determined to be global and unlock shareholder value 1...

See important disclosures, including any required research certifications, beginning on page 21

■ What's new Cheung Kong’s asset restructuring announced on 9 January signals both its commitment to unlock value for shareholders and become a prominent player on the global property scene, in our view. ■ What's the impact Re-arrangement of assets. The changes announced amount to a re-arrangement of the way the assets owned by Cheung Kong and its 49.7%-owned subsidiary Hutchison Whampoa (Hutchison: unrated) are held. The group will not add any assets to the portfolio other than an extra 6.2% stake in Husky Energy (raising its stake from 33.97% to 40.21%). Hence, what really changes is the way the assets are arranged. The group’s assets will be divided into 2 entities: a pure and much larger property company called CK Property, and a global conglomerate called Cheung Kong Hutchison (CKH) Holdings. The deal has no material impact on our forecasts for now.

Greatest significance: symbolic meaning for capital markets’ perception of the group. While there is arguably no real change in Cheung Kong’s underlying businesses and assets, we think this large-scale move signals a determination to become a global player and unlock shareholder value. Key, in our view, is whether Cheung Kong will be seen as a savvy and shareholder-oriented global business builder and investor. It could be aiming at something unprecedented among Hong Kong family business groups, which could result in it being valued differently from peers. ■ What we recommend We see this move as a major and promising long-term step. As such, we reaffirm our Buy (1) rating, with a new 12-month target price of HKD178 (formerly 6-month target of HKD175), based on a 15% discount (formerly 20%) applied to our NAV estimate of HKD209.40 for CKH Holdings (pre-distribution of CK Property shares), as we believe a reduced NAV discount is now merited. The main risk would be shareholders not voting in favour of the proposal. ■ How we differ Unlike some in the market, for us the deal’s greatest significance is that

Cheung Kong appears determined to unlock value for shareholders.

Financials / Hong Kong1 HK

12 January 2015

Cheung Kong

Determined to be global and unlock shareholder value

• Cheung Kong’s latest move is primarily a re-arrangement of assets, but has major symbolic significance

• Heralds a promising long-term phase; and much will depend on the progress it can make

• Seems determined and committed to become global and unlock value for shareholders; reiterating Buy (1) rating

Source: Daiwa forecasts

Source: FactSet, Daiwa forecasts

Financials / Hong Kong

Cheung Kong1 HK

Target (HKD): 175.00 178.00Upside: 42.6%9 Jan price (HKD): 124.80

Buy (unchanged)

OutperformHoldUnderperformSell

1

2

3

4

5

Forecast revisions (%)Year to 31 Dec 14E 15E 16ERevenue change - - -Net profit change - - -Core EPS (FD) change - - -

95

101

108

114

120

110

121

133

144

155

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

Share price performance

Cheung Kg (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 112.70-150.70Market cap (USDbn) 37.283m avg daily turnover (USDm) 59.69Shares outstanding (m) 2,316Major shareholder Li Ka Shing (43.3%)

Financial summary (HKD)Year to 31 Dec 14E 15E 16ERevenue (m) 44,019 49,353 54,972Operating profit (m) 22,426 23,620 25,678Net profit (m) 35,510 39,150 43,880Core EPS (fully-diluted) 15.331 16.903 18.945EPS change (%) 6.1 10.3 12.1Daiwa vs Cons. EPS (%) 0.2 14.7 22.4PER (x) 8.1 7.4 6.6Dividend yield (%) 3.0 3.2 3.4DPS 3.800 4.000 4.300PBR (x) 0.7 0.7 0.6EV/EBITDA (x) 1.1 0.3 n.a.ROE (%) 9.5 9.7 10.1

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

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

Financials / Hong Kong 1 HK

12 January 2015

- 2 -

Determination to unlock shareholder value .................................................................................. 6

The asset re-organisation ............................................................................................................ 6

Five major points related to the investment strategy .................................................................. 7

Risks ........................................................................................................................................... 10

Appendix 1: what is the fair P/NAV for the future CKH Holdings? ............................................. 11

Should the discount narrow? ..................................................................................................... 11

Appendix 2: valuation history of Cheung Kong ............................................................................ 12

Appendix 3: Major aspects of the deal .......................................................................................... 14

Contents


12 January 2015

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Growth outlook Estimated NAV structure of the future CKH Holdings**

After the restructuring, the Cheung Kong-Hutchison group will comprise 2 entities. The growth outlook for CK Property should be aided by the new rental income from investment properties owned by Hutchison before,and full 100% share of the property sales profits the group generated from property in China and overseas. As for CKH Holdings, it will be driven by 6 major businesses, and 1 key component would be its telecom investments in Europe, which have recently started generating positive cash flow and EBIT.

