Cheung Kong / Hutchison Whampoa

Transcription

1 Cheung Kong / Hutchison Whampoa Restructuring to unlock value We believe the announced group restructuring is long overdue, and is expected to remove the holding company discount of Cheung Kong. Hutch s shareholders should also benefit as their share prices will also be tied to the value of the combined growth. We maintain Overweight ratings on both companies, with price targets of HK$182 and HK$124 for Cheung Kong and Hutch, respectively. Long-awaited restructuring to unlock value. Cheung Kong and Hutch announced that the two companies will merge and then separate into two distinct companies, CKH Holdings and CK Property, which will be focused as a global conglomerate and pure property company, respectively. The two will become sister companies instead of having a vertical control relationship. The immediate impact is the likely removal of the holding company discount derived from Cheung Kong s holding in Hutch. We expect 42-46% potential upside for Hutch and Cheung Kong, driven mainly from the narrowing of its discount to NAV. Hong Kong Head of HK Research, Conglomerates and Property Cusson Leung AC Bloomberg JPMA LEUNG <GO> Leo Ng (852) leo.ng@jpmorgan.com J.P. Morgan Securities (Asia Pacific) Limited No change in the value of the combined group. We currently estimate the combined NAV of Cheung Kong and Hutch to be HK$1,035bn. After eliminating the Hutch shares being held by Cheung Kong and the added value from the acquisition of 6.42% of Husky Energy, we estimate the NAV of the newly formed combined entity to be HK$858.9bn or HK$222 for each CKH share. We believe the potential upside for Cheung Kong or Hutch shareholders is the same, as they are tied to the value of the newly formed entities at a pre-set share exchange ratio. A four-step rerating process. We believe the potential upside of Cheung Kong and Hutch shareholders will comprise four steps: 1) a re-rating of Cheung Kong s property assets to its peer valuation of a 37% discount to NAV; 2) a further re-rating of the property assets to our long-term target of 25%; 3) the re-rating of the property assets that Hutch will put into CK Property; and 4) the re-rating potential from the continued improvement in the ROIC of CKH s non-property assets. Plenty of room for major shareholder to increase stake. After the restructuring, the Li family/trust holding in CKH and CK Property will be just above 30%, from their previous holding of Cheung Kong at 43.4%. We believe the major shareholder will have room to increase its holding by a max of 2% a year until it starts to feel more secure about its control. Equity Ratings and Price Targets Mkt Cap Rating Price Target Company Ticker (HK$ mn) Price (HK$) Cur Prev Cur Prev Cheung Kong Holdings 1 HK 289, OW n/c Hutchison Whampoa Limited 13 HK 372, OW n/c Source: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change. All prices as of 09 Jan 15. See page 27 for analyst certification and important disclosures, including non-us analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 Figure 1: Group holding structure pre- and post-transaction Restructuring to unlock value Cheung Kong and Hutch jointly announced on 9 January a group restructuring exercise, aimed at creating two new companies, CK Hutchison Holdings (CKH Holdings) and CK Property, to be effected by a proposed merger between Cheung Kong and Hutchison. The non-property business of the combined group will be with CKH Holdings, while the pure property business, including the existing property business from Hutchison, will be spun off into a newly listed company (listing by introduction), CK Property. Source: Company data. Before we explore the details of the transactions, the expected resulting impacts are summarized as follow: 1) Li family/trust will hold 30.15% of both companies from the current holding of 43.42% in Cheung Kong with the rest being held by minority shareholders in both companies; 2) CK Property will be a 100% property company with no more holdings in Hutch s shares; 3) CKH will be 100% focused on being a globally diversified conglomerate by removing the undervalued property business; 4) Combined net asset value and earnings of CKH Holdings and CK property will be no different from the simple additions of Cheung Kong s and Hutch s NAV and earnings. But we believe the simplified group structure is likely to affect how investors ascribe value to those assets. 2

3 Why the restructuring? 1) Elimination of the holding company discount resulting from the vertical holding structure; 2) Increasing overlap of Cheung Kong s investment in non-property businesses versus Hutch s businesses; 3) Undiscovered valuation of the property assets inside Hutch which is likely to be better valued if under a pure property company; 4) A rebalancing of liquidity within the group. Table 1: Steep discount for Hutch and CK stub HK$/shr. HK$ m Hutch's current share price ,621 Hutch's NAV ,166 Discount -41% (263,545) Cheung Kong's stub price ,882 Cheung Kong's stub NAV ,848 Discount -52% (109,966) Source: Bloomberg, J.P. Morgan estimates Figure 2: Cheung Kong stub discount chart 80% 60% 40% 20% 0% Long term avg: -45% Current: -52% -20% -40% -60% -80% -100% -120% Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Source: Bloomberg, J.P. Morgan estimates Which one is better? Cheung Kong or Hutch? After this restructuring proposal, we believe there should be no difference in the potential upside of Cheung Kong and Hutch as the share prices of both entities will be tied to the valuation of the same entities, i.e. CKH Holdings and CK Property. Each Cheung Kong share will be tied to 1 CKH share and 1 CK Property share, while each Hutch share will be tied to CKH shares and CK Property shares. Given the exchange ratio of is fixed based on the last five-day average share price of Hutch and Cheung Kong at HK$88.28 and HK$129.06, respectively, the potential upside of the two shares should be the same up to the closing of the transaction. 3

4 Some may argue that the exchange ratio of is too low, given that the long-term average ratio of Hutch to Cheung Kong s share price is about 0.82 from However, this does not matter, in our view. Figure 3: Hutch-Cheung Kong share price ratio Hutch to CK ratio Source: Bloomberg, J.P. Morgan. Table 2: Sensitivity analysis of share exchange ratio to Hutch s target value For example, if this restructuring were carried out at a time when Hutch was at HK$100 and its share ratio with Cheung Kong was at 0.775, given that the value of CKH and CK Property is constant independent of Hutch's share price, the potential upside for Hutch would in fact be smaller at 34% at a higher share price level. Share exchange ratio Hutch price HK$ Target value from CKH + CK Prop Upside potential % % % % % % % % % % % % % Source: J.P. Morgan estimates With a fixed entitlement to CKH and CK Property, if Cheung Kong s share price were running too far ahead of Hutch, investors could sell-out their holding in Cheung Kong and buy Hutchison for the same exposure to CKH and CK Prop. How is value to be created? We believe the rating path of Cheung Kong (same for Hutch) will be driven by four components: 4

