Independent Adviser s Certificate

Transcription

1 Independent Adviser s Certificate In Respect of the Consideration Offered in the Acquisition Notice to Minority Shareholders of Chow Group Limited dated 7 June 2018 June 2018 Statement of Independence Simmons Corporate Finance Limited confirms that it: has no conflict of interest that could affect its ability to provide an unbiased report; and has no direct or indirect pecuniary or other interest in the proposed transaction considered in this report, including any success or contingency fee or remuneration, other than to receive the cash fee for providing this report. Simmons Corporate Finance Limited has satisfied the Takeovers Panel, on the basis of the material provided to the Panel, that it is independent under the Takeovers Code for the purposes of preparing this report.

2 Index Section Page 1. Introduction Summary of Valuation and Certification Profile of CGL Valuation of CGL Sources of Information, Reliance on Information, Disclaimer and Indemnity Qualifications and Expertise, Independence, Declarations and Consents Appendix I. Comparable Companies Trading Multiples Chow Group Limited Independent Adviser s Certificate

3 1. Introduction 1.1 Background Chow Group Limited (CGL or the Company) was incorporated on 5 February 2003 as Newcall Technologies Limited. The Company changed its name to Holly Springs Investments Limited on 27 February 2004 and it was listed on the NZX Alternative Market (NZAX) operated by NZX Limited (NZX) in June 2006 with the objective of it being used as a vehicle to effect a reverse listing transaction. The Company changed its name to RIS Group Limited (RIS) on 3 September 2009 following the acquisition of 100% of the shares in Retail Information Systems Pty Limited in May RIS was the subject of a reverse takeover on 26 February 2016 whereby it acquired 100% of the shares in 16 Park Avenue Limited (16PAL) for a purchase price of approximately $7.6 million. 16PAL formed part of the Chow Group of companies owned by Ka-Yu (John) Chow and Ka-Ming (Michael) Chow. 16PAL is the owner of the Park Ave Residence, an Auckland residential accommodation complex comprising 2 adjacent properties and an associated accommodation business located in Park Avenue, Otahuhu, Auckland. The 2 major shareholders in CGL are: John Chow and Michael Chow as the trustees of the John Chow Investment Trust 7,401,894 shares (44.97%) Michael Chow and John Chow as the trustees of the Michael Chow Investment Trust 7,425,240 shares (45.12%). We refer to the John Chow Investment Trust and the Michael Chow Investment Trust collectively as the Chow Trusts. The trustees of the Chow Trusts (John Chow and Michael Chow) collectively hold and control 90.09% of the Company s shares. The Company s market capitalisation was $9.9 million as at 6 June 2018 and its unaudited total equity was $10.8 million as at 31 March A profile of CGL is set out in section Acquisition Notice CGL is a code company under the Takeovers Code (the Code). Pursuant to Rule 51 of the Code, the Chow Trusts issued a Notice of Dominant Ownership to CGL on 31 May By virtue of becoming the dominant owner, the Chow Trusts are required under Rule 54 of the Code to issue an acquisition notice to all other CGL shareholders (the Acquisition Notice). Pursuant to Rule 55(1)(b)(i), the Acquisition Notice will state that the CGL shareholders must sell their shares to the Chow Trusts. The latest date that the Chow Trusts can send the Acquisition Notice to CGL s shareholders is 30 June Rule 57(1)(a) of the Code requires the Acquisition Notice to specify a cash sum as consideration for each CGL share certified as fair and reasonable by an Independent Adviser. Chow Group Limited Page 1 Independent Adviser s Certificate

4 The Chow Trusts have engaged Simmons Corporate Finance Limited (Simmons Corporate Finance) to act as Independent Adviser in respect of their obligations under Rule 57(1)(a) of the Code. The Acquisition Notice dated 7 June 2018 issued by John Chow and Michael Chow as trustees of the Chow Trusts offers $0.60 per share in cash (the Consideration) for all 1,630,986 ordinary shares in CGL that the Chow Trusts do not already hold or control. 1.3 Regulatory Requirements The Guidance Note on Independent Advisers and the Takeovers Code dated 1 March 2018 (the Guidance Note) issued by the Takeovers Panel includes the following guidance in respect of Independent Adviser Reports under Rule 57 of the Code. In broad terms, rule 57 of the Code relates to cases of compulsory acquisition where a person (whether alone or acting jointly or in concert with one or more other persons) has become a dominant owner (ie has become the holder or controller of 90% or more of the voting rights in a Code company by means other than a takeover offer (for example, on-market acquisitions). In such cases, the consideration specified in the acquisition notice under rule 55 of the Code, for the purposes of a compulsory acquisition of the outstanding securities in the Code company must be a cash sum certified as fair and reasonable by an independent adviser. For the purposes of rule 57, the fair and reasonable value of an equity security must be calculated by: (a) first assessing the value of all the equity securities in the class of equity securities of which the equity security forms part; and (b) then allocating that value pro rata among all the securities of that class. The rule 57(1) certificate should include a valuation of the Code company. This is important because outstanding security holders can object to the acquisition consideration. Accordingly, in order to exercise their objection rights in a considered manner, the outstanding security holders should have access to the financial analysis undertaken by the independent adviser. 1.4 Purpose of the Report The Chow Trusts have engaged Simmons Corporate Finance to prepare an Independent Adviser s Certificate to certify that the Consideration offered in the Acquisition Notice is fair and reasonable in accordance with Rule 57(1)(a) of the Code. Simmons Corporate Finance was approved by the Takeovers Panel on 1 June 2018 to prepare this Independent Adviser s Certificate. Simmons Corporate Finance issues this Independent Adviser s Certificate to: John Chow and Michael Chow as trustees of the John Chow Investment Trust Michael Chow and John Chow as trustees of the Michael Chow Investment Trust. Chow Group Limited Page 2 Independent Adviser s Certificate

