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1 Company Research Report Company Research Report Date Industry 2011/12/12 Property Closing Price HK$1.35 Share Information Target Price HK$3.00 Outstanding Shares (bn) 3.67 Market Cap (HK$bn) mth Avg Daily Turnover (HK$mn) mth High (HK$) mth Low (HK$) 0.96 BVPS (HK$) P/E (x) 1.27 P/B (x) 0.37 ROA (%) Total Debt/Total Assets (%) 31.3 Div. Yield (%) 5.59 Source : Bloomberg, Emperor Securities Research Price Performance HK$ /10 01/11 04/11 07/11 10/11 1-mth 3-mth 6-mth 12-mth Change (%) Rel. to HSI (%) Source : Bloomberg, Emperor Securities Research Emperor International Holdings (163.HK) 1HFY12 result review: Positive Outlook Record interim results: EIH reported a solid set of interim results with underlying profit rising 44.9% YoY to HK$1.66bn, thanks to steady growth of rental income and strong operation in hotel during the period. Excluding revaluation gain, core earnings soared 555% YoY to $93.8mn. Management proposed interim DPS of HK$0.05, representing a dividend payout of 11.1%. Steady growth of rental income: Gross rental income reached HK$218mn, up 15.3% YoY, thanks to upward rental reversion and improved tenant portfolio. Occupancy rate remains high (at 99.2%) despite renovation work in Fitfort Shopping Arcade and Emperor Plaza. Rental income is expected to grow by 16% and 18% in FY12 and in FY13, due to addition of investment properties and facilities upgrading. Strong profit to be recorded in 2HFY12 and FY13: The property development segment recorded a loss of HK$71mn as no property profit were recognized in 1HFY12. As at September 2011, over 95% of the Java project (Total GFA: 69,000 ft 2 ) and 93% of the Harbour One project (Total GFA: 140,000 ft 2 ) have been sold. Strong development profits are ready to be booked in 2HFY12 and in FY13, lifting the core pre-tax profit by 203% and 16% respectively. Maintain Overweight: We believe the market will react positively to the anticipated core earnings uplift from recognition of profit from property sales. Valuing the company at 40% discount to NAV, which implies a 3.11x forward FY12E P/E, we maintain our target price of $3.00 for EIH. Given a 122% potential upside, we recommend overweighting the stock. Financial Information Overweight Year Ended 31 March FY09 FY10 FY11 FY12E FY13E Revenue (HK$mn) 348 1,450 1,785 4,120 4,538 Growth (%) 316% 23% 131% 10% Net Profit (HK$mn) -1,537 3,059 3,445 3,541 3,258 Research Department Tel : (852) Fax : (852) esl.research@emperor.com.hk Growth (%) N/A 13% 3% -8% EPS (HK$) Growth (%) N/A -26% -3% -8% P/E (x) N/A DPS (HK cent) Source : Bloomberg, Emperor Securities Research 1

2 1HFY12 result review EIH reported a solid set of interim results, with underlying profit rising 44.9% YoY to HK$1.66bn on the back of steady growth of rental income and strong operation in hotel during the period. Excluding revaluation gain, core earnings soared 555% YoY to $93.7mn. Management proposed interim DPS of HK$0.05, representing a dividend payout of 11.1%. Figure 1: 1HFY12 interim results 1H12 1H11 Change % Remarks Revenue HKD('000) HKD('000) Lease of properties 217, ,948 15% Positive rental revision Properties development 3, % No project recognized Hotel and related operations 827, ,992 28% Gaming revenue surged Total Revenue 1,048, ,870 Segment Profit (Loss) Lease of properties 194, ,191 12% Properties development -61,563-70,946 N/A Hotel and related operations 287, ,755 47% Total Segment Profit 420, ,000 Marketing expense from Harbour One, The Java, 18 Upper East Gross win in gaming concourse surged 66.7% to HK$930mn Revaluation gain on properties 1,561,530 1,126,204 39% Net Profit 1,655,287 1,142,091 45% Earnings per share Basic HK$0.45 HK$ % Diluted HK$0.45 