Hutchison

shareholders Total

Cheung Kong's HK/China property assets & others 43.42% 56.58% - 100%

Cheung Kong's Hutchison stake 43.42% 56.58% - 100%

Hutchison's property assets 24.20% 28.30% 47.50% 100%

Hutchison's non-property assets 24.20% 28.30% 47.50% 100%

Post-transaction Effective stake



Shareholders Total

Cheung Kong's HK/China property assets & others 30.15% 33.95% 35.90% 100%

Cheung Kong's Hutchison stake 30.15% 33.95% 35.90% 100%

Hutchison's property assets 30.15% 34.00% 35.90% 100%

Hutchison's non-property assets 30.15% 34.00% 35.90% 100%

Change Effective stake



Shareholders Total

Cheung Kong's HK China property assets & others -13.27% -22.63% 35.90% -13.27%

Cheung Kong's Hutchison stake -13.27% -22.63% 35.90% -13.27%

Hutchison's property assets 5.95% 5.70% -11.60% 5.95%

Hutchison's non-property assets 5.95% 5.70% -11.60% 5.95%


Q2: Does the reorganisation signal that the Li family is bearish on Hong Kong/China property or even Hong Kong/China overall?


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After taking this into account, the reduction in the Li family & Trust’s exposure to property is not a lot smaller, at about USD1.6bn based on the carrying book values of Hutchison and Cheung Kong’s property assets – but this deal involves over USD100bn in total assets, of which about USD30bn come from property, on our estimates. Once we put this into perspective, we don’t think the deal is a firm sign that the Li family wants to reduce its exposure to Hong Kong/China property. In fact, we have doubts as to whether reducing exposure to Hong Kong/China property is the main motive. If the aim in the first place was to reduce the family’s exposure to Hong Kong/China property, it could just sell its property assets in Hong Kong/China at lower-than-market prices and there would be no need to embark on a complex reorganisation exercise. The actual magnitude of the reduction in the family’s exposure to Hong Kong/China property is quite modest in the overall scheme of things, in our view. The Cheung Kong Group has disposed of quite a few property assets in Hong Kong and China in recent years, but the whole group currently has a total of about HKD234bn in property assets on its books (and we think the book value of its investment properties and hotels is very conservative), and the property assets it has disposed of probably represent much less than 10% of the market value of these assets, on our estimates. And even if the primary motive for this reorganisation is to optimise the Li family & Trust’s exposure to various businesses (although we think this is up for debate), we don’t think the deal is a reason to conclude that the family must be bearish on Hong Kong/China property. Note that the reorganisation won’t result in an absolute reduction in the assets owned by the Li family (if anything, it has opted to swap its 6.2% stake in Husky Energy for shares in CKH Holdings, which will have sizeable property exposure before CK Property is spun off). As such, what we may infer from this reorganisation is most probably the family’s views on the relative values of the group’s assets. Yes, the family’s effective exposure to Hong Kong/China will be reduced, but in theory, it is possible that the family may not want to reduce its exposure to Hong Kong/China property assets (or even that the family thinks its assets are undervalued), and just thinks the Hutchison assets are even more undervalued. We think most investors agree that the reorganisation will clearly boost the earnings and NAV growth potential of the group’s property businesses (see Question 5). And as accepting lower stakes in Cheung Kong, or the future CKH Holdings, is a prerequisite for the family before it can access the synergies and enhanced potential from combining Cheung Kong and Hutchison’s property portfolios, it is possible that the family sees the reduction in direct exposure to Hong Kong/China property assets as a price to pay to get the enhanced potential offered via the new CK Property. All in all, we think there are various interpretations as to why the family has accepted a modest reduction in its effective exposure to Hong Kong/China property assets, and we don’t see this as the main motive for the reorganisation. We stand by our view that the primary focus for the whole transaction is more about unlocking value and creating a platform to allow the group to develop into global conglomerate over time. Likewise, we don't take seriously the view that the deal signals that the Li family is bearish on Hong Kong and China, or that the exercise is a way to mask the real motive, which is to move group assets out of Hong Kong and China, and into the Cayman Islands. Of course, we are not in a position to comment on whether this is the case or not. But the future CKH Holdings and CK property will remain listed in Hong Kong and will have to operate under Hong Kong’s law and regulatory framework. Not a lot will have changed in reality after the deal is finalised, and changing the registered place of the holding company is not the same as moving the business out of Hong Kong. As a matter of fact, registering the new entities in the Cayman Islands provides them with many practical advantages and flexibility. It is also probably why, in the past few years, well over 70% of newly listed companies in Hong Kong are domiciled in offshore jurisdictions, such as the Caymens or Bermuda (and this includes some of China’s state-owned enterprises). Thus, we don’t think the group registering in the Caymans is a big deal.


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As reported in various media stories, what the Cayman Island registration means is that if there are major legal disputes, the Court of Final Appeal would be in the UK. One could say this implies that the group has less confidence in the Hong Kong/China legal framework. But Common Law originated in the UK and this legal system has a much longer history of being used in the UK than in Hong Kong. And from the viewpoint of institutional shareholders in Cheung Kong and Hutchison, we believe it’s natural for them to prefer the company to be registered in the Caymans. We can’t rule out that there might be insurance issues involved in the deal, but we don’t think there is evidence to suggest that this is the main motive for the whole reorganisation exercise. In our opinion, Cheung Kong Group is an investor and business builder at heart. Our read is that it goes wherever it sees business value and this might be the reason why now it operates in over 50 countries. The group started in Hong Kong and has substantial assets in Hong Kong and China. Given that it is trying to become a global company, it is only natural for it to invest more in overseas assets as it builds up its international presence. Importantly, if Cheung Kong Group’s future direction is to become an increasingly global company, it would make the strongest business sense for it to choose to register in a place that provides the greatest flexibility and convenience to meet its objective of becoming this global enterprise. So, registering in the Caymans could well imply that the family is acting in the best long-term interests of the group’s shareholders. We also think it is important to consider that investing is an interactive and dynamic activity, and that the investing environment in Hong Kong and China is evolving. That Cheung Kong Group has not had made many new investments in Hong Kong and China in recent years does not necessarily mean that this won’t change in the future. The following table shows the geographical distribution of Hutchison’s assets over the past 13 years. Note that for all the talk about the group selling Hong Kong and China assets, as well as reducing its exposure to Hong Kong/China, the actual magnitude of reduction in Hutchison’s total assets in Hong Kong and China doesn't appear to be that large – the group’s China assets were still growing as at December 2013, and the figure at end-2013 actually was 1.8x the level it was 10 years ago (see below).

Geographical distribution of Hutchison’s total assets (HKDm) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Total assets

Hong Kong 111,479 118,644 120,804 128,114 119,466 128,023 148,495 130,997 132,663 111,842 105,503 104,344 106,494

Mainland China 37,260 36,476 43,764 43,291 53,981 61,630 69,640 72,205 70,184 58,510 65,933 76,202 80,483

Asia and Australia 24,357 40,998 50,763 69,521 46,256 51,176 78,288 72,273 64,362 92,893 90,873 96,821 92,811

Europe 163,428 195,258 236,558 285,167 272,310 309,980 330,766 282,596 290,124 291,166 320,956 329,418 368,229

Americas and others 94,685 106,773 171,788 121,102 105,026 126,707 172,037 110,110 134,064 44,762 48,426 50,735 48,030

Finance & Investments and others 122,128 88,853 146,351 119,475

431,209 498,149 623,677 647,195 597,039 677,516 799,226 668,181 691,397 721,301 720,544 803,871 815,522

% of total assets

Hong Kong 26% 24% 19% 20% 20% 19% 19% 20% 19% 16% 15% 13% 13%

Mainland China 9% 7% 7% 7% 9% 9% 9% 11% 10% 8% 9% 9% 10%

Asia and Australia 6% 8% 8% 11% 8% 8% 10% 11% 9% 13% 13% 12% 11%

Europe 38% 39% 38% 44% 46% 46% 41% 42% 42% 40% 45% 41% 45%

Americas and others 22% 21% 28% 19% 18% 19% 22% 16% 19% 6% 7% 6% 6%

100% 100% 100% 100% 100% 100% 100% 100% 100% 83% 88% 82% 85%


Thus, our read is that the various suggestions made about the Li family’s views in Hong Kong/China are not conclusive. We think the only indisputable conclusion to be made about the deal is that as it has resulted in the Li family & Trust and Cheung Kong shareholders raising their relative exposure to Hutchison – which should imply that the Li family can’t be bearish on the prospects of Hutchison’s businesses and assets. It is possible that the Li family’s view is that there is more upside or more under-priced assets under Hutchison than Cheung Kong, but this is different from saying that the family is bearish on the outlook of Hong Kong/China property or Hong Kong/China as a whole. And we don’t think the group has embarked on this massive exercise merely to optimise on the family’s exposure to various businesses or to move assets out of Hong Kong/China. This brings us to what we see as the main theme in this reorganisation exercise: which is that there is investment value to be unlocked within the group and one objective of the exercise is to facilitate the unlocking of such value.