5 This Independent Adviser s Certificate is not required to accompany the Acquisition Notice that is sent to each CGL shareholder. However, the Chow Trusts must send a copy of this report free of charge upon request to any CGL shareholder within one day of the request in accordance with Rule 57(5) of the Code. The Independent Adviser s Certificate is not to be used for any other purpose without our prior written consent. 1.5 Currency References Currency references in this report are to: New Zealand dollars ($) Indian rupees (INR). Chow Group Limited Page 3 Independent Adviser s Certificate

6 2. Summary of Valuation and Certification 2.1 Summary of Valuation Rule 57 of the Code specifies that the fair and reasonable value of an equity security (in this case the ordinary shares of CGL) is to be calculated by assessing the value of all securities in that class and then pro rating that value across those securities. The impact of this provision of the Code is that no minority discount is to be attributed to the value of the CGL shares offered to be acquired under the Acquisition Notice. Our valuation of the shares in CGL is set out in section 4. We assess the fair market value of 100% of the shares in CGL to be in the range of $9.5 million to $10.7 million. This equates to a value of $0.58 to $0.65 per share. 2.2 Certification of Fairness and Reasonableness The Chow Trusts have specified the cash Consideration in the Acquisition Notice to be $0.60 per share The Consideration offered is within our assessed valuation range of $0.58 to $0.65 per share. Accordingly, we certify that, for the purposes of Rule 57(1)(a) of the Code, the Consideration is fair and reasonable. Chow Group Limited Page 4 Independent Adviser s Certificate

7 3. Profile of CGL 3.1 Background CGL was incorporated on 5 February 2003 as Newcall Technologies Limited. The Company changed its name to Holly Springs Investments Limited on 27 February 2004 and it was listed on the NZAX in June 2006 with the objective of it being used as a vehicle to effect a reverse listing transaction. The Company changed its name to RIS Group Limited on 3 September 2009 following the acquisition of 100% of the shares in Retail Information Systems Pty Limited in May RIS was the subject of a reverse takeover on 26 February 2016 whereby it acquired 100% of the shares in 16PAL for a purchase price of $7,599,000 (the RIS Reverse Takeover). 16PAL formed part of the Chow Group of companies owned by John Chow and Michael Chow. 16PAL is the owner of the Park Ave Residence, an Auckland residential accommodation complex comprising 2 adjacent properties and an associated accommodation business located in Park Avenue, Otahuhu, Auckland. The purchase price for 16PAL was satisfied by CGL issuing 19,491,232,812 new ordinary shares to the Chow Trusts: 9,745,616,406 shares to the John Chow Investment Trust 9,745,616,406 shares to the Michael Chow Investment Trust. Upon completion of the RIS Reverse Takeover, the Chow Trusts held 94.93% of the ordinary shares in CGL and became the dominant owner of CGL. RIS changed its name to Chow Group Limited on 4 March On 4 and 8 March 2016, the Chow Trusts sold down 1,296,483,332 shares in CGL to various people, representing 6.31% of the shares then on issue. CGL consolidated its shares on a 25:1 basis on 7 March 2016, resulting in there being 821,306,211 ordinary shares on issue at that date. On 15 March 2016, CGL issued 1,597,537 new ordinary shares in satisfaction of the conversion of $21,447 of convertible notes held by VIG Limited. This increased the total number of ordinary shares on issue to 822,903,748. As the dominant owner of the Company, the Chow Trusts were obliged under Rule 54 of the Code to issue an acquisition notice to all other CGL shareholders offering them the opportunity to sell their shares to the Chow Trusts. Under the acquisition notice dated 29 March 2016, the Chow Trusts offered $0.011 per share in cash for the 95,113,770 ordinary shares in CGL that they did not already hold or control. The Chow Trusts acquired 1,238,853 ordinary shares under the acquisition notice. On 1 November 2017, CGL undertook a share consolidation whereby its 822,903,748 ordinary shares were consolidated on a 50:1 basis into 16,458,120 ordinary shares. Chow Group Limited Page 5 Independent Adviser s Certificate

8 3.2 Nature of Operations Background 16PAL was incorporated on 12 March 2012 as a commercial property investment company. During 2014, 16PAL purchased 2 adjacent Otahuhu properties at Park Avenue and Park Avenue (the Properties). The Properties were commercial buildings that were previously tenanted by Inland Revenue. The Properties were refurbished in 2015 into a 132 room residential accommodation complex now known as the Park Ave Residence. 16PAL commenced trading in July 2015 following the renovation of the Park Avenue property. The second property (10-14 Park Avenue) was opened during December 2015, resulting in a significant increase in the number of rooms available at the Park Ave Residence. Summary of the Properties An overview of the Properties is set out below Park Avenue, Otahuhu, Auckland Location Park Avenue, Otahuhu, Auckland Zoning Mixed use Description a 2 story building constructed in the 1970s the entire interior fit-out has been replaced as part of a recent renovation, whereby the property has been converted into a 45 room accommodation complex with communal kitchen, dining room, bathroom and toilet amenities. Laundry facilities are located in the adjacent building (16-20 Park Avenue). each room has an average size of 14m 2 and has been furnished with a bed, table and chairs, microwave, kettle, fridge and TV Tenancy profile Site area 857m 2 Floor area 1,004.1m 2 Long-stay and short-stay tenancies Capital value $3,200,000 (as at 1 July 2017) Source: Colliers International valuation dated 31 March 2018 (the Colliers 2018 Valuations) Location Zoning Park Avenue, Otahuhu, Auckland Park Avenue, Otahuhu, Auckland Mixed use Description a 4 story plus basement commercial building constructed in the 1970s the entire interior fit-out has been replaced as part of a renovation, whereby the property has been converted into an 87 room accommodation complex with individual ensuites and communal kitchen / dining room and laundry amenities each room has an average size of 14m 2 and has been furnished with a bed, table and chairs, microwave, kettle, fridge and TV Tenancy profile Site area 931m 2 Floor area 3,203.04m 2 Long-stay and short-stay tenancies Capital value $6,300,000 (as at 1 July 2017) Source: Colliers 2018 Valuations Chow Group Limited Page 6 Independent Adviser s Certificate