HK$ % Source: Emperor Securities Research We expect rental revenue to grow by 16% and 18% respectively in FY12 and in FY13, due to the addition of investment properties in the near future. EIH has demonstrated its strength in managing retail shops in prime locations, but the NAV enhancement is not yet fully reflected in the share price, in our view. Strong rental performance: Rental income from investment properties was $218mn, up 15.3% YoY thanks mainly to upward rental reversion. Occupancy rate remains high at 99.2%, despite renovation work in the Fitfort Shopping Arcade and the Emperor Plaza. We expect rental revenue to grow by 16% and 18% respectively in FY12 and FY13, due to the addition of investment properties, such as 507 Lockhart Road, 76 Percival Street, and The Pulse, a retail complex located at Repulse Bay, and continuous upgrading of facilities. Prime collection of Grade-A Retail Shops support rental income growth: With strong expertise in the luxury retail market, EIH has successfully transformed lower-grade retail shops into Grade A properties, making them more suitable for major flagship stores for international brands. This is achieved through EIH s unique strategy of combining creative refurbishment with the merging of smaller units into large ones. Substantial improvement of rental revenue after such restructuring projects is expected in the forthcoming years. All in all, EIH has demonstrated its strength in managing retail shops in prime locations, but the NAV enhancement is not yet fully reflected in the share price, in our view. 2

3 Redevelopment on track in Macau and China: The redevelopment of Avenida de Infante D Henrique and Avenida Da Praia Grande, a premium citycentre property in Macau, has been approved during the period, and is expected to be completed in In additional, approximately 95% of the clearance work in the Chang an Avenue East project has been completed during the period. The Chang an project, located near Tiananmen Square and Embassy area in Beijing, with total GFA of 1 million ft 2, will be developed into a high grade complex comprising a shopping mall and grade A offices and will become the headquarter of the Emperor Group in PRC. Completion is targeted at Development profit recognition for property development projects are expected on 2HFY12 and FY13, locking in substantial development profit for the current year and next. Harvest period of property sales in FY12 and FY13: As at September 2011, over 95% of the Java project (Total GFA: 69,000 ft 2 ), 93% of the Harbour One project (Total GFA: 140,000 ft 2 ), and 84% of the 18 Upper East project (Total GFA: 83,000 ft 2 ) have been sold. 96 out of 103 units of Harbour One have been sold with an average selling price (ASP) of HK$15,200/ft 2, at a total consideration of HK$1.88bn; 71 out of 75 units of the Java have also been sold, with an ASP of HK$12,500/ft 2, at a total consideration of HK$730mn. The remaining 5 units of Java are expected to be launched at a higher ASP of around 10% shortly afterwards. Launched in April 2011, 91 out of 108 units of the 18 Upper East project have been sold, contributing about HK$640mn of pre-sale proceeds at an ASP of HK$11,200/ft 2. The 17 remaining units are mainly located on upper floors and are expected to reap a higher ASP, at around HK$12,900/ft 2. Development profit recognition for the above projects are expected on 2HFY12 and FY13, locking in substantial development profit for the current year and next. EIH anticipates steady property sales in FY Riding on the uptrend of Macau s gaming industry, gaming revenue of the 60%-owned subsidiary Emperor Entertainment Hotel (296.HK) went up by 34.6% Stable launch pipeline in FY13-15: EIH anticipates maintaining