ck hutchison holdings (1 hk) -...

Restructuring – more complex than it looks. The CK Hutchison Holdings (CKHH)

reorganisation created a 2014 proforma recurring profit slightly below the 2014 actuals for

Hutchison Whampoa (HWL); however, this masks some important changes. The property

business has been replaced with extra infrastructure, a bigger stake in Husky Energy and

non-cash income of HKD5.8bn from accounting adjustments to depreciation and interest.

Greater near-term challenges than the old HWL, but some key opportunities. CKHH’s

profit is more focused on businesses outside of Hong Kong and mainland China and 70% is

non-HKD/USD. As a result, currency risk has risen; lower oil prices have also depressed

Husky’s earnings. Yet the restructuring generates some important opportunities as it helps

provide a platform to participate in the consolidation of the European mobile telephone

industry. We believe retail and European telecoms offer the best underlying growth

prospects, while ports growth has stalled and Husky forecasts are under pressure.

We forecast recurring net profit will fall 1% y-o-y in 2015e and rise at a 6% CAGR over

2014-17e because of the near-term oil and currency headwinds. HSBC’s forecast for 2015e

is in line with consensus, but our forecasts for 2016-17e are 9-15% below. Stripping out the

non-cash accounting adjustments, we forecast underlying earnings will rise 11% and 14%

y-o-y in 2016e and 2017e. In contrast, consensus forecasts imply underlying growth of

25% and 22% y-o-y, respectively – to us this looks overly optimistic.

We initiate coverage of CKHH with a target price of USD118 and a Hold rating. Our

appraised valuation is HKD138/share and we apply a 15% discount to arrive at our HKD118

TP. The discount we use is towards the tighter end of our conglomerate coverage and

reflects the liquidity of CKHH plus potential upside from the consolidation of the mobile

market in Europe. At our target price, CKHH would trade at 14x 2016e PE or 16x after

stripping out non-cash accounting adjustments – its nearest peers trade at 10-13x 2016e.

The keys to a rerating are further progress in mobile consolidation and a weakening USD.

CK Hutchison Holdings (1 HK)

Initiate Hold: Opportunities, but also near-term headwinds

CKHH’s greater European and energy focus creates near-term challenges and long-term telecom opportunities

Expect modest recurring profit growth; key potential catalysts are EU mobile consolidation and US dollar weakness

Initiate with Hold – a complex company priced towards the top end of its peer group; we set our target price at HKD118, based on a 15% discount to HKD138 appraised value

FIG Conglomerates Equity – Hong Kong

Company report

Index^ HANG SENG INDEXIndex level 27,405RIC 0001.HKBloomberg 1 HK

Source: HSBC

Hold Target price (HKD) 118.00 Share price (HKD) 117.80 Upside/Downside (%) 0.2

Dec 2014 a 2015 e 2016 e

HSBC EPS 8.07 7.99 8.68 HSBC PE 14.6 14.7 13.6

Performance 1M 3M 12M

Absolute (%) NA NA NA Relative^ (%) NA NA NA

Free float (%) 70Market cap (USDm) 58,631Market cap (HKDm) 454,670

Source: HSBC

26 June 2015

Mark Webb* Head of Conglomerate and Transport Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6574 [email protected]

Neale Anderson* Head of Telecoms Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6716 [email protected]

View HSBC Global Research at: http://www.research.hsbc.com

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations

Issuer of report: The Hongkong and Shanghai Banking Corporation Limited

Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

http://www.research.hsbc.com/

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CK Hutchison Holdings (1 HK) Conglomerates 26 June 2015

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Financials & valuation Financial statements

Year to 12/2014a 12/2015e 12/2016e 12/2017e

Profit & loss summary (HKDm)

Revenue 275,674 273,889 289,475 305,149EBITDA 47,616 49,172 52,686 55,894Depreciation & amortisation -17,557 -17,038 -18,421 -19,503Operating profit/EBIT 30,060 32,134 34,265 36,391Net interest -5,179 -5,313 -5,446 -4,947PBT 124,056 45,254 48,890 53,851HSBC PBT 44,817 45,433 48,786 53,497Taxation -3,072 -3,657 -3,957 -4,351Net profit 105,602 30,599 33,549 37,623HSBC net profit 31,157 30,839 33,511 37,337

Cash flow summary (HKDm)

Cash flow from operations 42,662 44,555 48,902 53,388Capex -31,825 -31,916 -21,638 -20,498Cash flow from investment -50,039 -45,993 -21,065 -19,925Dividends -44,374 -11,363 -10,483 -11,491Change in net debt 128,807 16,264 -13,680 -18,029FCF equity 16,580 8,241 22,036 26,490

Balance sheet summary (HKDm)

Intangible fixed assets 213,324 213,324 213,324 213,324Tangible fixed assets 291,146 305,451 308,094 308,516Current assets 303,728 286,894 305,548 328,578Cash & others 215,757 199,493 213,172 231,201Total assets 1,029,724 1,050,900 1,082,060 1,116,539Operating liabilities 97,204 96,590 101,954 107,347Gross debt 344,564 344,564 344,564 344,564Net debt 128,807 145,071 131,392 113,363Shareholders funds 414,224 433,459 456,525 482,657Invested capital 495,237 509,586 511,840 511,870

Ratio, growth and per share analysis

Year to 12/2014a 12/2015e 12/2016e 12/2017e

Y-o-y % change

Revenue -0.6 5.7 5.4EBITDA 3.3 7.1 6.1Operating profit 6.9 6.6 6.2PBT -63.5 8.0 10.1HSBC EPS -1.0 8.7 11.4

Ratios (%)

Revenue/IC (x) 0.6 0.5 0.6 0.6ROIC 6.7 5.9 6.2 6.5ROE 15.0 7.3 7.5 8.0ROA 24.5 4.5 4.7 4.9EBITDA margin 17.3 18.0 18.2 18.3Operating profit margin 10.9 11.7 11.8 11.9EBITDA/net interest (x) 9.2 9.3 9.7 11.3Net debt/equity 24.7 26.7 23.1 18.9Net debt/EBITDA (x) 2.7 3.0 2.5 2.0CF from operations/net debt 33.1 30.7 37.2 47.1

Per share data (HKD)

EPS reported (fully diluted) 27.36 7.93 8.69 9.75HSBC EPS (fully diluted) 8.07 7.99 8.68 9.67DPS 11.50 2.64 2.87 3.20Book value 107.32 112.30 118.28 125.05

Valuation data

Year to 12/2014a 12/2015e 12/2016e 12/2017e

EV/sales 1.7 1.7 1.5 1.4EV/EBITDA 9.9 9.5 8.4 7.5EV/IC 1.0 1.0 0.9 0.9PE* 14.6 14.7 13.6 12.2P/Book value 1.1 1.0 1.0 0.9FCF yield (%) 18% -2% 5% 6%Dividend yield (%) 9.8 2.2 2.4 2.7

Note: * = Based on HSBC EPS (fully diluted)

Price relative

Source: HSBC Note: price at close of 24 Jun 2015

109

111

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Jun-15CK Hutchison Holdings Rel to HANG SENG INDEX

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The restructuring of CKHH

The Cheung Kong reorganisation successfully re-modelled the group and the 2014 proforma recurring

profit for the new group parent, CK Hutchison Holdings (CKHH) is marginally below the actual recurring

net profit reported by Hutchison Whampoa (HWL). But this masks some key changes (see figure 1).

1. Reconciliation of HWL 2014 actual recurring net profit to CKHH 2014 proforma recurring net profit

Source: Company and HSBC estimates

The property business has been replaced with extra infrastructure, a bigger stake in Husky Energy and

importantly, some non-cash income from accounting adjustments to depreciation and interest costs which

totalled HKD5,766m in the 2014 proforma result. During the reorganization process, CKHH wrote down

the value of HWL’s fixed assets and telecom licenses so cutting depreciation by HKD3,226m, and re-

Telecoms TelecomsEnergy Energy

Infrastructure Infrastructure

RetailRetail

PortsPorts

Others Others

Depn + intProperty

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0

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10,000

15,000

20,000

25,000

30,000

35,000

HWL actual CKHH proformaTelecoms Husky Infrastructure RetailPorts Other Depn + int Property

Investment summary

Restructured group faces near-term challenges but long-term

opportunities from EU mobile industry consolidation

We forecast a 6% CAGR in recurring net profit in 2014-17e; our

forecasts are well below consensus in 2016-17e

Initiate coverage with a target price of HKD118 and a Hold rating

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measured upwards the value of long-term debt, which cut reported interest costs by HKD2,540m; the

latter had no impact on cash interest costs.

Earnings outlook depressed in near term by low oil prices and currency weakness

Compared to the old HWL, underlying earnings are lower and profit more focused on businesses outside

of Hong Kong and mainland China. This has created some near-term challenges as the currency risk

within the group has risen and lower oil prices have depressed Husky’s earnings. It also generates some

important long-term opportunities as it provides a platform to participate in the consolidation of the

European mobile telephone industry. We believe the retail business and European telecoms offer the best

underlying growth prospects. The key near-term headwinds are from the lower oil prices and the strength

of the HKD/USD cutting non-dollar income streams when reported at the parent level.

Telecoms – offers the best opportunities

CKHH has four main telecom businesses, which make up 13% of 2015e group recurring net profit. We

value CKHH’s telecom businesses at an HKD152bn enterprise value (but at an equity value of only

HKD70bn) and this comprises 22% of our appraised enterprise valuation of CKHH. 3 Europe is

comfortably the most important telecoms business. We believe the outlook for 3 is improving and argue

the prospects will be further supported if the mobile market consolidates in the UK and Italy. While we

are positive, some of the local currency gains will be offset by HK dollar strength versus the European

currencies. As a result, we forecast the recurring net profit contribution to CKHH will rise 9% in 2015e

and at a 6% CAGR in 2014-17e. Most of the remainder of the net profit growth from this segment is

generated by lower forecast losses at Hutchison Asia Telecommunications (HAT).

2. 2015e recurring net profit breakdown 3. HSBC appraised valuation breakdown

Source: HSBC estimates Source: HSBC estimates

Retail – solid underlying performance, affected by currency at the parent level

CKHH owns 75% of the retail business, which has been one of the strongest performing segments over

the last five years. This business accounts for 26% of 2015e proforma recurring profit and 22% of our

appraised valuation. We believe y-t-d, the main retail businesses performance (in local currency terms) is

likely to be similar to 2H14. However, 51% of this segment’s EBITDA is from Europe, and as we

highlight below, weaker European and Asian currencies relative to the HK dollar mean more depressed

earnings when reported at the CKHH level. CKHH excludes its loss-making luxury perfumery business

Retail26%

Infrastructure

32%

Ports11%

Telecoms13%

Husky5%

Other 13%

Retail22%

Infra31%

Husky9%

Ports14%

Telco22%

Other2%

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from its retail segment earnings (and instead includes it in other income). We value CKHH’s 75% in the

retail business at HKD135bn, which equates to 16x 2016e recurring profit.

Infrastructure – solid outlook, but only modest contribution from new infrastructure businesses

The largest earnings and valuation contribution within the infrastructure segment is 76% owned Cheung

Kong Infrastructure (CKI). CKI (1038 HK, Buy, CMP HKD61.2, TP HKD75) is covered by Evan Li. As

we flag above, as a result of the reorganisation of Cheung Kong Group, CKHH has direct stakes in six

further infrastructure projects as well as a new, wholly-owned aircraft leasing business. While these

businesses contributed over HKD5bn to CKHH’s proforma 2014 EBITDAR, the net profit contribution

was only HKD1.1bn. In our forecast, we believe the full-year impact of recent acquisitions will increase

the net profit contribution to HKD2.5bn in proforma 2015e. We expect the aggregate recurring net profit

contribution of infrastructure to rise 12% in 2015e on a proforma basis and to rise at a 5% CAGR in

2014-17e.

Ports – little growth expected

In 2015 we are not optimistic about port throughput growth in Europe – we expect lower imports due to

the euro depreciation and anticipate an increase in competition in Rotterdam and the UK. While we

expect some tariff rate increases in key terminals in China and Hong Kong, we forecast average container

handling fees will decline by 4% y-o-y in US dollar terms due to the depreciation of the pound and euro.