9 Operations The Properties are owned by 16PAL and managed by CGML Limited (CGML). CGML is by owned by the Chow Trusts. The Properties provide budget short-stay and long-stay accommodation in the South Auckland area. The accommodation is comparable with basic hotel rooms and is marketed on web-based accommodation platforms such as Expedia and Trivago. The Properties provide a range of rooms: studio twin with ensuite studio double with ensuite double room with shared facilities twin room with shared facilities. Current weekly room rates set are set out below. The weekly rates include water but power is charged in addition. Weekly Room Rates Park Avenue Park Avenue Singles $250 $259 Couples $265 $335 Work & Income (WINZ) $700 $1,050 Source: Colliers 2018 Valuations The rates are highly competitive when compared with typical budget hotel rates and demand has been strong since the first accommodation block opened in July Customers include a range of professionals and other persons including doctors and nurses working at Middlemore Hospital, as well as a mix of WINZ-funded tenants. All long-term tenants are fully vetted prior to their stay including security checks, references and other relevant information. Local competition includes a small number of traditional boarding houses in the Otahuhu area as well as the Auckland Astro Residence Motel located at 21 Park Avenue, which provides 30 units for short-term and long-term accommodation. Occupancy Rates and Average Room Rates The Properties monthly occupancy rates and average daily room rates for the year ended 31 March 2018 are set out below. Occupancy Rates and Average Room Rates Monthly Occupancy Rates Daily Average Room Rates Low 84% $39.87 Average 90% $46.63 High 97% $58.97 Source: 16PAL management accounts for the year ended 31 March 2018 Chow Group Limited Page 7 Independent Adviser s Certificate

10 Contract for Services Following the acquisition of 16PAL in 2016, CGL entered into a Contract for Services with CGML under which CGML provides secretarial and management services to CGL. The key of terms of the Contract for Services include: 3.3 Directors a term of 5 years commencing 26 February 2016 (or such shorter period as determined by CGL) the Contract for Services may be terminated by CGL at any time without penalty by giving one month s written notice to CGML an annual management fee based on CGML s existing hourly charge out rates (plus GST), capped at $150,000 (plus GST) per annum CGML provides a range of management services to CGL including, but not limited to, property management / administration services, tax and accounting services, recruitment assistance, payroll management and record keeping. The directors of CGL are: Michael Chow, executive director John Chow, executive chair Brent King, independent. Michael Chow and John Chow are trustees of the Chow Trusts. 3.4 Capital Structure and Shareholders CGL currently has 16,458,120 ordinary fully paid shares on issue held by 725 shareholders. The names, number of shares and percentage holding of the 10 largest shareholders as at 6 June 2018 are set out below. CGL s 10 Largest Shareholders Shareholder No. of Shares Held % Michael Chow Investment Trust 7,425, % John Chow Investment Trust 7,401, % Kenneth Donelan 171, % Ra Compusoft Private Limited 100, % High Street Nominees No 7 Limited 94, % Snowdon Peak Investments Limited (Snowdon) 51, % Lup Chow 50, % Hung Chow 48, % John Cheung 40, % Qing Xu 40, % Subtotal 15,422, % Others (715 shareholders) 1,035, % Total 16,458, % Source: NZX Company Research The Chow Trusts hold 14,827,134 shares, representing 90.09% of the shares in the Company. Chow Group Limited Page 8 Independent Adviser s Certificate

11 The Chow Trusts acquired 246,557 shares from 6 related party shareholders on 31 May 2018 at $0.60 per share to increase their combined shareholding from 88.59% to 90.09%. Snowdon is owned by CGL director Brent King. 3.5 Financial Performance A summary of CGL s financial performance following the RIS Reverse Takeover on 26 February 2016 is set out below. Summary of CGL Financial Performance Year to 31 Mar 17 (Audited) $000 Year to 31 Mar 18 (Draft) $000 Revenue 2,155 2,119 Other income 10 4 Operating expenses (1,235) (1,177) Operating profit Finance costs (299) (265) Change in fair value of investment properties 1, Profit before income tax 1,652 1,001 Income tax expense (184) (201) Net profit for the year 1, EPS ($) 1 $0.089 $0.049 EPS: Earnings per share 1 Based on current number of shares Source: CGL annual reports Revenue represents accommodation and rental income from the Properties. Operating expenses include salaries and wages, management fees paid to CGML, directors fees, rates and repairs and maintenance. Chow Group Limited Page 9 Independent Adviser s Certificate