- 15 -

Question 3

Why is there investment value to be

unlocked in Cheung Kong Group?


- 16 -

We believe the basic reason there is value to be unlocked in Cheung Kong Group shares is the substantial business that has been built up at both Hutchison and Cheung Kong over the past 20 years. As illustrated below, the total capex incurred over the past 20 years by Hutchison (before taking into account that funded by Husky and Cheung Kong Infrastructure’s own resources) amounts to some HKD492bn. While Cheung Kong’s financial disclosure is not as detailed as Hutchison’s, our read is that, over the past 20 years, it has kept its position as one of the largest residential developers in Hong Kong, with one of the largest hotel and serviced suites portfolios in Hong Kong comprising some 8,710 rooms, a sizeable China landbank of 80m sq ft, as well as a moderate presence in the Singapore property market. And it has achieved all of this with a falling gearing ratio and growing dividends.

Dividends declared by Cheung Kong and Hutchison

Source: Company, Bloomberg

Major business building at the Cheung Kong level over the past 20 years

20 years ago Now

Hotels No material presence One of the largest hotel owner-operators in Hong Kong with 9,360 rooms (of which 8,710 are in Hong Kong)

China property No material presence A sizeable player in China with 80m sf ft of development landbank and over HKD5bn in property sales profits

Infrastructure No presence Has developed CKI and put it under Hutchison in exchange for Hutchison shares in a group reorganisation in 1997

Source: Daiwa

Note also that over the past 10 years, Cheung Kong Group has sold some of its business assets at achieved prices that were often multiples of its investment cost. We see this as evidence of industry participants’ endorsement of the business value created by the group, and buyers of these assets include some of the largest players in their respective industries, such as Vodafone, Port of Singapore Authority, P&G. Moreover, over the past 20 years, the group’s EBITDA and EBIT at the Hutchison level have risen continuously, reaching HKD96bn and HKD65bn in 2013, versus HKD30bn and HKD23bn, respectively, back in 2001 – an impressive achievement by any standard. However, the Cheung Kong Group’s massive business building does not seem to have gained much recognition in the equity-market valuation.

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

(HKD)


Q3: Why is there investment value to be unlocked

in Cheung Kong Group?


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Asset realisation in Hutchison’s established businesses in recent years Deals Date Buyers Price Cost Profit Price/

(HKDm) (HKDm) (HKDm) cost (x)

Sale of 20% stake in P&G Hutchison 11 May 2004 P&G 15,600 1,900 13,700 8.2

Sale of 20% stake in HIT and 10% stake in COSCO-HIT 9 Jun 2005 PSA International 7,215 1,715 5,500 4.2

Sale of 19.3% stake in HTIL Nov 2005 Orasom Telecom 10,100 2,700 7,400 3.7

Sale of 20% stake in Hutchison Port Holdings 21 Apr 2006 PSA International 34,000 9,620 24,380 3.5

Sale of 67% stake in Hutchison Essar in India 12 Feb 2007 Vodafone 87,000 12,000 75,000 7.3

Sale of 51.3% stake in Partner Communications in Israel 12 Aug 2009 A private company 10,706 2,956 7,750 3.6

Sale of 24.9% stake in AS Watson April 2014 Temasek 44,000 5,000 39,000 8.8

208,621 35,891 172,730 5.8


Capex – Hutchison (HKDm)

Capex 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Ports 1,746 1,537 1,011 2,350 2,121 1,746 1,127 1,169 4,005 6,559 4,679 5,747 9,279 9,404 9,502 4,970 6,726 5,928 7,556 7,071

Property 1,964 255 3,735 1,475 4,498 3,088 1,826 735 1,190 2,175 794 226 221 89 89 54 127 274 271 535

Retail 600 1,222 596 717 732 601 1158 1,292 1,237 1,454 2,249 2,454 2,668 1,843 1,686 1,072 1,791 2,622 3,055 2,264

CKI* - - - 231 827 182 150 108 111 83 77 78 42 183 92 139 70 353 680 417

Husky* - - - - - - - - - - - - - - - - - - - -

Telecom* 2,707 3,140 2,252 2,628 1,455 1,948 1,413 3,311 2,799 2,841 5,780 5,357 - 3,698 5,336 5,004 3,617 10,639 3,903 2,887

Others - - - - - - - - - - - - - - 84 59 - - - 319

Established businesses* 7,017 6,154 7,594 7,401 9,633 7,565 5,674 6,615 9,342 13,112 13,579 13,862 12,210 15,217 16,789 11,298 12,331 19,816 15,465 13,493

Finance and investment 14 20 17 - - - 650 146 14 41 104 422 424 152 14 19 119 128 43 -

3 Group - - - - - - - 7,532 29,842 24,557 33,515 26,371 28,360 26,070 29,661 8,259 9,894 10,980 13,599 17,000

Total 7,031 6,174 7,611 7,401 9,633 7,565 6,324 14,293 39,198 37,710 47,198 40,655 40,994 41,439 46,464 19,576 22,344 30,924 29,107 30,493

Country breakdown

Hong Kong na na na na na na 2,266 2,804 4,336 5,493 3,038 2,266 1,558 1,437 2,769 1,449 1,895 3,435 2,581 2,037

Mainland China na na na na na na 632 460 1,028 3,724 2,035 2,355 4,622 3,656 1,848 922 1,587 1,844 2,228 1,654

Asia and Australia na na na na na na 616 386 5,490 4,260 8,030 7,117 2,796 7,038 7,631 5,229 3,771 13,865 6,967 7,139

Europe na na na na na na 538 9,893 27,970 23,085 32,968 27,177 30,779 26,605 31,567 10,367 13,374 11,652 17,288 19,344

Americas and others na na na na na na 2,272 750 374 1,148 1,127 1,740 1,239 2,703 2,649 1,609 1,717 128 0 0

Finance & Inv & others

43 319

Total na na na na na na 6,324 14,293 39,198 37,710 47,198 40,655 40,994 41,439 46,464 19,576 22,344 30,924 29,107 30,493

Source: Company, Daiwa Note: *capex of Husky, CKI and its telecom divisions were largely funded by themselves while its investment in China property were mainly financed by shareholders' loans

The underlying reasons for the discounted valuation are complex. One factor is the complicated corporate structure of the group, with its multitude of layers, and that some of these businesses have been co-invested by various entities within the group. Its investment in telecoms in Europe since 2000 is another factor, as it appears that this was seen by some as an unending, value-destroying investment. While we understand why the stock markets had this perception, we think some of their concerns were overplayed. For example, while Hutchison’s investment in the European telecoms business was substantial, at around USD38bn on our estimates, once we dissect the group’s transactions and how capital has been allocated since 2000, we can see that its investment in Europe was principally funded by the monetisation of its stakes in Orange, Vodafone and VoiceStream, which raised some USD20.4bn cash, the disposal of telecom assets, and its realisation of the value of some of its traditional businesses (see below).

Funds raised by monetisation of stakes in Orange, Vodafone and VoiceStream (USDm)

4Q99 Sale of 44.8% of Orange to Mannesmann 5,677

1Q00 Sale of 1.56% stake in Vodafone 5,233

2Q01 Sale of VoiceStream stakes to Deutsche Telekom 886

2001 Sale of Vodafone and Deutsche Telekom shares 3,763

2003 Sale of Vodafone and Deutsche Telekom shares 4,814

20,373

Source: Company


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Funds raised by the sale of other telecom assets (USDbn)

IPO of HTIL 0.9

Sale of a 19.3% stake in HTIL to Orasom Telecom 1.3

Sale of 51.3% stake in Partner Communications in Israel 1.4

HTIL's sale of its 67% stake in Hutchison Essar in India to Vodafone 11.1

14.7

Source: Company, Daiwa estimates

What the stock market may not have fully appreciated is that, based on our analysis, the nature of Cheung Kong Group’s investment in European mobile telecoms was to use its gains from its investments in the 2G business to build an important market position in the European mobile telecom industry over time – and the group may well be prepared to treat this as a project spanning more than 20 years, in our view. And while 20 years may be too long for the liking of some investors, we think the funding of this investment was prudent. All along, the 3 Group has been managed as a fully funded start-up and it doesn’t appear that Cheung Kong Group’s investment in the 3 Group has had a major adverse effect on the development of its other businesses. Hutchison has also not seen any cut in DPS – just that its DPS has been frozen since 1999 and resumed growth only in 2010. As illustrated above, the group has kept on investing across the board in almost all of its other major businesses throughout the past 15 years. In other words, the building of various businesses under Hutchison has been ongoing since it started to invest in mobile telecoms businesses in Europe in 2000. And this pace of investment is unlikely to have been affected at all.