We forecast HPH’s recurring profits (ex-HPHT) will grow at a 3% CAGR in 2015-16e.

For CKHH, we forecast a 1% y-o-y fall in recurring net profit in 2015e and only a modest 6% average

growth in recurring net profit in 2014-17e because of the near-term headwinds that we highlight above.

Growth is also held back by the non-cash accounting adjustments, which should at best, only stay flat

over the forecast period.

4. Proforma and forecast net profit

HKDm Proforma 2014 2015e 2016e 2017e

Infrastructure 8,831 9,889 9,980 10,338 Retail 8,499 7,909 8,576 9,256 Husky 3,656 1,707 2,551 3,729 Ports 3,507 3,480 3,724 4,059 Telecoms 2,530 3,889 4,479 4,931 Interest/other 4,134 3,965 4,200 5,023 Recurring profit 31,157 30,839 33,511 37,337 Non-recurring 74,445 -241 38 286 Net profit 105,602 30,599 33,549 37,623


HSBC’s forecast for 2015e is in line with consensus. However, our forecasts in 2016-17e are 9-15%

below consensus. Stripping out the accounting adjustments we highlight above, underlying earnings in

our forecasts would rise 11% y-o-y in 2016e and 14% y-o-y in 2017e. In contrast, consensus forecasts

imply underlying growth of 25% and 22% y-o-y; to us this looks overly optimistic. Clearly there are some

upside opportunities for CKHH. As well as positive changes to the macro environment (oil price rises or

US dollar weakness) the consolidation of the mobile telephone industry in Europe creates some upside to

our forecasts, although this will probably only be from 2017e.

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5. HWL appraised valuation by region (pre-merger) 6. CKHH appraised valuation by region (post-merger)

Note: October 2014

Source: HSBC estimates


Valuation and rating

We value CKHH using a sum-of-the-parts (SOTP) and then apply a conglomerate discount. A more

focused CKHH compared to the old HWL could suggest a move away to an earnings-based valuation

approach; however, we believe this would be difficult to use. CKHH has no track record or comparable

listed companies in Asia; it remains a very complex group and the non-cash accounting changes we

describe above make its reported profit more difficult to interpret.

Our appraised valuation of CKHH is HKD138 per share and the key valuation assumptions made are:

Retail: We value Asian retail at 14x 2016e EV/EBITDAR, which is in line with the nearest peer

Dairy Farm at our target price. We value European retail at 8x EV/EBITDAR, in line with European

food retailers.

Cheung Kong Infrastructure (1038 HK, CMP HKD61.2, TP HKD75): Evan Li, who covers CKI, has

a target price of HKD75 which is based on the DCF valuation methodology.

Other infrastructure assets: We value Northumbrian Water and Wales & West at appraised valuation,

the others we include at the cost of acquisition. In figure 7, we only include CKHH’s direct stake in

the businesses, other holdings are included within the CKI target price.

Husky Energy: This is not under coverage at HSBC and as a result, it is incorporated into our

valuation using the current share price (CAD23.72).

Ports: We value ports at 9-11x 2016e EV/EBITDA. We deduct the multiple layers of minority

interest within HPH. We include its 28% stake in HPH Trust (HPHT SP, Hold, CMP USD0.64, TP

USD0.65) at HSBC’s target price of USD0.65; HPHT is covered by Parash Jain.

Telecommunications: We value 3 Europe using DCF, which equates to 7.5x 2016e EV/EBITDAR,

slightly below its listed European peers which trade at c7.7x EV/EBITDAR. We have included an

additional HKD10.9bn in our 3 Europe valuation, which is 50% of our estimate of the present value

of the possible cost synergy between 3UK and O2 assuming the acquisition of the latter by 3 UK is

completed. We value HTHKH (215 HK, NR, HKD3.31) and HTA (HTA AU, NR, AUD0.083) at the

N.Amer13%

HK 26%

China22%

Other Asia10%

Europe25%

Other4%

N.Amer11%

HK 10%

China16%

Other Asia11%

Europe42%

Other10%

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current share price and include unlisted and loss-making HAT at our estimate of CKHH’s share of its

net assets.

7. HSBC appraised valuation of CKHH

EV (Net debt) /cash

Equity Per share

HKDm HKDm HKDm HKD % EV Holding Comments 2016e

Retail 148,935 -13,941 134,994 35.0 22% 75% Comparative valuation 8-14x 2016e EV/EBITDA 15.7 CKI 160,687 -17,693 142,994 37.0 23% 76% HSBC target price of HKD75/share 19.7 Other infra 54,571 54,571 14.1 8% 28-100% HSBC valuation and cost 20.0 Husky Energy 59,718 59,718 15.5 9% 40% Current share price 23.4 Ports 96,910 -19,810 77,100 20.0 14% 80% EV/EBITDAR 9-11x and HPHT target price 20.7 3 Group 119,071 -76,753 42,317 11.0 17% c100% DCF, WACC of 8.5%, terminal growth +1% 10.9 HAT 12,436 -1,284 11,152 2.9 2% 100% Assets at book value na HTHKH 13,712 -3,593 10,119 2.6 2% 65% Current share price 14.5 HTA 6,903 -839 6,064 1.6 1% 88% Current share price na Telco 152,122 -82,470 69,652 18.0 22% 16.4 Other 15,338 -16 15,322 4.0 2% Current share price/other na Head office -19,695 -19,695 -5.1 Unallocated net debt na Total 688,281 -153,624 534,657 138.5 16.0 Target (15% discount) 454,458 118 13.6

Source: Bloomberg and HSBC estimates

We allocated 2015e CKHH group debt among all of the consolidated companies within the group to

arrive at an equity valuation and to identify the holding company-related debt. Our 2015e net debt figure

includes the perpetual capital securities and interest bearing loans from minority interests.

We apply a 15% discount to appraised valuation

We value CKHH at a discount to our appraised valuation of 15%. The now delisted HWL had a similar

mix of businesses (with the exception of its property assets). In the five years to the end of 2014, HWL’s

average discount to appraised valuation was 24%. For CKHH, we use the same 15% discount to

appraised valuation as we previously used for HWL. This is towards the low end of the Asian

conglomerate sector range (of 5-50%) as it reflects CKHH’s higher liquidity than most of its peer group

and its relatively low proportion of separately listed subsidiaries and associates.

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8. Fully valued: Discount to appraised valuation 9. Expensive relative to sector: Actual and five-year average discount for conglomerate sector

Note: HWL discount to NAV until Dec 2014

Source: Thomson Reuters Datastream, HSBC estimates

Note: HWL discount to NAV until Dec 2014


Compared to HWL’s five-year discount, we select a smaller discount to reflect the potential upside from

any depreciation of the US dollar or increase in oil prices. The arguments for a tighter discount include:

The distribution of the property business simplifies the group structure

The potential upside from further mobile telecom consolidation in Europe above the estimated

HKD11bn we have already included in our valuation

The arguments for a wider discount are:

CKHH has a lower proportion of Hong Kong/China-based assets than HWL had previously

CKHH has greater non-HKD/USD assets than HWL, creating more currency risk

The reorganisation of CKHH and HWL was complex and some of the implications are difficult to

forecast

CKHH remains highly diversified

Initiate coverage with a TP of HKD118 and a Hold rating

Applying a 15% discount to our appraised valuation of HKD138/share gives us a fair value target price of

HKD118 and implies a 0.2% upside. At our target, CKHH would trade at a 13.6x 2016e PE and a 1.0x

book value. If we strip out our estimate of the ongoing non-cash accounting adjustments, CKHH would

trade at 16.4x 2016e. Its closest peers in the conglomerate sector are trading at 10-13x 2016e PE.

We estimate that every 5% strengthening of the HKD/USD against all other currencies would lower our

target price by 4%.

Risks to our valuation and rating

Upside risks

A weakening of the HKD/USD

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A material rise in oil prices

Faster-than-expected consolidation of the mobile telephone markets in the UK and Italy

Downside risks

A strengthening of the HKD/USD

A material fall in oil prices

Failure to complete the acquisition of O2 UK

A more difficult mobile telephone regulatory environment in Europe

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Group reorganisation

The Cheung Kong Group reorganisation has a number of implications for previous HWL investors. The

balance sheet has been substantially re-modelled, not just due to the change in business mix, but also due

to consolidation adjustments made on the acquisition of HWL by CKHH. 2014 proforma recurring profit

for CKHH at HKD31.2bn is only marginally below the HKD32.0bn reported by HWL in 2014. However,

this masks some important differences. The income statement loses HKD8.4bn from property. Part of this

is replaced with infrastructure and Husky, but most is replaced with the non-cash accounting changes

which come out of the balance sheet remodelling we discussed above. Going forward the contribution

from infrastructure is likely to rise; however, consensus forecasts suggest a fall from Husky. Finally,

reflecting the non-cash adjustments to earnings, CKHH’s 2014 proforma operating cash flow declines

relative to HWL’s 2014 actual. As we argue in the next section, the changing structure of the group has

generated some near-term risks from HKD/USD strength and oil price weakness. However, it also

supports some exciting opportunities for its telecoms business in Europe.

Balance sheet implications

HWL acquisition – accounting adjustments

In the reorganisation, HWL was acquired by CKHH and therefore the assets and liabilities of HWL were

re-measured at fair values estimated by CKHHs’ directors. As a result, the following adjustments were

made to the asset and liabilities of HWL:

Fixed assets were written down by HKD40.7bn

Telecom licenses were written down by HKD55.9bn

Brand names and other rights had a value enhancement of HKD74.4bn

Non-current debt was re-measured upward by HK10.8bn

Cheung Kong Group reorganisation

Property income largely replaced with infrastructure and non-cash

accounting adjustments

Operating cash flow weakens slightly

New structure creates near-term risks and long-term opportunities

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Additional non-current liabilities of HKD37.2bn

Additional minority interests of HKD59.5bn

The difference between the notional acquisition price and the fair value of HWL’s assets (post re-

measurement) generated goodwill of HKD131.7bn. As we discuss, the decision to write-down in

aggregate non-current assets and replace to an extent with goodwill has cut depreciation on a recurring

basis. Likewise, the upward re-measurement of debt has cut interest costs over the life of the debt.

1. Reconciliation of Balance sheet: 2014 HWL actual to CKHH proforma

HKDm HWL Net adjustments

CKHH Explanation of adjustment

Non-current assets Fixed assets 181,747 -14,241 167,506 Fixed asset impairment partly offset by CKH non-property assets Investment props 66,211 -65,907 304 Distribution of property businessAssociates & JCEs 245,849 -24,323 221,526 Primarily distribution of property businessLiquid funds 15,141 -1,105 14,036Goodwill 39,132 152,975 192,107 Arising largely on HWL acquisition by CKHH Deferred tax 19,203 2,014 21,217Other non-current 104,974 18,362 123,336 Re-measurement of brands/other offsets impairment of telecom licenses Non-current assets 672,257 67,775 740032Current assets Cash & deposits 125,318 76,403 201,721 Primarily cash to be settled by CK PropertyTrade and other rec 66,576 2,099 68,675Inventories 19,284 12 19,296Total current assets 211,178 78,514 289,692Total assets 883,435 146,289 1,029,724Current Liabilities Creditors 87,139 7,731 94,870ST Debt/Leases 42,281 18,185 60,466 Residual s-t debt from CKHOther 3,005 -671 2,334Current liabilities 132,425 25,245 157,670Net assets less curr liabs 751,010 121,044 872,054Long term liabilities LT Debt/Leases/bonds 213,332 70,766 284,098 CKH l-t debt, re-measurement of HWL debt, Northumbrian Water debt Deferred liabs/other 18,616 47,206 65,822Non-current liabilities 231,948 117,972 349920Paid-in capital 29,425 -25,566 3,859Reserves 436,793 -26,428 410,365Shareholders' funds 466,218 -51,994 414224Minorities 52,844 55,066 107,910Total equity & lib 751,010 121,044 872,054Perpetual securities 39,638 9,045 48,683 Addition of CKH perpetual securitiesNet debt 154,792 22,698 177,490Net debt/equity 32.3% 37.5%


Net debt levels

Including perpetual securities and interest bearing shareholder loans, we estimate HWL’s net debt to

equity was 32% at December 2014. On a proforma basis, we estimate this rises to 37%.