HKDm % HKD/share^NAV of assets previously belonged to Hutchison 586,644 72.6% 137.6NAV of assets previously belonged to Cheung Kong* 210,774 26.1% 91.06.2% additional stake in Husky Energy 10,896 1.3% 129.1

808,314 209.4^^

Source: Daiwa

*After excluding its stake in Hutchison; **before the distribution of CK Property

^Based on the existing issued shares of Cheung Kong and Hutchison

^^Based on the estimated number of issued shares of CKH Holdings (3.86bn)

Valuation Cheung Kong: price to NAV trend

Cheung Kong group used to trade at a lower discount to its NAV compared with its peers’ discounts to their NAVs. Cheung Kong stock has traded at an average discount to its NAV of 22% since 1990, and has sometimes traded at close its NAV in the past. Hutchison was also highly rated by the stock market in the past, when it has traded at a premium to its NAV, though it has derated since its investment in 3G telecom businesses in Europe since 2000.

Source: Datastream, Daiwa forecasts

Earnings revisions Business profile of CKH Holdings

The restructuring should not result in a material earnings impact on the total earnings generated by Cheung Kong and Hutchison, as what changes is really the way in which the group’s assets are held. The earnings profile of CK Property will come purely from the property business, while that for CKH Holdings will be derived from 6 major business lines, as shown in the opposite table.

Sector Operations Telecom Operates in 12 countries/region across Europe and Asia with a c.77m

active customer base* Ports 52 ports in 26 countries** Retail Over 10,800 stores across 25 markets worldwide* Infrastructure Streamline co-owned assets, portfolio spanning 4 continents** Energy Largest shareholder in one of the biggest integrated Canadian energy

producers** Leasing 60 aircraft acquired, providing long term stable income^

Source: Company, Daiwa

*as of 30 June 2014; **as of 31 December 2013

^Announced on 4 November 2014: Consideration of c.USD1.89bn acquisition of up to 45 aircrafts and c.USD0.73bn acquisition of up to 15 aircrafts through a 60-40 venture with MCAP

How do we justify our view?

Growth outlook

Valuation

Earnings revisions

Avg since 1990: -22.3%

(60%)

(50%)

(40%)

(30%)

(20%)

(10%)

0%

10%

20%

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Cheung Kong (disc)/prem to current NAV(Disc)/prem (%)

Current: -37.0%

Buy (unchanged)

OutperformHoldUnderperformSell

1

2

3

4

5


12 January 2015

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Key assumptions

Profit and loss (HKDm)

Cash flow (HKDm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016ERental EBIT (HKDm) 1,739 1,817 1,698 1,978 2,112 2,270 2,429 2,575Property sales profit (HKDm) 8,396 8,902 11,218 10,004 10,184 12,867 14,360 15,939

Hotels and serviced suites revenue (HKDm)

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

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016EProperty sales 21,513 29,297 38,143 26,521 27,589 39,856 43,548 48,779Rental income 1,155 1,264 1,377 1,867 1,960 2,140 2,360 2,620Other Revenue 1,625 2,302 2,839 2,718 2,765 2,023 3,445 3,573Total Revenue 24,293 32,863 42,359 31,106 32,314 44,019 49,353 54,972Other income 0 0 1,070 0 0 0 0 0COGS (10,740) (18,042) (25,904) (13,140) (10,649) (18,938) (23,054) (26,499)SG&A (1,032) (1,590) (1,810) (1,950) (2,120) (2,190) (2,210) (2,320)Other op.expenses (349) (398) (400) (430) (451) (465) (469) (475)Operating profit 12,172 12,833 15,315 15,586 19,094 22,426 23,620 25,678Net-interest inc./(exp.) (233) (222) (372) (496) (356) (374) (392) (408)Assoc/forex/extraord./others 7,381 12,496 29,718 16,049 19,634 17,944 20,640 23,743Pre-tax profit 19,320 25,107 44,661 31,139 38,372 39,996 43,868 49,013Tax (2,910) (3,330) (3,343) (3,499) (4,201) (4,080) (4,297) (4,675)Min. int./pref. div./others (242) (323) (204) (372) (712) (406) (421) (458)Net profit (reported) 16,168 21,454 41,114 27,268 33,459 35,510 39,150 43,880Net profit (adjusted) 16,168 21,454 24,693 27,268 33,459 35,510 39,150 43,880EPS (reported)(HKD) 6.980 9.263 17.751 11.773 14.446 15.331 16.903 18.945EPS (adjusted)(HKD) 6.980 9.263 10.661 11.773 14.446 15.331 16.903 18.945EPS (adjusted fully-diluted)(HKD) 6.980 9.263 10.661 11.773 14.446 15.331 16.903 18.945DPS (HKD) 2.700 2.950 3.160 3.160 3.480 3.800 4.000 4.300EBIT 12,172 12,833 15,315 15,586 19,094 22,426 23,620 25,678EBITDA 12,521 13,231 15,715 16,016 19,545 22,891 24,089 26,153