Net asset distribution of Hutchison (HKDm) FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

Net assets

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

Property & Hotels 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

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

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

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

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

Finance and investment 23,664 35,747 22,582 66,086 27,068 49,676 72,330 6,639 8,616 30,254 23,275 40,059 24,527

Others

0 11,235 8,647 - - 11,879 4,799

Established businesses 179,497 164,385 176,171 217,211 193,682 232,536 311,291 251,454 262,879 290,691 313,445 363,209 349,673

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

Total 254,977 263,741 293,263 279,794 253,629 290,565 358,658 292,131 320,944 357,259 398,783 438,541 476,232

Represented by:

Shareholders’ funds 218,077 222,145 247,515 251,171 243,554 273,794 310,014 260,319 283,531 314,033 359,612 391,519 426,609

Minority interests 36,900 41,596 45,748 28,623 10,075 16,771 48,644 31,812 37,413 43,226 39,171 47,022 49,623

Net assets 254,977 263,741 293,263 279,794 253,629 290,565 358,658 292,131 320,944 357,259 398,783 438,541 476,232


Most importantly, these investments have produced results, as evidenced by the EBITDA and EBIT growth of Cheung Kong Group over these years. Note also that the group has struck various major deals with industry players over the past 10 years, and the gains it has realised have often represented multiples of its investment cost.


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EBITDA – Hutchison (HKDm) FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

EBITDA

Ports 7,564 9,295 10,280 11,953 13,324 14,760 16,585 17,202 14,006 10,285 11,745 11,343 11,447

Property 2,288 2,819 3,408 3,440 4,444 6,127 4,520 8,527 6,844 9,279 9,903 10,887 13,995

Retail 1,303 2,186 4,187 4,678 5,110 4,822 6,153 6,849 7,986 10,081 11,724 12,779 14,158

CKI 6,102 6,564 7,516 8,473 9,552 8,113 9,465 9,488 9,044 11,007 17,242 21,405 22,841

Husky 3,584 3,975 5,804 5,603 9,336 12,537 15,581 19,060 9,737 8,987 16,053 14,889 14,779

Telecom 2,219 2,866 3,368 4,393 6,890 4,983 6,577 7,405 3,218 278 2,474 3,473 3,577

Finance and investment 6,522 6,267 6,326 9,243 5,702 7,157 14,164 6,297 4,145 1,067 687 2,479 2,179


3 Group - (1,839) (11,939) (16,329) (219) 7,729 17,216 13,682 9,274 8,718 10,524 9,213 12,671

Consolidated EBITDA 29,582 32,133 28,950 31,454 54,139 66,228 90,261 88,510 64,254 59,702 80,352 86,468 95,647


EBIT – Hutchison (HKDm) FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

EBIT

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

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

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

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

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

Telecom 719 969 1,195 162 2,789 2,648 3218 6,467 493 (1,598) 254 898 958

Others (791) (145)

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


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

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


The frustrating issue for investors – and no doubt the management of Cheung Kong Group – is that the business value creation the group has achieved does not seem to have shown up in its equity-market valuation. In our view, this could be one main reason for the most recent reorganisation exercise. As such, this reorganisation exercise may signal that Cheung Kong Group is now entering a new chapter. After having undergone massive business building over the past 20 years, with results showing up in terms of cash flow and business performance, there would seem to be no urgency for the group to take on any major risks related to new investments. As such, the next phase of its development could be less about building new businesses than realising the value of the businesses it has built up. This begs the question: will this reorganisation mark the beginning of Chapter 3 for Cheung Kong Group?


- 20 -

0


- 21 -

Question 4

Does this reorganisation signal the

beginning of Chapter 3 for

Cheung Kong Group?


- 22 -

We do not see Cheung Kong Group as merely a property company. Like many other major property companies in Hong Kong, Cheung Kong made its first fortune through manufacturing, and then ploughed that money into property in the aftermath of the 1967 riots. It was subsequently listed in 1971, the window between the oil crisis and the crash of the Hong Kong stock market in 1973. The group’s property business has enabled it to build up its capital base over the years, but our view is that, from the very outset, it has had ambitions beyond merely the property business, which culminated in its acquisition of the Hutchison stake from HSBC in 1979. We think it is most illuminating and appropriate for investors to see Cheung Kong Group (which comprised mainly Cheung Kong Hutchison in the past; and will be transformed into Cheung Kong Hutchison and Cheung Kong Property once its reorganisation proposal is passed) as a business builder and investor, and that it is arguably a veteran in these kinds of endeavours among business groups in Hong Kong, and even Asia. Most importantly, its record suggests that it seemingly has mastered the art of being in the right business at the right time. We would categorise its past developments into 2 chapters, and argue that it is now on the threshold of Chapter 3. Chapter 1 (1971-1993): Emerging as the largest business group in Hong Kong

This chapter started with its listing as a property company in Hong Kong in 1971 and rapid expansion in the Hong Kong property sector. The period culminated in its 1979 acquisition of Hutchison, which it then used it as a platform for business building across 5 strategic sectors in Hong Kong. Chapter 2 (1993-2014): Massive business building on a global scale revolving around 6 sectors

Cheung Kong Group’s foray into the global business arena started as early as the late 1980s when it acquired Husky in Canada and entered the telecoms business in the UK. Such initial steps outside Hong Kong, however, didn’t go well and later resulted in determined efforts by Cheung Kong to bring Hutchison back into shape (this involved injecting new equity capital into Hutchison in 1992 to help recapitalise it). Then, what followed was extensive business building on a global scale. While the group’s investment in the European telecom industry was the most high-profile, its international expansion was actually across-the-board, encapsulating all of its core businesses. We believe the group has succeeded in turning many of its core businesses into important players in the global arena, but it appears that such progress has not been rewarded in its equity market valuation, probably because of the poor investment sentiment towards the telecom industry in Europe.

Comparison of the 3 chapters of Cheung Kong Group Chapter Period Remarks Focus

Chapter 1 1971-1992 Emerging 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 an important market position in 6 industries and the creation of a strong residential property developer in Hong Kong and China, as well as 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 in business aspiration

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 in capitalising on opportunities related to mis-pricing of its group companies or other industry peers.

Greater attention being paid to get greater market recognition to view it as a modern premier global corporation.

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

Using the 2 listed vehicles as the flagship for expanding its core businesses and entering new areas.

Source: Daiwa

Q4: Does this reorganisation signal the beginning of Chapter 3 for Cheung Kong Group?


- 23 -

Chapter 3 (2015 and beyond): A phase of asset realisation and the building of strong market positions in all of its core businesses

In our opinion, there is a subtle difference between a vertical corporate structure and a horizontal one. We think a vertical corporate structure with many layers (which arguably was what the Cheung Kong Group reorganisation in 1997 created) has its merits when a group is in heavy investing mode (as Cheung Kong Group was at the time), as it allows it to use limited capital to get exposure to a wide spectrum of business assets. This also allows the risks and financial obligations to be shared among the group’s different subsidiaries and associated companies. In contrast, a more horizontal corporate structure (which we think is what this latest Cheung Kong Group reorganisation is aimed at) has more merit when the investing phase is ending and the group is moving on to crystallising the value of its investments. Following this line of thought, we do not believe the focus of Cheung Kong Group in the coming years will be as much on business building, as it has built up its businesses substantially and does not seem to have any urgency about expanding its current scope or nurturing new businesses. Nevertheless, we see the group continuing to pursue opportunities that give it stronger market positions in its 6 core businesses, and continuing to explore and nurture new investments (which arguably was its main objective in the past). Still, the group’s focus is likely to shift more to unlocking the business value associated with its business building of the past few decades, as well as further consolidating or expanding its market position in its core businesses. In this light, this latest reorganisation could act as a catalyst for the group moving ahead in this next phase – essentially an invitation to global investors to take a closer look at the investment value of the company. As such, we believe this reorganisation exercise heralds the inauguration of Chapter 3 for Cheung Kong Group, which we believe will have major implications for the development of this business group and possibly other major business groups in Hong Kong. In its Chapter 3, the capital markets will probably become more important for the group than before, given that it targets to crystallise the business value it has built up. However, we think improving the valuation of the group will have important implications for its future development.