5 Table 3: Breakdown of value enhancement upon restructuring 1) Re-rating of Cheung Kong s property assets to its peer valuation of a 37% discount to NAV due to the elimination of the holding company discount from its holding in Hutch shares; 2) Further re-rating of the property assets to our long-term target of 25%, given the high asset turnover model that the group has always been practising and the pure property nature of the company; 3) The property assets that Hutch will put into CK Property are likely to be subject to a re-rating as well when they were previously included in Hutch at a blended discount of 41%; 4) The largest chunk of re-rating potential will from the continued improvement in the ROIC of CKH s non-property assets. HK$/shr Current share price of Cheung Kong Cumulative HK$/shr. Cumulative Upside potential Rerating of Cheung Kong's property to current peer discount % Further rerating of CK Prop to target discount of 25% % Re-rating of Hutch's property assets from current 41% to 25% discount % Re-rating of CKH s assets from current 41% discount to target of 15% % Source: J.P. Morgan estimates Figure 4: Value creation upon restructuring from rerating of CK and Hutch assets Source: J.P. Morgan estimates Current Target post Current share price of Cheung Kong transaction Rerating of Cheung Kong's property to current peer discount Further rerating of CK Prop to target disccount of 25% Re-rating of Hutch's property assets from current 41% to 25% discount Re-rating of CKH's assets from current 41% discount to target of 15% Risk of the transaction The Cheung Kong reorganization proposal requires approval from more than 75% of the voting rights of the shareholders present and voting, in person, or by proxy, at the court meeting. At the same time, votes cast against the scheme must not exceed 10% of the voting rights. The headcount test does not apply. None of the Cheung Kong shareholders will be required to abstain from the voting at the Cheung Kong court meeting. Another element of the restructuring that requires voting in a court meeting is the Hutchison proposal. More than 75% of approval and not more than 10% of objections from Hutch s independent shareholders applies in this case. The headcount test does not apply as well. 5

6 We believe the likelihood of the deal being voted down is relatively low. The attractiveness of the restructuring will only become smaller when the two shares continue to go up, in our view. Is the family reducing or increasing exposure? The Li family/trust was holding 43.42% of Cheung Kong and an effective stake of 24.2% in Hutch. After the restructuring, it would be holding 30.15% of both CKH and CK Property. Some would argue that the major shareholder is reducing its exposure to property while increasing its stake in the non-property business. However, we believe the major shareholder's 30.15% holding in both companies is just at its starting point. From having tight control of the Cheung Kong/Hutch group through a vertical control structure, we believe the 30.15% holding level is a bit low and the major shareholder is allowed to increase its holding by a maximum of 2% per year until it hits 50%. How is the transaction to be done? The transaction will comprise four steps: 1) The Cheung Kong reorganization proposal. A new company, CKH Holdings, will first be formed and registered in the Cayman Islands. This will become the holding company of Cheung Kong which will be implemented through a share exchange under a scheme of arrangement. Each Cheung Kong share will be exchanged into one share in CKH Holdings. Figure 5: Cheung Kong reorganization CKH Holdings 1 new CKH share 1 existing Cheung Kong share Cheung Kong existing shareholders 43.42% 56.58% Trust/ Li family Other Cheung Kong shareholders Source: Company data, J.P. Morgan. Table 4: Step 1 Setting up CKH Holding in Cayman and acquiring all Cheung Kong shares at a ratio of 1 for 1 Shares Post step 1 Shares Existing Shareholding of Cheung Kong (mn) % Shareholdings of CKH Holding (mn) % Trust/Li family 1, % Trust/Li family 1, % Other Cheung Kong shareholders 1, % Other Cheung Kong shareholders 1, % Total 2, % Total 2, % Cheung Kong's 5 day average share price = HK$ = market value of CKH. Source: Company data, J.P. Morgan. Rationale: The setting up of CKH is the necessary step to group all assets under one holding company before any realignment. Why can't it be Cheung Kong serving this purpose? It is because Cheung Kong is incorporated in Hong Kong and under the Hong Kong company ordinance, a company cannot distribute dividends in excess of its distributable income in the retained earnings. Given that the distribution of the CK Property shares to shareholders is a necessary step of the whole restructuring exercise, a Cayman Islands registered company, i.e. CKH Holdings, will not be restricted by this rule. A Cayman Islands registered company can make distribution out of profits and, subject to solvency tests and its memorandum and articles of association, out of share premium. 6

7 Figure 6: Simplified shareholding structure after Cheung Kong reorganization Trust/ Li family Former other Cheung Kong shareholders 43.42% 56.58% CKH Holdings (listing by introduction) Cheung Kong Property businesses Cheung Kong Non- Property businesses Source: Company data, J.P. Morgan 2) The Hutch group will acquire 61.4m shares of Husky (6.24% of Husky Energy) from the Li family/trust that currently control Cheung Kong and hold 35.57% of Husky shares in exchange for new CKH Holdings shares in the ratio of one Husky share for CKH Holdings share. Figure 7: Husky share exchange 6.24% Husky shares Trust/ Li family CKH Holdings 84.4 mn CKH shares Source: Company data, J.P. Morgan Table 5: Step 2 CKH acquires 6.24% Husky shares from Trust Shares Post step 2 Shares Shareholdings of CKH Holding (mn) % Shareholdings of CKH Holding (mn) % Trust/Li family 1, % Trust/Li family 1, % Other Cheung Kong shareholders 1, % Trust/Li family (additional shares from sale of Husky) % Other Cheung Kong shareholders 1, % Total 2, % Total 2, % 45.41% Husky's 5 days average share price = CAD27.01 = HK$ ; implying conversion ratio of Source: Company data, J.P. Morgan 7