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016EProfit before tax 19,320 25,107 44,661 31,139 38,372 39,996 43,868 49,013Depreciation and amortisation 349 398 400 430 451 465 469 475Tax paid (713) (824) (3,456) (1,088) (1,230) (1,350) (1,420) (1,530)Change in working capital 7,713 11,036 9,280 5,560 5,850 5,920 5,960 5,980Other operational CF items 2,572 (4,710) (26,048) (6,939) (9,252) (11,190) (13,823) (16,825)Cash flow from operations 29,241 31,007 24,837 29,102 34,191 33,841 35,054 37,113Capex (6,520) (12,450) (35,155) (21,576) (7,183) (23,153) (24,091) (26,118)Net (acquisitions)/disposals 2,034 562 3,400 735 780 790 800 810Other investing CF items (2,726) (1,094) (1,294) (1,461) (1,450) (1,490) (1,520) (1,540)Cash flow from investing (7,212) (12,982) (33,049) (22,302) (7,853) (23,853) (24,811) (26,848)Change in debt (11,760) 0 0 0 0 0 0 0Net share issues/(repurchases) 0 0 0 0 0 0 0 0Dividends paid (5,233) (6,254) (7,064) (6,949) (7,319) (7,875) (8,338) (8,802)Other financing CF items (786) (712) (740) (760) (780) (790) (795) (835)Cash flow from financing (17,779) (6,966) (7,804) (7,709) (8,099) (8,665) (9,133) (9,637)Forex effect/others 0 0 0 0 0 0 0 0Change in cash 4,250 11,059 (16,016) (909) 18,239 1,323 1,110 628Free cash flow 22,721 18,557 (10,318) 7,526 27,008 10,688 10,963 10,995

Financial summary


12 January 2015

- 5 -

Balance sheet (HKDm)

Key ratios (%)


Company profile

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

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016ECash & short-term investment 11,423 25,147 19,894 21,167 33,197 34,520 35,630 36,258Inventory 62,999 65,679 68,932 80,088 79,784 86,994 94,203 104,024Accounts receivable 2,799 2,459 2,805 2,418 2,313 2,320 2,360 2,375Other current assets 2,010 592 375 672 1,911 1,932 1,950 1,989Total current assets 79,231 93,877 92,006 104,345 117,205 125,766 134,143 144,646Fixed assets 30,129 31,569 36,413 39,801 38,754 44,580 50,960 56,580Goodwill & intangibles 4 4 0 0 0 0 0 0Other non-current assets 188,106 203,183 244,767 262,579 272,878 285,896 301,305 319,387Total assets 297,470 328,633 373,186 406,725 428,837 456,242 486,408 520,613Short-term debt 7,210 13,127 22,897 5,098 2,438 2,438 2,438 2,438Accounts payable 12,078 18,298 9,701 13,290 11,699 12,310 12,450 12,658Other current liabilities 3,488 3,280 2,433 1,801 1,329 1,365 1,380 1,420Total current liabilities 22,776 34,705 35,031 20,189 15,466 16,113 16,268 16,516Long-term debt 25,279 22,027 23,020 43,001 39,452 39,452 39,452 39,452Other non-current liabilities 2,011 2,390 850 6,535 10,146 10,168 10,183 10,200Total liabilities 50,066 59,122 58,901 69,725 65,064 65,733 65,903 66,168Share capital 1,158 1,158 1,158 1,158 1,158 1,158 1,158 1,158Reserves/R.E./others 242,441 264,538 305,267 332,685 359,523 386,231 416,117 450,037Shareholders' equity 243,599 265,696 306,425 333,843 360,681 387,389 417,275 451,195Minority interests 3,805 3,815 7,860 3,157 3,092 3,120 3,230 3,250Total equity & liabilities 297,470 328,633 373,186 406,725 428,837 456,242 486,408 520,613EV 133,294 109,336 86,685 68,500 38,376 24,356 8,256 (10,338)Net debt/(cash) 21,066 10,007 26,023 26,932 8,693 7,370 6,260 5,632BVPS (HKD) 105.172 114.712 132.296 144.134 155.721 167.252 180.155 194.800

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016ESales (YoY) 47.8 35.3 28.9 (26.6) 3.9 36.2 12.1 11.4EBITDA (YoY) 47.0 5.7 18.8 1.9 22.0 17.1 5.2 8.6Operating profit (YoY) 47.8 5.4 19.3 1.8 22.5 17.5 5.3 8.7Net profit (YoY) 14.7 32.7 15.1 10.4 22.7 6.1 10.3 12.1Core EPS (fully-diluted) (YoY) 14.7 32.7 15.1 10.4 22.7 6.1 10.3 12.1Gross-profit margin 55.8 45.1 38.8 57.8 67.0 57.0 53.3 51.8EBITDA margin 51.5 40.3 37.1 51.5 60.5 52.0 48.8 47.6Operating-profit margin 50.1 39.1 36.2 50.1 59.1 50.9 47.9 46.7Net profit margin 66.6 65.3 58.3 87.7 103.5 80.7 79.3 79.8ROAE 6.8 8.4 8.6 8.5 9.6 9.5 9.7 10.1ROAA 5.5 6.9 7.0 7.0 8.0 8.0 8.3 8.7ROCE 4.3 4.4 4.6 4.2 4.8 5.4 5.3 5.4ROIC 3.8 4.1 4.6 3.9 4.6 5.2 5.2 5.2Net debt to equity 8.6 3.8 8.5 8.1 2.4 1.9 1.5 1.2Effective tax rate 15.1 13.3 7.5 11.2 10.9 10.2 9.8 9.5Accounts receivable (days) 21.0 29.2 22.7 30.6 26.7 19.2 17.3 15.7Current ratio (x) 3.5 2.7 2.6 5.2 7.6 7.8 8.2 8.8Net interest cover (x) 52.2 57.8 41.2 31.4 53.6 60.0 60.3 62.9Net dividend payout 38.7 31.8 17.8 26.8 24.1 24.8 23.7 22.7Free cash flow yield 7.9 6.4 n.a. 2.6 9.3 3.7 3.8 3.8