stable property sales in FY Projects pending launching in the pipeline includes the Prince Edward project in FY13, Saikung project, and Portland Street project in FY14, Sai Wan Ho project in FY15. As Hong Kong will remain the major market for property sales for EIH, management highlighted that proceeds from property sales or rental income will be used for land replenishment when attractive sites are available. Positive hotel outlook: Revenue from hotel operations increased by 28.4% YoY to HK$827mn. Segment profit shot up 47.6% YoY to HK$77.4mn. Riding on the uptrend of Macau s gaming industry, gaming revenue of the 60%-owned subsidiary Emperor Entertainment Hotel (296.HK) rose 34.6%, average win per table per day in gaming concourse surged by 62.7%. 4-star hotel in Hong Kong: In July. 2011, EIH acquired No. 373 Queen s Road East, Wanchai, with total GFA of 115,000ft 2. The Group plans to develop a 4-star, 30-storey hotel with 300 rooms on the site. The total consideration of the project will be at around HK$1.1bn (HK$648mn for land consideration and HK$500mn for construction investment), with completion expected in Management would consider redeveloping the existing Emperor Hotel, located at a prime location in Happy Valley, when the Wanchai Hotel is ready. Assuming a total GFA of 60,000ft 2, with expected ASP in the range of HK$20,000-30,000/ft 2, the lucrative project can be expected to contribute more than HK$1bn profit for the Group. 3

4 EIH s 1HFY12 gearing ratio (total borrowing/ total asset) decreased to 31.3% from 33.8% in FY11 and 46.3% in FY09, due to strong cash inflow from casino operation in Macau and decrease in bank borrowing. Gearing ratio decreased to 31.3%: EIH s 1HFY12 gearing ratio (total borrowing/ total asset) decreased to 31.3% from 33.8% in FY11 and 46.3% in FY09, due to strong cash inflow from casino operation in Macau and a substantial decrease in bank loan from HK$5.67bn to 4.76bn. It is worth noting that EIH s cash on hand increased to HK$1.4bn in 1HFY12, up 27% from HK$1.1bn 1HFY11, mainly attributed by strong operation cash inflow. EIH s balance sheet remains robust, with ample liquidity available for replenishment of land bank when opportunities arise. Maintain Overweight: We believe the market will react positively to the anticipated core earnings uplift from recognition of profit from property sales. Valuing the company at 40% discount to NAV, which implies a 3.11x forward FY12E P/E, we maintain our target price of $3.00 for EIH. Given a 122% potential upside, we recommend overweighting the stock. Figure 2: Investment Properties Ready for Lease Location Total GFA Book Value Type (s.f.) (HK$'000) 8(G-3/F), 20(G&3/F), 22, 24, 50-56, Russell Street & 76, Percival Street, Causeway Bay HK 62,600 6,232,000 R/C G-1/F, 4, 6, 8, Canton Road, Tsim Sha Tsui HK 4,300 1,927,000 R 81, Nathan Road, Tsim Sha Tsui HK 3, ,000 R (G-1/F), 478 (G/F), 507(G/F), 523 (G-1/F), Lockhart Road, Causeway Bay HK 5, ,000 R Emperor Group Centre, Wanchai HK 188,000 1,549,800 R/O Fitfort Shopping Arcade, North Point HK 130,000 1,443,000 R Emperor Plaza, Tsuen Wan HK 214,000 1,359,800 R/O Others HK 370,000 2,775,000 C Retail & Commercial units, Grand Emperor Hotel Macau 49, ,300 R/C Shops & Carparks, Emperor Lakeside Metropolis, Xiamen PRC 63,000 90,000 R Total 1,089,100 16,646,900 Retail - R; Commercial - C; Office - O; Service Centre SC Figure 3: Investment Properties under Development Book Location Total GFA Value (s.f.) (HK$'000) Type Completion Date The Pulse, Repulse Bay HK 143, ,000 R Avenida de Infante D & , , Avenida de Praia, Grande, Macau Macau 30, ,000 R 2013 Chang'an Avenue, Beijing PRC 1,000,000 1,350,000 R/O 2016 Emperor Star City, Huang Pu District, Shanghai PRC 1,300,000 1,135,000 R/C 2016 Total 2,473,000 3,752,000 Retail - R; Commercial - C; Office - O; Service Centre SC 4

