Cheung Kong/Hutch s Bold Move

Transcription

1 Cheung Kong/Hutch s Bold Move Q&A on the prospect of the group becoming a global play, with a valuation to match See important disclosures, including any required research certifications, beginning on page 46.

2 Contents Q1 Q2 Q3 Q4 Q5 Q6 What is the main motive behind this reorganisation? Why now? Does the reorganisation signal that the Li family is bearish on Hong Kong/China property or even Hong Kong/China overall? Why is there investment value to be unlocked in Cheung Kong Group? Does this reorganisation signal the beginning of Chapter 3 for Cheung Kong Group? What is Cheung Kong Group likely to do in its Chapter 3? Will the reorganisation unlock value for Cheung Kong Group? Appendix 39 Company section: Cheung Kong 41 Please also see: Swire Properties: Initiation: a large nurturing reward awaits The Hong Kong Property Toolkit: A step-by-step guide to the past, present and future of the Hong Kong Property Sector 22 May 2014 Autumn 2013 Jonas Kan, CFA (852) (jonas.kan@hk.daiwacm.com) Jonas Kan, CFA (852) (jonas.kan@hk.daiwacm.com)

3 Contributing Daiwa Analyst: Jonas Kan, CFA (852) Thoughts on the Cheung Kong Group reorganisation On 25 September 1979, at the close of trade in London, HSBC announced it was selling its stake in Hutchison Whampoa to Cheung Kong for HKD639m. The next day, one local newspaper ran the story under the headline, A bomb has exploded at the heart of Central, hinting at the impact this move was to have on the business landscape in Hong Kong. Thirty-five years later, on 9 January 2015, Cheung Kong Group announced another radical reorganisation, which, while having no parallels with the historic event of 1979, has huge symbolic significance. This latest move is likely to have important implications for the group s future direction, and could change the way the group, and possibly Hong Kong family business groups as a whole, are perceived and priced in the investing world. This reorganisation marks the beginning of what we refer to as Chapter 3 in the development of Cheung Kong Group, which will comprise Cheung Kong Hutchison Holdings and Cheung Kong Property assuming the group s reorganisation proposal is approved by shareholders (25 February). We see the unlocking of value emerging as a major theme for this group in the years to come, and believe Cheung Kong Group is making a concerted attempt to become a truly premier global company, with a valuation to match. As we see it, the investment implications of such a change have only just started to unfold. Our goal with this report is to share our thoughts on 6 inter-related questions raised by this move, and the implications for the group, as well as Hong Kong family business groups. Jonas Kan, Head of Hong Kong and China Property

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5 Question 1 What is the main motive behind this reorganisation? Why now? - 1 -

6 Q1: What is the main motive behind this reorganisation? Why now? Is the outcome more important than the motive? Our read is that this reorganisation will allow several objectives to be achieved at the same time. From the perspective of investors and shareholders, we think the most important aspect of the reorganisation is the outcome rather than the motive. As we see it, the main significance of the reorganisation is that it will create a structure that will be conducive to unlocking value for shareholders of both Cheung Kong and Hutchison, as well as to the ensuring the sustained growth and development of the many businesses of Cheung Kong Group in various geographical areas for many years to come. In the press conference of 9 January, when the reorganisation was announced, Victor Li, deputy chairman of Cheung Kong (depicted in our cover image along with KS Li and Canning Fok, Group Managing Director of Hutchison) noted that management had been frustrated by the discounted valuation assigned to the group for such a long period, but had been uncertain as to how to remove such a discount. At some point in 2014, management hit upon the reorganisation idea. It took the senior managements of both Cheung Kong and Hutchison several months to work out the details and address all the issues involved in a group reorganisation, and after these had been resolved, the deal was announced in early Li s description of how the reorganisation idea came about may appear a tad simplistic and undramatic to some, but it is not inconceivable that the real situation was as simple as that, in our view. Transaction overview Source: Company Note: (1) Calculated based on the average closing price of Cheung Kong and Hutchison shares for the five trading days up to and including 7 January 2015 and the average closing price of Husky for the five trading days up to and including 6 January

7 Removal of the layered holding structure Source: Company Note: (1) Based on Husky Share Exchange and Hutchison Proposal exchange ratios That said, the reorganisation will not be a small and easy exercise. It will involve the reshuffling of a sizeable amount of assets within the Cheung Kong Hutchison Group (totalling over HKD800bn in terms of asset value on the books) and the formation of a new holding company in the Cayman Islands to hold all of the group s businesses. It will also require Cheung Kong (or CKH Holdings) to issue 1.5bn new shares to the current minority shareholders of Hutchison Whampoa to buy out their interests, which will result in the Li family & Trust s stake in Cheung Kong (or CKH Holdings) being diluted from 43.4% to 28% although the trust s stake would be restored to above the 30% takeover threshold (30.15% to be exact) through the Li family swapping some 6.2% in Husky Energy for 84.4m shares in the future CKH Holdings. This whole exercise will engage many senior managers of Cheung Kong and Hutchison Whampoa, and, as such, should throw light on a number of issues related to Cheung Kong Group, in our view. In this report, we present our thoughts on some of them. Finally, it s done. As controversial as this reorganisation exercise may be, we believe that from the perspective of a Cheung Kong investor, they could use the word finally to describe this deal, in that it is a welcome, albeit longtime-coming, development. For investors and the global investment community, we think the deal makes a lot of sense, though in substance, it amounts to merely a rearrangement of assets (the only thing added to the Cheung Kong Hutchison business portfolio is a 6.2% additional stake in Husky Energy). By organising the total assets owned by Cheung Kong and Hutchison into two separate and distinct entities, the group will become more transparent and, thus, appealing more to institutional investors. We see at least 5 outcomes from the reorganisation gifts, if you like that would be of value to institutional investors: - 3 -

8 1. A more focused and streamlined corporate structure Source: Company Note: 1) Hutchison holds 78.16% stake in CKI as at 7 January 2015, hence interests in certain JVs with Cheung Kong 2) Based on the exchange ratio for Husky Share Exchange 2. Enhanced size and scale for the whole group Source: Company Notes: 1) total assets as at 30 June ) See later chart. 3) Calculated as Husky s market capitalisation as at 6 January 2015 of c.cad25bn * the exchange rate as at 6 January 2015 of HKD per CAD * 6.24%. 4) Announced on 4 November 2014: Consideration of c.usd1.89bn acquisition of up to 45 aircraft and c.usd0.73bn acquisition of up to 15 aircraft through venture with MCAP. 5) As at 31 December ) As of 30 June

9 3. Significant expansion in the size and scale of the group s property business Source: Company Notes: 1) For FY13, 2) as at 30 November 2014, 3) for rental properties, excluding hotels, 4) for development properties, excludes agricultural land and projects under planning stages, 5) on attributable basis, 6) in terms of GFA, including hotels, and 7) in terms of number of rooms 4. Greater financing flexibility Source: Company Note: the proposals will result in certain financial creditors being entitled to require the repayment or mandatory pre-payment of certain indebtedness of Cheung Kong Group and the Hutchison Group. The relevant companies have available sufficient resources to effect any such repayment or prepayment. The proposals are not therefore expected to have any adverse effect on Cheung Kong Group, the Hutchison Group or their respective creditors, according to the company

10 4. Greater financing flexibility (cont d) Source: Company Notes: 1) Exchange rate: 1GBP = HK$ (as at 31 March 2014), 1AUD = HK$ (as at 30 June 2014), 1CAD = HK$ (as at 30 September 2014). 2) CKI effective = CKI s direct shareholding + CKI s indirect interest through its 38.87% stake in Power Assets. 3) Hutchison effective = Hutchison s indirect shareholding through 78.16% stake in CKI. 4) CKH Holdings effective = Cheung Kong s interest + Hutchison s effective interest as a result of the Merger Proposal. 5. Expected increase in dividend payout ratios Source: Company Note: 1) Assuming existing Cheung Kong and Hutchison shareholders continue to hold both CKH Holdings and CK Property shares after the completion of the Merger Proposal and Spin-off Proposal. A strong signal. We think this reorganisation sends a strong signal about management s commitment to unlocking value in the group for all shareholders. Instead of trying to wait for a low enough price to privatise the business, it appears that Cheung Kong Group has done precisely the opposite organising the group along more focused business lines, eliminating layers in the corporate structure to make it easier for investors to buy what they want to get exposure to. In this sense, we think this allows for greater transparency in disclosing the operating performances of its different business lines. And in this case, the reorganisation should heighten the group s appeal as an investment proposition for global investors, in our view