Financial summary continued …


12 January 2015

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Determination to unlock shareholder value

The asset re-organisation

The Cheung Kong Group announced a restructuring on 9 January which involves the following: 1) A re-organisation proposal which will lead to the formation of CKH Holdings. 2) A merger proposal whereby the assets of Cheung Kong and Hutchison will be pooled together under CKH Holdings. This will be achieved via a share swap, whereby Cheung Kong will issue new shares at HKD129.1/share to buy out all the shares held by the minority shareholders of Hutchison at HKD88.3/share. The share prices of both companies represent their 5-day average closing share prices up to 7 January 2015. Also, CKH Holdings will acquire an additional 6.2% stake in Husky Energy (Not rated) from the Li family by issuing 84.4m new shares. This will lift its stake in Husky Energy from 33.97% to 40.21%. The valuation of this additional stake is also based on the 5-day average closing share price of Husky Energy up to 7 January 2015.

3) A spin-off proposal whereby a new listed entity, to be called CK Property, will be formed and distributed to CHK Holdings shareholders, on the basis of 1 share in CK Property for 1 share in CKH Holdings. Effectively, what the deal amounts to is a re-arrangement of the way the assets currently owned by Cheung Kong and Hutchison are held. Instead of a vertical structure which involves considerable overlaps, these assets will be divided up between 2 entities. One will be CK Property, which will be a pure property company but will own a much larger rental portfolio and development landbank. The other will be CKH Holdings, which will resemble Hutchison as it is now, but without any property business, and will have a larger stake in Husky Energy, more infrastructure investments and a new aircraft leasing business.


12 January 2015

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Transaction overview

Source: Company

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

Five major points related to the investment strategy

We argue that there is no material change in the assets and businesses owned by Cheung Kong and Hutchison before, as the only addition to the portfolio is an extra 6.2% stake in Husky Energy. What has changed is just the way these assets are held, and the new structure should fit better with the priorities and preferences of global institutional investors, in our view. That said, we see this move as an important development, and a strong signal of the Cheung Kong’s group’s commitment to become a truly global company and to unlock the business value in the group for all its shareholders. This is unprecedented among family business groups in Hong Kong, and quite possibly in Asia, in our view. Regarding the valuation and investment strategy for the Cheung Kong group, we highlight the following 5 points.

1. 0.684 will be the “magic figure” for CK Hutchison’s relative share price.

Assuming the market prices the shares of Cheung Kong and Hutchison as if the group’s restructuring will go ahead (which we think will be the case), then Hutchison’s share price would become purely a function of Cheung Kong’s share price, which would be governed by the ratio of 0.684 – meaning each Hutchison share would be worth 0.684 Cheung Kong shares. The following table shows the relative share prices of both companies; any deviation from that relative price ratio would create arbitrage opportunities, in our view.


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Relative share prices of Cheung Kong and Hutchison Share price of Cheung Kong (HKD) Share price of Hutchison* (HKD)

100 68.4 105 71.8 110 75.2 115 78.7 120 82.1 125 85.5 130 88.9 135 92.3 140 95.8 145 99.2 150 102.6 155 106.0 160 109.4 165 112.9 170 116.3 175 119.7 180 123.1 185 126.5 190 130.0 195 133.4 200 136.8

Source: Daiwa

Note: *based on the share exchange ratio of 0.684

2. NAV of CKH Holdings (pre-distribution

of CK Property) will be another key parameter.

The NAV for CKH Holdings (before the distribution of CK Property shares) is another major number to bear in mind when determining the valuation of Cheung Kong, and by extension Hutchison. We believe the fair price for Cheung Kong will be governed by the perceived fair discount applied to this NAV figure, which will be composed of 3 main entities; details are shown in the table below. Estimated NAV structure of the future CKH Holdings**

HKDm % HKD/share^NAV of assets previously belonged to Hutchison 586,644 72.6% 137.6NAV of assets previously belonged to Cheung Kong* 210,774 26.1% 91.06.2% additional stake in Husky Energy 10,896 1.3% 129.1

808,314 209.4^^Source: Daiwa

*After excluding its stake in Hutchison; **before the distribution of CK Property

^Based on the existing issued shares of Cheung Kong and Hutchison

^^Based on the estimated number of issued shares of CKH Holdings (3.86bn)

3. Fair NAV discount that should be

applied to the future CKH Holdings is key.