12 3.6 Financial Position CGL s financial position following the RIS Reverse Takeover on 26 February 2016 is set out below. CGL Financial Position As at 31 Mar 16 (Audited) $000 As at 31 Mar 17 (Audited) $000 As at 31 Mar 18 (Draft) $000 Cash and cash equivalents Trade and other receivables Related party receivables 1,973 2, Prepayments Available-for-sale financial assets Current assets 3,151 3,239 1,002 Property, plant and equipment Investment property 15,510 16,550 16,890 Non current assets 15,510 16,569 16,890 Total assets 18,661 19,808 17,892 Trade creditors and other payables (444) (300) (237) Related party payables (2,311) (2,403) (25) Loans and borrowings (448) (404) (400) Income tax payable (33) (101) (159) Current liabilities (3,236) (3,208) (821) Loans and borrowings (6,896) (6,492) (6,092) Deferred tax (25) (136) (207) Non current liabilities (6,921) (6,628) (6,299) Total liabilities (10,157) (9,836) (7,120) Total equity 8,504 9,972 10,772 Net assets per share 1 $0.52 $0.61 $0.65 Net tangible assets (NTA) per share 1 $0.52 $0.61 $ Based on current number of shares Source: CGL annual reports The Company's current assets as at 31 March 2018 consisted mainly of cash and cash equivalents and available-for-sale financial assets. Available-for-sale financial assets consist of 3,463,410 ordinary shares in USG Tech Solutions Limited (USG) that CGL acquired via the RIS Reverse Takeover (the USG Shares). USG is a software solutions and services company in India. Its shares are listed on the Bombay Stock Exchange with a market capitalisation of approximately $3.7 million as at 6 June CGL holds 8.79% of USG s shares. The company offers solutions for retailers (such as loyalty and rewards and promotions solutions) and solutions for corporates (including electronic cash registers system integration, customer service, fleet management and gift and prepaid card solutions). CGL intends to realise its investment in USG. Investment property comprises the Properties. The fair value of the Properties is established annually by an independent valuer. The Colliers 2018 Valuations assessed the fair value of the Properties to be $16.89 million as at 31 March The basis of valuation is set out below. Chow Group Limited Page 10 Independent Adviser s Certificate

13 Valuation Method Colliers 2018 Valuations Park Avenue Park Avenue Capitalisation of net income Capitalisation of net income Average room rate per week $260 $300 Other income per week $15 $15 Car parks income per week $40 $40 Expenses per annum $165,000 $348,000 Net income per annum $413,053 $851,435 Expected market rental growth 0% 0% Occupancy rate 95% 90% Net market capitalisation 7.5% 7.5% Fair value $5,500,000 $11,390,000 Value per room $122,222 $130,460 Source: Colliers 2018 Valuations Related party balances as at 31 March 2018 consist of receivables from Stonewood Homes NZ Franchisor Limited and payables to CGML. Loans and borrowings consist of a secured loan from ANZ Bank Limited (ANZ): security is in the form of a general security agreement granted by 16PAL and a registered first mortgage over the Properties repayments are $0.4 million per annum the current interest rate is 4.01% per annum. Deferred tax mainly represents timing differences on depreciation on the Properties. Total equity of $10.8 million as at 31 March 2018 consisted of: $0.5 million of issued share capital $10.3 million of retained earnings. 3.7 Cash Flows A summary of CGL s cash flows following the RIS Reverse Takeover on 26 February 2016 is set out below. Summary of CGL Cash Flows Year to 31 Mar 17 (Audited) $000 Year to 31 Mar 18 (Draft) $000 Net cash inflow from operating activities Net cash (outflow) from investing activities (42) (20) Net cash (outflow) from financing activities (623) (707) Net increase / (decrease) in cash held 70 (150) Opening cash balance Closing cash balance Source: CGL annual reports Financing cash flows consist of repayments of the ANZ loan and related party borrowings. Chow Group Limited Page 11 Independent Adviser s Certificate

14 3.8 Share Price History Set out below is a summary of CGL s daily closing share price and monthly volumes of shares traded from 4 January 2017 to 6 June Share prices and monthly volumes prior to 1 November 2017 have been adjusted to reflect the 50:1 share consolidation on 1 November Source: NZX Company Research During the period, CGL s shares have traded between $0.57 and $0.90 at a volume weighted average share price (VWAP) of $0.68 (on a post consolidation basis). Trading in the Company s shares is extremely thin, reflecting that 90.09% of the shares are currently held by the Chow Trusts and the top 10 shareholders collectively hold 93.71% of the shares. An analysis of CGL s recent VWAP, traded volumes and liquidity (measured as traded volumes as a percentage of shares outstanding) up to 6 June 2018 is set out below. Share Trading to 6 June 2018 Period Low ($) High ($) VWAP ($) Volume Traded (000) Liquidity 1 month % 3 months % 6 months % 1 year % Source: NZX Company Research The shares have traded on 67 days in the past year at a VWAP of $0.63. Chow Group Limited Page 12 Independent Adviser s Certificate