11 Should the move be seen as part of the group s succession plan? From the perspective of the group s longer-term development, we think opening it up more to the scrutiny of the capital markets and global investors, and having more streamlined and focused business lines should help in terms of attracting and retaining professional talent. The new structure is probably more conducive to the group achieving sustained and balanced earnings and NAV growth over an extended period of time, in our view. Another issue worth pondering is this: after decades of building a significant business spanning over 50 countries and including at least 6 major businesses (plus a few others currently being nurtured), Cheung Kong Group has grown into a large and complex business entity, and it is likely to become even more international and global in the years to come. As things stand today, it has over USD110bn in business assets, over USD50bn in annual revenue, and well over 260,000 employees globally. It must be a daunting task to manage such a large business group. But it is still feasible to do so today because the group is still managed by its founder and a few people who have been closely involved in its development over the past few decades. Thus, we think how to create a platform/structure that is the most conducive to driving the group s development probably carries considerable weight with the people who have worked hard to build the group into what it has become today. Accordingly, we think the reorganisation can also be seen as part of the group s succession plan, and believe the plan should help in terms of ensuring that the group has the best chance of establishing itself as a major global company for many more years to come. The many and diverse businesses of Cheung Kong Group across the globe Total assets* (HKDm) Operating performance** (HKDm) Cheung Kong Hutchison CKH Revenue EBITDA EBIT Remarks Ports - 99,125 99,125 34,179 11,447 7,358 One of the world's largest privately owned container terminal operators, holding interests in 52 ports in 26 Property & hotels countries and handling 78.3m TEUs in ,675 95, ,001 56,578 27,746 27,410 17m sq feet of rental property and 170m sq ft of development landbank in Hong Kong, China, Singapore, London, etc. Retail - 44,960 44, ,147 14,158 11,771 One of the world's largest health and beauty retailers, with over 10,500 retail stores in 25 markets worldwide. Energy - 52,416 52,416 59,481 14,779 7,208 One of the largest energy companies in Canada, with operations in Canada, the US, China, Taiwan, Greenland and Indonesia. Infrastructure 21, , ,069 42,460 24,443 19,130 One of the leading investors in global infrastructure with operations in the UK, Canada, Australia, New Zealand, the Netherlands, Hong Kong and China. Telecommun ications - 295, ,428 81,048 16,248 5,814 A leading global operator of mobile telecoms and other telecoms services, with operations in various other markets, such as Europe, Hong Kong, Australia, Hong Kong, Macau, Indonesia, Vietnam and Sri Lanka. Total 159, , , , ,821 78,691 A multinational conglomerate business group operating in 52 countries across the world with over 260,000 employees Source: Companies * as at June 2014 ** based on the latest full-year results (2013) Is capitalising on M&A opportunities in Europe s mobile telecoms sector another important consideration for the managements of Cheung Kong and Hutchison? In our view, the crux of Hutchison s strategy for its European telecoms business is to become an important player there, which would allow it to get a reasonable share of the industry revenue/cash flow, as well as profits, which stood at over USD70bn and USD25bn in 2000, on our estimates (based on just the mobile telecoms business in the 8 markets where Hutchison had a presence). Note that such revenue and profits were highly valued by the global stock markets before these operators made heavy investments in obtaining 3G licences the mobile businesses of the listed European telcos commanded an equity market valuation of close to USD2tn in total in 1999, of which about over USD800bn was attributable to the 8 markets where Hutchison had a business presence, on our estimates

12 The combined equity market value of its Orange and VoiceStream businesses exceeded USD25bn in 2000, representing many times what Hutchison had put into them the total equity investment attributable to Hutchison at the peak during for these 2 businesses was under USD2bn, on our estimates (note that Hutchison s investment in VoiceStream was effectively funded by the repayment of its shareholders loan extended to Orange after its IPO in 1996). The exceptionally high returns Hutchison realised from its investment in the European telecoms business were probably another important consideration in its USD38bn subsequent investment in the 3 Group, in our view. It is true though that the profitability and equity-market valuations of mobile telecoms businesses in Europe have declined considerably since the early 2000s. But is this because the wealth and income of many in countries in Europe have collapsed since then? Or have mobile phones become a lot less important to consumers than before? It is clear that mobile phones are now a necessity for many people in Europe and almost every other part of the world, and yet the aggregate profitability of the European mobile telecoms industry has not benefitted much, according to our industry research. In comparison, Verizon in the US appears to have done better than the telecoms companies in Europe over the past few years. Share price performance of Verizon vs. Vodafone (Rebased) Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Source: Bloomberg, Daiwa Verizon Vodafone The reasons for the decline in the profitability of the European mobile telecoms industry since 2010 are too complex to go into here. But we do wonder whether the operators in the mobile telecoms industry in Europe have fallen into a vicious competition cycle, which has resulted in them spending money on driving a large pool of unstable and low-arpu customers from moving among different operators. This may have resulted in subscribers paying less to the industry despite the fact that mobile phones have become more important for consumers. In any case, it appears to us that one major aspect of Cheung Kong Group s strategy in Europe is to focus on controlling costs and attracting more higher-quality post-paid customers to ensure that it has strong staying power and is in a strong position to take advantage of any industry consolidation/rationalisation opportunities as they arise. And it has been moving in this direction for quite some time, in our view starting with it acquiring Orange s operation in Austria in 2012 and then O2 s Ireland operation in Investments in M&A opportunities in the mobile telecoms sector in Europe by Hutchison Date February 2012 August 2013 January 2015 Remarks Acquired Orange's operation in Austria for EUR130m Acquired O2's operation in Ireland for Eur850m Has proposed to acquire O2's UK operation for GBP9.25bn (up to GBP1bn in profit sharing when the cash flow from the combined O2 and 3 UK has passed a certain pre-agreed level. Source: Company, Hong Kong Economic Times - 8 -

13 Over the past 12 years, the 3 Group has gone from being a new entrant in Europe, with virtually no customer base, into a player with around 10% of the UK and Italy markets, and a cost and revenue structure that allows it to go marginally beyond the breakeven point (it has reported a modest positive EBIT since 2010 and modest EBITDA after capex since 2013). Given that the telecoms industry is characterised by large fixed costs and limited variable costs, it probably does not need a telecoms expert to point out there are likely to be significant benefits associated with having a much expanded subscriber base. Financial performance of the 3 Group (HKDm) H14 Revenue - 2,023 15,742 37,502 50,668 59,909 60,372 57,590 64,205 74,288 58,708 61,976 31,063 Customer service operating cost (29,272) (26,343) (12,219) Net customer service revenue ,436 35,633 18,844 Other revenue ,851 1, Other operating expenses (1,839) (14,591) (36,296) (47,192) (49,166) (56,671) (55,980) (40,108) (37,580) (39,461) Operating expenses (14,397) (17,364) (9,162) Total CACs - (917) (8,423) (11,444) (5,494) (5,732) (3,457) (17,306) (17,909) (24,760) (7,677) (6,613) (3,546) EBITDA/(LBITDA) (1,839) (13,485) (28,977) (21,134) (3,992) (2,494) ,716 10,067 9,213 12,671 6,504 Depreciation & amortisation (231) (6,200) (14,454) (15,146) (16,004) (17,342) (14,737) (9,098) (9,544) (9,500) (6,515) (7,815) (4,222) Exceptional gain/ (losses) - - 4, ,898 2,945-3, EBIT (2,070) (19,685) (38,449) (36,280) (19,996) (17,938) (10,857) (8,922) 2,929 1,024 3,145 4,856 2,282 Capex (29,842) (24,557) (33,515) (26,371) (28,360) (26,070) (29,661) (8,259) (9,894) (10,980) (11,346) (10,176) (4,876) EBITDA capex (31,681) (38,042) (62,492) (47,505) (32,352) (28,564) (28,726) (8,083) (1,178) (913) (2,133) 2,495 1,628 EBITDA margin (%) -667% -184% -56% -8% -4% 2% 0% 14% 14% 16% 20% 21% EBIT margin (%) -973% -244% -97% -39% -30% -18% -15% 5% 1% 5% 8% 7% Source: Company, Daiwa * excluding Hutchison Telecom (Australia) from 2012 Given that the group has been working on building its presence in the mobile telecoms sector in Europe for such a long time, we do not think it is a surprise that it is interested in opportunities that will help it improve the profitability of its telecoms division. However, the UK and Italy are much larger markets than Austria or Ireland (where the group acquired its competitors in 2012 and 2013). Seizing new opportunities would require balance-sheet and capital strength, both of which are essential to ensuring that the group has the best bargaining position on issues relating to industry consolidation in Europe. We do believe that the group s plans to reorganise should enhance its ability to capitalise on M&A opportunities in the European mobile telecom sector, and it may not be a coincidence that the group announced its proposed acquisition of O2 in the UK two weeks after it announced the reorganisation. Note that after acquiring O2, 3 UK should emerge as the largest mobile operator in the UK, with a much larger cash flow and earnings base. While GBP9.25bn (and GBP1bn as a deferred payment that is conditional upon the actual operating performance of O2 UK) is a large sum, it should translate to around a 6.5x EV/EBITDA multiple, based on Telefonica s latest reported results, or around 4x EV/ EBITDA after adjusting for GBP3-4bn in synergy benefits expected by the group. Note also that the deal is likely to be funded by a GBP6bn loan and Cheung Kong Group has been negotiating to bring in private equity investors to take up to a 30% stake in this investment. As such, the equity proportion of this investment is not that large and the group should be able to further lower its risk exposure if it were to list 3 UK a topic that we explore further in Question