We estimate net assets per share of HKD107 and proforma tangible assets per share was HKD31.

Income statement

Based on disclosures in the CKHH Scheme Document dated 31 March 2015, what is deemed by the

company as recurring net profit in 2014 declined from HKD32.0bn in HWL actual results to HKD31.2bn

CKHH proforma. There are four largely offsetting factors that cause this movement in recurring profit.

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Loss of property income

The restructuring clearly entails the loss of property income. We calculate from the circular that the net

profit from the property division that HWL deemed as recurring was HKD8.4bn in 2014. We estimate

that about HKD3.2bn of the 2014 net profit was from property rentals and the remainder was from

property development sales and the disposal of investments properties.

2. Reconciliation of HWL 2014 actual recurring net profit to CKHH 2014 proforma recurring net profit


Cheung Kong non-property businesses

Despite the HKD5.6bn additional EBITDA generated from Cheung Kong’s non-property businesses,

CKHH’s share of the recurring net profit from these businesses is only HKD1.1bn. The difference is

depreciation, net interest costs and tax. Some of these businesses were only acquired in 2014, hence the

2015 profit contribution is likely to be above this level.

3. Reconciliation of HWL 2014 recurring profit to CKHH proforma recurring profit

HKDbn Explanation

Property out -8.4 Distribution of property business Infrastructure 1.1 Additional stakes in CKI's infrastructure ventures plus aircraft leasing held at CKH pre-reorganisation Husky 0.8 Additional 6.2% stakeLower depreciation 3.2 Impact of HWL asset write-down on acquisition by CKHHLower interest costs 2.5 Upward re-measurement of HWL debt on acquisition by CKHH cuts interest costs Total -0.8


Husky stake addition

In 2014, we calculate the additional 6.2% stake in Husky would have added HKD0.8bn to recurring net profit.

Non-cash accounting adjustments – which continue in the medium term

The adjustment to HWL’s asset and liabilities on acquisition has caused two non-cash earning

enhancements that will last over the medium term:

Telecoms TelecomsEnergy Energy

Infrastructure Infrastructure

RetailRetail

PortsPorts

Others Others

Depn + intProperty

-5,000

0

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15,000

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The impairment charges to HWL’s fixed assets and telecom license fees cut depreciation and

amortisation costs and boosted proforma 2014 recurring net profit by HKD3.2bn. These depreciation

and license amortisation costs will last over the life of the assets that were written down. The write-

downs probably primarily relate to the telecom businesses.

The upward re-measurement of HWL’s long-term debt which will reduce accounting interest costs

over the life of the debt – note this has no impact on cash interest costs: on a proforma basis in 2014

cash interest costs were HKD9.7bn versus income statement interest costs of HKD8.0bn (both before

payments in connection with the perpetual capital securities).

Cash flow

The operating and free cash flow deteriorates in the CKHH proforma 2014 compared to HWL’s actual

2014. CKHH’s 2014 proforma cash flow before investing activities declines versus the HWL 2014 actual.

In essence, the cash flow from property has been removed and partially replaced with non-cash

adjustments that we discuss above.

4. Summarised changes to 2014 cash flow

HKDm HWL actual Net adjustments CKHH proforma

Operating cash flow 47,920 -4,640 43,280 Adjustment to reflect change in deposits 1,822 1,822 Dividends to non-controlling shareholders -4,265 -699 -4,964 Perpetual capital security payments -1,980 -460 -2,440 Cash flow before investing/financing 41,675 -3,977 37,698 Investing -34,279 -15,760 -50,039 Free cash flow to equity 7,396 -19,737 -12,341


In the CKHH proforma, the investing cash outflow increases. This is difficult to interpret given the asset

acquisitions directly made at the CKHH level (for example, the aircraft assets) which distorts the

normalised capex. Replacing a property business with more infrastructure assets should not significantly

change normalised capex as both business lines tend not to be capex intensive (pre-acquisitions).

Many of the new businesses remain off balance sheet

Another factor to highlight is that four of the new businesses coming into CKHH from CKH have all or

part of the related debt off balance sheet:

The Wales & West Gas Distribution Network (61.53% effective stake) is equity accounted for and

had net debt of HKD15.8bn at December 2014

Australian Gas Networks (69.63% effective stake) is equity accounted for with 2014 net debt of

HKD13.6bn

AVR (67.37% effective stake) is equity accounted for with 2014 net debt of HKD3.1bn

In the aircraft leasing business, 15 of the jets are held under a 50% owned joint venture. CKKH’s

share of the debt associated with these jets is HKD2bn

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Business mix and quality of earnings

The change in the earnings mix from HWL to CKHH has a number of positives and negatives:

Cash flow from property has been partly replaced with non-cash accounting adjustments to

depreciation, amortisation and interest costs

An increase in stake in Husky carries greater risk given the fall in oil prices. For example, consensus

earnings for 2015 (source: Bloomberg) imply a 41% y-o-y fall in US dollar net profits

The aircraft leasing business, which was acquired in November 2014 and January 2015, is a new

business for CKHH; this creates execution and forecasting risks

A number of the infrastructure businesses were only acquired in 2014, such as Park N Fly and

Australian Gas Networks. In addition, the acquisition of Eversholt was only completed in April 2015.

Hence, the full impact of these acquisitions will only be reflected from 2016e.

In conclusion and assuming all else is equal, the replacement of property earnings primarily with non-

cash accounting adjustments implies, in our view, a lower quality earnings stream than that in HWL.

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Summary

CKHH has a number of strengths. We expect underlying growth in its retail businesses to remain good,

especially its well-placed health and beauty stores in mainland China. We are positive on the prospects

for the mobile telecom business in the UK and in the recently consolidated markets of Austria and

Ireland. Also, in our view, CKI’s recent business acquisitions will be value enhancing. However, there are

also challenges. With 70% of earnings from non-HKD/USD businesses, recent USD strength, if

maintained, will undermine profit growth in 2015e. Consensus net profit forecasts for Husky Energy have

fallen dramatically due to the drop in oil prices over the last nine months. Also, as we highlight in the

previous section, a part of the profit shortfall from property has been offset by non-cash accounting

changes which add no value to the business.

There are some exciting opportunities and, in our view, the most important is the possible mobile telecom

consolidation in the UK and Italy. Indeed, although the transaction has yet to complete, we add HKD11bn to

our fair value of 3UK to reflect possible cost synergy with O2. There are also risks. It is unclear to us that

CKHH has any major competitive advantage in its new aircraft leasing business. We expect port terminal

handling rates and volumes to come under pressure from new capacity at Rotterdam. Finally, much of the

potential upside to 3 Europe is reliant on the relatively benign regulatory environment continuing.

Telecoms

CKHH has four main telecom businesses which make up 13% of 2015e group recurring net profit. We

value CKHH’s telecom businesses at an HKD152bn enterprise value (but at an equity value of only

HKD70bn) and this comprises 22% of our appraised enterprise valuation of CKHH group.

3 Europe – this is comfortably the most important telecoms business. We believe the outlook for 3 is

improving and argue the prospects will be further supported if the mobile market consolidates in the UK

and Italy. While we are positive, some of the local currency gains will be offset by HKD strength versus

the European currencies; as a result, we forecast the recurring net profit contribution to CKHH will rise 9%

in 2015e and at a 6% CAGR in 2014-17e. Our enterprise value for this business is HKD119bn, which

includes an estimate for the possible future benefits of the O2 acquisition of HKD11bn.

Business outlook

European telecoms and retail offer best underlying prospects

HKD/USD strength and oil price weakness are greatest near-term

risks

Key opportunity is consolidation of mobile telephone market in

Europe

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Hutchison Telecommunications HK Holdings (HTHKH). CKHH has a 65% stake in listed HTHKH.

This stock is not covered by HSBC and we include consensus forecasts and current market value

of HKD10bn.

Hutchison Asia Telecommunications (HAT) is a wholly owned business which has mobile operations

in Indonesia, Vietnam and Sri Lanka. It owns 65% of its Indonesia mobile network, which is the

largest component of HAT. HAT’s performance has been problematic and we forecast continued

losses in 2015e. We value this business at approximate book value of HKD11bn.

Hutchison Telecommunications (Australia) Ltd. CKHH has an 88% stake in this listed business which

gives it an effective 44% stake in its joint venture in Australia, Vodafone Hutchison Australia. We expect

this business to generate small losses in 2015e and include at the current market value of HKD6bn.

1. CKHH telecom businesses

HKDm 2014 2015e 2016e 2017e

3 65,623 62,529 64,142 65,757 HTHKH 16,296 15,197 15,954 16,893 HAT 5,757 6,218 6,715 7,252 Revenue 87,676 83,944 86,811 89,902 3 6,892 7,290 7,696 8,069 HTHKH 1,378 1,456 1,571 1,616 HAT -1,465 -500 -100 100 EBIT 6,805 8,246 9,167 9,785 3 182 149 122 183 HTHKH -35 -10 -10 -10 HAT 0 0 0 0 Associates 147 139 112 173 Interest costs -3,215 -3,210 -3,434 -3,615 Non-recurring -157 -100 -50 0 PBT 3,580 5,076 5,795 6,343 Tax -654 -690 -729 -758 MI -553 -596 -637 -653 Net profit 2,373 3,789 4,429 4,932 3 3,440 3,750 3,884 4,114 HTHKH 554 639 696 717 HAT -1,465 -500 -100 100 Recurring profit 2,530 3,889 4,479 4,931 HTA -157 -100 -50 0 Net profit 2,373 3,789 4,429 4,931

Source: Company, Bloomberg and HSBC estimates

Consolidation – a material positive for 3 Group Europe

The outlook is improving for 3 Group in Europe. Consolidation and cost synergies have improved

profitability in markets such as Austria and Ireland, while the prospect of consolidation creates potential

for improvement in the UK and – critically – Italy. Additionally, 4G spectrum awards (and license

payments) and initial 4G rollouts are now completed in most markets, resulting in a stable capex and cash

flow outlook. We raise our local currency estimates reflecting the consolidation of O2 Ireland (completed

June 2014). However, this is partially offset by the impact of currency weakness relative to the US dollar:

our EV for 3 Group Europe increases by 8% from HKD99bn to HKD107bn. Key potential catalysts from

here are approval for the acquisition of O2 in the UK and the completion of a JV with Wind in Italy.

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Current business momentum – boosted by consolidation

2014 results saw stronger momentum as a result of improving performance in markets that have seen

consolidation:

Austria. 3 Austria completed the acquisition of Orange Austria in January 2013. While MVNOs

(Mobile Virtual Network Operators) have continued to take share, 3 Austria posted robust EBITDA

growth (up 35% y-o-y in local currency terms in 2014) due to cost synergies. We forecast EBITDA

growth of 8% in 2015e.

Ireland. 3 Ireland completed the acquisition of O2 Ireland in July 2014. EBITDA improved from

EUR8m in 2013 to EUR64m in 2014, swinging from a loss to profit in 2H14 following the merger.

We model EBITDA of EUR161m in 2015e. We reflect the consolidated results for 3 Ireland for the

first time in this report.

Other smaller markets – such as Denmark and Sweden – remain stable, posting EBITDA growth of 3%

and 17%, respectively, in 2014.

Across the group, revenues increased by 6% in 2014. We model a 5% decline in HK dollar terms in

2015e largely because of currency effects – we model growth in all markets except Denmark on a local

currency basis. Customer acquisition costs (net of handset revenues) – a key driver of EBITDA –

increased 8% in 2014. We believe this can stabilise due to lower competition in Austria, Ireland and the

UK – although Italy is likely to remain a tough market. Capex increased 11% in 2014 – we expect this to

decline 6% in 2015e due to currency effects, as well as a greater stability in 3 Group networks.

3 Europe’s two most important markets – the UK and Italy – have the potential to improve via consolidation.

3 UK – cost synergies

3 UK announced the proposed acquisition of O2 in March 2015 for GBP9.25bn. A further GBP1bn will

be payable when free cash flow reaches an agreed threshold. In May 2015 Hutchison announced the

backing of sovereign wealth funds such as GIC and ADIA: these and three other investors will pay

GBP2.77bn for a 32.98% stake in the combined entity (before any extra payment to O2 is triggered and

GBP3.1bn if the full amount is paid to O2). With debt of the combined entity at GBP6bn, this values 3

UK (and the expected synergies) at GBP5.15bn. 3 UK has previously been the strongest performer of 3

Europe, contributing c40-45% of total 3 Group EBITDA.