Note that this restructuring, complex as it is, will not result in any change to the total assets in the Cheung Kong and Hutchison portfolio, other than the addition of an extra 6.2% stake in Husky Energy acquired from the Li family. As such, this deal amounts to a re-arrangement of the way in which these assets are distributed between

Cheung Kong and Hutchison. Instead of a vertical structure, which involves overlapping ownerships in various assets and businesses, this restructuring will create 2 separate entities, one being a pure and much larger property company called CK Property, and the other an entity called CKH Holdings. The latter will own all the non-property assets of the Cheung Kong-Hutchison group and be a global conglomerate that operates in over 50 countries, will have a clear ownership structure and will have management control over 6 major businesses, many of which already have a significant presence in various major global markets. In this light, we think the key to the Cheung Kong group’s share price is the fair discount that should be applied to the NAV of the future CKH Holdings (pre-distribution of CK Property shares), which we estimate at HKD209.40/share. In our opinion, this restructuring does have some structural impact on how this business group will be perceived by the global investment community in the future. We see determining the fair discount as a complex issue and do not think there is a clear answer for now (see Appendix 1). Still, we tend to lean more towards the lower discount end given that Cheung Kong’s past 24-year average trading discount to its NAV has been 22%, and that Cheung Kong and Hutchison have a past record of trading at close to or even above NAV. However, we believe its peers are currently trading at a higher discount and that telecom and energy are not sectors that are in favour with the stock market at present. Overall, we believe this restructuring will be positive in terms of lowering the NAV discount assigned to the Cheung Kong’s group’s shares. Hence, in our assessment of our fair value and target price for the group, we have reduced our target NAV discount to 15% (from 20%, which was based on the past-24-year average discount for Cheung Kong shares since 1990). As such, we are raising our target price for Cheung Kong to HKD178, based on a 15% discount applied to our NAV estimate for CKH Holdings of HKD209.40/share and now on a 12-month horizon. (Our former target price for Cheung Kong of HKD175 was based on a 6-month horizon and used our former NAV of HKD219/share for Cheung Kong under its previous structure.) We also set out in the following sections the implied fair value of Cheung Kong and Hutchison based on various assumptions on the levels of fair discount.


12 January 2015

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Implied fair values for Cheung Kong and Hutchison Fair discount to NAV Implied fair value Implied fair valuefor CKH Holdings for Cheung Kong for Hutchison5% 198.9 136.110% 188.5 128.915% 178.0 121.720% 167.5 114.625% 157.1 107.430% 146.6 100.335% 136.1 93.140% 125.6 85.945% 115.2 78.850% 104.7 71.655% 94.2 64.560% 83.8 57.3

Source: Daiwa

Cheung Kong: price/NAV trend

Source: Datastream, Daiwa forecasts

4. Issues involved in arriving at a fair

discount to the NAV for CHK Holdings. Admittedly, the total assets and businesses owned by Cheung Kong and Hutchison will not really change as a result of this restructuring. Nevertheless, we do not think it would be fair to say that such a re-arrangement would not have a lasting impact on how these assets will be priced by the stock market going forward. While the business value of these assets may not change in the immediate future, how these assets are priced by the stock market could be an issue in that there could be some subtle differences in pricing, and the importance of these differences could rise over time. Outlined further on in this report are some reasons we think the restructuring could result in important changes in how these assets are priced by the stock market over time. In a nutshell, this restructuring could signal the beginning of a new chapter for Cheung Kong/ Hutchison, and we believe the group could be on the way to transforming itself from an Asian family business group into a truly multinational company. As such, it will strive to match global premier corporations in terms of transparency, corporate structure, professionalization of management, business

performance, etc. More importantly, we contend that this major restructuring exercise is a signal of the group’s determination and commitment to unlock value in the shares for all shareholders. In our view, this restructuring will be a long process and will encounter many issues along the way. We believe its greatest significance is the signal that it sends to the investment community that the Cheung Kong group has the commitment and determination to become a global player and embrace evaluations by global institutional investors. Much will depend on how much progress the group can achieve over the next few years. If it can achieve its vision to become recognised by the stock market as a savvy and shareholder-oriented global business builder and investor, we think it could ultimately command a 5-15% discount to NAV, or even a premium to NAV. After all, Hutchison has a record of trading at a premium to its NAV in the past, and a premium to NAV is not something novel for genuine premier global corporations. Given that the NAV of CKH Holdings (pre-distribution of CK Property shares) is more than USD100bn currently, a 5% reduction in the NAV discount would translate into the unlocking of significant investment value of over USD5bn – a sum that is probably sizeable enough to attract interest from global investors, even those who previously were not interested in Asian family business groups. 5. Will this herald a change in Hong Kong

family business groups? Will Cheung Kong’s move mark the beginning of Hong Kong family companies taking a more serious look at how to improve their companies’ valuations? We note that in the past decades, the Cheung Kong group has been the leader in the Hong Kong corporate sector in many respects. Nearly all the family property companies in Hong Kong are trading at notable discounts to their NAVs and that the growth in their NAVs in recent years generally has not been rewarded much by the stock market, thus resulting in a widening in their NAV discounts in the recent years. At the same time, many property companies globally have traded at close to their NAVs or at a premium to NAV, while The Link REIT (823 HK, HKD48.40, Buy [1]) – a Hong Kong property company that is not family-owned – which owns low-tier retail property assets in Hong Kong, has consistently traded at close to, or above, its NAV.