14 Impact of potential O2 acquisition on the relative market position of various operators in the UK Before acquiring O2 After acquiring O2 No. of Market No. of Market 3Q14 subscribers share subscribers share EBITDA Brands Owners (m) (%) (m) (%) (GBPm) Everything Everywhere Deutsche Telekom/ France Telecom 31.0* 36.8% % Not disclosed O2 Telefonica % 0 0.0% 362 Vodafone Vodafone % % UK Hutchison Whampoa % - 0.0% Not disclosed New 3 UK CKH Holdings % % % Source: Companies, Hong Kong Economic Times, Daiwa Note:*Including subscribers from MVNOs, totalling about 5m The Cheung Kong/Hutchison valuation gap has allowed the reorganisation to take place. Over the past 14 years, the relative valuation of Cheung Kong versus Hutchison has narrowed, and this will allow the share swap to work. Had Hutchison been trading at a higher valuation at the time the deal was announced, the Li family & Trust s stake in the new CKH Holdings would have fallen to well below 30% although such a scenario was prevented by the family swapping its Husky Energy shares for CKH shares. Had the Cheung Kong/Hutchison relative valuation changed in Hutchison s favour, the deal would have been a lot more difficult to finalise. (Note: while some investors may worry that the deal has undervalued Hutchison shares, we think Hutchison s underperformance relative to Cheung Kong may well continue. After all, investors do not appear to be favouring oil and European telecoms plays at this point. With the plunge in oil prices over recent months, we think the Li family & Trust has not chosen the best time and the best price to swap its stake in Husky Energy.) Cheung Kong and Hutchison: relative share price performance since 2000 (Rebased) Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Cheung Kong Hutchison Source: Bloomberg, Daiwa All in all, we believe that investment value in the group is there to be unlocked, and that this is central to the reorganisation exercise. As we see it, this is the most important factor, after which comes the need for a succession plan, the relative valuation gap between Cheung Kong and Hutchison over the past 14 years, the group s determination to capitalise on M&A opportunities in the European telecoms sector, among others

15 Question 2 Does the reorganisation signal that the Li family is bearish on Hong Kong/China property or even Hong Kong/China overall?

16 Q2: Does the reorganisation signal that the Li family is bearish on Hong Kong/China property or even Hong Kong/China overall? This has been one popular interpretation of the announcement by some media outlets and commentators. It is difficult to comment on the motives, but we think the following will help put into perspective the seemingly notable reduction in the Li family & Trust s stake in the group s property businesses. Redistribution of assets among Cheung Kong and Hutchison shareholders Pre-transaction Effective stake Li family & Trust Other Cheung Kong shareholders Other Hutchison Shareholders Cheung Kong 43.42% 56.58% - Hutchison 24.22% 28.27% 47.52% Post-transaction Effective stake Li family & Trust Other Cheung Kong shareholders Other Hutchison Shareholders Cheung Kong 30.15% 33.95% 35.90% Hutchison 30.15% 33.95% 35.90% Change Effective stake Li family & Trust Other Cheung Kong shareholders Other Hutchison Shareholders Cheung Kong -13.3% -22.6% 35.9% Hutchison 5.9% 5.7% -11.6% Source: Company, Daiwa From the numbers above, Li family & Trust s relative exposure to the HK China property business will be reduced, as its stake in Cheung Kong s assets will go from 43.3% to 30.15%. That said, if we look more closely, the extent of the reduction in the family s stake in property assets is less than it appears. Yes, the family s stake in property assets has been reduced to 30.15%, from 43.42%, but the deal would also result in the family and Cheung Kong shareholders raising their exposure to Hutchison s property components. Effectively, the Li family & Trust s exposure to Hutchison s rental properties, as well as its China and overseas landbank, rises from 24.2% to 30.15% (see following table). Changes in various parties effective exposure to various assets Pre-transaction Effective stake Other Cheung Kong shareholders Other Hutchison shareholders Li family & Trust Total Cheung Kong's HK/China property assets & others 43.42% 56.58% - 100% Cheung Kong's Hutchison stake 43.42% 56.58% - 100% Hutchison's property assets 24.20% 28.30% 47.50% 100% Hutchison's non-property assets 24.20% 28.30% 47.50% 100% Post-transaction Effective stake Other Cheung Kong shareholders Other Hutchison Shareholders Li family & Trust Total Cheung Kong's HK/China property assets & others 30.15% 33.95% 35.90% 100% Cheung Kong's Hutchison stake 30.15% 33.95% 35.90% 100% Hutchison's property assets 30.15% 34.00% 35.90% 100% Hutchison's non-property assets 30.15% 34.00% 35.90% 100% Change Effective stake Other Cheung Kong shareholders Other Hutchison Shareholders Li family & Trust Total Cheung Kong's HK China property assets & others % % 35.90% % Cheung Kong's Hutchison stake % % 35.90% % Hutchison's property assets 5.95% 5.70% % 5.95% Hutchison's non-property assets 5.95% 5.70% % 5.95% Source: Company, Daiwa

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

18 As reported in various media stories, what the Cayman Island registration means is that if there are major legal disputes, the Court of Final Appeal would be in the UK. One could say this implies that the group has less confidence in the Hong Kong/China legal framework. But Common Law originated in the UK and this legal system has a much longer history of being used in the UK than in Hong Kong. And from the viewpoint of institutional shareholders in Cheung Kong and Hutchison, we believe it s natural for them to prefer the company to be registered in the Caymans. We can t rule out that there might be insurance issues involved in the deal, but we don t think there is evidence to suggest that this is the main motive for the whole reorganisation exercise. In our opinion, Cheung Kong Group is an investor and business builder at heart. Our read is that it goes wherever it sees business value and this might be the reason why now it operates in over 50 countries. The group started in Hong Kong and has substantial assets in Hong Kong and China. Given that it is trying to become a global company, it is only natural for it to invest more in overseas assets as it builds up its international presence. Importantly, if Cheung Kong Group s future direction is to become an increasingly global company, it would make the strongest business sense for it to choose to register in a place that provides the greatest flexibility and convenience to meet its objective of becoming this global enterprise. So, registering in the Caymans could well imply that the family is acting in the best long-term interests of the group s shareholders. We also think it is important to consider that investing is an interactive and dynamic activity, and that the investing environment in Hong Kong and China is evolving. That Cheung Kong Group has not had made many new investments in Hong Kong and China in recent years does not necessarily mean that this won t change in the future. The following table shows the geographical distribution of Hutchison s assets over the past 13 years. Note that for all the talk about the group selling Hong Kong and China assets, as well as reducing its exposure to Hong Kong/China, the actual magnitude of reduction in Hutchison s total assets in Hong Kong and China doesn't appear to be that large the group s China assets were still growing as at December 2013, and the figure at end-2013 actually was 1.8x the level it was 10 years ago (see below). Geographical distribution of Hutchison s total assets (HKDm) Total assets Hong Kong 111, , , , , , , , , , , , ,494 Mainland China 37,260 36,476 43,764 43,291 53,981 61,630 69,640 72,205 70,184 58,510 65,933 76,202 80,483 Asia and Australia 24,357 40,998 50,763 69,521 46,256 51,176 78,288 72,273 64,362 92,893 90,873 96,821 92,811 Europe 163, , , , , , , , , , , , ,229 Americas and others 94, , , , , , , , ,064 44,762 48,426 50,735 48,030 Finance & Investments and others 122,128 88, , , , , , , , , , , , , , , ,522 % of total assets Hong Kong 26% 24% 19% 20% 20% 19% 19% 20% 19% 16% 15% 13% 13% Mainland China 9% 7% 7% 7% 9% 9% 9% 11% 10% 8% 9% 9% 10% Asia and Australia 6% 8% 8% 11% 8% 8% 10% 11% 9% 13% 13% 12% 11% Europe 38% 39% 38% 44% 46% 46% 41% 42% 42% 40% 45% 41% 45% Americas and others 22% 21% 28% 19% 18% 19% 22% 16% 19% 6% 7% 6% 6% 100% 100% 100% 100% 100% 100% 100% 100% 100% 83% 88% 82% 85% Source: Company, Daiwa Thus, our read is that the various suggestions made about the Li family s views in Hong Kong/China are not conclusive. We think the only indisputable conclusion to be made about the deal is that as it has resulted in the Li family & Trust and Cheung Kong shareholders raising their relative exposure to Hutchison which should imply that the Li family can t be bearish on the prospects of Hutchison s businesses and assets. It is possible that the Li family s view is that there is more upside or more under-priced assets under Hutchison than Cheung Kong, but this is different from saying that the family is bearish on the outlook of Hong Kong/China property or Hong Kong/China as a whole. And we don t think the group has embarked on this massive exercise merely to optimise on the family s exposure to various businesses or to move assets out of Hong Kong/China. This brings us to what we see as the main theme in this reorganisation exercise: which is that there is investment value to be unlocked within the group and one objective of the exercise is to facilitate the unlocking of such value