The proposed acquisition requires clearance from the European Commission, which is expected to reach a

decision in 1H16. The HSBC telecoms team has argued that consolidation can trigger investment and

lower unit costs (see the team’s April 2015 report Supersonic: European telecoms mergers will boost

capex, driving prices lower and speeds higher). The media has quoted a figure from CKHH management

of a present value of GBP3-4bn of cost synergies (Financial Times, 11 May 2015). 3 UK is planning to

retain its network sharing agreement with EE, and proposes that O2 keeps its network sharing agreement

with Vodafone. The key target areas to realize cost synergies are customer acquisition costs, distribution,

network operating costs and capex. There are positive precedents within 3 Europe for raising margins

following consolidation:

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=0vtnnBi4E0&n=453718.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=0vtnnBi4E0&n=453718.PDF

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3 Austria. Prior to consolidation (completed January 2013), 3 Austria EBITDA margins were 14% in

2012, 24% in 2013 after the acquisition, and 36% in 2014.

3 Ireland. Prior to consolidation (completed June 2014), 3 Ireland margins were 0% in 1H13, 9% in

2H13, -3% in 1H14, and improving to 20% in 2H14.

Below we illustrate a potential improvement in 3 UK margins following the acquisition with GBP3.7bn

net present value in total cost savings. However, we assume that the GBP1bn additional payment to

Telefonica would be triggered under this scenario. The net present value of the synergies after the

GBP1bn and after accounting for the 32.98% stake owned by the five co-investors to CKHH would be

cGPB1.8bn.

2. Estimate of potential synergies from UK consolidation

GBPm 2012 2013 2014 2015e 2016e 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e

3 UK Revenues 1,948 2,044 2,063 2,075 2,070 2,057 2,038 2,012 1,979 1,939 1,892 1,838 1,776 % chg YoY 4.9% 0.9% 0.6% -0.3% -0.6% -0.9% -1.3% -1.6% -2.0% -2.4% -2.9% -3.4% EBITDA 281 417 547 431 466 495 518 537 551 561 567 569 567 % chg YoY 48.4% 31.2% -21.2% 8.1% 6.2% 4.8% 3.6% 2.7% 1.8% 1.0% 0.4% -0.3% % margin 20.4% 26.5% 20.8% 22.5% 24.0% 25.4% 26.7% 27.9% 28.9% 30.0% 31.0% 31.9% O2 UK Revenues 5,709 5,673 5,685 5,767 5,835 5,931 6,031 6,121 6,207 6,294 6,383 6,474 6,565 % chg YoY -0.6% 0.2% 1.4% 1.2% 1.6% 1.7% 1.5% 1.4% 1.4% 1.4% 1.4% 1.4% EBITDA 1,297 1,353 1,365 1,388 1,412 1,440 1,468 1,493 1,517 1,510 1,531 1,553 1,575 % chg YoY 4.3% 0.9% 1.7% 1.7% 2.0% 2.0% 1.7% 1.6% -0.4% 1.4% 1.4% 1.4% % margin 23.8% 24.0% 24.1% 24.2% 24.3% 24.3% 24.4% 24.4% 24.0% 24.0% 24.0% 24.0% Combined entity Revenues 7,657 7,717 7,748 7,874 7,989 8,187 8,395 8,548 8,655 8,797 8,666 8,766 9,171 % chg YoY 0.8% 0.4% 1.6% 1.5% 2.5% 2.5% 1.8% 1.2% 1.6% -1.5% 1.2% 4.6% EBITDA 1,578 1,770 1,912 1,819 2,321 2,622 2,813 2,928 2,997 3,062 3,025 3,064 3,208 % chg YoY 12.2% 8.0% -4.9% 27.6% 13.0% 7.3% 4.1% 2.3% 2.2% -1.2% 1.3% 4.7% % margin 22.9% 24.7% 23.1% 29.0% 32.0% 33.5% 34.3% 34.6% 34.8% 34.9% 35.0% 35.0% Cost synergy estimate

- - - - 443 687 827 898 929 991 927 942 1,065

NPV, GPBm 3,713


3 Italy. The media have reported that Hutchison and Vimpelcom have found an agreement for an equal

JV in Italy (Bloomberg, 12 May 2015). This report suggests Wind’s CEO Maximo Ibarra is likely to be

the CEO of the merged unit with the current 3 Italia’s CEO Novari to become something like a non-

executive chairman. Italy has been the weakest performing unit in 3 Group Europe, with heavy

competition against a backdrop of weak economic growth. 3 Italy has also been disadvantaged by its

weaker spectrum portfolio than peers. In 2014, net customer service revenue at 3 Italy increased by 2%,

but EBITDA declined by 11% on continued heavy competition.

Given that no agreement between 3 Italy and Wind has been reached and nor do we know of the terms of

any proposed deal, we cannot estimate the fair value of any potential benefits of a possible merger.

Changes to our forecasts

Our forecasts versus our prior estimates are outlined in the table below. The primary drivers of the

changes in our forecasts are:

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Currency. The weakening of European currencies relative to the US dollar is the largest driver of

change in our forecasts.

3 Ireland. We reflect the consolidation of 3 Ireland with O2 Ireland (completed June 2014) for the

first time in our estimates.

While we include in our fair value an estimate of a portion of the net present value of the synergy arising

from the possible acquisition of O2 UK by 3 UK, we have not adjusted our net profit, balance sheet or

cash flow forecasts to reflect this acquisition.

Valuation

We continue to value 3 Group Europe using a DCF methodology. We apply a WACC of 8.5%, and a

terminal growth rate of 1%. This returns our fair value of HKD108bn. Our estimate of the present value

of synergy between 3 UK and O2 is GBP1.8bn (HKD21.8bn). We believe there is a 50% probability that

the deal will be completed, and this synergy realised; hence we include HKD10.9bn of our estimate of the

synergy in our valuation of 3 Europe. This gives a total enterprise valuation of approximately HKD119bn

or 7.5x 2016e EV/EBITDAR, which is slightly below the European mobile telephone average of 7.7x

2016e EV/EBITDAR.

3. 3 Group Europe: Current estimates vs prior

2014 2015e 2016e 2017e 2018e 2019e

New forecasts Total accounts 31,057 31,636 31,543 32,119 33,624 34,613 Revenue, HKDm 65,623 62,529 64,142 65,757 67,374 68,913 % chg YoY 5.9% -4.7% 2.6% 2.5% 2.5% 2.3% EBITDA 15,598 15,057 15,830 16,544 17,277 17,968 % chg YoY 23.1% -3.5% 5.1% 4.5% 4.4% 4.0% % EBITDA margin 23.8% 24.1% 24.7% 25.2% 25.6% 26.1% EBIT 6,892 7,290 7,168 7,753 8,326 8,879 % chg YoY 41.9% 5.8% -1.7% 8.2% 7.4% 6.6% % EBIT margin 22.2% 23.0% 22.7% 24.1% 24.8% 25.7% Capex (11,436) (10,629) (10,580) (10,544) (10,239) (10,012) Free cash flow 3,265 3,420 4,306 5,011 5,996 6,749 HSBC June 2014 estimates Total accounts 29,173 30,103 29,702 30,567 32,009 33,015 Revenue, HKDm 64,566 65,626 66,499 67,433 68,330 68,986 % chg YoY 4.2% 1.6% 1.3% 1.4% 1.3% 1.0% EBITDA 14,330 14,988 15,552 16,121 16,639 17,061 % chg YoY 13.1% 4.6% 3.8% 3.7% 3.2% 2.5% % EBITDA margin 49.1% 49.8% 52.4% 52.7% 52.0% 51.7% EBIT 6,561 6,619 7,026 7,431 7,803 8,114 % chg YoY 35.1% 0.9% 6.1% 5.8% 5.0% 4.0% % EBIT margin 22.5% 22.0% 23.7% 24.3% 24.4% 24.6% Capex (10,558) (10,304) (10,199) (9,885) (9,648) (9,447) Free cash flow 2,693 3,795 4,328 5,067 5,710 6,252 % change Accounts 6.5% 5.1% 6.2% 5.1% 5.0% 4.8% Revenue 1.6% -4.7% -3.5% -2.5% -1.4% -0.1% EBITDA 8.9% 0.5% 1.8% 2.6% 3.8% 5.3% EBIT 5.0% 10.1% 2.0% 4.3% 6.7% 9.4% Capex 8.3% 3.2% 3.7% 6.7% 6.1% 6.0% Free cash flow 21.3% -9.9% -0.5% -1.1% 5.0% 7.9%


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Other businesses

We use consensus forecasts for HTHKH and the current share price in our appraised valuation for CKHH.

For HAT, we estimate its profit contribution and value the business at approximately book value. We

value the listed HTA at its current share price. As the HTA business is being restructured and is loss-

making, CKHH chooses to treat the losses as a non-recurring item – we also use this disclosure to make

our forecasts more comparable. However, in our view, these losses are recurring in nature.

4. HSBC valuation of CKHH Telecom businesses

HKDm Enterprise value Net debt Equity value

3 Group 108,171 -76,753 31,417 NPV of 3 UK synergy 10,900 10,900 HAT 12,436 -1,284 11,152 HTHKH 13,712 -3,593 10,119 HTA 6,903 -839 6,064 Telecom valuation 152,122 -82,470 69,652


Retail

Summary

CKHH’s 75% owned retail business has been one of the strongest performing segments over the last five

years. This business accounts for 26% of 2015e proforma recurring profit and 22% of our appraised

valuation. We believe y-t-d, the main retail businesses performance (in local currency terms) is likely to

be similar to 2H14. However, 51% of this segment’s EBITDA is from Europe, and as we highlight below,

weaker European and Asian currencies relative to the HK dollar mean more depressed earnings when

reported at the CKHH level. CKHH excludes its loss-making luxury perfumery business from its retail

segment earnings (and instead includes it in other income). We value CKHH’s 75% stake in the retail

business at HKD135bn, which equates to 16x 2016e recurring profit.

5. Retail EBITDA mix by segment – 2014 6. HSBC estimate of EBITDA mix by currency - 2014

Source: Company data, HSBC Source: Company data, HSBC estimates

Health & beauty in Asia

Mainland China

This business operates using the Watsons brand and now has about 2,100 stores in mainland China.

Watsons’ health and beauty stores in the mainland have had an excellent track record and Watsons is the

premium segment market leader. Watsons and other Hong Kong branded stores have tended to be popular

H&B-Western Europe

38%

H&B-Eastern Europe

13%

H&B-Asia ex China

12%

H&B-China27%

Other10%

EUR29%

GBP8%

RMB28%

HKD16%

PLN13%

TWD4%

SGD2%

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in China’s health and beauty market due to the perceived quality of products sold. In mainland China, a

strong (20%) EBITDA margin creates the risk of new entrants and hence increased competition. Indeed,

Dairy Farm’s Mannings has been trying to expand in that market. However, we believe Watsons has three

key advantages:

Scale – with 2,100 stores it is about 10x larger than Mannings and this helps it to secure preferential

pricing from suppliers

Own label products – 42% of sales in the mainland for Watsons are own label (compared to 28% for the

whole AS Watsons Group). We believe Dairy Farm’s own label sales are probably under 10% of total

Supply chain structure and systems

Rest of Asia

Ex-mainland China, Watsons has a pan-Asian health and beauty chain with about 1,900 stores across nine

Asian markets including Hong Kong. Watsons sits behind market leader Mannings in most of these markets.

Health & beauty Europe

Watsons’ European health and beauty business operates through Kruidvat and Trekpleister in Benelux

region, Rossman in Germany, and Superdrug and Savers in the UK. For Western European EBITDA, the

Netherlands is the largest market, followed by Germany and then the UK, with the latter making up 20-

25% of Western European EBITDA. The UK business performance has been improving. Indeed, the

health and beauty chain Superdrug recently announced plans to open 100 new stores in the next three

years, bringing the total number of stores to 900. Poland is comfortably the largest Eastern European

market for Watsons and has been performing well.