8 Figure 8: Simplified shareholding structure after Husky share exchange Trust/ Li family Formerother Cheung Kong shareholders 45.41% 54.59% 29.33% additional 6.24% CKH Holdings Husky shares CheungKong Property businesses Cheung Kong Non- Property businesses Source: Company data, J.P. Morgan Rationale: The sale of the 6.24% stake of Husky by the Li family/trust is to secure an additional stake in CKH Holdings. Without this transaction, the Li family/trust would have ended up with only 27.97% in CKH Holdings after the restructuring. This would be a big obstacle for the Li family/trust to increase its shareholding in CKH Holdings in the future to above 30% as this triggers a General Offer (GO) requirement. With this transaction, as the Li family/trust will start off from 30.15%, it can continue to acquire shares in CKH Holdings for a maximum of 2% per year until it crosses 50%. 3) CKH Holdings and Hutch will enter into a share exchange under a scheme of arrangement for each share of Hutch not held by Cheung Kong will be exchanged for newly issued CKH Holdings shares in the ratio of one Hutchison share for CKH Holdings share. Figure 9: Takeover of Hutchison CKH Holdings CKH share 1 Hutchison share Hutchison existing shareholders Source: Company data, J.P. Morgan. Rationale: This is to merge Hutchison into CKH Holdings in exchange for its shares in CKH Holdings. The exchange ratio of is a ratio between the five-day average share price of Cheung Kong and Hutchison at HK$ and HK$88.28, respectively. The ratio does not represent a discount to Hutch shareholders. Given the value to Hutch and Cheung Kong is tied to the same entity, CKH, the lower exchange ratio for Hutch shareholders simply reflects a difference in the nominal share price between Hutch and Cheung Kong. 8

9 Table 6: Step 3 CKH acquires all Hutchison shares at a ratio of 1 for Shares Post step 3 Shares Shareholdings of CKH Holding (mn) % Shareholdings of CKH Holding (mn) % Trust/Li family 1, % Trust/Li family 1, % Trust/Li family (additional shares from sale of % 45.41% Trust/Li family (additional share from its direct % 30.15% Husky) holding in Hutch) Other Cheung Kong shareholders 1, % Other Hutch shareholders 1, % 69.85% Other Cheung Kong shareholders 1, % Total 2, % Total 3, % Hutch's 5 days average share price = HK$88.28; implying a conversion ratio of Source: Company data, J.P. Morgan. Figure 10: Simplified shareholding structure after takeover of Hutchison Trust/ Li family Former other Cheung Kong shareholders Former other Hutchison shareholders 30.15% 33.95% 35.90% 29.33% CKH Holdings 100% CheungKong Property businesses CheungKong (ex-holdings in Hutch) Non-Property businesses Hutchison 40.21% 100% 100% Husky Hutchison Property businesses HutchisonNon-Property businesses Source: Company data, J.P. Morgan. 4) Spin-off of CK Property. Following the merger with Hutch, all of CKH Holdings development and rental property and hotel business (from both Cheung Kong and Hutch) will be transferred to CK Property, a newly formed holding company to be registered and listed in Hong Kong, for a combination of new CK Property share and cash. The cash portion of the consideration is HK$55bn. All CK Property shares in issue will then be distributed by CKH Holdings to the then eligible CKH Holdings shareholders through a distributionin-specie on a one-for-one basis. Figure 11: Spin-off and listing of CK Property CKH Holdings 1 CK Property share All CKH shareholders Source: Company data, J.P. Morgan. 9

10 Rationale: After the spin-off, this will result in two distinct companies, with CKH focusing on the non-property business while CK Property will become a 100% property company. Existing Hutch and Cheung Kong minority shareholders will hold 35.9% and 33.95% of both companies, respectively. Table 7: Step 4 CKH distributes CK Property in specie and spin-off for listing by introduction CKH Post step 4 CKH CK Property Shareholdings of CKH Holding Shares (mn) % Shares (mn) % Shares (mn) % Trust/Li family 1, % Trust/Li family 1, % 1, % Other Hutch shareholders 1, % Other Hutch shareholders 1, % 1, % Other Cheung Kong shareholders 1, % Other Cheung Kong shareholders 1, % 1, % Total 3, % Total 3, % 3, % Source: Company data, J.P. Morgan. Figure 12: Simplified shareholding structure after the spin-off and listing of CK Property Trust/ Li family Former other Cheung Kong shareholders Former other Hutchison shareholders 30.15% 33.95% 35.90% 29.33% CKH Holdings CK Property 40.21% Cheung Kong Non- Property businesses Hutchison Non-Property businesses Cheung Kong Property businesses Hutchison Property businesses Husky Source: Company data, J.P. Morgan. Consolidated infrastructure projects Consolidated property projects 10

11 Effect on Valuation The restructuring does not involve any fund raising by the group through any IPO but with two new companies, CKH Holdings and CK Property, replacing Cheung Kong and Hutchison. We are adjusting our NAV estimates for Cheung Kong and Hutch by eliminating the market value of Cheung Kong s holding in Hutch shares and the addition of the 6.24% stake in Husky Energy to be purchased from Li family/ Trust. After the adjustments, the NAV of the CKH and CK Prop are at HK$576bn and HK$283bn, respectively. Table 8: Reconciliation of CK/Hutch and CK Prop/CKH s NAV HK$ m Cheung Kong's NAV 399,027 Hutchison NAV 636,166 Total 1,035,193 Elimination of Cheung Kong's holding in market value -186,180 Added value of 6.24% of Husky 9,889 Adjusted total 858,902 CKH's NAV 575,914 CK Property's NAV 282,989 Total 858,902 Source: J.P. Morgan estimates Given each Cheung Kong share will be tied to 1 CKH Holdings plus 1 CK Prop shares and each Hutch share will be tied to CKH Holdings plus CK Property shares, the valuation of both Cheung Kong and Hutch will be tied to the valuation of CKH Holdings and CK Prop. Table 9: Current discount to NAV of property peers Stock code NAV discount (%) Henderson Land 12 HK -35% Sino Land 83 HK -41% SHKP 16 HK -36% Wheelock 20 HK -34% Average -37% Source: Bloomberg, J.P. Morgan estimates CK Property will become one of the largest pure property companies in Hong Kong, and we believe it should deserve a premium valuation to its peers. The value of its investment properties and property development is about the same and its exposure to China property development is about 21% of NAV. Large cap developers in Hong Kong are trading at an average discount of 37%. However, our long-term target discount for large scale developers is about 25% and we believe this should be around the fair value of CK Property. 11