19 Question 3 Why is there investment value to be unlocked in Cheung Kong Group?

20 Q3: Why is there investment value to be unlocked in Cheung Kong Group? We believe the basic reason there is value to be unlocked in Cheung Kong Group shares is the substantial business that has been built up at both Hutchison and Cheung Kong over the past 20 years. As illustrated below, the total capex incurred over the past 20 years by Hutchison (before taking into account that funded by Husky and Cheung Kong Infrastructure s own resources) amounts to some HKD492bn. While Cheung Kong s financial disclosure is not as detailed as Hutchison s, our read is that, over the past 20 years, it has kept its position as one of the largest residential developers in Hong Kong, with one of the largest hotel and serviced suites portfolios in Hong Kong comprising some 8,710 rooms, a sizeable China landbank of 80m sq ft, as well as a moderate presence in the Singapore property market. And it has achieved all of this with a falling gearing ratio and growing dividends. Dividends declared by Cheung Kong and Hutchison (HKD) Source: Company, Bloomberg Major business building at the Cheung Kong level over the past 20 years 20 years ago Now Hotels No material presence One of the largest hotel owner-operators in Hong Kong with 9,360 rooms (of which 8,710 are in Hong Kong) China property No material presence A sizeable player in China with 80m sf ft of development landbank and over HKD5bn in property sales profits Infrastructure No presence Has developed CKI and put it under Hutchison in exchange for Hutchison shares in a group reorganisation in 1997 Source: Daiwa Cheung Kong Note also that over the past 10 years, Cheung Kong Group has sold some of its business assets at achieved prices that were often multiples of its investment cost. We see this as evidence of industry participants endorsement of the business value created by the group, and buyers of these assets include some of the largest players in their respective industries, such as Vodafone, Port of Singapore Authority, P&G. Moreover, over the past 20 years, the group s EBITDA and EBIT at the Hutchison level have risen continuously, reaching HKD96bn and HKD65bn in 2013, versus HKD30bn and HKD23bn, respectively, back in 2001 an impressive achievement by any standard. However, the Cheung Kong Group s massive business building does not seem to have gained much recognition in the equity-market valuation. Hutchison

21 Asset realisation in Hutchison s established businesses in recent years Deals Date Buyers Price Cost Profit Price/ (HKDm) (HKDm) (HKDm) cost (x) Sale of 20% stake in P&G Hutchison 11 May 2004 P&G 15,600 1,900 13, Sale of 20% stake in HIT and 10% stake in COSCO-HIT 9 Jun 2005 PSA International 7,215 1,715 5, Sale of 19.3% stake in HTIL Nov 2005 Orasom Telecom 10,100 2,700 7, Sale of 20% stake in Hutchison Port Holdings 21 Apr 2006 PSA International 34,000 9,620 24, Sale of 67% stake in Hutchison Essar in India 12 Feb 2007 Vodafone 87,000 12,000 75, Sale of 51.3% stake in Partner Communications in Israel 12 Aug 2009 A private company 10,706 2,956 7, Sale of 24.9% stake in AS Watson April 2014 Temasek 44,000 5,000 39, ,621 35, , Source: Company, Daiwa Capex Hutchison (HKDm) Capex Ports 1,746 1,537 1,011 2,350 2,121 1,746 1,127 1,169 4,005 6,559 4,679 5,747 9,279 9,404 9,502 4,970 6,726 5,928 7,556 7,071 Property 1, ,735 1,475 4,498 3,088 1, ,190 2, Retail 600 1, ,292 1,237 1,454 2,249 2,454 2,668 1,843 1,686 1,072 1,791 2,622 3,055 2,264 CKI* Husky* Telecom* 2,707 3,140 2,252 2,628 1,455 1,948 1,413 3,311 2,799 2,841 5,780 5,357-3,698 5,336 5,004 3,617 10,639 3,903 2,887 Others Established businesses* 7,017 6,154 7,594 7,401 9,633 7,565 5,674 6,615 9,342 13,112 13,579 13,862 12,210 15,217 16,789 11,298 12,331 19,816 15,465 13,493 Finance and investment Group ,532 29,842 24,557 33,515 26,371 28,360 26,070 29,661 8,259 9,894 10,980 13,599 17,000 Total 7,031 6,174 7,611 7,401 9,633 7,565 6,324 14,293 39,198 37,710 47,198 40,655 40,994 41,439 46,464 19,576 22,344 30,924 29,107 30,493 Country breakdown Hong Kong na na na na na na 2,266 2,804 4,336 5,493 3,038 2,266 1,558 1,437 2,769 1,449 1,895 3,435 2,581 2,037 Mainland China na na na na na na ,028 3,724 2,035 2,355 4,622 3,656 1, ,587 1,844 2,228 1,654 Asia and Australia na na na na na na ,490 4,260 8,030 7,117 2,796 7,038 7,631 5,229 3,771 13,865 6,967 7,139 Europe na na na na na na 538 9,893 27,970 23,085 32,968 27,177 30,779 26,605 31,567 10,367 13,374 11,652 17,288 19,344 Americas and others na na na na na na 2, ,148 1,127 1,740 1,239 2,703 2,649 1,609 1, Finance & Inv & others Total na na na na na na 6,324 14,293 39,198 37,710 47,198 40,655 40,994 41,439 46,464 19,576 22,344 30,924 29,107 30,493 Source: Company, Daiwa Note: *capex of Husky, CKI and its telecom divisions were largely funded by themselves while its investment in China property were mainly financed by shareholders' loans The underlying reasons for the discounted valuation are complex. One factor is the complicated corporate structure of the group, with its multitude of layers, and that some of these businesses have been co-invested by various entities within the group. Its investment in telecoms in Europe since 2000 is another factor, as it appears that this was seen by some as an unending, value-destroying investment. While we understand why the stock markets had this perception, we think some of their concerns were overplayed. For example, while Hutchison s investment in the European telecoms business was substantial, at around USD38bn on our estimates, once we dissect the group s transactions and how capital has been allocated since 2000, we can see that its investment in Europe was principally funded by the monetisation of its stakes in Orange, Vodafone and VoiceStream, which raised some USD20.4bn cash, the disposal of telecom assets, and its realisation of the value of some of its traditional businesses (see below). Funds raised by monetisation of stakes in Orange, Vodafone and VoiceStream (USDm) 4Q99 Sale of 44.8% of Orange to Mannesmann 5,677 1Q00 Sale of 1.56% stake in Vodafone 5,233 2Q01 Sale of VoiceStream stakes to Deutsche Telekom Sale of Vodafone and Deutsche Telekom shares 3, Sale of Vodafone and Deutsche Telekom shares 4,814 20,373 Source: Company