15 4. Valuation of CGL 4.1 Introduction We are of the view that the appropriate basis upon which to evaluate the fairness of the Consideration is to compare the Consideration with the full underlying value of CGL on a standalone basis, pro rated across all shares. Such an approach attributes full control value to CGL under its current strategic and operational initiatives but excludes the value of any synergies that may accrue to a specific acquirer. The resulting value exceeds the price at which we would expect minority interests in CGL to trade in the absence of a takeover offer. This approach is consistent with Rule 57(4) of the Code which seeks to avoid issues of premia or discounts for minority shareholdings. 4.2 Standard of Value We have assessed the fair market value of 100% of the shares in CGL. Fair market value is defined as the price that a willing but not anxious buyer, with access to all relevant information and acting on an arm s length basis, would be prepared to pay to a willing but not anxious seller in an open, unrestricted and stable market. 4.3 Basis of Valuation In general terms it is recognised that the value of a share represents the present value of the net cash flows expected therefrom. Cash flows can be in the form of either dividends and share sale proceeds or a residual sum derived from the liquidation of the business. There are a number of methodologies used in valuing shares and businesses. The most commonly applied methodologies include: discounted cash flow (DCF) capitalisation of earnings net assets or estimated proceeds from an orderly realisation of assets. Each of these valuation methodologies is applicable in different circumstances. The appropriate methodology is determined by a number of factors including the future prospects of the business, the stage of development of the business and the valuation practice or benchmark usually adopted by purchasers of the type of business involved. The DCF method is the fundamental valuation approach used to assess the present value of future cash flows, recognising the time value of money and risk. The value of an investment is equal to the value of future free cash flows (FCF) arising from the investment, discounted at the investor s required rate of return. The capitalisation of earnings method is an adaptation of the DCF method. It requires an assessment of the maintainable earnings of the business and a selection of a capitalisation rate (or earnings multiple) appropriate to that particular business for the purpose of capitalising the earnings figure. Chow Group Limited Page 13 Independent Adviser s Certificate

16 An assets based methodology is often used in circumstances where the assets of a company have a market value independent of the profitability of the company that owns them. A valuation based on an orderly realisation of assets is normally restricted to instances where the investor holds sufficient control to effect a sale of the assets and / or there is some indication that an orderly realisation is contemplated. 4.4 Valuation Approach Our preferred valuation approach is the DCF method. However, in the absence of robust long term financial forecasts that have been approved by the CGL board of directors (the Board), it is not possible to undertake a meaningful DCF analysis of CGL. We have therefore assessed the value of CGL using the following valuation methodologies: sum of the parts (SOTP) net realisable value (NRV). We have assessed the reasonableness of the valuation outcomes by comparing the implied valuation multiples with the observed multiples for comparable companies. 4.5 SOTP Valuation Assessment Methodology The SOTP approach assumes that CGL can and will continue as a going concern. It involves assessing: the current market value of all of CGL s assets the current market value of all of CGL s liabilities (both on and off balance sheet) the net present value (NPV) of all of CGL s obligations not reflected in the liabilities (e.g. its ongoing management costs). The SOTP approach is an adaption of the DCF approach. It is premised on the basis that: the current market values of CGL s assets are the NPV of the assets FCF the current market values of CGL s liabilities are the NPV of the FCF associated with those liabilities and obligations. We have assessed the underlying value of CGL s shares by aggregating the values of the Company's component assets and liabilities as follows: the Properties based upon the Colliers 2018 Valuation the USG Shares based upon the Board s assessment of value and USG s current share price the value of CGL s other assets and liabilities has been based upon our estimates of their realisable values CGL s maintainable ongoing level of corporate overheads has been capitalised at an appropriate multiple to arrive at the NPV for the head office function. Chow Group Limited Page 14 Independent Adviser s Certificate

17 The Properties We have adopted the Colliers 2018 Valuations as the basis for assessing the value of the Properties. We have reviewed the Colliers 2018 Valuations and consider the valuation approach and underlying assumptions to be reasonable. USG Shares CGL has an 8.79% shareholding in USG. USG s shares are listed on the Bombay Stock Exchange with a market capitalisation of INR173.4 million as at 6 June 2018, which equates to $3.7 million. Trading of USG shares has been extremely thin over the 12 month period to 6 June 2018, with the traded volume of shares representing only 0.5% of the total number of shares on issue. Less than 200,000 shares have traded over the past 12 months - significantly less than the 3,463,410 shares held by CGL. The lack of liquidity in the USG Shares represents a key risk to CGL in relation to its ability to realise the market value of its investment. Based on USG s current share price of INR4.4, the value of the USG Shares is in the vicinity of $0.3 million. However, given their illiquid nature, we would expect that a shareholding of the size of the USG Shares could only be disposed of at a significant discount to the current share price. For the purposes of our valuation, we have assessed the value of the USG Shares to be in the range of $162,000 to $243,000: the low value of $162,000 is based on the Board s assessment of value in CGL s 2018 annual report the high value of $243,000 is based on USG s current share price less a 25% discount to allow for illiquidity. Other Assets and Liabilities We have adopted the carrying values for the Company s other assets and liabilities as at 31 March 2018, other than in respect of the deferred tax liability. Our SOTP valuation is predicated on the basis that CGL continues as a going concern and that the current investment property portfolio is retained (effectively into perpetuity). In such circumstances, the deferred tax liability (arising from the recovery of depreciation claimed for tax purposes) will never crystallise. Therefore, this liability is ignored for valuation purposes. Corporate Overheads As set out in section 3.5, CGL s corporate overheads (excluding finance costs) were approximately $1.2 million per annum in the 2017 and 2018 financial years. The majority of these costs represent direct operating expenses of the Properties and are taken into account in the Colliers 2018 Valuations. We have assessed CGL s level of future maintainable corporate overheads to be in the vicinity of $0.25 million. These relate mainly to audit fees, directors fees, share registry costs and NZAX listing fees. Chow Group Limited Page 15 Independent Adviser s Certificate