12 Table 10: Current discount to NAV of conglomerate peers Stock code NAV discount (%) Wheelock 20 HK -34% Wharf 4 HK -37% Hopewell 54 HK -47% Jardine Matheson JM SP -19% Average -34% Source: Bloomberg, J.P. Morgan estimates CKH Holdings will be a globally diversified conglomerate after the restructuring. Given the improvement in ROIC above its WACC, we believe the operations should deserve to trade at a tight discount of 15%. Table 11: Implied price target for CK and Hutch based on target valuation of CKH and CK Property Current price Based on target valuation of peers HK$ Value of the new holdings Value of CKH Value of CK Property Upside potential Cheung Kong shareholders % Hutch shareholders % Source: Target prices for Cheung Kong and Hutch After the reorganization, we estimate the NAV for CKH Holdings and CK Property at HK$149.2/shr and HK$73.3/shr, respectively. Based on a target discount of 15% and 25% for CKH and CK Prop, we estimate their fair values to be at HK$126.8 and HK$55.0, respectively. As each share of Cheung Kong will receive 1 CKH and 1 CK Prop share, our price target for Cheung Kong is now at HK$182, representing about 46% potential upside from current levels or 41% potential upside from its five-day average price of HK$ Our price target for Hutch is now HK$124, based on x fair value of CKH Holdings plus x fair value of CK Prop. This represents about 42% potential upside from current levels of Hutch s share price or 41% potential upside from its five-day average share price of HK$ Our previous price target for Hutch was HK$133, while we are maintaining the same target discount at 15%, the decline in price target was mainly driven by the decline in the value of its listed investment in Husky Energy over the last three months. 12

13 Table 12: NAV breakdown of Cheung Kong and Hutchison before transaction Cheung Kong Property development Hutch HK$ m HK$/shr % HK$ m HK$/shr % Hong Kong 60, % Hong Kong Property development % China 37, % China 37, % Overseas 7, % Overseas % Farmland 2, % Farmland % Sub-total 106, % Sub-total 37, % Property investment Property investment Hong Kong 35, % Hong Kong 95, % China 17, % China % Sub-total 52, % Sub-total 95, % Hotel 31, % Hotel 15, % Property 190, % Property 147, % market value 186, % Container ports 118, % Other listed investments 15, % Retail operations 132, % Infrastructure 28, % Husky Energy 57, % Aircraft leasing 20, % Cheung Kong Infrastructure 130, % Telecom - others 16, % Gross asset value 440, % 3 Europe 116, % Net debt (40,986) (17.7) Gross asset value 719, % NAV 399, Net debt (83,687) (19.6) Source: J.P. Morgan estimates NAV 636,

14 Table 13: Pro-forma NAV breakdown of CKH Holdings and CK Property CKH CK Property HK$ m HK$/shr % HK$ m HK$/shr % Container ports 118, % Property development Hong Kong 60, % Retail operations 132, % China 74, % Overseas 7, % Husky Energy 67, % Farmland 2, % Sub-total 143, % Cheung Kong Infrastructure 130, % Infrastructure 28, % Property investment Aircraft leasing 20, % Hong Kong 130, % Sub-total 178, % China 17, % Sub-total 147, % Telecom - others 16, % 3 Europe 116, % Hotel 46, % Sub-total 132, % Other listed investments 15, % Gross asset value 645, % Net debt (69,673) (18.1) Gross asset value 337, % Net debt (55,000) (14.3) NAV 282, NAV Source: J.P. Morgan estimates 575,

15 Timeline of the transaction Entire transaction to be completed by end of 1H15 Cheung Kong and Hutchison expect the entire transaction will be completed around the end of 1H15. In particular, subject to the completion of the Cheung Kong Reorganization Proposal, it is expected that the CKH Holdings Circular will be dispatched to CKH shareholders around the end of March or early April The precise date depends on the Court schedule and the availability of hearing dates. Also, the Hutchison Scheme Document is expected to be dispatched within seven days of completion of the Cheung Kong Reorganization Proposal. Table 14: Timeline of the transaction Date End March/Early April 2015 Within 7 days after the completion of Cheung Kong Reorganization Proposal Around end of 1H15 Event CKH Holdings Circular to be dispatched to the CKH Holdings Shareholders subject to completion of the Cheung Kong Reorganization Proposal Hutchison Scheme Document to be dispatched Proposals completed Source: Company data Higher FY15 dividends expected for both CK and Hutch shareholders If the merger and spin-off proposals become effective, an interim dividend will be declared by each of CKH Holdings and CK Property during the FY15 interim announcement for results from 1 January If an existing CK or Hutch shareholder continues to hold both the CKH and CK Property shares received, CK and Hutch expect the combined per share dividend the new companies will pay for FY15 will be more than the total dividend per CK or Hutch share paid in FY14 (excluding the special dividends paid). Going forward from FY16, it is expected that the dividend payout ratio will be higher that that in FY15. 15

16 Changes in earnings and NAV changes The transaction itself does not have any impact on the earnings and NAV of both companies. Our estimate changes are primarily driven by earnings revisions for Husky Energy in light of falling oil prices as well as depreciation of the euro. In particular, FY14-16E core net profits for Hutchison are revised down by 5%, 13% and 8%, respectively. Our Dec-15 NAV estimate is also cut by 3%, mainly to reflect the lower market price of listed investments such as Husky. Therefore, Cheung Kong s FY14-16E earnings estimates are also adjusted down by 2-8% accordingly due to a lower contribution from Hutchison. Dec-15 NAV is also reduced by 8% mainly to reflect the lower market price of Hutchison. Table 15: Earnings and NAV estimate change for Hutchison FY14E FY15E FY16E Net profit (HK$ mn) Old 48,672 35,828 38,207 New 46,925 31,089 35,049 % change -4% -13% -8% Core net profit (HK$ mn) Old 33,751 35,828 38,207 New 32,004 31,089 35,049 % change -5% -13% -8% EPS (HK$) Old New % change -4% -13% -8% EPS ex-hutch (HK$) Old New % change -5% -13% -8% NAV (HK$) Dec-15 Old New % change -3% Source: J.P. Morgan estimates Table 16: Earnings and NAV estimate change for Cheung Kong FY14E FY15E FY16E Net profit (HK$MM) Old 39,353 32,142 32,545 New 38,433 29,704 30,889 % change -2% -8% -5% Core net profit ex-hutch (HK$MM) Old 15,021 14,223 13,436 New 14,985 14,169 13,375 % change 0% 0% 0% EPS (HK$) Old New % change -2% -8% -5% EPS ex-hutch (HK$) Old New % change 0% 0% 0% NAV (HK$) Dec-15 Old New % change -8% Source: J.P. Morgan estimates 16