22 Funds raised by the sale of other telecom assets (USDbn) IPO of HTIL 0.9 Sale of a 19.3% stake in HTIL to Orasom Telecom 1.3 Sale of 51.3% stake in Partner Communications in Israel 1.4 HTIL's sale of its 67% stake in Hutchison Essar in India to Vodafone Source: Company, Daiwa estimates What the stock market may not have fully appreciated is that, based on our analysis, the nature of Cheung Kong Group s investment in European mobile telecoms was to use its gains from its investments in the 2G business to build an important market position in the European mobile telecom industry over time and the group may well be prepared to treat this as a project spanning more than 20 years, in our view. And while 20 years may be too long for the liking of some investors, we think the funding of this investment was prudent. All along, the 3 Group has been managed as a fully funded start-up and it doesn t appear that Cheung Kong Group s investment in the 3 Group has had a major adverse effect on the development of its other businesses. Hutchison has also not seen any cut in DPS just that its DPS has been frozen since 1999 and resumed growth only in As illustrated above, the group has kept on investing across the board in almost all of its other major businesses throughout the past 15 years. In other words, the building of various businesses under Hutchison has been ongoing since it started to invest in mobile telecoms businesses in Europe in And this pace of investment is unlikely to have been affected at all. Net asset distribution of Hutchison (HKDm) FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Net assets Ports 27,430 29,910 33,232 32,672 34,124 29,949 33,991 39,831 44,434 44,942 45,566 44,981 48,448 Property & Hotels 54,892 55,032 52,214 54,932 58,771 62,755 63,431 68,329 65,296 71,020 86,362 87,565 88,614 Retail -3,645 5,168 4,101-3,649 3,902 14,138 8,174 23,239 25,214 22,491 23,402 19,585 19,211 CKI 39,233 37,085 41,271 40,558 42,817 45,052 46,946 44,065 47,720 58,971 64,927 78,477 85,569 Husky 10,834 11,734 14,246 16,783 20,241 23,923 32,353 37,190 41,019 43,493 48,552 54,023 51,833 Telecom 27,089-10,291 8,525 9,829 6,759 7,043 54,066 20,926 21,933 19,520 21,361 26,640 26,672 Finance and investment 23,664 35,747 22,582 66,086 27,068 49,676 72,330 6,639 8,616 30,254 23,275 40,059 24,527 Others 0 11,235 8, ,879 4,799 Established businesses 179, , , , , , , , , , , , ,673 3 Group 75,480 99, ,092 62,583 59,947 58,029 47,367 40,677 58,065 66,568 85,338 75, ,559 Total 254, , , , , , , , , , , , ,232 Represented by: Shareholders funds 218, , , , , , , , , , , , ,609 Minority interests 36,900 41,596 45,748 28,623 10,075 16,771 48,644 31,812 37,413 43,226 39,171 47,022 49,623 Net assets 254, , , , , , , , , , , , ,232 Source: Company, Daiwa Most importantly, these investments have produced results, as evidenced by the EBITDA and EBIT growth of Cheung Kong Group over these years. Note also that the group has struck various major deals with industry players over the past 10 years, and the gains it has realised have often represented multiples of its investment cost

23 EBITDA Hutchison (HKDm) FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 EBITDA Ports 7,564 9,295 10,280 11,953 13,324 14,760 16,585 17,202 14,006 10,285 11,745 11,343 11,447 Property 2,288 2,819 3,408 3,440 4,444 6,127 4,520 8,527 6,844 9,279 9,903 10,887 13,995 Retail 1,303 2,186 4,187 4,678 5,110 4,822 6,153 6,849 7,986 10,081 11,724 12,779 14,158 CKI 6,102 6,564 7,516 8,473 9,552 8,113 9,465 9,488 9,044 11,007 17,242 21,405 22,841 Husky 3,584 3,975 5,804 5,603 9,336 12,537 15,581 19,060 9,737 8,987 16,053 14,889 14,779 Telecom 2,219 2,866 3,368 4,393 6,890 4,983 6,577 7,405 3, ,474 3,473 3,577 Finance and investment 6,522 6,267 6,326 9,243 5,702 7,157 14,164 6,297 4,145 1, ,479 2,179 Established businesses 29,582 33,972 40,889 47,783 54,358 58,499 73,045 74,828 54,980 50,984 69,828 77,255 82,976 3 Group - (1,839) (11,939) (16,329) (219) 7,729 17,216 13,682 9,274 8,718 10,524 9,213 12,671 Consolidated EBITDA 29,582 32,133 28,950 31,454 54,139 66,228 90,261 88,510 64,254 59,702 80,352 86,468 95,647 Source: Company, Daiwa EBIT Hutchison (HKDm) FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 EBIT Ports 5,791 6,626 7,597 8,956 10,219 11,395 12,849 13,236 10,406 7,207 8,226 7,681 7,358 Property 1,717 2,570 3,121 3,003 3,939 5,667 4,060 8,087 6,430 8,847 9,517 10,521 13,659 Retail 537 1,031 2,305 3,202 3,261 2,720 3,711 4,384 5,692 7,866 9,330 10,357 11,771 CKI 4,589 4,990 5,605 5,921 6,675 6,136 7,353 7,404 6,905 8,454 13,478 16,643 17,528 Husky 1,899 2,084 3,462 2,793 6,140 8,305 10,523 13,316 4,010 3,073 8,614 7,427 7,208 Telecom , ,789 2, , (1,598) Others (791) (145) Finance and investment 6,457 6,200 6,250 8,989 5,491 6,920 13,851 3,261 4, ,914 1,259 Established businesses 21,709 24,470 29,535 33,026 38,514 43,791 55,565 55,364 37,870 34,659 49,889 55,441 59,741 3 Group - (2,070) (18,310) (38,449) (26,880) (19,996) (17,938) (15,792) (8,922) 2,931 1,481 3,145 4,856 Consolidated EBIT 21,709 22,400 11,225 (5,423) 11,634 23,795 37,627 39,572 28,948 37,590 51,370 58,586 64,597 Source: Company, Daiwa The frustrating issue for investors and no doubt the management of Cheung Kong Group is that the business value creation the group has achieved does not seem to have shown up in its equity-market valuation. In our view, this could be one main reason for the most recent reorganisation exercise. As such, this reorganisation exercise may signal that Cheung Kong Group is now entering a new chapter. After having undergone massive business building over the past 20 years, with results showing up in terms of cash flow and business performance, there would seem to be no urgency for the group to take on any major risks related to new investments. As such, the next phase of its development could be less about building new businesses than realising the value of the businesses it has built up. This begs the question: will this reorganisation mark the beginning of Chapter 3 for Cheung Kong Group?

24 0 Cheung Kong/Hutch s Bold Move

25 Question 4 Does this reorganisation signal the beginning of Chapter 3 for Cheung Kong Group?

26 Q4: Does this reorganisation signal the beginning of Chapter 3 for Cheung Kong Group? We do not see Cheung Kong Group as merely a property company. Like many other major property companies in Hong Kong, Cheung Kong made its first fortune through manufacturing, and then ploughed that money into property in the aftermath of the 1967 riots. It was subsequently listed in 1971, the window between the oil crisis and the crash of the Hong Kong stock market in The group s property business has enabled it to build up its capital base over the years, but our view is that, from the very outset, it has had ambitions beyond merely the property business, which culminated in its acquisition of the Hutchison stake from HSBC in We think it is most illuminating and appropriate for investors to see Cheung Kong Group (which comprised mainly Cheung Kong Hutchison in the past; and will be transformed into Cheung Kong Hutchison and Cheung Kong Property once its reorganisation proposal is passed) as a business builder and investor, and that it is arguably a veteran in these kinds of endeavours among business groups in Hong Kong, and even Asia. Most importantly, its record suggests that it seemingly has mastered the art of being in the right business at the right time. We would categorise its past developments into 2 chapters, and argue that it is now on the threshold of Chapter 3. Chapter 1 ( ): Emerging as the largest business group in Hong Kong This chapter started with its listing as a property company in Hong Kong in 1971 and rapid expansion in the Hong Kong property sector. The period culminated in its 1979 acquisition of Hutchison, which it then used it as a platform for business building across 5 strategic sectors in Hong Kong. Chapter 2 ( ): Massive business building on a global scale revolving around 6 sectors Cheung Kong Group s foray into the global business arena started as early as the late 1980s when it acquired Husky in Canada and entered the telecoms business in the UK. Such initial steps outside Hong Kong, however, didn t go well and later resulted in determined efforts by Cheung Kong to bring Hutchison back into shape (this involved injecting new equity capital into Hutchison in 1992 to help recapitalise it). Then, what followed was extensive business building on a global scale. While the group s investment in the European telecom industry was the most high-profile, its international expansion was actually across-the-board, encapsulating all of its core businesses. We believe the group has succeeded in turning many of its core businesses into important players in the global arena, but it appears that such progress has not been rewarded in its equity market valuation, probably because of the poor investment sentiment towards the telecom industry in Europe. Comparison of the 3 chapters of Cheung Kong Group Chapter Period Remarks Focus Chapter Emerging as the largest business group in Hong Kong. Hong Kong Chapter Massive business building on a global scale, creating a global conglomerate with an Global important market position in 6 industries and the creation of a strong residential property developer in Hong Kong and China, as well as one of the largest owners of hotel rooms in Hong Kong. Chapter and Asset realisation and creation of global players in at least 6 major industries (ports, Global in business aspiration beyond retail, property and hotel, energy, infrastructure and telecom). Increasingly recognised by the stock market as a global company with at least 6 core Greater attention being paid to businesses, as well as a veteran business builder and investor, savvy in capitalising on get greater market recognition opportunities related to mis-pricing of its group companies or other industry peers. to view it as a modern premier global corporation. Continuous group re-organisation and M&A to unlock and create value for shareholders. Using the 2 listed vehicles as the flagship for expanding its core businesses and entering new areas. Source: Daiwa