- 24 -


- 25 -

Question 5

What is Cheung Kong Group

likely to do in its Chapter 3?


- 26 -

Based on what happened in its Chapter 1 and Chapter 2, we think Cheung Kong Group’s Chapter 3 will be less about business-building and more about asset realisation. To follow are the 6 major things we think the group will consider doing in Chapter 3 of its development:

1) Pursue greater recognition from the capital markets on the investment value of its 2 listed flagships 2) Capitalise on mis-pricing and reorganisation opportunities within its listed entities 3) Create a principal listed vehicle for each of its core businesses 4) Pursue M&A opportunities globally 5) Raise its dividend payouts, with potential for the family to raise its stakes, and the listed companies to

conduct share buybacks 6) Undertake special distributions of shares in its various businesses as and when they are mature enough

Below, we elaborate on these 6 points. 1.Pursue greater recognition from the capital markets on the investment value of its 2 listed flagships

One main outcome of this reorganisation is that it will create 2 flagship listed vehicles under the Li family & Trust (CK Hutchison Holdings and CK Property), both of which will be sizeable players in their own fields, with business assets of over USD80bn and USD30bn, respectively. We see this reorganisation exercise as a friendly invitation to the capital markets and global investors to take a closer look at the investment value of the group, and believe that one of the main objectives is to get these 2 flagships properly priced in the capital markets.

Estimated NAV structure of the future CKH Holdings**

HKDm % HKD/share^

NAV of assets previously belonged to Hutchison 586,644 72.6% 137.6

NAV of assets previously belonged to Cheung Kong* 210,774 26.1% 91.0

6.2% additional stake in Husky Energy 10,896 1.3% 129.1

808,314

209.4^^

Source: Daiwa *After excluding its stake in Hutchison; **before the distribution of CK Property ^Based on the existing issued shares of Cheung Kong and Hutchison ^^Based on the estimated number of issued shares of CKH Holdings (3.86bn)

2. Capitalising on the mispricing of, and reorganisation opportunities for, the group’s listed vehicles

However, we believe the group would not stop at getting greater recognition from the capital markets of its investment value. Once it succeeds in enhancing the equity-market valuation of its listed flagships, it would be open to an array of mis-pricing as well as reorganisation and M&A opportunities in the capital markets. One clear example would be mis-pricing and reorganisation opportunities within the various listed companies in the group. For example, Power Assets (6 HK, HKD79.0, Hold [3]) is sitting on over HKD60bn in cash and its current structure is arguably not conducive to making the most productive use of its capital. In our opinion, having parent Cheung Kong Infrastructure (1038 HK, HKD63.65, Buy [1]) use a similar share-swap arrangement as this Cheung Kong Group reorganisation to buy out the minority shareholders of Power Assets would have merits for the group. Similarly, if Hutchison’s acquisition of O2 goes ahead, 3 UK would emerge as the largest mobile telecom operator in the UK, with the credentials for a separate listing. A potential spin-off of 3 UK would help pay for the acquisition price of O2, and the combined entity could then be used as the vehicle to acquire the group’s other mobile telecom businesses in Europe over time.

Q5: What is Cheung Kong Group likely to do in its Chapter 3?


- 27 -

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 Investments 15% 19% 49%

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% in it


At this point, we think there is a case for saying that Hutchison’s mobile telecom businesses in Europe are now under-priced by the stock market. However, if its acquisition of O2 can get regulatory approval and the integration of 3 UK and O2 can proceed smoothly, we believe there would be a significant improvement in the cash flow and profitability of CKH’s mobile telecom businesses in the UK. And this is before we take into account a potential improvement in the competitive environment in the UK mobile telecom businesses. However, once the “New 3 UK” is spun-off and can command a premium stock-market valuation, it could become a vehicle to unlock the value of the group’s other mobile telecom businesses in Europe, through for example, 3 UK, buying out 3 Italy or the group’s other mobile telecom operations in Europe through issuing new shares. 3. Creating a principal listed vehicle for each of its core businesses

The reorganisation will create a sizeable global property company called CK Property, which will have gross rental income of about USD1bn a year (including the contribution from services suites) and a sizeable development landbank of 170m sq ft. Will this become the model for the group’s other business lines? That is to say, would there be a separately listed global telecom company called CKH Telecom in the future? Would there be a separately listed global retail company called CKH Retail in the future? Would CK Infrastructure be distributed to the family in due course? Would CK Property also spin off a CK Hotel over time? We think the answer to these questions is Yes, eventually, but believe the process would take time. Whenever the group has a business operation that has matured to the point where it has sufficient capital and asset base, as well as management resources to become a major global player (such as the situation with CK Property at the moment), it would probably be in the interests of CKH shareholders to get a distribution in such a separate listed vehicle through, for example, a special dividend similar to the group’s current plans related to CK Property. That said, outside property, the group’s businesses in other operations have not yet matured to this point.


- 28 -

The principal listed vehicle in each of Cheung Kong Group’s core business

Principal listed

Business vehicles Remarks

Property CK Property CK Property could spin-off its China business or hotel division

Infrastructure CK Infrastructure There should be reorganisation opportunities within this division as well as new investment opportunities in the market

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

Ports Not yet clear Hutchison Port Holdings Trust is already listed in Singapore but the group still has many port assets which are not yet included in HPH Trust.

Presently, Hutchison has a 80% stake in the unlisted Hutchison Port Holdings, which is also 20% owned by PSA in Singapore

Telecom Not yet established Assuming the O2 acquisition goes through, the enlarged 3 UK could spin-off as the principal listed vehicle for its telecoms division and it may eventually acquire all of the group's telecom assets in Europe and potentially other markets as well

Retail Not yet established A global health & beauty retailer and can be listed any time

Hutchison currently owns 80% of the unlisted AS Watson, with the remaining 20% owned by Temasek

Source: Daiwa

Under such circumstances, we think one option would be to have one principal listed vehicle for each of its major business lines (arguably, CKH now may not be that far from this point as one could say it already has such a vehicle for its infrastructure and energy businesses and there are entities within its port, telecom and retail division which has the credentials to become such a vehicle). We believe the 3 Group’s UK operation could perform such a role for its telecom division and we think it is quite possible that CK Hutchison will have a listed retail arm – indeed, this was what the group had been pursuing before it sold a 25% stake in its retail division to Temasek in April 2014. 4. Pursuing M&A opportunities globally

Note that if CKH and CK Property can command premium valuations in the capital markets, then the opportunities they would be presented with would not necessarily be restricted to listed companies within the group. Indeed, the group could arguably capitalise on any M&A opportunities related to undervalued listed companies in Hong Kong, or possibly Asia or indeed any part of the world, and we think it is possible that Cheung Kong Group could pursue opportunities related to this. After all, one key to the rise of Cheung Kong as the largest business group in Hong Kong by the late 1980s was it being the pioneer in unlocking the value of many British corporations (Hutchison, Green Island Cement, Hong Kong Electric are among the major examples) through acquiring them when they were judged to be mispriced by the stock market. Note that when Cheung Kong was first listed in 1971, it was far from being the largest in the Hong Kong property sector. One main reason for its rapid rise since then has been its ability to make effective use of the stock market through issuing new shares to raise capital to embark on attractive projects (many were joint ventures with companies which own land but did not have property development expertise). As the group has been able to demonstrate that it is capable of employing its capital to find good investments to create value for shareholders, its issuing of shares has often been welcomed, and this has allowed it to build up its capital base and scale of operation much faster than peers. In this sense, focusing more on mispricing opportunities in the capital markets and making effective use of the stock market’s fund-raising function could bring Cheung Kong back to doing what it’s been good at in the past, ie, acquiring undervalued companies in the stock market. Now, the main difference is that in the 1980s and before, its focus was old British companies listed in Hong Kong. But now and in the future, its focus could well be global, in addition to the other listed entities within the group. In the 1980s and before, the shares it issued were mainly to fund the acquisition of land. But now and in the future, the funds raised could be used to buy listed companies within the group plus any listed or unlisted assets in its 6 core businesses in any parts of the world. 5. Raising dividends, potential family raising its stakes, and listed companies conducting share buybacks

This reorganisation will result in the Li family & Trust owning just over 30% (30.15% to be exact) of Cheung Kong Group listed flagship companies, which is also the threshold related to take-over activities in Hong Kong. We think 30.15% of a company the size of CKH Holdings and CK Property is already substantial, and we do not foresee any major risk that the family’s control over the group will be under threat.