17 Cheung Kong Holdings Key catalyst for the stock price: Upside risks to our view: Downside risks to our view & PT: Successful restructuring of CK and Hutch Upcoming large-scale primary launches in HK such as HEMERA Higher-than-expected margin from Hong Kong development properties Earlier-than-expected cancellation of property cooling measures in Hong Kong Delay in key new launches Prices of new launches are substantially below market expectations Construction cost rises Interest rate rises Key financial metrics FY13A FY14E FY15E FY16E Valuation and price target basis Revenues (HK$) 32,314 50,939 52,933 48,014 Our Dec-15 PT of HK$182 is based on the anticipated Revenue growth (%) 4% 58% 4% -9% receipt of: 1) one CKH Holdings share valued at a target EBITDA (HK$) 19,847 20,287 19,187 18,073 discount of 15% to its Dec-15 NAV of HK$149.2; and EBITDA margin (%) 61% 40% 36% 38% 2) one CK Property share valued at a target discount of Tax rate (%) 11% 11% 13% 12% 25% to its Dec-15 NAV of HK$73.3 Net profit (HK$) 33,454 38,433 29,704 30,889 EPS (HK$) EPS growth (%) 24% 15% -23% 4% NAV breakdown (Dec-15E) DPS (HK$) BVPS (HK$) Operating cash flow (HK$ mn) 17,607 25,034 21,774 20,513 Free cash flow (HK$ mn) 22,958 25,191 21,919 20,610 Interest cover (X) Net margin (%) 104% 75% 56% 64% Sales/assets (X) Debt/equity (%) 11.2% 9.8% 8.1% 6.8% Net debt/equity (%) 2.0% -0.5% -3.6% -6.2% ROE (%) 9.4% 10.2% 7.6% 7.6% Key model assumptions FY14E FY15E HK residential price chg -20% 0% HK office rental chg 3-5% 2-5% HK retail rental chg 3-5% 2-3% HK office cap rate 4.5-5% 5-5.5% HK retail cap rate % % China office cap rate 8-9% % China retail cap rate 7.5-9% % Source: Company, J.P. Morgan estimates Source: J.P. Morgan estimates Sensitivity analysis NAV EPS JPMe vs. consensus, change in estimates Sensitivity to Dec-15 FY15E EPS FY14E FY15E 5% chg in HK residential price 0.8% 0.8% JPMe old % chg in HK inv prop rents 0.4% 0.0% JPMe new bps chg in HK cap rate 0.5% n/a % chg -2% -8% 5% change in Hutchison share price 2.5% n/a Consensus Source: J.P. Morgan estimates Source: Bloomberg, Company and J.P. Morgan estimates Comparative metrics CMP Mkt Cap P/E NAV discount P/BV YTD LC HK$Bn FY14E FY15E Dec-15 FY14E FY15E Stock perf. Cheung Kong % % Henderson Land % % SHKP % % New World Development % % Sino Land % % Kerry Properties % % Wheelock & Co % % Wharf Holdings % % Source: Bloomberg, Company and J.P. Morgan estimates Prices are as of 9 January Hutch 44% Others 10% Overseas 2% HK Dev 15% China inv 4% HK Inv 8% Hotels 8% China dev 9% 17

18 Hutchison Whampoa Limited Key catalysts for the stock price: Key catalysts for the stock price include:1) Successful restructuring of CK and Hutch; 2) continued consolidation in European 3G operations; and 3) improvement in the company's return profile Downside risks to our view: Key risks to our view include: 1) shareholders voting down the proposed transaction which will forbid any value enhancement; 2) deterioration in the capital market preventing any asset monetization potential; 3) regulatory risks for further consolidation in the European telecom sector; and 4) a sudden increase in capex plans Key financial metrics FY13A FY14E FY15E FY16E Valuation and price target basis Revenues (HK$ mm) 256, , , ,848 Our Dec-15 PT of HK$124 is based on the anticipated receipt Revenue growth (%) 5% -6% 6% 5% of 1) CKH Holdings share (CKH valued at a target EBITDA (HK$ mm) 45,152 51,888 53,675 57,560 discount of 15% to its Dec-15 NAV of HK$149.2); and 2) EBITDA margin (%) 17.6% 21.6% 21.1% 21.5% CK Property share (CK Property valued at a target discount of Tax rate (%) 23% 16% 20% 20% 25% to its Dec-15 NAV of HK$73.3) Net profit (HK$ mm) 31,112 46,925 31,089 35,049 EPS (HK$) EPS growth (%) 20% 51% -34% 13% 2015E NAV by business segment (before discount) DPS (HK$) BVPS (HK$) Operating cash flow (HK$ mn) 45,052 69,891 72,660 78,218 Free cash flow (HK$ mm) (2,320) 36,821 37,270 41,741 Interest cover (X) Net margin (%) 12% 19.5% 12.2% 13.1% Sales/assets (X) Debt/equity (%) 48% 45% 42% 40% Net debt/equity (%) 30% 20% 14% 8% ROE (%) 7.7% 7.2% 6.6% 7.1% Key model assumptions FY14E FY15E Retail revenue growth 6.0% 6.8% 3G EBIT (HK$ m) 7,738 9,166 Capex (HK$ m) 23,176 23,939 Source: Company and J.P. Morgan estimates Source: J.P. Morgan estimates Sensitivity analysis EBITDA EPS JPMe vs. consensus, change in estimates Sensitivity to FY14E FY14E EPS FY14E FY15E 10% chg in retail margin -2.1% -2.7% JPMe old (HK$) bp chg in debt cost 0.0% -2.6% JPMe new (HK$) % chg in ECT throughput -1.4% -1.5% % chg -4% -13% Source: J.P. Morgan estimates Consensus Source: Bloomberg, J.P. Morgan estimates Comparative metrics 1/9/2015 Price Mkt Cap P/E EV/EBITDA P/BV YTD LC US$Mn FY14E FY15E FY14E FY15E FY14E FY15E Stock perf. Hutchison Whampoa , % Beijing Enterprise Holding , % Shun Tak , % Jardine Matheson , % Wharf , % MTR Corp , % Swire Pacific , % Citic Pacific , % Shanghai Industrial , % Fosun Intl , % NWS Holdings , % China Travel , % Source: Bloomberg, J.P. Morgan estimates Telecom, 2% Energy & infra, 26% 3 Group, 16% Retail, 19% Ports, 17% Property, 20% 18