Avg since 1990: -22.3%

(60%)

(50%)

(40%)

(30%)

(20%)

(10%)

0%

10%

20%

1989

1990

1991

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1995

1996

1997

1998

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2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Cheung Kong (disc)/prem to current NAV(Disc)/prem (%)

Current: -37.0%


12 January 2015

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In our opinion, the main significance of this deal is that it involves an industry leader coming out to try and address its valuation issue through re-arranging its assets to better fit with the priorities and interests of global institutional investors. Instead of trying to move away from the investing world through privatising the assets, the strategy of Cheung Kong group appears to do the opposite, by building a global company that will be structured and managed along professional lines, and monitored and evaluated by market forces and global institutional investors. This could also be Mr Li’s answer to the succession issue, as he could be intending to hand over to his successor a platform and business structure that can continue to drive the development of the group for many years to come. Will this be the start of something to be followed by others? Will it spark some initial interest among global investors in Hong Kong family companies? In Hong Kong, family companies have up to now not been seen by global investors as a separate class for investment; nevertheless these companies now own decent-sized assets of well over USD300bn, and are trading at discounts to NAV, which is rarely found in the world’s other major stock markets, according to our research. We believe this will be an important issue for the Hong Kong corporate sector in 2015.

Risks

The key risk to our positive investment thesis on Cheung Kong would be if shareholders were to not approve its asset the restructuring proposal. This would mean the associated benefits expected would not materialise. Secondary business-related risks we see include a worsening of the competitive environment in the group’s telecom businesses in Europe, and a deterioration in the property markets of Hong Kong and China.


12 January 2015

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Appendix 1: what is the fair P/NAV for the future CKH Holdings?

Should the discount narrow?

On our estimates, about 72.2% of the assets of the future CKH Holdings are assets currently owned directly by Hutchison, 26.4% are assets currently owned by Cheung Kong, and 1.4% is the additional Husky Energy stake. Hence, the simplest and most straightforward way to estimate the fair discount for CKH Holdings is to apply a fair discount to each of the above components based on their historical NAV discounts. However, we believe this would not be the best answer to this question. Granted, the assets and businesses will not change as a result of this restructuring. Still, we do not think it is fair to assume that such a rearrangement will not have a lasting impact on how these assets are priced by the stock market. While the business value of these assets may not see any immediate change, there may be differences, however subtle, in how they are priced by the stock market. For instance, we believe CK Property will become a more important stock relative to Cheung Kong, at least for global property funds, if only because its property assets will become much larger (over USD30bn) and it will be a pure play (no significant non-property exposure, which presents an issue for some funds in terms of its suitability for their portfolios). We also believe the restructuring will result in CKH Holdings’ infrastructure division becoming the group’s only vehicle for pursuing infrastructure investments, which should assuage some investors’ concerns about Cheung Kong’s involvement in some of the group’s infrastructure investments. Up to now, the fact that many businesses are 50/50 owned joint ventures of Cheung Kong and Hutchison has prompted concern among investors about off-balance-sheet debts, but the restructuring should address these concerns. Moreover, we think that for investors there is a difference in perception between assets being owned directly by the KS Li family and trust and those in which another company is also involved.

We note, too, there are many assets and businesses within the group that have restructuring potential and are under-utilised. One obvious example is the cash held by Power Assets, but we think there are many others. Now that these assets are directly owned by the Li family and trust, and with the removal of the constraint of Cheung Kong having effectively maximised its stake in Hutchison (it previously owned 49.97% and any further increase would have required it to consolidate Hutchison’s accounts) should mean there is more flexibility in terms of further restructuring or reorganisation within the group. Implied fair values for Cheung Kong and Hutchison Fair discount to NAV Implied fair value Implied fair valuefor CKH Holdings for Cheung Kong for Hutchison5% 198.9 136.110% 188.5 128.915% 178.0 121.720% 167.5 114.625% 157.1 107.430% 146.6 100.335% 136.1 93.140% 125.6 85.945% 115.2 78.850% 104.7 71.655% 94.2 64.560% 83.8 57.3

Source: Daiwa

This restructuring will result in the Li family and trust having a notably larger exposure to the businesses and assets under Hutchison, and will result in the Li family and trust owning just 30.15% of the flagship listed vehicle, vs. 43.4% before. We do not see a material risk the family’s control over the group being undermined. That said, we would not be surprised if the family were to continue using its spare cash to raise its stake in the company (under Hong Kong listing rules, stakes can now be increased by 2% pa). At the same time, we believe it is possible that the group will engage in share buybacks, which would likely return value to shareholders while enhancing the family’s stake in the vehicle. We have argued before that this is probably the most effective and achievable way to unlock value for Hong Kong family property companies. (See section 6 of our initiation report on Swire Properties, A large “nurturing reward” awaits, published on 22 May 2014). The group has declared that it intends to raise its dividend. Our view is that, from a financial standpoint, CKH and CK Property should able to sustain continuous growth in their DPS, given CK Property should have recurrent gross rental income of over USD1bn a year, and CKH’s retail, infrastructure and port businesses should be highly cash-generative now that the capex phase of its 3G investment is over with the business already generating positive cash flow.