18 We have capitalised the maintainable corporate overheads at a pre tax multiple of 5.0x to 6.0x (based on our assessment of the Company s cost of capital) to derive the NPV of capitalised corporate overheads in the range of $1.25 million to $1.5 million. Valuation Assessment Based on the above, we assess the value of CGL s shares to be in the range of $0.58 to $0.60 per share as at the present date using the SOTP approach. SOTP Valuation Assessment As at 31 Mar 18 (Draft) $000 Basis Low $000 High $000 Cash and cash equivalents Trade and other receivables Related party receivables Prepayments Available-for-sale financial assets Current assets 1,002 1,002 1,083 Investment property 16, ,890 16,890 Total assets 17,892 17,892 17,973 Trade creditors and other payables (237) 1 (237) (237) Related party payables (25) 1 (25) (25) Loans and borrowings (400) 1 (400) (400) Income tax payable (159) 1 (159) (159) Current liabilities (821) (821) (821) Loans and borrowings (6,092) 1 (6,092) (6,092) Deferred tax (207) Non current liabilities (6,299) (6,092) (6,092) Total liabilities (7,120) (6,913) (6,913) Total equity 10,772 10,979 11,060 Capitalised corporate costs (1,500) (1,250) Value of 100% of shares 9,479 9,810 No. of shares (000) 16,458 16,458 Value per share $0.58 $ CGL draft 2018 annual report 2 Based on the Board s valuation and the discounted USG current share price 3 Colliers 2018 Valuations 4 Deferred tax liability is assumed not to crystallise 4.6 NRV Valuation Assessment Methodology The NRV approach derives a value for the shares by assessing the residual cash distribution that would be made to shareholders after: selling all of CGL s assets in a timely manner repaying all liabilities, including tax liabilities that may arise from the sale of assets allowing for costs involved in liquidating the Company. We have assessed the NRV of CGL based upon an orderly sale of the Company's assets over the next 6 to 12 months, allowing for the costs required to realise the assets and wind-up the Company. Chow Group Limited Page 16 Independent Adviser s Certificate

19 In applying the NRV valuation approach, we note that we are not aware of any intention on the Chow Trusts or the Board s part to sell all or any of the Company s assets or to liquidate CGL. The Properties We have assessed the NRV of the investment property portfolio based primarily on the Colliers 2018 Valuations. In our view, the Properties would be relatively easy to sell within (say) 3 to 6 months in the current property market. We have assessed the NRV of the Properties based on the Colliers 2018 Valuations less an allowance of 3% for selling costs. USG Shares We have assessed the NRV of the USG Shares based on the Board s assessment of value and the current USG share price less a 25% discount for illiquidity. Other Assets and Liabilities We have adopted the carrying values for the Company s other assets and liabilities as at 31 March NZAX Listing As a listed shell company, CGL s only material intangible asset not on its balance sheet is likely to be its NZAX listing. In general terms, the value ascribed to a NZAX / NZX Main Board listing is a function of the costs saved by a company undertaking a backdoor listing or reverse listing rather than undergoing an initial public offering (IPO) or compliance listing. The costs of an IPO (when a company seeks to raise capital at the time of its listing) can be significant due to brokerage fees as well as other expense such as share registry expenses, legal fees, accounting fees, advertising costs, printing costs and postage costs associated with preparing an investment statement and prospectus. However, the costs associated with a compliance listing, where a company s shares are listed but no new capital is raised, are considerably lower. Recent backdoor listings and reverse listings on the NZAX / NZX Main Board have ascribed values in the range of $200,000 to $450,000 to the NZAX / NZX Main Board listings. We consider a reasonable value for CGL s NZAX listing to be in the range of $200,000 to $450,000. Liquidation Costs We estimate the costs associated with liquidating CGL would be in the range of $50,000 to $100,000. These costs cover legal costs and accounting costs. Chow Group Limited Page 17 Independent Adviser s Certificate

20 Valuation Conclusion Based on the above, we assess the value of CGL s shares to be in the range of $0.63 to $0.65 per share as at the present date using the NRV approach. NRV Valuation Assessment As at 31 Mar 18 (Draft) $000 Basis Low $000 High $000 Cash and cash equivalents Trade and other receivables Related party receivables Prepayments Available-for-sale financial assets Current assets 1,002 1,002 1,083 Investment property 16, ,383 16,383 Total assets 17,892 17,385 17,466 Trade creditors and other payables (237) 1 (237) (237) Related party payables (25) 1 (25) (25) Loans and borrowings (400) 1 (400) (400) Income tax payable (159) 1 (159) (159) Current liabilities (821) (821) (821) Loans and borrowings (6,092) 1 (6,092) (6,092) Deferred tax (207) 1 (207) (207) Non current liabilities (6,299) (6,299) (6,299) Total liabilities (7,120) (7,120) (7,120) Total equity 10,772 10,265 10,346 NZAX listing Liquidation costs (100) (50) Value of 100% of shares 10,365 10,746 No. of shares (000) 16,458 16,458 Value per share $0.63 $ CGL draft 2018 annual report 2 Based on the Board s valuation and the discounted USG current share price 3 Colliers 2018 Valuations less 3% selling costs 4.7 Value of CGL Shares We assess the fair market value of CGL s shares to be in the range of $0.58 to $0.65 per share as at the present date under the 2 valuation approaches. The assessed value range implies price earnings (PE) and NTA multiples as set out below. The PE multiples are based on CGL s draft results for the 2018 financial year. The NTA multiples are based on CGL s NTA as at 31 March Implied Valuation Multiples 31 March 2018 (Draft) Low High Value per share $0.58 $0.65 PE multiple 11.9x 13.4x NTA multiple 0.9x 1.0x Chow Group Limited Page 18 Independent Adviser s Certificate