19 Cheung Kong Holdings Company Data Shares O/S (mn) 2,316 Market Cap (HK$ mn) 289,056 Market Cap ($ mn) 37,283 Price (HK$) Date Of Price 09 Jan 15 Free Float(%) 53.9% 3M - Avg daily vol (mn) M - Avg daily val (HK$ mn) M - Avg daily val ($ mn) 58.1 HSI 23, Exchange Rate 7.75 Price Target End Date 31-Dec-15 Cheung Kong Holdings (Reuters: 0001.HK, Bloomberg: 1 HK) HK$ in mn, year-end Dec FY12A FY13A FY14E FY15E FY16E Revenue (HK$ mn) 31,106 32,314 50,939 52,933 48,014 Net Profit (HK$ mn) 27,035 33,454 38,433 29,704 30,889 Core Profit (HK$ mn) 27,035 33,454 38,433 29,704 30,889 EPS (HK$) Core EPS (HK$) Core EPS growth (%) 10.5% 23.7% 14.9% (22.7%) 4.0% DPS (HK$) ROE 8.3% 9.4% 10.2% 7.6% 7.6% P/E (Core) P/BV (x) BVPS (HK$) RNAV/Share Dividend Yield 2.5% 2.8% 2.8% 2.8% 2.8% Source: Company data, Bloomberg, J.P. Morgan estimates. Investment Thesis, Valuation and Risks Cheung Kong Holdings (Overweight; Price Target: HK$182.00) Investment Thesis We believe the potential upside of Cheung Kong will come from the restructuring proposal, whereby all of its holding company discount will be removed. The company is also likely to be re-rated as a pure property company. Valuation Our Dec-15 PT of HK$182 is based on the anticipated receipt of: 1) one CKH Holdings share valued at a target discount of 15% to its Dec-15 NAV of HK$149.2; and 2) one CK Property share valued at a target discount of 25% to its Dec-15 NAV of HK$

20 Source: J.P. Morgan estimates Dec-15 HK$MM HK$/sh % of GAV Property Development Hong Kong Lux ury residential 32, % Mass residential 27, % HK Dev 60, % China Res/Com 37, % China Dev (sqm) 37, % Other overseas Dev 7, % Total Property Development 104, % Investment Property Hong Kong Office 14, % Retail 19, % Industrial/others 1, % HK Inv pty 35, % China Residential 2, % Office 2, % Retail 12, % China Inv pty 17, % Total Investment Property 52, % Hotel Hong Kong HK hotel total 29, % China Existing 1, % Total Hotel 31, % Agricultural Landbank 2, % Investments Hutchison Whampoa Ltd (0013.HK) 186, % TOM Group Ltd. (2383.HK) % CK Life (0775.HK) 3, % Hutchison Telecom Int'l (2332.HK) % Hutchison Telecom Hong Kong (0215.HK) % Fortune REIT (FRT SP) 3, % Prosperity REIT (808 HK) % Hui Xian REIT (87001 HK) 4, % ARA Asset Management (ARA SP) % Infrastructure 28, % Securities 1, % Other investments (incl infra) 43, % Gross Asset Value 420, % Gross debt (incl perpetual debt) (48,649) (21.0) Less Cash & Short Term Deposits 30, Est Net Interest Bearing Debt (17,996) (7.8) Associated debt (2,990) (1.3) NAV 399, Risks to Rating and Price Target The key downside risk to our price target and rating would be shareholders voting down the proposed transaction which would forbid any value enhancement. On the fundamentals side, downside risks for Cheung Kong include delays in key launches, the price of new launches being substantially below market expectations, a rise in construction costs and an increase in interest rates. 20