7. Retail margins 8. Retail EBIT and EBITDA growth trends

Source: Company data, HSBC Source: Company data, HSBC

Other retail

The ‘Other retail’ category includes Hong Kong focused supermarket chain, PARKnSHOP, electronics

retailer Fortress, Watsons Wine and manufacturing operations for its water and beverage business. This

group of businesses has been performing poorly with EBITDA down 20% y-o-y in 2014. Watsons’

supermarket business has been losing market share to rival Dairy Farm and the supermarkets plus the

other businesses in this segment have been impacted by higher rents in Hong Kong. We believe this

negative factor will continue in 2015e.

0%

2%

4%

6%

8%

10%

12%

14%

1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14

EBIT Margin EBITDA margin

-10%0%

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

1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14

EBIT growth (YoY) EBITDA growth (YoY)

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Earnings growth to slow

We expect EBIT from the retail segment to rise 4% but for recurring net profit to fall 7% y-o-y in 2015e.

We forecast underlying growth rates in local currency terms of around 8% are offset by the 14% decline

in the basket of currencies that affect its European business (which made up about 50% of the total retail

segment earnings in 2014). The contribution at the CKHH level is furthered reduced by the full year

impact of the 25% stake sale in April 2014. The negative impact of currency depreciation and slower

underlying growth was already evident in declining growth rates in 2H14 (see figure 8).

9. Actual and HSBC net profit forecast for retail

HKDm 2014 2015e 2016e 2017e

Revenues 126,709 128,206 138,363 148,578 EBIT 10,680 11,105 12,163 13,238 Associates/jointly controlled 2,343 2,106 2,192 2,280 Profit before tax 13,023 13,211 14,354 15,518 Tax -2,563 -2,665 -2,919 -3,177 Recurring net profit 10,460 10,545 11,435 12,341 Minority interests -1,961 -2,636 -2,859 -3,085 CKHH share of recurring NP

8,499 7,909 8,576 9,256


We expect 2014-17e EBIT and recurring net profit contribution growth rates to average 7% and 3%

respectively, assuming no change in average exchange rates y-o-y in 2016e and 2017e. We find every 5%

weakening in non-HKD/RMB currencies would lower our 2016e recurring net profit forecast by 2.5%.

Valuation

CKHH’s retail division has two distinct segments – Asian retail which comprises mainland China and

Asia (ex-China) health and beauty as well as other Retail and Manufacturing. This segment is dominated

by health and beauty and has enjoyed rapid growth and in aggregate, relatively high margins. We argue

the most comparable business to this division is Dairy Farm.

We value this segment at the same multiple as Dairy Farm at our target price, which gives a fair value of

HKD131bn for 100%.

10. Retail valuation

Division EBITDA (HKDm) EV/EBITDA (x) Value (HKDm) Assumption

Asia 9,517 14 131,338 13.8x FY16e EBITDA Europe 7,633 8 62,594 8.2x FY16e EBITDA Total value 17,151 193,932


The second segment is European retail which has slightly lower margins and growth rates. Given the lack

of a peer group, we value this business at 2016e EV/EBITDA of the European food retailers. These stocks

trade at approximately 8.2x 2016e EV/EBITDA, and we value CKHH’s European operations at this level,

which gives a fair value of HKD63bn.

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11. European retailers’ valuation (Peer group)

Name RIC 2016e EV/EBITDA

Ahold AHLN.AS 6.2x Carrefour CARR.PA 8.1xCasino CASP.PA 6.9xDelhaize DELB.BR 5.4xDIA DIDA.MC 8.3xJeronimo Martins JMT.LS 11.1xMetro MEOG.DE 5.9xMorrison MRW.L 6.6xOcado OCDO.L 13.5xSainsbury SBRY.L 5.7xTesco TSCO.L 12.1xAverage 8.2x


This gives us a combined value for the whole retail group of HKD194bn. We estimate the retail business

has net debt of HKD14bn, which gives an equity valuation of HKD180bn with CKHH’s 75% stake

valued at HKD135bn.

Infrastructure

The largest earnings and valuation contribution within the infrastructure segment is 76% owned Cheung

Kong Infrastructure (CKI). As we flagged in the previous section of this report, as a result of the

reorganisation of the Cheung Kong Group, CKHH has direct stakes in six further infrastructure projects

as well as a new, wholly-owned aircraft leasing business. We expect the aggregate recurring net profit

contribution of infrastructure to rise 12% in 2015e on a proforma basis and to rise at a 5% CAGR in

2014-17e. Our equity valuation of the infrastructure business is HKD198bn, or 31% of our appraised

enterprise valuation of CKHH.

12. Proforma and forecast earnings for infrastructure

HKDm 2014p 2015e 2016e 2017e

CKI 7,730 7,353 7,257 7,430 Northumbrian Water 795 840 900 ParkNfly 60 62 62 Eversholt 75 83 94 Wales & West 588 642 679 Australian Gas Networks 70 75 79 AVR 133 206 279 Aircraft Leasing 815 815 815 Other 1,101 Net profit 8,831 9,889 9,980 10,338


Cheung Kong Infrastructure (1038 HK, Buy, TP HKD75)

CKI is covered by Evan Li and in his recent report, he highlighted his positive outlook for the company (see

Hong Kong Utilities: Finding lifeboats in rough seas, 26 June). Below are the highlights from the report:

CKI continues to demonstrate a disciplined investment strategy by focusing on projects that provide 12%

IRR or cash yield. We expect earnings excluding Hong Kong to rise to 93% of 2015e EBIT (2014: 90%).

CKI’s overseas businesses are based in regulatory regimes which offer more protection against rate hikes

and inflation. In fact, regulatory resets have recently been completed for most utilities in the UK (e.g. UK

Power Network and Northumbrian Water in late 2014), a country that makes up 63% of CKI’s EBIT. We

Evan Li* Head of Utilities and Alternative Energy, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 [email protected]

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=bGAlIWmWnL&n=466673.PDF

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are not expecting any major surprises from upcoming resets in Australia in 2015-16e, given the level of

guidance already provided by the government.

13. CKI valuation methodology: DCF

HKDm 2016e 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026-35e TV

Net profit ex share of profit from associates/JVs

(8) 16 40 80 129 182 238 301 370 443 8,627

Add: Dividends received from associates/JVs

5,454 5,624 5,821 6,054 6,308 6,575 7,196 7,641 7,954 8,261 99,446

Add: D&A 331 321 311 302 294 287 280 273 267 262 2,410 Less: Capex (206) (206) (206) (206) (206) (206) (206) (206) (206) (206) (2,065)Less: Investment in associates/JVs

- - - - - - - - - - -

Less: Change in NWC 37 83 83 89 96 104 112 120 129 139 1,404 Add: Change in net debt 552 464 464 (36) (36) (36) (36) (36) (36) (36) (363)Free cash flows to equity 6,160 6,301 6,512 6,283 6,585 6,904 7,582 8,092 8,478 8,862 109,459 329,934 WACC calculation WACC 5.2% Cost of equity 5.8% Cost of debt 4.5% Equity beta 0.46 Debt beta 0.2 Asset beta 0.57 Risk free rate 3.5% Market risk premium 5.0% Target gearing 30.0% Effective corporate tax rate 16.5% Debt premium 1.0% NPV at project level 198,798 Net (debt)/cash at corporate level at FY15e

(9,789)

NPV 189,009 Shares m 2,520 Value per share HKD 75.0


At 9% net debt-to-equity (see-through debt-to-capital: 39%), we estimate that CKI has a war chest of

HKD21bn (equity portion) for acquisitions, equivalent to taking on new assets worth up to 1.5x the size

of Eversholt (acquired in January 2015 for USD850m) or a similar size to Northumbrian Water (acquired

in October 2011 for USD1.2bn).

We forecast CKI’s net profit to grow 8% for 2015-17e, reflecting the following:

Acquisition of 50% Eversholt Rail in January 2015 for HKD6.3bn (GBP570m)

Equity placement of 80m new shares in January 2015, raising HKD4.6bn

Divestment of a 3.4% stake in HKE in May 2015

Regulatory resets of utilities in the UK, including UK Power Network (power transmission and

distribution) and Northumbrian Water (water utilities), where returns for the new cycle are lower than

the previous levels

Recent net profit revisions from CKI’s 39% owned subsidiary Power Asset Holdings (PAH)

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Evan’s target price, which is based on DCF valuation methodology, has been recently revised up to

HKD75 (from HKD63). Previously, HSBC valued the stock on the basis of the rounded average of a

SOTP and DCF.

Downside risks to forecasts, target price and rating

A weakening of the GBP and AUD relative to the HKD/USD, which will lower income from

overseas businesses

The next tariff reset for businesses in Australia will take place during 2015-16

Faster-than-expected interest rate increases in the US.

Aircraft leasing

In a series of transactions in 2014 and early 2015, CKHH acquired a portfolio of 60 jets; these are all

relatively new aircraft with an average age of 2.8 years and an average remaining lease term of 7.5 years.

The total consideration was USD2.0bn or HKD15.6bn. In transaction 4, 15 jets were acquired in a joint

venture in which CKHH now holds 50%; CKHH’s share of the net consideration was USD110m.

14. CKHH aircraft portfolio

Ownership A319 A320 A321 A330 B737-700

B737-800

B737-900

B777-300ER

B787-8

Total Avg age

Avgremain

lease

Cost USDm

Cost HKDm

Transaction 1a 100% 11 5 2 18 3.1 6.5 715 5,575 Transaction 1b 100% 3 4.4 8.9 101 789 Transaction 2 100% 3 1 1 3 1 1 10 4.1 6.3 492 3,838 Transaction 3 100% 1 7 1 3 2 14 2.6 8.1 584 4,557 Transaction 4* 50% 8 5 1 1 15 1.8 9.0 110 858 Total 1 29 1 1 1 16 5 2 1 60 2.8 7.5 2,002 15,617

*Net cost after debt financing


Of the 45 wholly owned aircraft, 26 of the purchases were completed in 2014, with the remaining 19

completing in early 2015 – this implies capex of approximately HKD6.2bn in 2015e.

Aircraft leasing industry

An increasingly attractive asset class

Operating lessors offer, potentially, lower risk exposure to the aviation sector. The passenger fleet

continues to grow rapidly, and aircraft are mobile but trackable assets with the ownership (and

repossession) protected by international law. The core airline fleet is also concentrated in four major

aircraft types and an established secondary market means these assets follow relatively predictable

depreciation paths. Aircraft operating leases are a popular option for acquiring aircraft capacity and half

of the world’s fleet is leased. However, barriers to entry in aircraft leasing have been falling. Purchasing,

leasing and financing jets are relatively straight forward skills, and as a result a number of new lessors

have been entering the market in Asia.

Profits driven by aircraft purchase price, funding costs and lease and returns management

Our previous research suggests that lessor profits are driven by two key ingredients: the price paid for

aircraft which makes up about 50% of costs and the price paid for funding which accounts for another 35%.

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Timing the aircraft purchase

Therefore, one of the key factors is to be able to predict low points in the airline cycle – lessors will rarely

get a good deal if there’s a huge backlog of aircraft unless they buy in massive scale. In addition, lessors

need access to a plentiful supply of low cost funding so they can move rapidly to buy assets at their

cyclical lows. Funding aircraft purchases at the moment is easy and cheap. The aircraft debt financing

market is very liquid due to the plentiful supply of commercial bank debt plus export credit. The bond

market has also become increasingly important.

Lease and returns management

Lessors face two main risks. They are exposed to the cash flow of the airlines (ie the operating lease

payments) and the residual value of the aircraft – ie what the aircraft is worth once it is returned to the

lessor at the end of the lease. A good lessor transition jets between leases in a manner which ensures very

high utilisation levels and repossessing and redeploying aircraft when necessary. Managing the residual

value means choosing the rights assets. Lessors need to have the ability to sell aircraft at a profit – indeed,

a lessor only knows the total return that they have actually made once the aircraft has been sold. As we

highlight above, the key to selling jets at a profit is to buy the best jets in the first place and to buy

counter-cyclically.

Customer diversification

Finally, a good aircraft leasing business has a well-diversified customer base, which requires a global network.