27 Chapter 3 (2015 and beyond): A phase of asset realisation and the building of strong market positions in all of its core businesses In our opinion, there is a subtle difference between a vertical corporate structure and a horizontal one. We think a vertical corporate structure with many layers (which arguably was what the Cheung Kong Group reorganisation in 1997 created) has its merits when a group is in heavy investing mode (as Cheung Kong Group was at the time), as it allows it to use limited capital to get exposure to a wide spectrum of business assets. This also allows the risks and financial obligations to be shared among the group s different subsidiaries and associated companies. In contrast, a more horizontal corporate structure (which we think is what this latest Cheung Kong Group reorganisation is aimed at) has more merit when the investing phase is ending and the group is moving on to crystallising the value of its investments. Following this line of thought, we do not believe the focus of Cheung Kong Group in the coming years will be as much on business building, as it has built up its businesses substantially and does not seem to have any urgency about expanding its current scope or nurturing new businesses. Nevertheless, we see the group continuing to pursue opportunities that give it stronger market positions in its 6 core businesses, and continuing to explore and nurture new investments (which arguably was its main objective in the past). Still, the group s focus is likely to shift more to unlocking the business value associated with its business building of the past few decades, as well as further consolidating or expanding its market position in its core businesses. In this light, this latest reorganisation could act as a catalyst for the group moving ahead in this next phase essentially an invitation to global investors to take a closer look at the investment value of the company. As such, we believe this reorganisation exercise heralds the inauguration of Chapter 3 for Cheung Kong Group, which we believe will have major implications for the development of this business group and possibly other major business groups in Hong Kong. In its Chapter 3, the capital markets will probably become more important for the group than before, given that it targets to crystallise the business value it has built up. However, we think improving the valuation of the group will have important implications for its future development

28 Cheung Kong/Hutch s Bold Move

29 Question 5 What is Cheung Kong Group likely to do in its Chapter 3?

30 Q5: What is Cheung Kong Group likely to do in its Chapter 3? Based on what happened in its Chapter 1 and Chapter 2, we think Cheung Kong Group s Chapter 3 will be less about business-building and more about asset realisation. To follow are the 6 major things we think the group will consider doing in Chapter 3 of its development: 1) Pursue greater recognition from the capital markets on the investment value of its 2 listed flagships 2) Capitalise on mis-pricing and reorganisation opportunities within its listed entities 3) Create a principal listed vehicle for each of its core businesses 4) Pursue M&A opportunities globally 5) Raise its dividend payouts, with potential for the family to raise its stakes, and the listed companies to conduct share buybacks 6) Undertake special distributions of shares in its various businesses as and when they are mature enough Below, we elaborate on these 6 points. 1.Pursue greater recognition from the capital markets on the investment value of its 2 listed flagships One main outcome of this reorganisation is that it will create 2 flagship listed vehicles under the Li family & Trust (CK Hutchison Holdings and CK Property), both of which will be sizeable players in their own fields, with business assets of over USD80bn and USD30bn, respectively. We see this reorganisation exercise as a friendly invitation to the capital markets and global investors to take a closer look at the investment value of the group, and believe that one of the main objectives is to get these 2 flagships properly priced in the capital markets. Estimated NAV structure of the future CKH Holdings** HKDm % HKD/share^ NAV of assets previously belonged to Hutchison 586, % NAV of assets previously belonged to Cheung Kong* 210, % % additional stake in Husky Energy 10, % , ^^ Source: Daiwa *After excluding its stake in Hutchison; **before the distribution of CK Property ^Based on the existing issued shares of Cheung Kong and Hutchison ^^Based on the estimated number of issued shares of CKH Holdings (3.86bn) 2. Capitalising on the mispricing of, and reorganisation opportunities for, the group s listed vehicles However, we believe the group would not stop at getting greater recognition from the capital markets of its investment value. Once it succeeds in enhancing the equity-market valuation of its listed flagships, it would be open to an array of mis-pricing as well as reorganisation and M&A opportunities in the capital markets. One clear example would be mis-pricing and reorganisation opportunities within the various listed companies in the group. For example, Power Assets (6 HK, HKD79.0, Hold [3]) is sitting on over HKD60bn in cash and its current structure is arguably not conducive to making the most productive use of its capital. In our opinion, having parent Cheung Kong Infrastructure (1038 HK, HKD63.65, Buy [1]) use a similar share-swap arrangement as this Cheung Kong Group reorganisation to buy out the minority shareholders of Power Assets would have merits for the group. Similarly, if Hutchison s acquisition of O2 goes ahead, 3 UK would emerge as the largest mobile telecom operator in the UK, with the credentials for a separate listing. A potential spin-off of 3 UK would help pay for the acquisition price of O2, and the combined entity could then be used as the vehicle to acquire the group s other mobile telecom businesses in Europe over time

31 Major listed companies within Cheung Kong Group Effective stake (%) Effective stake (%) Effective stake (%) CKH level Next layer The next layer Remarks Property Hong Kong 30.15% - - Unlisted, under CK Property China 30.15% - - Unlisted, under CK Property Overseas 30.15% - - Unlisted, under CK Property Hotels 30.15% - - Unlisted, under CK Property Infrastructure CK Infrastructure 78% - - Power Asset Holdings 30% 39% - HK Electric Investments 15% 19% 49% Energy Husky Energy 40% - - The family still has 29.3% stake in Husky Energy Ports Hutchison Port Holdings 80% - - Unlisted. PSA in Singapore has a 20% stake in it HPH Trust 28% - - HPH owns 35% of HPH Trust Telecom 3 UK 100% - - Now pursuing to acquire O2 in the UK 3 Italy 97% - - Unlisted 3 Sweden and 3 Denmark 60% - - Unlisted 3 Austria 100% - - Unlisted Hutchison Telecom (HK) 65% - - Hutchison Telephone (HK) 49% 75.9% - Vodafone Hutchison Australia 44% - - Hutchison Telecom Vietnam 100% - - Unlisted Hutchison 3 Indonesia 65% - - Unlisted Retail AS Watson 80% - - Unlisted. Temasek has a 20% in it Source: Company, Daiwa At this point, we think there is a case for saying that Hutchison s mobile telecom businesses in Europe are now under-priced by the stock market. However, if its acquisition of O2 can get regulatory approval and the integration of 3 UK and O2 can proceed smoothly, we believe there would be a significant improvement in the cash flow and profitability of CKH s mobile telecom businesses in the UK. And this is before we take into account a potential improvement in the competitive environment in the UK mobile telecom businesses. However, once the New 3 UK is spun-off and can command a premium stock-market valuation, it could become a vehicle to unlock the value of the group s other mobile telecom businesses in Europe, through for example, 3 UK, buying out 3 Italy or the group s other mobile telecom operations in Europe through issuing new shares. 3. Creating a principal listed vehicle for each of its core businesses The reorganisation will create a sizeable global property company called CK Property, which will have gross rental income of about USD1bn a year (including the contribution from services suites) and a sizeable development landbank of 170m sq ft. Will this become the model for the group s other business lines? That is to say, would there be a separately listed global telecom company called CKH Telecom in the future? Would there be a separately listed global retail company called CKH Retail in the future? Would CK Infrastructure be distributed to the family in due course? Would CK Property also spin off a CK Hotel over time? We think the answer to these questions is Yes, eventually, but believe the process would take time. Whenever the group has a business operation that has matured to the point where it has sufficient capital and asset base, as well as management resources to become a major global player (such as the situation with CK Property at the moment), it would probably be in the interests of CKH shareholders to get a distribution in such a separate listed vehicle through, for example, a special dividend similar to the group s current plans related to CK Property. That said, outside property, the group s businesses in other operations have not yet matured to this point