- 29 -

That said, this size of stake may not be the most optimal in 2 senses. First, it means that the ability of CKH Holdings and CK Property to use new shares to fund attractive acquisitions or reorganisation opportunities within the group could be restrained somewhat, as we do not think the Li family & Trust would accept a shareholding of less than 30%. Second, if the businesses to be distributed out of CKH Holdings and CK Property are less than 100% owned by the 2 entities, the family may not end up having a more than 30% stake in the companies to be distributed out. Against this backdrop, we believe there is incentive for the family to find ways to increase its stake in its 2 listed flagships. One way is to plough back the dividends received from these 2 flagships to buy more of their shares (pursuant to the existing rules and regulations in Hong Kong, the family could raise its stake by up to 2% a year, without triggering an obligation to make a general offer to minority shareholders). We believe the same objective could be achieved by having its 2 flagship listed vehicles keep on buying back shares every year (subject to the requirement that the family’s effective stake cannot rise by more than 2% a year). In our opinion, a share buyback would be a safe and effective way to create value for all shareholders (see also section 6 of our Swire Properties report: Initiation: a large “nurturing reward” awaits). We also believe this would be a good way to deploy the abundant cash flow that would be generated by its 2 listed flagships (the EBITDA of the future CKH Holdings and CK Property should be over USD10bn and USD2bn a year, we estimate).

Dividends declared by Cheung Kong and Hutchison

Source: Companies, Bloomberg

Importantly, our read of the Circular related to this Cheung Kong Group reorganisation released on 6 February is that one reason for the group’s changing to be incorporated in the Cayman Islands could be that of ensuring that CKH Holdings has the greatest flexibility of declaring some major dividend or doing major share buybacks going forward. As stated in 6 February Circular, “under the Companies Ordinance, a Hong Kong company may only make distributions to shareholders out of its profits available for distribution. By way of contrast, the Cayman Islands Companies Law permits a Cayman Islands company to make distributions out of profits and, subject to a solvency test and any provisions of the company’s memorandum, and articles of association, out of the share premium account.” Meanwhile, the Circular also highlights that this group reorganisation will result in a large share premium of about HKD331.7bn to be created and credited to the share premium account of CKH Holdings. We believe that such a large share premium would make it possible for the group to distribute CK Property shares to shareholders and make a similar distribution of the group’s other businesses in the future.

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

(HKD)


http://asiaresearch.daiwacm.com/eg/cgi-bin/files/Swire_Properties_140522.pdf#page=1


- 30 -

Amount credited to share premium account of CKH [HKD331.7bn (note 1)]

Source: Company

In this light, one important aspect of the group’s change to be incorporated in the Cayman Islands could be that of ensuring it has the flexibility to embark on a major share buyback if it judges that it is in the interests of its shareholders to do so. In Appendix V of the document, it is stated that under the Companies Ordinance in Hong Kong, “a redemption or buy back may only be funded out of the company’s distributable profits.” By way of contrast, if a company is incorporated in the Cayman Islands, it is possible that its share buyback can be funded by its share premium account as well, provided that “the company shall be able to pay its debts as they fall due in the ordinary course of business.” Our read is that among the reasons for the planned incorporation in the Cayman Islands is to allow the group to: 1) distribute CK Property and possibly other businesses of the group to CKH shareholders in the future, and 2) engage in a major share buyback. As we have stated elsewhere, a share buyback is probably the most effective way for Hong Kong companies to break away from the “Hong Kong discount”. 6.Special distribution to shareholders when the business is mature enough

In our opinion, the distribution of CK Property shares to CKH shareholders sets an example of what could happen to all of the group’s core businesses eventually, as we believe that such an arrangement is the most conducive to maximising the value of these businesses, ensuring they can continue to attract and retain professional talent, and eventually becoming premier global companies. Indeed, ensuring that the group can distribute its various assets to its shareholders could well have been the main reason for the move to be incorporated in the Cayman Islands. However, the group’s other businesses are not yet mature enough to be distributed to shareholders in the immediate future, in our view, as we still see considerable reorganisation potential within the group and M&A opportunities in the market. The group could aim to distribute these other businesses to shareholders eventually, and before this happens, there should be incentive for the KS Li family & Trust to raise its stake in CKH Holdings. We think that raising dividends together with share buybacks would represent a win-win for all the shareholders of Cheung Kong Group, as well as being a safe and equitable way to create value for shareholders. If the group really commits to doing this, it would represent another case where the group is a pioneer in the Hong Kong corporate sector, in our view.


- 31 -

Of course, distributing out CKH’s businesses as separate listed entities would run the risk of lowering the investment value of CKH Holdings over time. That said, we believe that given the abundant businesses the group has invested in over the past 2 decades or more, the time it takes to the point where CKH Holdings will be left with no major businesses could be 10-20 years or more. The group may not necessarily distribute all the assets within any business in one go. Hence, CKH Holdings may continue its “nurturing work” for its major listed companies for some time, and during the process, could use its surplus cash flow to nurture new investments or it buy the shares of its listed companies like any other institutional shareholders in the market. As such, the role of CKH Holdings could become that of an “investment house,” or private equity firm which keeps on building and investing in businesses and then distributes them to shareholders when these businesses become mature enough to become global players through their own resources. In our opinion, Cheung Kong Group is one of the few conglomerates with a capital allocation mindset and can create synergies from its diverse businesses. As such, we would argue that CKH Holdings is an astute capital allocator, on top of being a builder of, and investor in, business. The conglomerate model has been out of fashion in the investing world for some time now, and we believe the reason could be the lack of synergies and lack of capital allocation discipline at many conglomerates. Among the global conglomerates, General Electric and Berkshire Hathaway are both highly valued globally and generally seen as robust and savvy in terms of capital allocation. If CKH Holdings can prove itself to be an astute capital allocator as well as a veteran builder of, and investor in, business, it could command a better valuation in the capital markets.


- 32 -


- 33 -

Question 6

Will the reorganisation unlock

value for Cheung Kong Group?


- 34 -

This is a complex question. Both CKH and CK Property would be sizeable corporations, with assets already on their books likely exceeding USD80bn and USD30bn, respectively. Hence, it would require considerable investing capital to enable them to sustain premium valuation in the stock market. We believe the group has the business value to support a higher equity-market valuation, but there are of course reasons for its historical valuation discount. Indeed, the NAV discounts that the market applies to the share of Hong Kong family business groups and property companies have widened in recent years. In our view, these valuation discounts are partly attributable to the special characteristics of the Hong Kong stock market over the past 15 years, during which stock-market capitalisation has expanded 5-fold to cHKD25tn, fuelled by mega IPOs involving Mainland China corporations. As a result of this trend, there is an abundant supply of shares but the amount of capital available for secondary market trading may not have risen as quickly. According to the Hong Kong Exchange, Mainland China stocks accounted for 50.5% of equity market turnover in Hong Kong in 2014, compared with just 8.9% in 1994. It is reasonable to assume there will be many more Mainland companies listing in Hong Kong in the coming years. Against this backdrop, it is understandable that Hong Kong’s traditional blue chips have been marginalised to some extent. We see this marginalisation as one structural reason for Cheung Kong Group’s historical valuation discount, though compared with those of other Hong Kong property companies its valuation discount has been modest.

Hang Seng Index members: market capitalisation


Still, we view the planned group reorganisation as an important step toward unlocking more business value. Having risen by more than 5x from about HKD5tn in 2005, Hong Kong’s stock market is already in the global leagues in terms of market capitalisation. Yet it is still not seen as a core market by many global funds. Worse still, as one of the most liquid of the emerging markets, Hong Kong is often the place for foreign investment funds to raise liquidity during times of international crisis. We think Hong Kong’s market capitalisation has arguably grown to a level in excess of the traditional investment capital base of the market. As such, companies will likely need to attract investors from outside the traditional investor pool in Hong Kong and the Mainland if they are to command higher valuations, in our view. We believe there is a good case for Hong Kong, over time, to assume greater prominence in the global investing world. And, as that process unfolds, we believe that at least some Hong Kong-listed companies will enjoy enhanced appeal to global investors. One example of this trend in the property segment is Link REIT, which in recent years has attracted the attention of some global funds and global REIT funds.