21 In the absence of publicly available data in respect of recent transactions involving companies that are truly comparable with CGL, we have compared the implied valuation multiples with observed multiples for 10 comparable listed New Zealand companies. However, this analysis can only provide an indication of reasonableness as the companies listed on the NZX Main Board are not directly comparable with CGL due to their size and / or the diversity of their operations. Set out at Appendix I is an analysis of historic and prospective PE multiples and historic NTA multiples for 10 property investment companies listed on the NZX Main Board. The companies are considerably larger than CGL and have more diverse operations. The observed PE and NTA multiples are based on trading prices for minority parcels and as such do not include any premium for control. Source: NZX Company Research and S&P Capital IQ, data as at 6 June 2018 The historic PE multiples range from 4.0x to 92.2x at an average of 12.4x (excluding outliers) and the prospective PE multiples range from 15.5x to 20.7x at an average of 17.8x. Source: NZX Company Research and S&P Capital IQ, data as at 6 June 2018 The historic NTA multiples range from 0.8x to 1.5x at an average of 1.0x. Given the comparative size of CGL to the comparable companies and the lack of liquidity in its shares, we consider the implied valuation multiples to be reasonable. Chow Group Limited Page 19 Independent Adviser s Certificate

22 4.8 Conclusion We assess the fair market value of 100% of the shares in CGL to be in the range of $9.5 million to $10.7 million as at the present date. This equates to $0.58 to $0.65 per share. The midpoint of the range is $0.62 per share. Chow Group Limited Page 20 Independent Adviser s Certificate

23 5. Sources of Information, Reliance on Information, Disclaimer and Indemnity 5.1 Sources of Information The statements and opinions expressed in this report are based on the following main sources of information: the Acquisition Notice the CGL annual report for the years ended 31 March, 2016 and 2017 the draft CGL annual report for the year ended 31 March 2018 the 16PAL management accounts for the year ended 31 March 2018 the Colliers 2018 Valuations the RIS Independent Adviser s Report and Appraisal Report prepared by Campbell MacPherson Limited dated 18 January 2016 the CGL Independent Adviser s Report prepared by Campbell MacPherson Limited dated 29 March 2016 data in respect of CGL from NZX Company Research and S&P Capital IQ. During the course of preparing this report, we have had discussions with and / or received information from the Chow Trusts, CGL and their respective advisers. John Chow and Michael Chow have confirmed that we have been provided for the purpose of this Independent Adviser s Report with all information relevant to the valuation of CGL that is known to them and that all the information is true and accurate in all material aspects and is not misleading by reason of omission or otherwise. Including this confirmation, we have obtained all the information that we believe is desirable for the purpose of preparing this Independent Adviser s Report. 5.2 Reliance on Information In preparing this report we have relied upon and assumed, without independent verification, the accuracy and completeness of all information that was available from public sources and all information that was furnished to us by the Chow Trusts, CGL and their respective advisers. We have evaluated that information through analysis, enquiry and examination for the purposes of preparing this report but we have not verified the accuracy or completeness of any such information or conducted an appraisal of any assets. We have not carried out any form of due diligence or audit on the accounting or other records of CGL. We do not warrant that our enquiries would reveal any matter which an audit, due diligence review or extensive examination might disclose. Chow Group Limited Page 21 Independent Adviser s Certificate

24 5.3 Disclaimer We have prepared this report with care and diligence and the statements in the report are given in good faith and in the belief, on reasonable grounds, that such statements are not false or misleading. However, in no way do we guarantee or otherwise warrant that any forecasts of future profits, cash flows or financial position of CGL will be achieved. Forecasts are inherently uncertain. They are predictions of future events that cannot be assured. They are based upon assumptions, many of which are beyond the control of CGL and its directors and management. Actual results will vary from the forecasts and these variations may be significantly more or less favourable. We assume no responsibility arising in any way whatsoever for errors or omissions (including responsibility to any person for negligence) for the preparation of the report to the extent that such errors or omissions result from our reasonable reliance on information provided by others or assumptions disclosed in the report or assumptions reasonably taken as implicit, provided that this shall not absolve Simmons Corporate Finance from liability arising from an opinion expressed recklessly or in bad faith or which cannot be disclaimed by law. Our evaluation has been arrived at based on economic, exchange rate, market and other conditions prevailing at the date of this report. Such conditions may change significantly over relatively short periods of time. We have no obligation or undertaking to advise any person of any change in circumstances which comes to our attention after the date of this report or to review, revise or update this report. 5.4 Indemnity John Chow, Michael Chow and the Chow Trusts have agreed that, to the extent permitted by law, it will indemnify Simmons Corporate Finance and its directors and employees in respect of any liability suffered or incurred as a result of or in connection with the preparation of the report. This indemnity does not apply in respect of any negligence, wilful misconduct or breach of law. John Chow, Michael Chow and the Chow Trusts have also agreed to indemnify Simmons Corporate Finance and its directors and employees for time incurred and any costs in relation to any inquiry or proceeding initiated by any person. Where Simmons Corporate Finance or its directors and employees are found liable for or guilty of negligence, wilful misconduct or breach of law or term of reference, Simmons Corporate Finance shall reimburse such costs. Chow Group Limited Page 22 Independent Adviser s Certificate