How well positioned is CKHH?

Looking at the criteria we discuss above, it is difficult to assess how well positioned this business is. The

positives are that its portfolio comprises primarily the most popular narrow body jets (see figure 14

above). However, the company has no track record – so we are not in position to assess how it manages

lease transition and the redeployment or sale of the aircraft. As it purchases jets off existing lessors, it is

not clear that CKHH purchased the aircraft at attractive prices.

15. CKHH Leasing profit forecast

HKDm 2015e 2016e 2017e

100% owned 738 738 738 50% owned 77 77 77 Net profit 815 815 815


In terms of the earnings outlook, we took a sample of listed lessors (see Air Asia (AIRA MK): Reduce:

United we fall (10 June)), and we estimate the average ROIC in 2014 was 5% and the average geared

ROE (assuming an average 3.1x net debt/equity) was 9%.

Based on this, we assume the pre-financing returns of CKHH’s wholly owned assets will be 5% (on a

full-year basis) and the ROE of its 50% owned joint venture will be 9%. Assuming no further aircraft

purchases, based on these returns, our forecasts for this business are set out in figure 15.

We believe that the fair value of this business will be roughly the purchase price of the aircraft. This

implies a fair value for the wholly owned jets of HKD14,759m (USD1,892m) and for its 50% stake in the

joint venture of HKD858m (USD110m), giving a total of HKD15,617m.

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=HZTf76jaQ2&n=465133.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=HZTf76jaQ2&n=465133.PDF

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Other infrastructure valuation

We value CKHH’s direct holdings in Northumbrian Water and Wales & West at appraised valuation; we

value the other investments at cost. This, combined with our appraised valuation of its aircraft leasing

business, gives an aggregate equity valuation of HKD55bn.

Where the businesses were acquired before year-end 2014 and where the businesses are consolidated at

the CKHH level but not the CKI level, we adopt the following treatment in our valuation:

We value CKHH’s direct stake only at an equity valuation. CKI’s direct stake has already been

included in our CKI valuation (see figure 13);

We deduct 100% of the business debt in arriving at our debt levels we use for the valuation of CKHH.

The only major treatment this applies to is Northumbrian Water, and we deduct our estimate of its entire

net debt of HKD31.9bn from our group net debt (see figure 6 on page 34).

The other three major infrastructure investments are equity accounted for at both the CKHH and CKI levels.

16. HSBC appraised valuation of CKHH's other infrastructure investments

CKHH share 100% HKDm CKHH stake* HKDm Method

Aircraft Leasing* 15,617 100% 15,617 Cost – 19 aircraft acquired in 1H15 Northumbrian Water** 13,103 40% 32,756 Appraised equity valuation ParkNfly** 1,350 50% 2,700 CostEversholt** 14,650 50% 29,300 Cost – acquired 1H15 Wales & West 4,488 40% 11,219 Appraised equity valuation Australian Gas Networks 3,054 28% 11,100 CostAVR 2,310 35% 6,600 CostTotal 54,571

Note: * directly held by CKHH only; ** consolidated at the CKHH level, but not at the CKI level; others equity accounted for at both CKHH and CKI levels


Ports

Outlook

In 2014, HWL’s European terminals performed better than expected and drove the increase in earnings.

However, in 2015 we are less optimistic on the throughput growth in Europe – we expect lower imports

due to the euro depreciation and anticipate an increase in competition in Rotterdam and the UK. Indeed

we expect the peak season in the Asia-Europe head haul trade route to be weaker y-o-y. On the tariff side,

we expect some rate increases in key terminals in China and Hong Kong as shipping lines return to

profitability and the focus shifts to improving port productivity. However, we forecast average container

handling fees will decline by 4% y-o-y in dollar terms due to depreciation of currencies such as the pound

and euro where HPH operates (for instance, y-t-d, the euro is down 13% vs 2014). We have lowered our

recurring profit forecasts for HPH’s port business (ex HPHT) by 4-7% in 2015-16e to reflect the impact

of local currency depreciation which more than offsets the decline in interest expenses (from lower

leverage). We now forecast HPH’s recurring profits (ex-HPHT) to grow at a 3.1% CAGR in 2015-16e. In

this note we introduce our 2017e estimates for HPH.

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17. CKHH port businesses

HKDm 2014 2015e 2016e 2017e

Revenues 27,914 27,465 28,477 29,715 EBIT 5,474 5,226 5,379 5,584 Net interest (costs)/income -1,142 -815 -698 -572 Associates/jointly controlled 1,684 1,685 1,838 2,084 HPHT 447 441 470 510 Other non-recurring gains -581 0 0 0 Profit before tax 5,881 6,536 6,988 7,605 Tax -1,981 -2,009 -2,149 -2,339 Minorities -858 -1,047 -1,116 -1,207 Net profit 3,042 3,480 3,724 4,059 Non-recurring -465 0 0 0 Recurring net profit 3,507 3,480 3,724 4,059


Valuation

Our enterprise value and equity value estimates increase by 5% and 20% from our previous valuation as

we roll over valuation to 2016e (from 2015e), use the HSBC target price for Westports (WPRTS MK,

Reduce, CMP: MYR4.30, TP: MYR3.80, covered by Parash Jain) and forecast lower debt than we had

previously assumed.

18. HSBC appraised valuation of HPH

2016e 2016e 2016e 2016e Equity TEU EBIT/TEU EBIT EBITDA EV/EBITDA EV (HKD) (HKDm) (HKDm) (HKDm)

Shanghai 2,679 279 748 898 10.6x 11,684 Ningbo 1,122 251 282 338 10.6x 3,588 ECT & others 15,262 2,829 9.4x 26,590 Others 17,970 5,107 10.2x 52,193 Busan 2,646 752 10.0x 7,520 Other China 1,503 427 10.0x 4,272 Other Asia 4,343 1,234 10.0x 12,342 Latin America 6,987 1,986 9.0x 17,872 ME / Africa 2,064 587 10.0x 5,865 Others 427 121 10.0x 4,323 HPH EV ex-Trust 37,033 9,173 10.3x 94,055 Net cash / (debt) (2015e) (20,061) HPH Equity value 73,994 HPH Equity value to HWL (80%) 59,196 HPHT 12,187 Westports Malaysia 5,718 Ports equity value 77,100 Old equity value (14 Oct 2014) 64,326 Change 20%


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Summary

On a proforma basis, we forecast 2015e recurring net profit will fall 1% and will rise at a 6% CAGR in

2014-17e. The main driver of the earnings growth is the telecom business. While our forecast for 2015e is

close to consensus, 2016-17e is well below and we believe consensus in the later forecast years is overly

optimistic about the underlying earnings outlook. Clearly the complexity of the Cheung Kong Group

reorganisation increases forecasting risks.

We initiate coverage of CKHH with a Hold rating based on a target price of HKD118 per share. This

target price has been set at a 15% discount to our appraised valuation of CKHH of HKD138. The discount

we apply of 15% is towards the tighter end of the range for our conglomerate coverage and reflects the

size and liquidity of CKHH. We argue a further tightening of the discount over the long term is probably

unwarranted, given its complexity, the relatively low exposure to Hong Kong/China and the currency risk

within the group. Our target price implies a 2016e PE of 13.6x before and 16.4x after stripping out non-

cash accounting adjustments which arose during the reorganisation.

Earnings and cash flow forecasts

Earnings outlook

On a proforma basis, we expect recurring net profit to fall 1% y-o-y in 2015e as we expect strong growth

from the telecom businesses to be more than offset by: a 53% decline in net profit contribution from

Husky (this is based on consensus forecasts) and a 7% decline in Retail, with the latter suffering in our

forecast from an appreciation of the HKD/USD against European currencies and the full-year impact of

the 25% stake sale in April 2014.

In 2014-17e, we forecast recurring profit will rise at a 6% CAGR, with telecoms being the most important

growth driver.

Group earnings and valuation

We forecast recurring net profit will rise at a 6% CAGR in 2014-17e

We expect good telecoms prospects offset by weakness at Husky

Initiate coverage with a fair value target price of HKD118 and a

Hold rating

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1. Proforma and forecast net profit

HKDm 2014p 2015e 2016e 2017e

Infrastructure 8,831 9,889 9,980 10,338 Retail 8,499 7,909 8,576 9,256 Husky 3,656 1,707 2,551 3,729 Ports 3,507 3,480 3,724 4,059 Telcos 2,530 3,889 4,479 4,931 Interest/other 4,134 3,965 4,200 5,023 Recurring profit 31,157 30,839 33,511 37,337 Non-recurring 74,445 -241 38 286 Net profit 105,602 30,599 33,549 37,623


Forecast risks

There are a number of issues to consider with CKHH’s forecasts.

The group reorganisation was complicated and new businesses were acquired in early 2015. This

increases forecasting risks.

The forecasts contain a major income source, which we term interest and other income. This reflects

three major items: 1) the non-cash income (2014 proforma HKD3.2bn) generated from the write-

down of fixed assets and reduction in depreciation, which will continue in 2015-17e. While the

majority of this credit probably relates to the telecom business, it is unclear how it should be

allocated to our forecasts; 2) the non-cash credit (2014 proforma HKD2.5bn) from the upward re-

measurement of long-term debt – this income will also continue in 2015-17e; and 3) other businesses,

head office costs and unallocated interest costs.

Actual reported net profit for 2015e will be a mixture of CK Holdings and the new CKHH.

Therefore, the most useful figure to track will be the proforma results in 1H15 and 2015.

2. HSBC recurring net profit versus consensus

HKDm HSBC net profit Consensus Difference

2015e 30,839 30,607 1% 2016e 33,511 36,767 -9% 2017e 37,337 43,676 -15%


HSBC’s recurring net profit forecast for 2015e is in line with consensus. HSBC’s forecasts for 2016e and

2017e are well below consensus. If we strip out the non-cash accounting adjustments in 2015-17e, then

our underlying forecasts increase by 11% and 14% y-o-y in 2016e and 2017e, respectively. In contrast,

consensus implies underlying earnings growth of +25% and +22%, respectively. At this stage, we believe

these growth rates are unlikely. In addition:

Other forecasts may be assuming higher oil prices which would boost the contribution from Husky

Other forecasts may include upside from further telecom consolidation in Europe. However, given

the completion of any possible acquisition or merger would be from mid-2016e onwards, it is

difficult to envisage a material impact of consolidation on 2016e earnings

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Earnings sensitivity

The possible upside risks to our net profit forecasts include:

A positive impact from telecom industry consolidation in the UK and Italy

Euro and pound strengthening relative to the HKD/USD


Downside risks include:

Euro and pound weakening relative to the HKD/USD or a further decline in oil prices

The positive impact of non-cash accounting adjustments dissipate faster than anticipated

Indeed, we estimate that every 5% strengthening of the HKD/USD against all other currencies would

lower our fair value target price by 4%.

Cash flow forecast

We forecast CKHH’s operating free cash flow will rise at a 7% CAGR in 2014p-17e. While we forecast a

free cash flow yield of 5-6% in 2016-17e, in 2016e we have not factored in the net cash outflow in

connection with the possible acquisition of O2 UK.

3. Proforma and forecast cash flow

HKDm 2014p 2015e 2016e 2017e

EBITDA 47,616 49,172 52,686 55,894 Tax paid -4,935 -3,657 -3,957 -4,351 Change in working capital/other -1,929 -45 390 392 Dividend from associates 9,055 9,863 11,027 Net interest paid -12,145 -10,293 -10,426 -9,927 Other 14,055 323 346 354 Operating cash flow 42,662 44,555 48,902 53,388 Fixed assets -31,784 -21,399 -9,030 -9,295 Telco capex -41 -9,944 -12,035 -10,629 Investment in jointly controlled co -8,286 -14,650 Purchase of subsidiary -9,928 Net cash flow from investing -50,039 -45,993 -21,065 -19,925 Free cash flow pre div to MI/other -7,377 -1,437 27,837 33,464 Dividend paid -44,374 -11,363 -10,483 -11,491 Dividends paid to MI -4,964 -6,004 -6,215 -6,484 Others (incl. FX) 94,728 Net cash flow 38,013 -16,264 13,680 18,029 Net debt, opening -166,820 -128,807 -145,071 -131,392 Net debt, closing -128,807 -145,071 -131,392 -113,363 Analysis of net cash/(debt) Cash & deposits 201,721 185,457 199,136 217,165 Marketable securities 14,036 14,036 14,036 14,036 ST Debt/Lease financing -60,466 -60,466 -60,466 -60,466 LT Debt/Lease financing/Bonds -284,098 -284,098 -284,098 -284,098 Net debt -128,807 -145,071 -131,392 -113,363


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4. Actual, proforma and forecast net debt to equity (before and after treating perpetual securities as debt)


Valuation

We value CKHH using a SOTP and our appraised valuation is HKD138 per share. The key valuation

assumptions made are:

Retail: We value Asian retail at 14x 2016e EV/EBITDAR, which is in line with the nearest peer

Dairy Farm at our target price. We value European retail at an 8x EV/EBITDAR, in line with

European food retailers.