0

5

10

15

20

2003 2013

(HKDtn)

Real Estate Investment & Services (HK) Real Estate Investment & Services (China) BanksCasino and Gaming Conglomerate Consumer Discretionary/StaplesElectronic & Electrical Equipment Financial Services Industrial TransportationInformation Techonology Life Insurance MediaMining Oil , Gas & Consumable Fuels TelecommuncationsTravel & Leisure Utilities

Q6: Will the reorganisation unlock value for Cheung Kong Group?


- 35 -

In retrospect, we believe there are 3 major factors that have enabled The Link REIT to break away from “The Hong Kong discount” which has been accorded to all major property stocks in Hong Kong. First is the high transparency and good disclosure of its business performance. Second is the importance The Link REIT has placed on communicating with its unitholders and making the priorities and preferences of its major institutional shareholders important considerations. And third is steady growth in the dividends declared by The Link REIT. As a consequence, The Link REIT is trading currently at a premium to book of 1.09x versus 0.81x for the property developers. Since its IPO in November 2005, the average PBR of The Link REIT was 1.22x and it has been trading at one of the highest valuations ever achieved by Hong Kong property companies.

Major Hong Kong property developers: price-to-NAV

Source: Datastream, Daiwa estimates

Major Hong Kong property developers: PBR trend

Source: Datastream, Daiwa

PBR trend - The Link REIT

Source: Bloomberg, Company, Daiwa

Average since 1990: -26.5%

+1SD: -10.2%

+2SD: 6.2%

-1SD: -42.9%

-2SD: -59.3%

(70%)

(60%)

(50%)

(40%)

(30%)

(20%)

(10%)

0%

10%

20%

30%

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Weighted average (disc)/prem to NAV – four developers(Disc)/prem (%)

Current: -37.2%

Average: 1.24x

+1 SD: 1.63x

-1 SD: 0.85x

-2 SD: 0.46x

+2 SD: 2.02x

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

(x) Weighted-average PBR of four developers

Current PBR: 0.81x

Average since IPO: 1.22x

+1 SD: 1.41x

-1 SD: 1.03x

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Nov

05

May

06

Nov

06

May

07

Nov

07

May

08

Nov

08

May

09

Nov

09

May

10

Nov

10

May

11

Nov

11

May

12

Nov

12

May

13

Nov

13

May

14

Nov

14

(x)

Current PBR: 1.09x


- 36 -

In this context, we believe one of the most important aspects of the Cheung Kong Group reorganisation is that it signals management’s commitment to take into account the priorities and preferences of global investors, which we see as one step on the road to becoming a genuinely premier global company. In our opinion, capturing the attention of investors who currently do not typically invest in Hong Kong is one approach for Hong Kong companies looking to command valuations closer to those of their global peers – not to mention valuations that better reflect the commercial value of their underlying assets and businesses. Hence, we view Cheung Kong Group’s reorganisation as a sign that this longstanding pioneer among Hong Kong companies is again setting the pace. This likely won’t be a straightforward process for the group, given that global investors do not currently view Hong Kong’s family business groups as a separate asset class. In terms of market capitalisation, however, these business groups are anything but small.

Hong Kong family business groups and listed Hong Kong property stocks Bloomberg

No. of Share price Market cap Stake of major Free-flow Free-flow

code Names shares (m) (HKD) (USDbn) shareholder (%) no. of shares (m) value (USDbn)

Property Developers

1 HK Cheung Kong 2,316 147.40 44.0 43.5 1,309 24.9

16 HK SHK Properties 2,823 124.60 45.4 48.5 1,453 23.4

12 HK Henderson Land 3,000 54.95 21.3 69.5 916 6.5

83 HK Sino Land 6,064 12.68 9.9 53.4 2,828 4.6

20 HK Wheelock 2,032 42.45 11.1 60.6 800 4.4

17 HK New World 8,893 9.35 10.7 42.0 5,154 6.2

142.5

70.0

Property Investors

4 HK Wharf 3,030 61.70 24.1 55.1 1,360 10.8

1972 HK Swire Properties 5,850 25.20 19.0 82.0 1,053 3.4

HKL SP HK Land 2,353 USD7.85 18.5 50.2 1,172 9.2

101 HK Hang Lung Properties 4,485 22.60 13.1 54.0 2,064 6.0

14 HK Hysan Development 1,064 37.50 5.1 40.9 629 3.0

683 HK Kerry Properties 1,445 27.00 5.0 58.3 603 2.1

41 HK Great Eagle 656 26.10 2.2 62.7 245 0.8

87.1

35.4

REITs

823 HK Link REIT 2,292 52.55 15.5 10.0 2,064 14.0

87001 HK Hui Xian REIT 5,298 3.47 2.9 51.3 2,581 1.4

2778 HK Champion REIT 5,745 3.87 2.9 62.0 2,182 1.1

778 HK Fortune REIT 1,876 8.68 2.1 28.6 1,340 1.5

1881 HK Regal REIT 3,257 2.20 0.9 75.0 814 0.2

405 HK Yue Xiu REIT 2,800 4.06 1.5 63.0 1,037 0.5

435 HK Sunlight REIT 1,633 3.95 0.8 31.9 1,113 0.6

1426 HK Spring REIT 1,109 3.67 0.5 37.7 691 0.3

808 HK Prosperity REIT 1,424 2.92 0.5 12.7 1,243 0.5

27.7

20.1

Niche property companies

878 HK Soundwill 284 12.54 0.5 69.2 87 0.1

173 HK K Wah International 2,787 4.10 1.5 61.4 1,076 0.6

497 HK CSI Properties 10,487 0.30 0.4 44.2 5,852 0.2

201 HK Magnificent Estates 8,947 0.35 0.4 71.1 2,586 0.1

369 HK Wing Tai Properties 1,339 4.83 0.8 65.2 466 0.3

488 HK Lai Sun Development 20,095 0.18 0.5 52.2 9,613 0.2

4.0

1.6

261.3

127.1

Source: Bloomberg, Daiwa Note: prices as of close on 4 Feb 2015


- 37 -

One question that will be answered in the coming months and years is whether the families behind these companies view an attempt to catch the eyes of global investors as a priority. Either way, Cheung Kong Group seems to have accepted the challenge, and we think there are several factors that will work to the advantage of the group as it kicks off the process. First, Cheung Kong Group is genuinely a global concern in terms of its underlying businesses. Whether it is ports, retail, energy, infrastructure or telecoms, the future CKH Holdings should have solid credentials to be a global player in all the industries it operates in. Hence, we believe it will appeal to global funds seeking exposure to, say, opportunities within these industries, macro recovery globally or in Europe, or M&A opportunities in the European mobile telecom sector. The fact that CKH in its future incarnation could be seen as a play on several global investment themes ought to put it in a better position than many other Hong Kong companies to attract attention from the global investment community, in our view. Currently, Cheung Kong and Hutchison are among the largest constituents of the MSCI Hong Kong, with a combined weighting of around 14%. With the reorganisation plan calling for Cheung Kong (of the future CKH Holdings) to issue 1.5bn new shares, we do not expect the combined weighting of the future CKH Holdings and CK Property to be smaller than it is today. Another factor to consider is whether the globalisation of Cheung Kong Group’s businesses, along with the possible acquisition of O2 and spin-off of 3 UK, will enhance the group’s chances of becoming a constituent of some of the major indices that track global companies. If it does become a constituent of major indices while retaining its MSCI Hong Kong status, we believe the stock would almost certainly draw greater interest from investors. As such, we think it is important that the pure property company (ie, CK Property) will be spun off from CKH Holdings, because we believe CK Property will have the clout to become an important stock within the global property universe, with total assets of more than USD30bn and about US1bn in gross rental income (including the contribution from its serviced suites). Global property funds may previously have been hesitant about including Cheung Kong due to its large exposure to non-property businesses, but we think this is unlikely to be the case once it becomes a pure property play – some global-property funds would have to increase their weightings in it as it is likely to become one of the largest pure property names in Hong Kong. And as a pure property company, CK Property will have certain strengths, in our view. The global property universe is full of large commercial-property players, and it is probably fair to say that the group’s commercial properties do not particularly stand out within the context of the global arena. But when it comes to its residential-property development business, we do think the group has strengths, especially as it has shown that it can achieve over HKD10bn pre-tax profits in 2013 from its China property business, which is one of the largest among the Hong Kong property companies. We consider it quite an achievement that over the past 10 years, Cheung Kong has remained one of the largest residential-property developers in Hong Kong, has built up its China presence, created a sizeable hotel portfolio, including some presence in Singapore, and made some direct investments in global infrastructure, all the while with falling gearing and rising dividends. Our view is that the group’s high asset-turnover model has made an important contribution to this and that this type of model could be an asset to the group when it comes to gaining more share of the China market. As such, we believe that CK Property could have pockets of strength unlike those offered by the major global property stocks and this could attract the attention of the global investors. This is before we take into account any M&A opportunities that it may consider in the future. And we see pockets of strength throughout the group. As we said in the Question 4 and 5 sections, we see room for many of the businesses under the future CKH Holdings to be listed separately. Moreover, we believe there are already quite a few M&A and reorganisation opportunities waiting to happen within the group’s companies, and as the opportunities for the spun-off companies grow, the higher the valuations its 2 flagship listed vehicles will be able to command.