25 6. Qualifications and Expertise, Independence, Declarations and Consents 6.1 Qualifications and Expertise Simmons Corporate Finance is a New Zealand owned specialist corporate finance advisory practice. It advises on mergers and acquisitions, prepares independent expert's reports and provides valuation advice. The person in the company responsible for issuing this report is Peter Simmons, B.Com, DipBus (Finance), INFINZ (Cert). Simmons Corporate Finance and Mr Simmons have significant experience in the independent investigation of transactions and issuing opinions on the merits and fairness of the terms and financial conditions of the transactions. 6.2 Independence Simmons Corporate Finance does not have at the date of this report, and has not had, any relationship with the Chow Trusts or any conflicts of interest that could affect our ability to provide an unbiased opinion. Simmons Corporate Finance will receive a fixed fee for the preparation of this report. This fee is not contingent on the conclusions of this report. We will receive no other benefit from the preparation of this report. 6.3 Declarations An advance draft of this report was provided to John Chow and Michael Chow for their comments as to the factual accuracy of the contents of the report. Changes made to the report as a result of the circulation of the draft have not changed the methodology or our conclusions. Our terms of reference for this engagement did not contain any term which materially restricted the scope of the report. 6.4 Consents We consent to the issuing of this report in the form and context in which it is to be sent to the Company s shareholders upon their request. Neither the whole nor any part of this report, nor any reference thereto may be included in any other document without our prior written consent as to the form and context in which it appears. Peter Simmons Director Simmons Corporate Finance Limited 7 June 2018 Chow Group Limited Page 23 Independent Adviser s Certificate

26 Appendix I Comparable Companies Trading Multiples Trading Multiples Company Market Capitalisation ($m) Historic PE Multiple Prospective NTA Multiple Gross Dividend Yield Argosy Property x 16.0x 1.0x 6.9% Augusta Capital x 15.5x 1.5x 7.0% Goodman Property 1, x 19.4x 1.0x 5.5% Investore Property x 16.3x 1.0x 6.2% Kiwi Property 1, x 18.6x 1.0x 6.4% NPT x 16.6x 0.8x 7.1% Precinct Properties 1, x 20.6x 1.1x 4.7% Property for Industry x 20.7x 1.0x 4.6% Stride Property x 18.0x 1.0x 6.5% Vital Healthcare x 16.3x 0.9x 4.3% Minimum x 15.5x 0.8x 4.3% Average x 17.8x 1.0x 5.9% Average (excluding outlier) x Maximum 1, x 20.7x 1.5x 7.1% n/m: Not meaningful n/a: Not available 1 Augusta Capital historic PE multiple treated as an outlier Source: NZX Company Research and S&P Capital IQ, data as at 6 June 2018 Argosy Property Trust Argosy Property Trust s investment portfolio consists of 100 properties comprising retail, industrial and commercial properties. The company s properties are primarily located in Auckland, Hamilton, and Wellington. The firm was formerly known as ING Property Trust. Argosy Property Trust is based in Auckland. Augusta Capital Limited Augusta Capital Limited invests in commercial and industrial properties in New Zealand. The company owns 5 commercial properties comprising commercial office towers, office buildings, finance centre and business parks located in Auckland. It also provides property syndication services. The company was formerly known as Kermadec Property Fund Limited and changed its name to Augusta Capital Limited in March Augusta Capital Limited was incorporated in 2006 and is based in Auckland. Goodman Property Trust Goodman Property Trust is a real estate investment trust externally managed by Goodman (NZ) Limited. Its portfolio consists of industrial property and business space. Goodman Property Trust was founded in April 1999 and is based in Auckland. Chow Group Limited Page 24 Independent Adviser s Certificate

27 Investore Property Limited Investore Property Limited owns a portfolio of 40 large format retail properties that operate in the supermarket, building materials / hardware, and discount retail categories. The company is managed by Stride Investment Management Limited. Investore Property Limited was founded in 2015 and is based in Auckland. Kiwi Property Group Limited Kiwi Property Group Limited is New Zealand s largest listed diversified property company, investing in retail and office space. The company was formerly known as Kiwi Income Property Trust. Kiwi Property Group Limited was formed in 1992 and is based in Auckland. NPT Limited NPT Limited invests in retail, commercial and industrial properties located in Auckland, Hastings and Christchurch. The company was formerly known as The National Property Trust and changed its name to NPT Limited on 1 April It is managed by Augusta Funds Management Limited. NPT Limited was founded in 1994 and is based in Wellington. Precinct Properties New Zealand Limited Precinct Properties New Zealand Limited specialises in the investment and operation of commercial premium office properties and is one of the largest owners of premium inner-city business space in Auckland and Wellington. Property for Industry Limited Property For Industry Limited invests in industrial properties located in North Harbour, Avondale, Penrose, Mount Wellington, Manukau, Mangere, East Tamaki, Wellington and Christchurch. Property For Industry Limited was founded in 1994 and is based in Auckland. Stride Property Group Stride Property Group is a stapled group comprising Stride Property Limited and Stride Investment Management Limited. Stride Property Limited is a real estate investment firm specialising in co-investments and investments in commercial, retail and industrial real estate properties. Stride Investment Management Limited is a specialist real estate investment manager. Stride Property Group is based in Auckland. Vital Healthcare Property Trust Vital Healthcare Property Trust specialises in investments in health and medical related properties in New Zealand and Australia. It undertakes acquisition or development of medical or healthcare-related properties such as surgical and medical facilities, geriatric and continuing care facilities primary healthcare facilities and health support facilities. It was formerly known as ING Medical Properties Trust and Calan Healthcare Properties Trust. Chow Group Limited Page 25 Independent Adviser s Certificate