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


12 January 2015

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Appendix 2: valuation history of Cheung Kong Implied NAV discount / (premium) of ex-Hutchison component

Source: Datastream, Daiwa

Cheung Kong’s Hutchison stake / Cheung Kong’s share price

Source: Datastream, Daiwa

Cheung Kong: share price performance since 1990

Source: Bloomberg, Daiwa





Hutchison: share price performance since 1990


(170)(150)(130)(110)

(90)(70)(50)(30)(10)

1030

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Implied NAV discount o f Cheung Kong 's ex-Hutch ison componentAverage+1 STDV-1 STDV

(% )Current: -55%

Average: -52%

Averge: 68%

0

20

40

60

80

100

120

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

CK's Hut stake / CK share price Average

+1 STDV -1 STDV

(% )Current: 64%

0

20

40

60

80

100

120

140

160

Jan-

90Ja

n-91

Jan-

92Ja

n-93

Jan-

94Ja

n-95

Jan-

96Ja

n-97

Jan-

98Ja

n-99

Jan-

00Ja

n-01

Jan-

02Ja

n-03

Jan-

04Ja

n-05

Jan-

06Ja

n-07

Jan-

08Ja

n-09

Jan-

10Ja

n-11

Jan-

12Ja

n-13

Jan-

14Ja

n-15

(HKD)

0

20

40

60

80

100

120

140

160

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

(HKD)

0

20

40

60

80

100

120

140

160Ja

n-10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

(HKD)

0

20

40

60

80

100

120

140

Jan-

90Ja

n-91

Jan-

92Ja

n-93

Jan-

94Ja

n-95

Jan-

96Ja

n-97

Jan-

98Ja

n-99

Jan-

00Ja

n-01

Jan-

02Ja

n-03

Jan-

04Ja

n-05

Jan-

06Ja

n-07

Jan-

08Ja

n-09

Jan-

10Ja

n-11

Jan-

12Ja

n-13

Jan-

14Ja

n-15

(HKD)


12 January 2015

- 13 -





Cheung Kong and Hutchison: relative performance since 1990






0

20

40

60

80

100

120

140

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

(HKD)

0

20

40

60

80

100

120

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

(HKD)

0200400600800

1,0001,2001,4001,6001,800

Jan-

90Ja

n-91

Jan-

92Ja

n-93

Jan-

94Ja

n-95

Jan-

96Ja

n-97

Jan-

98Ja

n-99

Jan-

00Ja

n-01

Jan-

02Ja

n-03

Jan-

04Ja

n-05

Jan-

06Ja

n-07

Jan-

08Ja

n-09

Jan-

10Ja

n-11

Jan-

12Ja

n-13

Jan-

14Ja

n-15

(Rebased)

Cheung Kong Hutchison

020406080

100120140160180

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

(Rebased)


0

50

100

150

200

250Ja

n-10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

(Rebased)



12 January 2015

- 14 -

Appendix 3: Major aspects of the deal Summary of deal terms

Source: Company

Notes: 1) Based on the average closing price for the five trading days of Cheung Kong shares up to and including 7 January 2015 of HKD129.06 and the average closing price for the five trading days of Husky shares up to and including 6 January 2015 of CAD27.01, and an exchange rate of HKD6.5782 per CAD.

2) Based on the average closing price for the five trading days of Cheung Kong and Hutchison shares up to and including 7 January 2015 of HKD129.06 and HKD88.28, respectively.

3) Both existing CKH Holdings shareholders as well as new shareholders who received CKH Holdings shares through the Husky Share Exchange and the Hutchison Proposal are entitled to receive CK Property shares on a one-for-one basis.


12 January 2015

- 15 -

(2) Greater transparency and business coherence and elimination of investment arbitrage

Source: Company

Note: 1) Hutchison holds 78.16% stake in CKI as at 7 January 2015, hence interested in certain JVs with Cheung Kong

2) Based on the exchange ratio for Husky Share Exchange

(4) Enhanced size and scale – CK Property

Source: Company

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


12 January 2015

- 16 -

(4) Enhanced size and scale – CKH Holdings

Source: Company

Notes: 1) total assets as at 30 June 2014.

2) See later chart.

3) Calculated as Husky’s market capitalisation as at 6 January 2015 of c.CAD25bn * the exchange rate as at 6 January 2015 of HK$6.5782 per CAD * 6.24%.