- 38 -

Most importantly, as we put forward in the Question 5 section, we believe that following this reorganisation: 1) Cheung Kong Group will pay higher dividends, 2) the KS Li family & Trust will raise its stake in Cheung Kong Group, and 3) these 2 companies may embark on a major share buyback programme. What is more, CKH Holdings may aim at distributing its many other businesses to shareholders when they are mature enough, so long-term shareholders of Cheung Kong and Hutchison could end up holding CKH Holdings, plus many other global businesses in addition to CK Property. In sum, we think this reorganisation represents just the beginning of Cheung Kong Group’s attempt to unlock value for shareholders, and that there are still many areas where the group can unlock value for shareholders. Indeed, we believe the reorganisation could be the inauguration of harvesting time for long-term shareholders of Cheung Kong and Hutchison. Above all, we see the planned reorganisation as a move by a major Hong Kong-family-owned business group to become a global company. This is unprecedented in Hong Kong. It has important implications for the group’s development and could, in our view, result in Hong Kong family-owned business groups being viewed as an asset class of their own.


- 39 -

Appendix


- 40 -

The expected timetable for the Cheung Kong Reorganisation Proposal Date Event

23 Feb 2015 Latest time for lodging forms of transfer of Shares to qualify for entitlement to vote at the Court Meeting and the General Meeting

24 Feb 2015 Closure of register of members of the Company for determining entitlement to attend and vote at the Court Meeting and the General Meeting

25 Feb 2015 Suspension of dealings in the Shares; Court Meeting; General Meeting

26 Feb 2015 Resumption of dealings in the Shares

10 Mar 2015 Dealings in the Shares on the Stock Exchange cease

12 Mar 2015 Latest time for lodging transfers of Shares in order to be entitled to CKH Holdings Shares

13 Mar 2015 Closure of register of members of the Company for determining entitlement to CKH Holdings Shares

17 Mar 2015 Court hearing of the petition to sanction the Scheme

Despatch of the new certificates for CKH Holdings

18 Mar 2015 Withdrawal of the listing of the Shares on the Main Board

Dealings in CKH Holdings Shares on the Stock Exchange commence

Apr - Jun 2015 AGM

Before Jun 2015 Completion of the Merger and the CK Property Spin-off

Source: Company, Hong Kong Economic Times

See important disclosures, including any required research certifications, beginning on page 46

■ What's new

Following our initial take (see Determined to be global and unlock shareholder value, 12 January), we have analysed in depth the major questions surrounding the Cheung Kong Group’s reorganisation and the circular released on 6 February. The positive implications of this new roadmap are only just starting to be realised, in our opinion. ■ What's the impact

The key is the roadmap for the group. For investors, we believe the most important aspect of the reorganisation plan is the strong signal it sends: the Cheung Kong Group is committed to becoming, and being seen as, a global player in a multi-year effort that we believe will unlock shareholder value. Chapter 3 has begun. If the Cheung Kong Group’s Chapter 2 (1993-2004) was all about business-building, Chapter 3 is about asset realisation following the group’s

decades-long investment in various businesses on a global scale. In the accompanying thematic report, we outline 6 things the group may look to do in the coming years, all of which should be positive for shareholders and, crucially, investor perceptions of the group, in our view. With this transaction, all parties’ interests appear to be in close alignment. As we see it, Chapter 3 will pave the way for the interests of the family and those of shareholders and investors to remain aligned for years to come. For long-term Cheung Kong/Hutchison investors, we view the reorganisation as a clear signal that the group could now be entering a multi-year harvesting period. ■ What we recommend

We reaffirm our Buy (1) call and 12-month target price of HKD178, based on a 15% discount applied to our NAV estimate of HKD209.40 for CKH Holdings (pre-distribution of CK Property shares). The main risk to our positive view would be if shareholders vote against the reorganisation (25 February). ■ How we differ

We see this transaction as the beginning of what could be a multi-years harvesting period for the

group’s shareholders, and believe the market as a whole does not yet appreciate the transformative nature of the plan.

Financials / Hong Kong 1 HK

9 February 2015

Cheung Kong

Entering a new era

The reorganisation plan signals the group’s commitment to take on a

global perspective that should unlock value

The group’s “Chapter 3” should bring the interests of the family into

alignment with those of investors and shareholders

We see the group making tangible progress on the road to a multi-year

harvesting period; Buy (1) call reaffirmed

Source: Daiwa forecasts

Source: FactSet, Daiwa forecasts

Financials / Hong Kong

Cheung Kong1 HK

Target (HKD): 178.00 g 178.00

Upside: 19.9%

9 Feb price (HKD): 148.50

Buy (unchanged)

Outperform

Hold

Underperform

Sell

1

2

3

4

5

Forecast revisions (%)Year to 31 Dec 14E 15E 16E

Revenue change - - -

Net profit change - - -

Core EPS (FD) change - - -

95

101

108

114

120

110

121

133

144

155

Feb-14 May-14 Aug-14 Nov-14

Share price performance

Cheung Kg (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 112.70-150.70

Market cap (USDbn) 44.37

3m avg daily turnover (USDm) 85.34

Shares outstanding (m) 2,316

Major shareholder Li Ka Shing (43.3%)

Financial summary (HKD)Year to 31 Dec 14E 15E 16E

Revenue (m) 44,019 49,353 54,972

Operating profit (m) 22,426 23,620 25,678

Net profit (m) 35,510 39,150 43,880

Core EPS (fully-diluted) 15.331 16.903 18.945

EPS change (%) 6.1 10.3 12.1

Daiwa vs Cons. EPS (%) (0.7) 16.5 24.1

PER (x) 9.7 8.8 7.8

Dividend yield (%) 2.6 2.7 2.9

DPS 3.800 4.000 4.300

PBR (x) 0.9 0.8 0.8

EV/EBITDA (x) 3.5 2.6 1.7

ROE (%) 9.5 9.7 10.1

Jonas Kan, CFA

(852) 2848 4439

[email protected]

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/Cheung_Kong_150112.pdf#page=1

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/Cheung_Kong_150112.pdf#page=1


- 42 -

Key assumptions

Profit and loss (HKDm)

Cash flow (HKDm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Rental EBIT (HKDm) 1,739 1,817 1,698 1,978 2,112 2,270 2,429 2,575

Property sales profit (HKDm) 8,396 8,902 11,218 10,004 10,184 12,867 14,360 15,939

Hotels and serviced suites revenue

(HKDm)1,399 2,037 2,489 2,738 3,012 3,253 3,513 3,759

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Property sales 21,513 29,297 38,143 26,521 27,589 39,856 43,548 48,779

Rental income 1,155 1,264 1,377 1,867 1,960 2,140 2,360 2,620

Other Revenue 1,625 2,302 2,839 2,718 2,765 2,023 3,445 3,573

Total Revenue 24,293 32,863 42,359 31,106 32,314 44,019 49,353 54,972

Other income 0 0 1,070 0 0 0 0 0

COGS (10,740) (18,042) (25,904) (13,140) (10,649) (18,938) (23,054) (26,499)

SG&A (1,032) (1,590) (1,810) (1,950) (2,120) (2,190) (2,210) (2,320)

Other op.expenses (349) (398) (400) (430) (451) (465) (469) (475)

Operating profit 12,172 12,833 15,315 15,586 19,094 22,426 23,620 25,678

Net-interest inc./(exp.) (233) (222) (372) (496) (356) (374) (392) (408)

Assoc/forex/extraord./others 7,381 12,496 29,718 16,049 19,634 17,944 20,640 23,743