21 Cheung Kong Holdings: Summary of Financials Income Statement Cash flow statement HK$ in millions, year end Dec FY13 FY14E FY15E FY16E HK$ in millions, year end Dec FY13 FY14E FY15E FY16E Revenues 32,314 50,939 52,933 48,014 EBIT 19,522 19,945 18,829 17,697 % change Y/Y 3.9% 57.6% 3.9% (9.3%) Depr. & amortization EBIT 19,522 19,945 18,829 17,697 Change in working capital (3,657) 3,500 2,500 2,500 % change Y/Y 26.1% 2.2% (5.6%) (6.0%) Others (12,515) (17,240) (10,788) (13,253) EBIT Margin 60.4% 39.2% 35.6% 36.9% Cash flow from operations 17,607 25,034 21,774 20,513 Net Interest (104) (176) (166) (110) Earnings before tax 38,372 43,431 34,358 35,194 Capex % change Y/Y 24.4% 13.2% (20.9%) 2.4% Disposal/(purchase) 0 (6,218) 0 0 Tax (4,206) (4,745) (4,426) (4,110) Net Interest (9) as % of EBT 11.0% 10.9% 12.9% 11.7% Free cash flow 22,958 25,191 21,919 20,610 Net income (reported) 33,454 38,433 29,704 30,889 % change Y/Y 23.7% 14.9% (22.7%) 4.0% Equity raised/(repaid) 3, Core net profit 33,454 38,433 29,704 30,889 Debt raised/(repaid) (6,093) (3,945) (5,326) (4,527) % change Y/Y 23.7% 14.9% (22.7%) 4.0% Other (836) Shares outstanding 2,316 2,316 2,316 2,316 Dividends paid (7,896) (8,657) (8,657) (8,657) EPS (reported) (HK$) Beginning cash 21,167 33,197 38,716 45,813 % change Y/Y 23.7% 14.9% (22.7%) 4.0% Ending cash 33,197 38,716 45,813 52,447 Core EPS (HK$) DPS (HK$) % change Y/Y 23.7% 14.9% (22.7%) 4.0% Balance sheet Ratio Analysis HK$ in millions, year end Dec FY13 FY14E FY15E FY16E %, year end Dec FY13 FY14E FY15E FY16E Cash and cash equivalents 33,197 38,716 45,813 52,447 EBIT margin 60.4% 39.2% 35.6% 36.9% Accounts receivable 2,313 2,313 2,313 2,313 Net margin 103.5% 75.4% 56.1% 64.3% Inventories 79,784 79,784 80,784 81,784 SG&A/Sales Others Current assets 117, , , ,455 Sales per share growth 3.9% 57.6% 3.9% (9.3%) LT investments 10,407 16,625 16,625 16,625 Sales growth 3.9% 57.6% 3.9% (9.3%) Net fixed assets 38,754 39,835 40,953 42,107 Net profit growth 23.7% 14.9% (22.7%) 4.0% Total Assets 428, , , ,743 EPS growth 23.7% 14.9% (22.7%) 4.0% Liabilities Interest coverage (x) ST loans 2,438 2,438 2,438 2,438 Net debt to total capital 1.9% (0.6%) (3.8%) (6.6%) Payables 11,699 13,199 14,699 16,199 Net debt to equity 2.0% (0.5%) (3.6%) (6.2%) Others 1,329 1,329 1,329 1,329 Sales/assets Total current liabilities 15,466 16,966 18,466 19,966 Assets/equity Long-term debt 39,452 35,507 30,181 25,654 ROE 9.4% 10.2% 7.6% 7.6% Other liabilities 1,098 1,098 1,098 1,098 ROCE 4.3% 4.3% 3.8% 3.6% Total Liabilities 56,016 53,571 49,745 46,718 Shareholder's equity 369, , , ,643 BVPS Source: Company reports and J.P. Morgan estimates. 21

22 Hutchison Whampoa Limited Company Data 52-week Range (HK$) Market Cap (HK$ mn) 372,600 Market Cap ($ mn) 48,058 Shares O/S (mn) 4,263 Price (HK$) Date Of Price 09 Jan 15 3M - Avg daily vol (mn) M - Avg daily val ($ mn) 67.4 Exchange Rate 7.75 HSI 23, Price Target End Date 31-Dec-15 Price Target (HK$) Hutchison Whampoa Limited (Reuters: 0013.HK, Bloomberg: 13 HK) HK$ in mn, year-end Dec FY12A FY13A FY14E FY15E FY16E Revenue (HK$ mn) 243, , , , ,848 Net Profit (HK$ mn) 25,897 31,112 46,925 31,089 35,049 Recurring EPS (HK$) DPS (HK$) P/E (x) EV/EBITDA (x) Dividend Yield 2.4% 2.6% 2.9% 3.2% 3.2% FCF Yield (0.4%) (0.6%) 9.9% 10.0% 11.2% Source: Company data, Bloomberg, J.P. Morgan estimates. Investment Thesis, Valuation and Risks Hutchison Whampoa Limited (Overweight; Price Target: HK$124.00) Investment Thesis We see further re-rating potential for Hutch driven by: 1) continued improvement in operating returns; 2) the growing importance of diversification in times of economic uncertainty; and 3) a pipeline of confirmed and potential corporate actions such as further M&A in the European 3G operation. With the current restructuring proposal, there is likely to be value enhancement from its injection of property assets into the newly formed company as well. Valuation Our Dec-15 PT of HK$124 is based on the anticipated receipt of: 1) CKH Holdings share (CKH valued at a target discount of 15% to its Dec-15 NAV of HK$149.2); and 2) CK Property share (CK Property valued at a target discount of 25% to its Dec-15 NAV of HK$73.3). 22

23 Estimated Dec-15 NAV breakdown Interest Methodology HK$ mn Attr. HK$ mn HK$/shr % of NAV Properties 147, , % Investment properties Office 5.25% Yield 55,227 55, % Retail 5.25% Yield 15,525 15, % Others 5.5% to 10% Yield 24,275 24, % Sub-total 95,027 95, % China property DCF 37,036 37, % Hotels EBITDA Yield 7% 15,221 15, % Container ports Various 155, , % HPH Trust 27.6% JPM valuation. PT=USD ,653 13, % Rest of the World 10.5x 15E EV/EBITDA 104, , % Retail operations 75% Last transaction price 177, , % Energy and infrastructure 333, , % Husky Energy 35% Mkt price 166,357 57, % Cheung Kong Infrastructure 78% JPM valuation. PT=HKD , , % Telecommunication 23,442 16, % Hutchison Telecom Australia 88% Mkt price 5,612 4, % HTHKH 65% JPM valuation. PT=HKD ,830 11, % 3G Various 132, , % Gross NAV 719, % Adjusted net debt -83, NAV 636, Source: J.P. Morgan estimates Risks to Rating and Price Target The key downside risk to our price target and rating would be shareholders voting down the proposed transaction which would forbid any value enhancement. On the fundamentals front, we believe one of the key risks is a sharp deterioration in capital markets. Under such circumstances, the potential for asset monetization would be unlikely. Furthermore, regulatory considerations could prevent consolidation of the European 3G operations. For example, the European Commission has extended its investigation into Hutch s merger with O2 by 20 working days. Any sudden increase in the company's capex is also likely to derail our expectation of an improvement in its free cashflow. 23