4) Announced on 4 November 2014: Consideration of c.USD1.89bn acquisition of up to 45 aircraft and c.USD0.73bn acquisition of up to 15 aircraft through 60-40 venture with MCAP.

5) As at 31 December 2013.

6) As of 30 June 2014.

(5) Greater financing flexibility with expected strong investment grade ratings

Source: Company

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


12 January 2015

- 17 -

(5) Greater financing flexibility with expected strong investment grade ratings (cont’d)

Source: Company

Notes: 1) Exchange rate: 1GBP = 12.9052 HK$ (as at 31 March 2014), 1AUD = 7.3010HK$ (as at 30 June 2014), 1CAD = 6.9572HK$ (as at 30 September 2014).

2) CKI effective = CKI’s direct shareholding + CKI’s indirect interest through its 38.87% stake in Power Assets.

3) Hutchison effective = Hutchison’s indirect shareholding through 78.16% stake in CKI.

4) CKH Holdings effective = Cheung Kong’s interest + Hutchison’s effective interest as a result of the Merger Proposal.

(6) Expected increase in dividend payout ratios

Source: Company

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


12 January 2015

- 18 -

Proposed Management teams of CKH Holdings and CK Property

Source: Company


12 January 2015

- 19 -

Daiwa’s Asia Pacific Research Directory

HONG KONG

Hiroaki KATO (852) 2532 4121 [email protected] Regional Research Head

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

[email protected]

Regional Research Co-head

John HETHERINGTON (852) 2773 8787 [email protected] Regional Deputy Head of Asia Pacific Research

Rohan DALZIELL (852) 2848 4938 [email protected] Regional Head of Product Management

Kevin LAI (852) 2848 4926 [email protected] Chief Economist for Asia ex-Japan; Macro Economics (Regional)

Christie CHIEN (852) 2848 4482 [email protected] Macro Economics (Regional)

Junjie TANG (852) 2773 8736 [email protected] Macro Economics (China)

Jonas KAN (852) 2848 4439 [email protected] Head of Hong Kong and China Property

Leon QI (852) 2532 4381 [email protected] Banking (Hong Kong, China); Broker (China); Insurance (China)

Anson CHAN (852) 2532 4350 [email protected] Consumer (Hong Kong/China)

Jamie SOO (852) 2773 8529 [email protected] Gaming and Leisure (Hong Kong/China)

Lynn CHENG (852) 2773 8822 [email protected] IT/Electronics (Semiconductor) (Greater China)

Dennis IP (852) 2848 4068 [email protected] Power; Utilities; Renewables and Environment (Hong Kong/China)

John CHOI (852) 2773 8730 [email protected] Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap

Joey CHEN (852) 2848 4483 [email protected] Steel (China)

Kelvin LAU (852) 2848 4467 [email protected] Head of Transportation (Hong Kong/China); Transportation (Regional)

Brian LAM (852) 2532 4341 [email protected] Transportation – Aviation (Hong Kong/China); Railway; Construction and Engineering (China)

Carrie YEUNG (852) 2773 8243 [email protected] Transportation – Transportation Infrastructure (Hong Kong/China)

Jibo MA (852) 2848 4489 [email protected] Head of Custom Products Group

Thomas HO (852) 2773 8716 [email protected] Custom Products Group

PHILIPPINES

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

SOUTH KOREA

Sung Yop CHUNG (82) 2 787 9157 [email protected] Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel

Mike OH (82) 2 787 9179 [email protected] Capital Goods (Construction and Machinery)

Jun Yong BANG (82) 2 787 9168 [email protected] Oil; Chemicals; Tyres

Thomas Y KWON (82) 2 787 9181 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game

TAIWAN

Rick HSU (886) 2 8758 6261 [email protected] Head of Regional IT/Electronics; Semiconductor/IC Design (Regional)

Steven TSENG (886) 2 8758 6252 [email protected] IT/Technology Hardware (PC Hardware)

Christine WANG (886) 2 8758 6249 [email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer

Kylie HUANG (886) 2 8758 6248 [email protected] IT/Technology Hardware (Handsets and Components)

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Head of India Research; Strategy; Banking/Finance

Saurabh MEHTA (91) 22 6622 1009 [email protected] Capital Goods; Utilities

SINGAPORE

Ramakrishna MARUVADA (65) 6499 6543 [email protected] Telecommunications (China/ASEAN/India)

Royston TAN (65) 6321 3086 [email protected] Oil and Gas; Capital Goods

David LUM (65) 6329 2102 [email protected] Property and REITs

Evon TAN (65) 6499 6546 [email protected] Property and REITs

Jame OSMAN (65) 6321 3092 [email protected] Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)


12 January 2015

- 20 -

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12 January 2015

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The views expressed in the report accurately reflect the analyst’s personal views about the securities and issuers that are subject of the Report, and that no part of the analyst’s compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non – US affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited. Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research. Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE Link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively. Thailand

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

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


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

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

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

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

This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent. United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000). Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

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

"1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in

the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.


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

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

• There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.

*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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