32 The principal listed vehicle in each of Cheung Kong Group s core business Principal listed Business vehicles Remarks Property CK Property CK Property could spin-off its China business or hotel division Infrastructure CK Infrastructure There should be reorganisation opportunities within this division as well as new investment opportunities in the market Energy Husky Energy The family still has 29.3% stake in Husky Energy Ports Not yet clear Hutchison Port Holdings Trust is already listed in Singapore but the group still has many port assets which are not yet included in HPH Trust. Presently, Hutchison has a 80% stake in the unlisted Hutchison Port Holdings, which is also 20% owned by PSA in Singapore Telecom Not yet established Assuming the O2 acquisition goes through, the enlarged 3 UK could spin-off as the principal listed vehicle for its telecoms division and it may eventually acquire all of the group's telecom assets in Europe and potentially other markets as well Retail Not yet established A global health & beauty retailer and can be listed any time Hutchison currently owns 80% of the unlisted AS Watson, with the remaining 20% owned by Temasek Source: Daiwa Under such circumstances, we think one option would be to have one principal listed vehicle for each of its major business lines (arguably, CKH now may not be that far from this point as one could say it already has such a vehicle for its infrastructure and energy businesses and there are entities within its port, telecom and retail division which has the credentials to become such a vehicle). We believe the 3 Group s UK operation could perform such a role for its telecom division and we think it is quite possible that CK Hutchison will have a listed retail arm indeed, this was what the group had been pursuing before it sold a 25% stake in its retail division to Temasek in April Pursuing M&A opportunities globally Note that if CKH and CK Property can command premium valuations in the capital markets, then the opportunities they would be presented with would not necessarily be restricted to listed companies within the group. Indeed, the group could arguably capitalise on any M&A opportunities related to undervalued listed companies in Hong Kong, or possibly Asia or indeed any part of the world, and we think it is possible that Cheung Kong Group could pursue opportunities related to this. After all, one key to the rise of Cheung Kong as the largest business group in Hong Kong by the late 1980s was it being the pioneer in unlocking the value of many British corporations (Hutchison, Green Island Cement, Hong Kong Electric are among the major examples) through acquiring them when they were judged to be mispriced by the stock market. Note that when Cheung Kong was first listed in 1971, it was far from being the largest in the Hong Kong property sector. One main reason for its rapid rise since then has been its ability to make effective use of the stock market through issuing new shares to raise capital to embark on attractive projects (many were joint ventures with companies which own land but did not have property development expertise). As the group has been able to demonstrate that it is capable of employing its capital to find good investments to create value for shareholders, its issuing of shares has often been welcomed, and this has allowed it to build up its capital base and scale of operation much faster than peers. In this sense, focusing more on mispricing opportunities in the capital markets and making effective use of the stock market s fund-raising function could bring Cheung Kong back to doing what it s been good at in the past, ie, acquiring undervalued companies in the stock market. Now, the main difference is that in the 1980s and before, its focus was old British companies listed in Hong Kong. But now and in the future, its focus could well be global, in addition to the other listed entities within the group. In the 1980s and before, the shares it issued were mainly to fund the acquisition of land. But now and in the future, the funds raised could be used to buy listed companies within the group plus any listed or unlisted assets in its 6 core businesses in any parts of the world. 5. Raising dividends, potential family raising its stakes, and listed companies conducting share buybacks This reorganisation will result in the Li family & Trust owning just over 30% (30.15% to be exact) of Cheung Kong Group listed flagship companies, which is also the threshold related to take-over activities in Hong Kong. We think 30.15% of a company the size of CKH Holdings and CK Property is already substantial, and we do not foresee any major risk that the family s control over the group will be under threat

33 That said, this size of stake may not be the most optimal in 2 senses. First, it means that the ability of CKH Holdings and CK Property to use new shares to fund attractive acquisitions or reorganisation opportunities within the group could be restrained somewhat, as we do not think the Li family & Trust would accept a shareholding of less than 30%. Second, if the businesses to be distributed out of CKH Holdings and CK Property are less than 100% owned by the 2 entities, the family may not end up having a more than 30% stake in the companies to be distributed out. Against this backdrop, we believe there is incentive for the family to find ways to increase its stake in its 2 listed flagships. One way is to plough back the dividends received from these 2 flagships to buy more of their shares (pursuant to the existing rules and regulations in Hong Kong, the family could raise its stake by up to 2% a year, without triggering an obligation to make a general offer to minority shareholders). We believe the same objective could be achieved by having its 2 flagship listed vehicles keep on buying back shares every year (subject to the requirement that the family s effective stake cannot rise by more than 2% a year). In our opinion, a share buyback would be a safe and effective way to create value for all shareholders (see also section 6 of our Swire Properties report: Initiation: a large nurturing reward awaits). We also believe this would be a good way to deploy the abundant cash flow that would be generated by its 2 listed flagships (the EBITDA of the future CKH Holdings and CK Property should be over USD10bn and USD2bn a year, we estimate). Dividends declared by Cheung Kong and Hutchison (HKD) Source: Companies, Bloomberg Cheung Kong Hutchison Importantly, our read of the Circular related to this Cheung Kong Group reorganisation released on 6 February is that one reason for the group s changing to be incorporated in the Cayman Islands could be that of ensuring that CKH Holdings has the greatest flexibility of declaring some major dividend or doing major share buybacks going forward. As stated in 6 February Circular, under the Companies Ordinance, a Hong Kong company may only make distributions to shareholders out of its profits available for distribution. By way of contrast, the Cayman Islands Companies Law permits a Cayman Islands company to make distributions out of profits and, subject to a solvency test and any provisions of the company s memorandum, and articles of association, out of the share premium account. Meanwhile, the Circular also highlights that this group reorganisation will result in a large share premium of about HKD331.7bn to be created and credited to the share premium account of CKH Holdings. We believe that such a large share premium would make it possible for the group to distribute CK Property shares to shareholders and make a similar distribution of the group s other businesses in the future

34 Amount credited to share premium account of CKH [HKD331.7bn (note 1) ] Source: Company In this light, one important aspect of the group s change to be incorporated in the Cayman Islands could be that of ensuring it has the flexibility to embark on a major share buyback if it judges that it is in the interests of its shareholders to do so. In Appendix V of the document, it is stated that under the Companies Ordinance in Hong Kong, a redemption or buy back may only be funded out of the company s distributable profits. By way of contrast, if a company is incorporated in the Cayman Islands, it is possible that its share buyback can be funded by its share premium account as well, provided that the company shall be able to pay its debts as they fall due in the ordinary course of business. Our read is that among the reasons for the planned incorporation in the Cayman Islands is to allow the group to: 1) distribute CK Property and possibly other businesses of the group to CKH shareholders in the future, and 2) engage in a major share buyback. As we have stated elsewhere, a share buyback is probably the most effective way for Hong Kong companies to break away from the Hong Kong discount. 6.Special distribution to shareholders when the business is mature enough In our opinion, the distribution of CK Property shares to CKH shareholders sets an example of what could happen to all of the group s core businesses eventually, as we believe that such an arrangement is the most conducive to maximising the value of these businesses, ensuring they can continue to attract and retain professional talent, and eventually becoming premier global companies. Indeed, ensuring that the group can distribute its various assets to its shareholders could well have been the main reason for the move to be incorporated in the Cayman Islands. However, the group s other businesses are not yet mature enough to be distributed to shareholders in the immediate future, in our view, as we still see considerable reorganisation potential within the group and M&A opportunities in the market. The group could aim to distribute these other businesses to shareholders eventually, and before this happens, there should be incentive for the KS Li family & Trust to raise its stake in CKH Holdings. We think that raising dividends together with share buybacks would represent a win-win for all the shareholders of Cheung Kong Group, as well as being a safe and equitable way to create value for shareholders. If the group really commits to doing this, it would represent another case where the group is a pioneer in the Hong Kong corporate sector, in our view

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

36 Cheung Kong/Hutch s Bold Move

37 Question 6 Will the reorganisation unlock value for Cheung Kong Group?

38 Q6: Will the reorganisation unlock value for Cheung Kong Group? This is a complex question. Both CKH and CK Property would be sizeable corporations, with assets already on their books likely exceeding USD80bn and USD30bn, respectively. Hence, it would require considerable investing capital to enable them to sustain premium valuation in the stock market. We believe the group has the business value to support a higher equity-market valuation, but there are of course reasons for its historical valuation discount. Indeed, the NAV discounts that the market applies to the share of Hong Kong family business groups and property companies have widened in recent years. In our view, these valuation discounts are partly attributable to the special characteristics of the Hong Kong stock market over the past 15 years, during which stock-market capitalisation has expanded 5-fold to chkd25tn, fuelled by mega IPOs involving Mainland China corporations. As a result of this trend, there is an abundant supply of shares but the amount of capital available for secondary market trading may not have risen as quickly. According to the Hong Kong Exchange, Mainland China stocks accounted for 50.5% of equity market turnover in Hong Kong in 2014, compared with just 8.9% in It is reasonable to assume there will be many more Mainland companies listing in Hong Kong in the coming years. Against this backdrop, it is understandable that Hong Kong s traditional blue chips have been marginalised to some extent. We see this marginalisation as one structural reason for Cheung Kong Group s historical valuation discount, though compared with those of other Hong Kong property companies its valuation discount has been modest. Hang Seng Index members: market capitalisation (HKDtn) Source: Bloomberg, Daiwa Real Estate Investment & Services (HK) Real Estate Investment & Services (China) Banks Casino and Gaming Conglomerate Consumer Discretionary/Staples Electronic & Electrical Equipment Financial Services Industrial Transportation Information Techonology Life Insurance Media Mining Oil, Gas & Consumable Fuels Telecommuncations Travel & Leisure Utilities Still, we view the planned group reorganisation as an important step toward unlocking more business value. Having risen by more than 5x from about HKD5tn in 2005, Hong Kong s stock market is already in the global leagues in terms of market capitalisation. Yet it is still not seen as a core market by many global funds. Worse still, as one of the most liquid of the emerging markets, Hong Kong is often the place for foreign investment funds to raise liquidity during times of international crisis. We think Hong Kong s market capitalisation has arguably grown to a level in excess of the traditional investment capital base of the market. As such, companies will likely need to attract investors from outside the traditional investor pool in Hong Kong and the Mainland if they are to command higher valuations, in our view. We believe there is a good case for Hong Kong, over time, to assume greater prominence in the global investing world. And, as that process unfolds, we believe that at least some Hong Kong-listed companies will enjoy enhanced appeal to global investors. One example of this trend in the property segment is Link REIT, which in recent years has attracted the attention of some global funds and global REIT funds