5 Figure 4: Property Development to be Launced for Pre-sale Expected Sales Total GFA Site Area Book Value Expected ASP Proceeds (s.f.) (s.f.) (HK$ 000) (HK$/s.f) (HK$ 000) Prince Edward Road West, Kowloon, HK 30,000 3, ,000 10, , Connaught Road West & A Des Voeux Road West, Sai Wan, HK 185,000 18,300 1,400,000 20,000 3,570, Ho Chung, DD210, Saikung, HK 26,000 66,000 49,000 25, , Portland Street, HK 34,000 4, ,000 12, , Emperor Hotel, Happy Valley, HK 59,000 6, ,000 25,000 1,475, Total 334,000 97,600 2,089,000 Completion Date Figure 5: Property Development Launched for Pre-sale Pre-sale Date Units Sold Total GFA Book Value Land Cost + Construction Cost Amt Realized on Sold Units Total Est. Amt on 100% Sold Units (s.f.) (HK$ 000) (HK$ 000) (HK$'000) (HK$'000) 1,883,000 2,263,000 Harbour One, 856,000 (HK$15,200/ (HK$16,250/ Sai Wan, HK May /103 (93%) 140, ,000 (HK$6,100/sq.ft) sq.ft) sq.ft) The Java, North Point, HK Jul /75 (95%) 69, , Upper East, Sai Wan Ho, HK Apr /108 (84%) 83, ,000 Total 292,000 1,490, , ,000 (HK$12,500/ (HK$7,000/sq.ft) sq.ft) 640, ,000 (HK$11,200/ (HK$5,500/sq.ft) sq.ft) 951,000 (HK$13,800/ sq.ft) 1,066,000 (HK$12,900/ sq.ft) Figure 6: Self-run Hotel under Development Total GFA Book Value Completion Date (s.f.) (HK$ 000) 373 Queen's Road East, Wanchai

6 Income Statement Year Ended 31 March (HK$mn) FY09 FY10 FY11 FY12E FY13E Turnover by segment Property investment Property development ,062 2,155 Consultancy Hotel ,350 1,580 1,817 Total 348 1,450 1,785 4,120 4,538 Results by Segment Property investment Property development (10.0) (112) 950 1,067 Consultancy Hotel Total ,834 2,077 Unallocated expenses (55.3) (266.0) (88) (91) (93) Net finance cost (120.2) (83.3) (67) (161) (148) Operating Profit ,582 1,835 Revaluation (1,758) 2,794 3,278 2,470 2,000 Share of result associates Profit before tax (1,683) 3,334 3,800 4,052 3,835 Taxation 146 (149) (99) (261) (303) Minority Interests 0.4 (125.9) (256) (250) (275) Net profit (1537) Source: Emperor Securities Research Balance Sheet As at 31 March (HK$mn) FY07 FY08 FY09 FY10 FY11 Investment properties 3,996 6,674 6,181 13,333 17,928 Property, plant and equipment ,464 1,673 Prepaid lease payments Other non-current assets 1,112 1,547 2, Total non-current assets Bank balances and cash Trade and other receivables Properties held for sale Properties under development Other current assets Total Current Assets Trade and other payables Taxation payable Secured bank borrowings Other current liabilities 1,129 1,961 1, Total Current Liabilities Amount due to a related company Secured bank borrowings Deferred taxation Other noncurrent liabilities Total Noncurrent Liabilities Share capital Reserves Equity attributable to Company owner Minority interests Total Shareholders Equity 4,666 6,400 4,792 10,915 4,926 Source : Bloomberg, Emperor Securities Research 6

7 DISCLAIMERS & DISCLOSURES The information contained in this report has been compiled from sources believed to be reliable and has been compiled with high integrity, but Emperor Securities Limited ( Emperor Securities ) or any member of Emperor Capital Group ( ECG ) does not make any representation or warranty as to its accuracy, completeness or correctness. The information and opinions contained in this report are or may be subject to change or revision without any notice. This report is for information purposes only. No representation, warranty or guarantee whatsoever, whether expressed or implied, is made as to its accuracy or completeness and should not be construed as an offer to buy or sell or the solicitation of an offer to buy or sell the securities mentioned. Emperor