Pre-tax profit 19,320 25,107 44,661 31,139 38,372 39,996 43,868 49,013

Tax (2,910) (3,330) (3,343) (3,499) (4,201) (4,080) (4,297) (4,675)

Min. int./pref. div./others (242) (323) (204) (372) (712) (406) (421) (458)

Net profit (reported) 16,168 21,454 41,114 27,268 33,459 35,510 39,150 43,880

Net profit (adjusted) 16,168 21,454 24,693 27,268 33,459 35,510 39,150 43,880

EPS (reported)(HKD) 6.980 9.263 17.751 11.773 14.446 15.331 16.903 18.945

EPS (adjusted)(HKD) 6.980 9.263 10.661 11.773 14.446 15.331 16.903 18.945

EPS (adjusted fully-diluted)(HKD) 6.980 9.263 10.661 11.773 14.446 15.331 16.903 18.945

DPS (HKD) 2.700 2.950 3.160 3.160 3.480 3.800 4.000 4.300

EBIT 12,172 12,833 15,315 15,586 19,094 22,426 23,620 25,678

EBITDA 12,521 13,231 15,715 16,016 19,545 22,891 24,089 26,153

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Profit before tax 19,320 25,107 44,661 31,139 38,372 39,996 43,868 49,013

Depreciation and amortisation 349 398 400 430 451 465 469 475

Tax paid (713) (824) (3,456) (1,088) (1,230) (1,350) (1,420) (1,530)

Change in working capital 7,713 11,036 9,280 5,560 5,850 5,920 5,960 5,980

Other operational CF items 2,572 (4,710) (26,048) (6,939) (9,252) (11,190) (13,823) (16,825)

Cash flow from operations 29,241 31,007 24,837 29,102 34,191 33,841 35,054 37,113

Capex (6,520) (12,450) (35,155) (21,576) (7,183) (23,153) (24,091) (26,118)

Net (acquisitions)/disposals 2,034 562 3,400 735 780 790 800 810

Other investing CF items (2,726) (1,094) (1,294) (1,461) (1,450) (1,490) (1,520) (1,540)

Cash flow from investing (7,212) (12,982) (33,049) (22,302) (7,853) (23,853) (24,811) (26,848)

Change in debt (11,760) 0 0 0 0 0 0 0

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

Dividends paid (5,233) (6,254) (7,064) (6,949) (7,319) (7,875) (8,338) (8,802)

Other financing CF items (786) (712) (740) (760) (780) (790) (795) (835)

Cash flow from financing (17,779) (6,966) (7,804) (7,709) (8,099) (8,665) (9,133) (9,637)

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

Change in cash 4,250 11,059 (16,016) (909) 18,239 1,323 1,110 628

Free cash flow 22,721 18,557 (10,318) 7,526 27,008 10,688 10,963 10,995

Financial summary


- 43 -

Balance sheet (HKDm)

Key ratios (%)


Company profile

Cheung Kong is one of the two largest property companies in Hong Kong. It is also the largest shareholder in Hutchison Whampoa, which has diversified investments in ports, telecom, property, retail and infrastructure businesses in Hong Kong and overseas. In Hong Kong, Cheung Kong concentrates more on the residential-property development business. The restructuring proposal announced on 9 January 2015 would result in the two companies’ assets being re-distributed among two new entities.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Cash & short-term investment 11,423 25,147 19,894 21,167 33,197 34,520 35,630 36,258

Inventory 62,999 65,679 68,932 80,088 79,784 86,994 94,203 104,024

Accounts receivable 2,799 2,459 2,805 2,418 2,313 2,320 2,360 2,375

Other current assets 2,010 592 375 672 1,911 1,932 1,950 1,989

Total current assets 79,231 93,877 92,006 104,345 117,205 125,766 134,143 144,646

Fixed assets 30,129 31,569 36,413 39,801 38,754 44,580 50,960 56,580

Goodwill & intangibles 4 4 0 0 0 0 0 0

Other non-current assets 188,106 203,183 244,767 262,579 272,878 285,896 301,305 319,387

Total assets 297,470 328,633 373,186 406,725 428,837 456,242 486,408 520,613

Short-term debt 7,210 13,127 22,897 5,098 2,438 2,438 2,438 2,438

Accounts payable 12,078 18,298 9,701 13,290 11,699 12,310 12,450 12,658

Other current liabilities 3,488 3,280 2,433 1,801 1,329 1,365 1,380 1,420

Total current liabilities 22,776 34,705 35,031 20,189 15,466 16,113 16,268 16,516

Long-term debt 25,279 22,027 23,020 43,001 39,452 39,452 39,452 39,452

Other non-current liabilities 2,011 2,390 850 6,535 10,146 10,168 10,183 10,200

Total liabilities 50,066 59,122 58,901 69,725 65,064 65,733 65,903 66,168

Share capital 1,158 1,158 1,158 1,158 1,158 1,158 1,158 1,158

Reserves/R.E./others 242,441 264,538 305,267 332,685 359,523 386,231 416,117 450,037

Shareholders' equity 243,599 265,696 306,425 333,843 360,681 387,389 417,275 451,195

Minority interests 3,805 3,815 7,860 3,157 3,092 3,120 3,230 3,250

Total equity & liabilities 297,470 328,633 373,186 406,725 428,837 456,242 486,408 520,613

EV 188,188 164,230 141,579 123,394 93,270 79,250 63,150 44,556

Net debt/(cash) 21,066 10,007 26,023 26,932 8,693 7,370 6,260 5,632

BVPS (HKD) 105.172 114.712 132.296 144.134 155.721 167.252 180.155 194.800

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales (YoY) 47.8 35.3 28.9 (26.6) 3.9 36.2 12.1 11.4

EBITDA (YoY) 47.0 5.7 18.8 1.9 22.0 17.1 5.2 8.6

Operating profit (YoY) 47.8 5.4 19.3 1.8 22.5 17.5 5.3 8.7

Net profit (YoY) 14.7 32.7 15.1 10.4 22.7 6.1 10.3 12.1

Core EPS (fully-diluted) (YoY) 14.7 32.7 15.1 10.4 22.7 6.1 10.3 12.1

Gross-profit margin 55.8 45.1 38.8 57.8 67.0 57.0 53.3 51.8

EBITDA margin 51.5 40.3 37.1 51.5 60.5 52.0 48.8 47.6

Operating-profit margin 50.1 39.1 36.2 50.1 59.1 50.9 47.9 46.7

Net profit margin 66.6 65.3 58.3 87.7 103.5 80.7 79.3 79.8

ROAE 6.8 8.4 8.6 8.5 9.6 9.5 9.7 10.1

ROAA 5.5 6.9 7.0 7.0 8.0 8.0 8.3 8.7

ROCE 4.3 4.4 4.6 4.2 4.8 5.4 5.3 5.4

ROIC 3.8 4.1 4.6 3.9 4.6 5.2 5.2 5.2

Net debt to equity 8.6 3.8 8.5 8.1 2.4 1.9 1.5 1.2

Effective tax rate 15.1 13.3 7.5 11.2 10.9 10.2 9.8 9.5

Accounts receivable (days) 21.0 29.2 22.7 30.6 26.7 19.2 17.3 15.7

Current ratio (x) 3.5 2.7 2.6 5.2 7.6 7.8 8.2 8.8

Net interest cover (x) 52.2 57.8 41.2 31.4 53.6 60.0 60.3 62.9

Net dividend payout 38.7 31.8 17.8 26.8 24.1 24.8 23.7 22.7

Free cash flow yield 6.6 5.4 n.a. 2.2 7.9 3.1 3.2 3.2

Financial summary continued …


- 44 -

Daiwa’s Asia Pacific Research Directory

HONG KONG

Hiroaki KATO (852) 2532 4121 [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)

Junjie TANG (852) 2773 8736 [email protected]

Macro Economics (China)

Jonas KAN (852) 2848 4439 [email protected]

Head of Hong Kong and China Property

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)

Lynn CHENG (852) 2773 8822 [email protected]

IT/Electronics (Semiconductor) (Greater 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

Joey CHEN (852) 2848 4483 [email protected]

Steel (China)

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)

Carrie YEUNG (852) 2773 8243 [email protected]

Transportation – Transportation Infrastructure (Hong Kong/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

Evon TAN (65) 6499 6546 [email protected]

Property and REITs

Jame OSMAN (65) 6321 3092 [email protected]

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


- 45 -

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- 46 -

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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

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


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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. 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.

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








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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/hutch’s bold move -...

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