39 In retrospect, we believe there are 3 major factors that have enabled The Link REIT to break away from The Hong Kong discount which has been accorded to all major property stocks in Hong Kong. First is the high transparency and good disclosure of its business performance. Second is the importance The Link REIT has placed on communicating with its unitholders and making the priorities and preferences of its major institutional shareholders important considerations. And third is steady growth in the dividends declared by The Link REIT. As a consequence, The Link REIT is trading currently at a premium to book of 1.09x versus 0.81x for the property developers. Since its IPO in November 2005, the average PBR of The Link REIT was 1.22x and it has been trading at one of the highest valuations ever achieved by Hong Kong property companies. Major Hong Kong property developers: price-to-nav (Disc)/prem (%) 30% 20% 10% 0% (10%) (20%) (30%) (40%) (50%) (60%) (70%) Average since 1990: -26.5% Weighted average (disc)/prem to NAV four developers +2SD: 6.2% +1SD: -10.2% -1SD: -42.9% -2SD: -59.3% Current: -37.2% Source: Datastream, Daiwa estimates Major Hong Kong property developers: PBR trend (x) Weighted-average PBR of four developers Current PBR: 0.81x SD: 2.02x +1 SD: 1.63x Average: 1.24x SD: 0.85x -2 SD: 0.46x Source: Datastream, Daiwa PBR trend - The Link REIT (x) Current PBR: 1.09x SD: 1.41x Average since IPO: 1.22x -1 SD: 1.03x 0.6 Nov 05 May 06 Nov 06 May 07 Nov 07 May 08 Nov 08 May 09 Nov 09 May 10 Nov 10 May 11 Nov 11 May 12 Nov 12 May 13 Nov 13 May 14 Nov 14 Source: Bloomberg, Company, Daiwa

40 In this context, we believe one of the most important aspects of the Cheung Kong Group reorganisation is that it signals management s commitment to take into account the priorities and preferences of global investors, which we see as one step on the road to becoming a genuinely premier global company. In our opinion, capturing the attention of investors who currently do not typically invest in Hong Kong is one approach for Hong Kong companies looking to command valuations closer to those of their global peers not to mention valuations that better reflect the commercial value of their underlying assets and businesses. Hence, we view Cheung Kong Group s reorganisation as a sign that this longstanding pioneer among Hong Kong companies is again setting the pace. This likely won t be a straightforward process for the group, given that global investors do not currently view Hong Kong s family business groups as a separate asset class. In terms of market capitalisation, however, these business groups are anything but small. Hong Kong family business groups and listed Hong Kong property stocks Bloomberg No. of Share price Market cap Stake of major Free-flow Free-flow code Names shares (m) (HKD) (USDbn) shareholder (%) no. of shares (m) value (USDbn) Property Developers 1 HK Cheung Kong 2, , HK SHK Properties 2, , HK Henderson Land 3, HK Sino Land 6, , HK Wheelock 2, HK New World 8, , Property Investors 4 HK Wharf 3, , HK Swire Properties 5, , HKL SP HK Land 2,353 USD , HK Hang Lung Properties 4, , HK Hysan Development 1, HK Kerry Properties 1, HK Great Eagle REITs 823 HK Link REIT 2, , HK Hui Xian REIT 5, , HK Champion REIT 5, , HK Fortune REIT 1, , HK Regal REIT 3, HK Yue Xiu REIT 2, , HK Sunlight REIT 1, , HK Spring REIT 1, HK Prosperity REIT 1, , Niche property companies 878 HK Soundwill HK K Wah International 2, , HK CSI Properties 10, , HK Magnificent Estates 8, , HK Wing Tai Properties 1, HK Lai Sun Development 20, , Source: Bloomberg, Daiwa Note: prices as of close on 4 Feb

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

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

43 Appendix

44 The expected timetable for the Cheung Kong Reorganisation Proposal Date Event 23 Feb 2015 Latest time for lodging forms of transfer of Shares to qualify for entitlement to vote at the Court Meeting and the General Meeting 24 Feb 2015 Closure of register of members of the Company for determining entitlement to attend and vote at the Court Meeting and the General Meeting 25 Feb 2015 Suspension of dealings in the Shares; Court Meeting; General Meeting 26 Feb 2015 Resumption of dealings in the Shares 10 Mar 2015 Dealings in the Shares on the Stock Exchange cease 12 Mar 2015 Latest time for lodging transfers of Shares in order to be entitled to CKH Holdings Shares 13 Mar 2015 Closure of register of members of the Company for determining entitlement to CKH Holdings Shares 17 Mar 2015 Court hearing of the petition to sanction the Scheme Despatch of the new certificates for CKH Holdings 18 Mar 2015 Withdrawal of the listing of the Shares on the Main Board Dealings in CKH Holdings Shares on the Stock Exchange commence Apr - Jun 2015 AGM Before Jun 2015 Completion of the Merger and the CK Property Spin-off Source: Company, Hong Kong Economic Times

45 Cheung Kong Financials / Hong Kong 1 HK Financials / Hong Kong Cheung Kong 1 HK Target (HKD): g Upside: 19.9% 9 Feb price (HKD): Entering a new era The reorganisation plan signals the group s commitment to take on a global perspective that should unlock value The group s Chapter 3 should bring the interests of the family into alignment with those of investors and shareholders We see the group making tangible progress on the road to a multi-year harvesting period; Buy (1) call reaffirmed Buy (unchanged) Outperform Hold Underperform Sell Jonas Kan, CFA (852) jonas.kan@hk.daiwacm.com What's new Following our initial take (see Determined to be global and unlock shareholder value, 12 January), we have analysed in depth the major questions surrounding the Cheung Kong Group s reorganisation and the circular released on 6 February. The positive implications of this new roadmap are only just starting to be realised, in our opinion. What's the impact The key is the roadmap for the group. For investors, we believe the most important aspect of the reorganisation plan is the strong signal it sends: the Cheung Kong Group is committed to becoming, and being seen as, a global player in a multi-year effort that we believe will unlock shareholder value. Chapter 3 has begun. If the Cheung Kong Group s Chapter 2 ( ) was all about businessbuilding, Chapter 3 is about asset realisation following the group s decades-long investment in various businesses on a global scale. In the accompanying thematic report, we outline 6 things the group may look to do in the coming years, all of which should be positive for shareholders and, crucially, investor perceptions of the group, in our view. With this transaction, all parties interests appear to be in close alignment. As we see it, Chapter 3 will pave the way for the interests of the family and those of shareholders and investors to remain aligned for years to come. For long-term Cheung Kong/Hutchison investors, we view the reorganisation as a clear signal that the group could now be entering a multi-year harvesting period. What we recommend We reaffirm our Buy (1) call and 12- month target price of HKD178, based on a 15% discount applied to our NAV estimate of HKD for CKH Holdings (pre-distribution of CK Property shares). The main risk to our positive view would be if shareholders vote against the reorganisation (25 February). How we differ We see this transaction as the beginning of what could be a multiyears harvesting period for the group s shareholders, and believe the market as a whole does not yet appreciate the transformative nature of the plan. Forecast revisions (%) Year to 31 Dec 14E 15E 16E Revenue change Net profit change Core EPS (FD) change Source: Daiwa forecasts Share price performance (HKD) (%) Feb-14 May-14 Aug-14 Nov-14 Cheung Kg (LHS) Source: FactSet, Daiwa forecasts Relative to HSI (RHS) 12-month range Market cap (USDbn) m avg daily turnover (USDm) Shares outstanding (m) 2,316 Major shareholder Li Ka Shing (43.3%) Financial summary (HKD) Year to 31 Dec 14E 15E 16E Revenue (m) 44,019 49,353 54,972 Operating profit (m) 22,426 23,620 25,678 Net profit (m) 35,510 39,150 43,880 Core EPS (fully-diluted) EPS change (%) Daiwa vs Cons. EPS (%) (0.7) PER (x) Dividend yield (%) DPS PBR (x) EV/EBITDA (x) ROE (%) See important disclosures, including any required research certifications, beginning on page 46