Securities and ECG do not accept any responsibility or liability whatsoever for any direct or consequential loss or damage of whatsoever nature arising from or as a result of the use in whole or in part of this report or any of its contents. The research analyst(s) who prepared this report hereby confirm the views expressed in this report only reflect the personal views of the research analyst(s) about the subject company(ies) and their securities. The research analyst(s) also confirm the research analyst(s) were not, are not, and will not be receiving any direct or indirect compensation or other benefits for expressing the specific recommendation(s) or view(s) in this report. Emperor Securities is a wholly-owned subsidiary of ECG. Both ECG and Emperor International Holdings Limited are companies listed on the Hong Kong Stock Exchange and with a common controlling shareholder. Apart from that, Emperor Securities and ECG and their respective directors, officers, partners, representatives, or employees may have positions or otherwise be directly or indirectly interested in the securities mentioned in this report or may buy, sell, or deal or offer to buy, sell, or deal in or with such securities from time to time, whether as principal for its or their own account or as agent or in any other capacity for or on behalf of another person. Copyright protection and other rights exist or subsist in this report, which may accordingly not be used for any other purpose, nor sold, distributed, published, or reproduced in any manner without the express consent of Emperor Securities. 7

8 Contact Us Headquarter 23-24/F, Emperor Group Centre, 288 Hennessy Road, Wan Chai, HK Tel : Hong Kong Hotline (852) Northern China Toll-free Hotline Southern China Toll-free Hotline Macau Toll-free Hotline Fax : Hong Kong Hotline (852) Emperor Financial Services Centre Northern China Toll-free Hotline Southern China Toll-free Hotline Macau Toll-free Hotline Shops 2-6, G/F, East Ocean Court, 525 Shanghai Street, Mongkok, Kowloon Tel : Hong Kong Hotline (852) Northern China Toll-free Hotline Southern China Toll-free Hotline Fax : Hong Kong Hotline (852) Hong Kong Island Northern China Toll-free Hotline Southern China Toll-free Hotline Shop 1, 1/F, Tung Che Commercial Centre, No.246, Des Voeux West Tel : (852) Fax : (852) Office A, 2/F, Tat Fat Building, No.50-52, Russell Street, Causeway Bay Tel : (852) Fax : (852) Room 705-6, Tai Yau Building, 181 Johnston Road, Wanchai Tel : (852) Fax : (852) Shop E, G/F A King s Road, Quarry Bay Tel : (852) Fax : (852) Kowloon Shop 9-11, G/F, 83 Wuhu Street, Chuang s Hunghom Plaza Tel : (852) Fax : (852) New Territories 16/F, Hang Seng Tsuen Wan Building, No.289 Sha Tsui Road, Tsuen Wan Tel : (852) Fax: (852) Shop 2, G/F Kam Wo Bu & Kam Hing Building, No Shun Lung Street Sha Tau Kok Tel : (852) Fax : (852) Shop B7, G/F., Kar Ho Building, Hong Lok Road, Yuen Long Tel : (852) Fax : (852) G/F, 19 Tai Wai Road, Tai Wai Tel : (852) Fax : (852) Mainland Information Centre Shanghai 2202, City Gateway, 398 Caoxi Road (N), Shanghai Tel : (86) / (86) Fax : (86) Shenzhen 1102, 11/F, New World Center, No 6009, Yitian Road, Futian Distrct, Shenzhen Tel : (86) / (86) Fax : (86) Emperor Wealth Management Limited Shops 2-6, G/F, East Ocean Court, 525 Shanghai Street, Mongkok, Kowloon Tel : (852) Fax : (852) Tel :(852) Fax :(852) esl.research@emperor.com.hk Us esl.cs@emperor.com.hk Emperor Futures Limited efl.cs@emperor.com.hk Emperor Wealth Management Limited wealthmanagement@emperor.com.hk G/F, 216 Castle Peak Road, Sham Shui Po Tel : (852) Fax : (852) Shop 4, G/F, No Nga Tsin Wai Road, Kowloon City Tel : (852) Fax : (852) Shop A, G/F, , Prince Edward Road West, Prince Edward Tel : (852) Fax : (852)