24 Hutchison Whampoa Limited: Summary of Financials Income Statement Cash flow statement HK$ in millions, year end Dec FY13 FY14E FY15E FY16E HK$ in millions, year end Dec FY13 FY14E FY15E FY16E Revenues 256, , , ,848 Cash flow from operations 45,052 69,891 72,660 78,218 % change Y/Y 5.4% (6.2%) 5.7% 5.4% Capex (47,372) (23,176) (23,939) (24,527) EBITDA 45,152 51,888 53,675 57,560 Cash flow from investing (35,758) (8,255) (23,939) (24,527) % change Y/Y 21.2% 14.9% 3.4% 7.2% Cash flow from financing (31,591) (18,747) (22,781) (23,219) EBIT 29,302 33,788 35,006 38,291 % change Y/Y 26.9% 15.3% 3.6% 9.4% EBIT Margin 11.4% 14.1% 13.8% 14.3% Change in cash for year (22,297) 42,888 25,940 30,472 Net Interest (8,391) (8,602) (8,421) (8,446) Earnings before tax 50,196 67,539 53,053 58,484 % change Y/Y 23.3% 34.6% (21.4%) 10.2% Beginning cash 107,948 85, , ,479 Tax (11,349) (10,721) (10,512) (11,484) Closing cash 85, , , ,951 as % of EBT 22.6% 15.9% 19.8% 19.6% Net income (reported) 31,112 46,925 31,089 35,049 % change Y/Y 20.1% 50.8% (33.7%) 12.7% Shares outstanding 4,263 4,263 4,263 4,263 EPS (reported) % change Y/Y 20.1% 50.8% (33.7%) 12.7% Balance sheet Ratio Analysis HK$ in millions, year end Dec FY13 FY14E FY15E FY16E HK$ in millions, year end Dec FY13 FY14E FY15E FY16E Cash and cash equivalents 85, , , ,951 EBITDA margin 17.6% 21.6% 21.1% 21.5% Accounts receivable 69,083 69,083 69,083 69,083 Operating margin 11.4% 14.1% 13.8% 14.3% Inventories 20,855 20,855 20,855 20,855 Net margin 12.2% 13.3% 12.2% 13.1% Others Current assets 175, , , ,889 Sales per share growth 5.4% (6.2%) 5.7% 5.4% LT investments 25,070 25,070 25,070 25,070 Sales growth 5.4% (6.2%) 5.7% 5.4% Net fixed assets 177, , , ,608 Net profit growth 20.1% 50.8% (33.7%) 12.7% Total Assets 815, , , ,427 EPS growth 20.1% 50.8% (33.7%) 12.7% Liabilities Interest coverage (x) Short-term loans 18,159 6,069 6,676 7,344 Payables 86,812 86,812 86,812 86,812 Net debt to equity 30.5% 20.0% 14.3% 8.4% Others 3,319 3,319 3,319 3,319 Sales/assets Total current liabilities 108,290 96,200 96,807 97,475 Assets/equity Long-term debt 212, , , ,747 ROE 7.7% 7.2% 6.6% 7.1% Other liabilities 18,360 18,360 18,360 18,360 ROCE 3.4% 4.2% 4.0% 4.2% Total Liabilities 339, , , ,582 Shareholder's equity 476, , , ,845 BVPS (HK$) Source: Company reports and J.P. Morgan estimates. 24

25 JPM Q-Profile Cheung Kong (Holdings) Limited (HONG KONG / Financials) As Of: 09-Jan-2015 Quant_Strategy@jpmorgan.com Local Share Price Current: Mth Forward EPS Current: PE (1Yr Forward) Current: 8.4x P/E Relative to Hong Kong Index Current: x 30.0x 25.0x 20.0x 15.0x 10.0x 5.0x 0.0x Earnings Yield (& Local Bond Yield) Current: 12% Dividend Yield (Trailing) Current: % 14% 12% 10% 8% 6% 4% 2% 0% ROE (Trailing) Current: Price/Book (Value) Current: 0.8x Aug/00 Aug/00 Sep/00 Apr/01 Apr/01 Jun/01 Dec/01 Dec/01 Mar/02 Aug/02 Aug/02 Dec/02 Apr/03 Apr/03 Sep/03 Dec/03 Dec/03 Jun/04 Aug/04 Aug/04 Mar/05 Apr/05 Apr/05 Sep/06 Aug/06 Aug/06 Apr/07 Jun/07 Apr/07 Dec/07 Dec/07 Mar/08 Aug/08 12Mth fwd EY Hong Kong BY Proxy Aug/08 Dec/08 Apr/09 Apr/09 Sep/09 Dec/09 Dec/09 Jun/10 Aug/10 Aug/10 Mar/11 Apr/11 Apr/11 Sep/12 Aug/12 Aug/12 Jun/13 Apr/13 Apr/13 Mar/14 Dec/13 Dec/13 Dec/14 Aug/14 Aug/ x Aug/00 Aug/00 Aug/00 Apr/01 Apr/01 Apr/01 Dec/01 Dec/01 Dec/01 Aug/02 Aug/02 Aug/02 Apr/03 Apr/03 Apr/03 Dec/03 Dec/03 Dec/03 Aug/04 Aug/04 Aug/04 Apr/05 Apr/05 Apr/05 Aug/06 Aug/06 Aug/06 P/B Trailing Apr/07 Apr/07 Apr/07 Dec/07 Dec/07 Dec/07 Aug/08 Aug/08 Aug/08 Apr/09 Apr/09 Apr/09 Dec/09 Dec/09 Dec/09 P/B Forward Aug/10 Aug/10 Aug/10 Apr/11 Apr/11 Apr/11 Aug/12 Aug/12 Aug/12 Apr/13 Apr/13 Apr/13 Dec/13 Dec/13 Dec/13 Aug/14 Aug/14 Aug/ x 1.5x 1.0x x 0.00 Aug/00 Apr/01 Dec/01 Aug/02 Apr/03 Dec/03 Aug/04 Apr/05 Aug/06 Apr/07 Dec/07 Summary Cheung Kong (Holdings) Limited As Of: 9-Jan-15 HONG KONG TICKER 1 HK Local Price: Financials Real Estate Management & Devel EPS: Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg 12mth Forward PE 8.43x % 245% 67% 78% P/BV (Trailing) % 151% 24% 30% Dividend Yield (Trailing) 2.72x % 49% -5% -4% ROE (Trailing) % 324% -23% 0% Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, JPMorgan Quantitative & Derivative Strategy Aug/08 Apr/09 Dec/09 Aug/10 Apr/11 Aug/12 Apr/13 Dec/13 Aug/14 0.0x Aug/00 Apr/01 Dec/01 Aug/02 Apr/03 Dec/03 Aug/04 Apr/05 Aug/06 Apr/07 Dec/07 Aug/08 Apr/09 Dec/09 Aug/10 Apr/11 Aug/12 Apr/13 Dec/13 Aug/14 25