Cheung Kong Infrastructure (1038 HK, Buy, CMP HKD61.2, TP HKD75): Evan Li, who covers

CKI, has a target price of HKD75 which is based on DCF valuation methodology.

Other infrastructure assets: We value Northumbrian Water and Wales & West at appraised valuation,

the others we include at the cost of acquisition.

Husky Energy: This is not under coverage at HSBC and as a result, it is incorporated into our

valuation using the current share price (CAD23.72).

Ports: We value ports at 9-11x 2016e EV/EBITDA. We deduct the multiple layers of minority

interest within HPH. We include the 28% stake in HPH Trust (Hold) at our HSBC target price of

USD0.65 (covered by Parash Jain).

Telecommunications: We value 3 Europe using DCF, which equates to 7.5x 2016e EV/EBITDAR,

slightly below its listed European peers which trade at c7.7x EV/EBITDAR. We have included an

additional HKD10.9bn in our 3 Europe valuation which is 50% of our estimate of the present value of

the possible cost synergy between 3UK and O2 assuming the acquisition of the latter by 3 UK is

completed. We value HTHKH (215 HK, Not Rated, HKD3.31) and HTA (HTA AU, Not Rated,

AUD0.083) at the current share price and include the unlisted and loss-making HAT at our estimate

of CKHH’s share of its net assets.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

HWL 2014a CKHH 2014p 2015e 2016e 2017e

Net debt/equity Net debt/equity (incl perpetuals)

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5. HSBC appraised valuation of CKHH

EV Net debt Equity Per share HKDm HKDm HKDm HKD % EV Holding Comments 2016e

Retail 148,935 -13,941 134,994 35.0 22% 75% Comparative valuation 8-14x 2016e EV/EBITDA 15.7 CKI 160,687 -17,693 142,994 37.0 23% 76% HSBC target price of HKD75/share 19.7 Other infra 54,571 54,571 14.1 8% 28-100% HSBC valuation and cost 20.0 Husky Energy* 59,718 59,718 15.5 9% 40% Current share price 23.4 Ports 96,910 -19,810 77,100 20.0 14% 80% EV/EBITDAR 9-11x and HPHT target price 20.7 3 Group 119,071 -76,753 42,317 11.0 17% c100% DCF, WACC of 8.5%, terminal growth +1% 10.9 HAT 12,436 -1,284 11,152 2.9 2% 100% Assets at book value na HTHKH 13,712 -3,593 10,119 2.6 2% 65% Current share price 14.5 HTA 6,903 -839 6,064 1.6 1% 88% Current share price na Telco 152,122 -82,470 69,652 18.0 22% 16.4 Other 15,338 -16 15,322 4.0 2% Current share price/other na Head office -19,695 -19,695 -5.1 Unallocated net debt na Total 688,281 -153,624 534,657 138.5 16.0 Target (15% discount)

454,458 118 13.6

Note: * accounted for on an equity basis, so debt excluded from CKHH consolidated net debt


Above we show how we have allocated 2015e CKH group debt (including perpetual securities, per

below) among all of the consolidated companies within the group to arrive at an equity valuation.

6. Analysis of net debt and perpetual debt

HKDm Proforma 2014 2015e 2016e 2017e

L-t liquid funds 14,036 14,036 14,036 14,036 Cash & deposits 201,721 185,457 199,136 217,165 S-t debt -60,466 -60,466 -60,466 -60,466 L-t debt -273,896 -273,896 -273,896 -273,896 Reverse accounting adjustments 10,800 8,260 5,720 3,180 Loans from Minorities -10,202 -10,202 -10,202 -10,202 Perpetuals -48,683 -48,683 -48,683 -48,683 Northumbrian Water net debt 31,870 31,870 31,870 31,870 Net debt -134,820 -153,624 -142,485 -126,996


We value CKHH at a discount to appraised valuation of 15%. The now delisted HWL had a similar mix

of businesses (with the exception of its property assets). In the five years to the end of 2014, HWL’s

average discount to appraised valuation was 24%. For CKHH, we use the same 15% discount to

appraised valuation as we previously used for HWL. This is towards the low end of the Asian

conglomerate sector range (of 5-50%) and reflects CKHH’s higher liquidity and the relatively low

proportion of separately listed subsidiaries and associates.

Arguments for a lower and higher discount to appraised valuation

Arguments for a tighter discount:

The distribution of the property business simplifies the group structure

The potential upside from further mobile telecom consolidation in Europe above the estimated

HKD11bn we have already included in our valuation

Arguments for a wider discount:

CKHH has a lower proportion of Hong Kong/China-based assets than HWL had previously

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CKHH has greater non-HKD/USD assets than HWL, so creating more currency risk

The reorganisation of CKHH and HWL was complex and some of the implications are difficult to

forecast

CKHH remains highly diversified

An earnings-based approach would be difficult to use

The distribution of the asset heavy property business could suggest an earnings-based valuation approach

may be appropriate. However, we argue that placing a multiple on CKHH’s earnings would be difficult to

use. Its predecessor, HWL, had no consistent recurring PE trading range; CKHH itself has no track record;

and there are no listed peers in Asia with a comparable business mix. However, the most important factor is

that net profit was adjusted during the reorganisation process (and on an ongoing basis over the medium

term) by two material non-cash credits. which total HKD5.8bn or 19% of 2015e net profit. As these create

no additional value, they should be stripped out in any comparable valuation approach.

7. Appraised valuation by region 8. HWL and CKHH’s discount to appraised valuation

Source: HSBC estimates Note: HWL disc to NAV till Dec 2014


Applying a 15% discount to our appraised valuation of HKD138/share gives us a fair value target price of

HKD118 and implies 0.2% upside. At our target, CKHH would trade at a 13.6x 2016e PE and 1.0x book

value. If we strip out our estimate of the ongoing non-cash accounting adjustments, CKHH would trade at

16.4x 2016e. Its closest peers in the conglomerate sector are trading at 10-13x 2016e PE.

N.Amer11%

HK 10%

China16%

Other Asia11%

Europe42%

Other10%

-80%

-60%

-40%

-20%

0%

20%

40%

Jun

-05

Jun

-06

Jun

-07

Jun

-08

Jun

-09

Jun

-10

Jun

-11

Jun

-12

Jun

-13

Jun

-14

Jun

-15

Hutch Disc to NAV CKHH

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9. Actual and five-year average discount for conglomerate sector

10. Actual and five-year average PE (x)

Source: Thomson Reuters Datastream, HSBC estimates Source: Thomson Reuters Datastream, HSBC estimates

Valuation scenario analysis

Below we show the fair value for CKHH implied by different levels of discount to appraised valuation.

Also, we estimate that every 5% strengthening of the HKD/USD against all other currencies would lower

our target price by 4%.

11. Fair value scenarios

Discount Fair value (HKD) PE (x) PE Adj PB

25% 104 12.0 14.5 0.88 20% 111 12.8 15.4 0.94 15% 118 13.6 16.4 1.00 10% 125 14.4 17.3 1.05 5% 132 15.2 18.3 1.11


Risks to our valuation and rating

Upside risks

A weakening of the HKD/USD


Faster-than-expected consolidation of the mobile telephone markets in the UK and Italy

Downside risks

A strengthening of the HKD/USD

A material fall in oil prices

Failure to complete the acquisition of O2 UK

A more difficult mobile telephone regulatory environment in Europe

-60%

-50%

-40%

-30%

-20%

-10%

0%ShunTak

SIHL FPC JS JM Wharf HWL/CKHH

Swire MTR Astra

Disc to NAV 5yr avg Current Disc to NAV

CKHH Current Disc to NAV

0.0

5.0

10.0

15.0

20.0

25.0

HWL/CKHH

MTR Whar f Astra Swire JM JS ShunTak

FPC SIHL

5 Yr avg Fwd PE CKHH 2016e PE 2016e PE

CK

Hu

tchiso

n H

old

ing

s (1 HK

) C

on

glo

merates

26 Jun

e 2015

36

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c12. HSBC conglomerates valuation snapshot

Target Current _____ PE ______ _____ PB ______ _____ ROE _____ _ EV/EBITDAR __ ____ EV/IC ______ ____ ROIC _____ _____ REP ______ Dividend yld (%) Company RIC Ccy price price Rating 2015e 2016e 2015e 2016e 2015e 2016e 2015e 2016e 2015e 2016e 2015e 2016e 2015e 2016e 2015e 2016e

Astra International ASII.JK IDR 7000 6950 Hold 15.5x 13.2x 2.7x 2.4x 17.1% 18.2% 11.7x 10.1x 2.1x 2.0x 9.4% 10.3% 2.4x 2.1x 3.3 3.6 First Pacific 0142.HK HKD 8.6 6.8 Buy 10.8x 10.3x 1.0x 1.0x 10.5% 10.2% 5.8x 5.2x 1.0x 1.0x 8.7% 8.6% 1.0x 0.9x 2.9 3.1 CKH Holdings 0001.HK HKD 118.0 117.8 Hold 14.7x 13.6x 1.0x 1.0x 6.5% 6.9% 9.5x 8.4x 1.0x 0.9x 5.8% 6.1% 1.2x 1.1x 2.2 2.4 Jardine Matheson JARD.SI USD 62.0 56.0 Hold 13.3x 11.8x 1.0x 1.0x 8.0% 8.4% 8.8x 8.0x 1.0x 1.0x 6.5% 6.9% 1.3x 1.2x 2.5 2.7 Jardine Strategic JSH.SI USD 39.0 31.4 Buy 11.3x 10.3x 0.7x 0.7x 6.8% 6.9% 8.1x 7.2x 0.9x 0.8x 6.3% 6.4% 1.2x 1.1x 0.9 0.9 MTR Corp 0066.HK HKD 32.0 37.1 Reduce 21.7x 22.6x 1.3x 1.3x 8.0% 7.5% 15.1x 14.2x 1.2x 1.2x 8.7% 7.7% 0.9x 1.0x 3.0 3.2 Shanghai industrial 0363.HK HKD 30.5 27.5 Hold 10.9x 9.7x 0.8x 0.8x 7.3% 7.8% 7.9x 6.7x 0.8x 0.8x 7.1% 8.0% 0.8x 0.8x 3.2 3.6 Shun Tak 0242.HK HKD 4.5 4.4 Hold 11.8x 8.8x 0.6x 0.5x 4.7% 6.0% 8.2x 6.9x 0.5x 0.5x 8.7% 11.7% 0.3x 0.2x 2.5 3.4 Swire Pacific 0019.HK HKD 104.0 99.1 Hold 13.4x 11.5x 0.7x 0.6x 4.6% 5.3% 13.6x 12.6x 0.7x 0.7x 3.5% 3.7% 1.2x 1.1x 4.0 4.3 Wharf (Holdings) 0004.HK HKD 64.0 52.8 Hold 13.4x 12.1x 0.5x 0.5x 3.7% 4.0% 10.2x 9.1x 0.5x 0.5x 3.2% 3.5% 1.1x 1.0x 3.4 3.7

Note: Priced as at close of 24 June 2015 Source: Thomson Reuters Datastream, HSBC estimates

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The restructuring of the Cheung Kong Group occurred in two steps and was first announced on

9 January 2015.

Step 1 – The Cheung Kong reorganisation

In the Cheung Kong reorganisation, the holding company of the Cheung Kong Group was changed from

Cheung Kong to CK Hutchison Holdings by the issuance of one CK Hutchison Holding share for every

one Cheung Kong share. This was approved at a shareholders’ meeting on 25 February 2015 and

completed on 18 March 2015.

Step 2 – The merger and CK Property spin-off

Husky share exchange

A wholly-owned subsidiary of Hutchison Whampoa acquired from the Li Family Trust 61.357m shares in

Husky Energy (HSE.TO, CAD23.72, Not Rated) or 6.24% of total. The consideration for this was

84.427m new shares in CK Hutchison Holdings at an exchange ratio of 1.376 new shares for every Husky

share acquired. After this transaction, Hutchison Group held 40.2% of the common shares of Husky. The

Husky share exchange completed immediately prior to the completion of the acquisition of Hutchison

(see below).

The Hutchison acquisition

On 31 March 2015, CK Hutchison Holdings made a share exchange offer to Hutchison Scheme

shareholders (all shareholders other than that of CK Hutchison Holdings Group), whereby Hutchison

Scheme shareholders received 0.684 new shares in CK Hutchison Holdings for every one Hutchison

share. The Hutchison acquisition was completed on 3 June 2015.

CK Property spin-off

CK Property issued via a distribution in specie to CK Hutchison shareholders one new CK Property share

for every one CK Hutchison Holding share. This was completed on 3 June 2015.

Cheung Kong Group restructuring

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1. CKH Holdings - Change in organisation structure

Source: Company data

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CKHH Income statement

Year to Dec, HKDm 2014p 2015e 2016e 2017e

Ports 27,914 27,465 28,477 29,715 Retail 126,709 128,206 138,363 148,578 CKI 6,173 6,774 6,824 6,954 HTIL 5,757 6,218 6,715 7,252 HTHK 16,296 15,197 15,954 16,893 Other 27,226 27,500 29,000 30,000 3 Group 65,599 62,529 64,142 65,757 Revenue 275,674 273,889 289,475 305,149 Ports 5,474 5,226 5,379 5,584 Retail 10,680 11,105 12,163 13,238 CKI 6,100 6,577 6,577 6,804 HTIL -1,465 -500 -100 100 HTHK 1,378 1,456 1,571 1,616 Other 980 980 980 980 3 Group 6,913 7,290 7,696 8,069 EBIT 30,060 32,134 34,265 36,391 EBIT ex 3G 23,147 24,844 26,570 28,322 Net finance costs -5,179 -5,313 -5,446 -4,947 Ports 1,684 1,685 1,838 2,084 Retail 2,343 2,106 2,192 2,280 CKI 14,627 17,150 17,411 17,981 Husky 7,126 3,182 4,361 6,020 HTHK 2 -10 -10 -10 Finance 1,889 1,900 1,900 1,900 HPHT 786 1,182 1,278 1,386 3 Group -21 149 122 183 Non-recurring items 17,150 -502 -242 0 Interest, tax and MI -8,500 -8,731 -9,124 -9,770 Associates/JCE 37,086 18,111 19,725 22,053 Other non-recurring 62,089 323 346 354 Pre-tax profit 124,056 45,254 48,890 53,851 Pre-tax recurring 44,817 45,433 48,786 53,497 Tax -3,072 -3,657 -3,957 -4,351 MI -15,382 -10,999 -11,385 -11,877 Net profit 105,602 30,599 33,549 37,623

Source: Company data, HSBC estimates

Financial models

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CKHH Net profit breakdown


Ports 3,060 3,040 3,254 3,550 Retail 8,499 7,909 8,576 9,256 CKI 8,831 9,889 9,980 10,338 HAT -1,465 -500 -100 100 HTHK 554 639 696 717 HPHT 447 441 470 510 Husky 3,656 1,707 2,551 3,729 Interest/other 4,134 3,965 4,200 5,023 Recurring profit ex-3G 27,716 27,089 29,627 33,223 3 Group 3,440 3,750 3,884 4,114 Recurring profit 31,157 30,839 33,511 37,337 Non-recurring 74,445 -241 38 286 Net profit 105,602 30,599 33,549 37,623


CKHH Balance sheet

As at 31 Dec, HKDm 2014p 2015e 2016e 2017e

Fixed assets 167,506 182,384 185,601 186,595 Investment properties 304 304 304 304 Associates & JCEs 221,526 245,231 255,094 266,121 Liquid funds 14,036 14,036 14,036 14,036 Goodwill 192,107 192,107 192,107 192,107 Deferred tax assets 21,217 21,217 21,217 21,217 Other non-current assets 123,336 122,763 122,190 121,617 Total non-current assets 740,032 778,042 790,548 801,997 Cash & deposits 201,721 185,457 199,136 217,165 Trade and other receivables 68,675 68,230 72,113 76,018 Inventories 19,296 19,171 20,262 21,359 Total current assets 289,692 272,858 291,512 314,542 Total assets 1,029,724 1,050,900 1,082,060 1,116,539 Creditors 94,870 94,256 99,620 105,013 ST Debt/Lease financing 60,466 60,466 60,466 60,466 Other current liabilities 2,334 2,334 2,334 2,334 Total current liabilities 157,670 157,056 162,420 167,813 Net assets less current liabilities 872,054 893,844 919,640 948,726 LT Debt/Lease financing/Bonds 284,098 284,098 284,098 284,098 Deferred liabilities/other 65,822 65,822 65,822 65,822 Total non-current liabilities 349,920 349,920 349,920 349,920 Paid-in capital 3,859 3,859 3,859 3,859 Reserves 410,365 429,600 452,666 478,798 Shareholders' funds 414,224 433,459 456,525 482,657 Minorities 107,910 110,465 113,195 116,149 Total equity & liability 872,054 893,844 919,640 948,726


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CKHH Cash flow statement


EBITDA 47,616 49,172 52,686 55,894 Tax paid -4,935 -3,657 -3,957 -4,351 Change in working capital/other -1,929 -45 390 392 Dividend from associates 0 9,055 9,863 11,027 Net interest paid -12,145 -10,293 -10,426 -9,927 Other 14,055 323 346 354 Operating cash flow 42,662 44,555 48,902 53,388 Capital expenditure Fixed assets -31,784 -21,399 -9,030 -9,295 3G fixed assets -41 -9,944 -12,035 -10,629 Investment in jointly controlled co -8,286 -14,650 0 0 Purchase of subsidiary -9,928 0 0 0 Net cash flow from investing -50,039 -45,993 -21,065 -19,925 Free cash flow -7,377 -1,437 27,837 33,464 Dividend paid -44,374 -11,363 -10,483 -11,491 Dividend paid to MI -4,964 -6,004 -6,215 -6,484 Others (incl. FX) 94,728 0 0 0 Issue/(repurchase) of shares 0 2,540 2,540 2,540 Net cash flow 38,013 -16,264 13,680 18,029 Net debt, opening -166,820 -128,807 -145,071 -131,392 Net debt, closing -128,807 -145,071 -131,392 -113,363


CKHH Key ratios

Year to Dec 2014p 2015e 2016e 2017e

HSBC EPS HKD 8.07 7.99 8.68 9.67 EPS growth % 37.1 -1.0 8.7 11.4 PE x 14.6 14.7 13.6 12.2 DPS HKD 11.5 2.6 2.9 3.2 Yield % 9.8 2.2 2.4 2.7 Book NAV/shr HKD 107.3 112.3 118.3 125.1 Net debt/equity % 24.7 26.7 23.1 18.9 Operating ROIC 5.67% 5.83% 6.10% 6.45% EV/Sales 1.70x 1.70x 1.53x 1.37x EV/EBITDA 9.87x 9.46x 8.43x 7.48x EV/ Invested capital 0.99x 0.97x 0.91x 0.85x Rating to Economic Profit (REP) 1.30x 1.23x 1.10x 0.98x ROE 23.02% 6.53% 6.85% 7.32%


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Notes

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Notes

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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Mark Webb, Neale Anderson and Evan Li

Important disclosures

Equities: Stock ratings and basis for financial analysis

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating because research reports contain more complete information concerning the analysts' views and the basis for the rating.

From 23rd March 2015 HSBC has assigned ratings on the following basis:

The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12 months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more than 20% below the current share price, the stock will be classified as a Reduce.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage, change in target price or estimates).

Upside/Downside is the percentage difference between the target price and the share price.

Prior to this date, HSBC’s rating structure was applied on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The target price for a stock represented the value the analyst expected the stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.

*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

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Rating distribution for long-term investment opportunities

As of 25 June 2015, the distribution of all ratings published is as follows: Buy 40% (29% of these provided with Investment Banking Services)

Hold 43% (28% of these provided with Investment Banking Services)

Sell 17% (20% of these provided with Investment Banking Services)

For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial analysis” above.

Share price and rating changes for long-term investment opportunities

Cheung Kong Infrastructur (1038.HK) Share Price performance HKD Vs HSBC

rating history

Recommendation & price target history

From To Date

Neutral Overweight 22 November 2012 Overweight Neutral 04 March 2013 Neutral Overweight 09 June 2014 Overweight Restricted 09 January 2015 Restricted Buy 26 June 2015 Target Price Value Date

Price 1 49.00 14 August 2012 Price 2 52.00 22 November 2012 Price 3 55.00 12 April 2013 Price 4 54.00 13 June 2013 Price 5 53.00 25 July 2013 Price 6 54.00 09 March 2014 Price 7 63.00 09 June 2014 Price 8 Restricted 09 January 2015 Price 9 75.00 26 June 2015

Source: HSBC

Source: HSBC HSBC & Analyst disclosures Disclosure checklist

Company Ticker Recent price Price Date Disclosure

CHEUNG KONG INFRASTRUCTURE 1038.HK 61.20 24-Jun-2015 2, 5, 6, 7CK HUTCHISON HOLDINGS 0001.HK 117.80 24-Jun-2015 1, 2, 4, 5, 6, 7, 11

Source: HSBC

1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next

3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this

company. 4 As of 31 May 2015 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 30 April 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of investment banking services. 6 As of 30 April 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of non-investment banking securities-related services. 7 As of 30 April 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as

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detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this

company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in

securities in respect of this company HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

Whether, or in what time frame, an update of this analysis will be published is not determined in advance.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

Additional disclosures 1 This report is dated as at 26 June 2015. 2 All market data included in this report are dated as at close 24 June 2015, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

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Disclaimer * Legal entities as at 30 May 2014 ‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR; The Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch

Issuer of report

The Hongkong and Shanghai Banking Corporation Limited Level 19, 1 Queen’s Road Central

Hong Kong SAR

Telephone: +852 2843 9111

Fax: +852 2596 0200

Website: www.research.hsbc.com

This document has been issued by The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) in the conduct of its Hong Kong regulated business for the information of its institutional and professional investor (as defined by Securities and Future Ordinance (Chapter 571)) customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited is regulated by the Hong Kong Monetary Authority. All enquires by recipients in Hong Kong must be directed to your HSBC contact in Hong Kong. If it is received by a customer of anaffiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of the Research Division of HSBC only and are subject to change without notice. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR. In Japan, this publication has been distributed by HSBC Securities (Japan) Limited. It may not be further distributed in whole or in part for any purpose. In Korea, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. HBAP SLS is regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. In Canada, this document has been distributed by HSBC Bank Canada and/or its affiliates. Where this document contains market updates/overviews, or similar materials (collectively deemed “Commentary” in Canada although other affiliate jurisdictions may term “Commentary” as either “macro-research” or “research”), the Commentary is not an offer to sell, or a solicitation of an offer to sell or subscribe for, any financial product or instrument (including, without limitation, any currencies, securities, commodities or other financial instruments). © Copyright 2015, The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited. MICA (P) 073/06/2015, MICA (P) 136/02/2015 and MICA (P) 041/01/2015

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Mark Webb Regional Head of Conglomerate and Transport Research +852 2996 6574 [email protected]

Parash Jain Analyst +852 2996 6717 [email protected]

Shishir Singh Analyst +852 2822 4292 [email protected]

Stephen Wan Analyst +852 2996 6566 [email protected]

Rajani Khetan Analyst +852 3941 0830 [email protected]

Aric Hui Associate +852 2822 3165 [email protected]

Conglomerate and Transport (Asia-Pacific)

mailto:[email protected]

ck hutchison holdings (1 hk) -...

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