Jackie Chan: “Should I give them the money or the stock?”

1. Jackie Chan: “Should I give them the money or the stock?”

2. Wing Yee Winnie Chan Elaine Lam Patrick Ng Zhi Ming Vicky Wen Jessie Zheng

3. Agenda Background & Overview Real Estate Market in Asia Investment Risk & Concern Company Performance Stock Valuation Analysis of Stock Valuation Recommendation

4. Cheung Kong Group • The biggest conglomerate in Hong Kong • Owned by the richest man in HK: Li Ka Shing • Started from $1 in 1972 to $116 in 2000 • Even in economic downturn today, still priced at $44 Cheung Kong (Holdings), Ltd. • Company’s long-standing policy is : continuously enhance quality and introduce innovations and initiatives to cater to changing needs and trends in the property market, with the aim of brining quality to our customers

5. Economic Overview of China • External demand affected by Asian financial crisis and global economic slowdown • Domestic demand affected by increased pace in corporate reform and weak rural income • Government engagement in expansionary fiscal monetary policy

6. Continued… • By August 2001, China regained its growth momentum • Increase in external demand • Property prices in Shanghai rose 30 – 50%

7. Economic Overview of Hong Kong • Hong Kong suffered a sharp slowdown in 2001, with GDP growth decelerating to 0.1% from 10.5% the year earlier • Residential property prices are 65% below their 1997 peaks. They have been hurt by oversupply and anemic demand.

8. Agenda Background & Overview Real Estate Market in Asia Investment Risk & Concern Company Performance Stock Valuation Analysis of Stock Valuation Recommendation

9. Real Estate Industry in Asia • China • Many opportunities due to rapid economic growth, rising per capita income and flood of foreign investment. • Real estate sector is highly profitable – averaging 20% margins. • Property boom nearing bubble proportions • In 2002, investment in real estate rose 36.6% while fixed-asset investment rose only 24% • Real estate vacancy rate at 26% • The vacancy rate in the US is only 7% • The international warning level is 10%

10. Real Estate Industry in Asia • Hong Kong • Asian financial crisis has led to economic contraction • Falling property prices and wage rates • Nearly half their peak • Flooded property market • 20,000 completed and 30,000 incomplete private residential flats for sale on the market • Property is no longer a major investment vehicle

11. Real Estate Industry in Asia • Future Outlook • Homes are more affordable – mortgage payments comprise smaller share of income. • Residential property prices 65% below their peak in 1997. • The low tax rate in Hong Kong as compared to other major international cities allow its citizens to have more disposable income.

12. Foreign Market Developments • Joint agreements with Hutchison Whampoa to develop properties in Mainland China. • Other foreign markets • Singapore • United Kingdom

13. Agenda Background & Overview Real Estate Market in Asia Investment Risk & Concern Company Performance Stock Valuation Analysis of Stock Valuation Recommendation

14. Investment Risks of China • Economic Risks • Situation • Significant growth of economy • GDP is expected to increase to an average of 7.9% in 2003 • Domestic demand is being stimulated through an expansionary public investment program • Concerns • Different program carry on at the same time • strengthening the financial system • developing legal and regulatory framework for the economy • promoting the role of private sector • Risks • Targeted long-term growth remain largely uncertain

15. Investment Risks of China • Country Risks • Situation • Accession to the WTO • Reexamining existing laws and statutes in accordance with the framework of the WTO • Risks • Revised laws are relatively new and untested, the enforcement of these laws under the improving law system of China involve significant uncertainty

16. Investment Risks of Hong Kong • Economic Risks • Situation • Slowly recovered economy • 0.6% in 2001, 2.3% in 2002 • Low interest rate • 2% per year • Risks • Increase in interest rate • No more tendencies for interest rate to decrease • However, with a slowly recovery market, government might not plan to increase interest rate • Investors better off

17. Investment Risks of Hong Kong • Country Risks and Concerns • Suffering from Asia Financial Crisis since 1997 • Weakening demand of economy • Drop in exports • However, market has been slowly recovered since 2002 • New Risks: SARS • Currently Hong Kong and China have the highest number of infected patients

18. Investment Risks of Cheung Kong • Currency Exchange Rate Risks • Most of Cheung Kong’s operations are located in Hong Kong • Economic downturns in Hong Kong since 1997 • Deflation observed in the market • However, Hong Kong dollar remained constant because of Linked Exchange Rate System • Concerns • A big share of business invested in China and London • Restrictions on currency exchange might limit Cheung Kong’s ability to utilize its revenue to fund business activities

19. Investment Risks of Cheung Kong • Company Risks and Concerns • Reported increasing net profit during the past decades • The increase of net profit slowed down during recent years • Economic downturns in the world • The real estate market in Hong Kong has become saturated • Difficulties in obtaining larger market shares • Losses from subsidiaries companies such as Tom.com

20. Agenda Background & Overview Real Estate Market in Asia Investment Risk & Concern Company Performance Stock Valuation Analysis of Stock Valuation Recommendation

21. Liquidity • Current Ratio > 1 for the Past 3 Years • High level of Liquidity • Increasing • Decreasing Quick Ratio • Using cash and securities to pay off liabilities and purchase inventories

22. Leverage Ratio • Increasing Long Term Debt Ratio • Relies more on equity than debt financing • Lower Debt-to-Assets Ratio • Advantage in borrowing additional funds • Interest Coverage Ratio • Dramatic decrease from 88.18 to 6.87 • Negative Operating Cash Flow to Total Liability

23. Profitability • Profit Margin • Over 100% in 1999 and 2000 but decreasing • Low in percentage of operating profit • Volatile • Decreasing Return on Assets • Return on Equity • Decreased from 46% to 6% in 2000

24. Agenda Background & Overview Real Estate Market in Asia Investment Risk & Concern Company Performance Stock Valuation Analysis of Stock Valuation Recommendation

25. CAPM • Risk-free Rate – 10 year Exchange Fund Notes = 4.40% • Market Return – Hang Seng Index = 8.83% • Beta = 1.079 • CAPM = 9.18%

26. Altman’s Z-score – Cost of Debt • Z-score = 6.72 EM Score = 3.25 + 6.56(X1) + 3.26(X2) + 6.72(X3) + 1.05(X4) • Bond Rating = A • Cost of Debt = 6.2% Cost of Debt = Risk free rate + Default spread

27. WACC & Goldman Model WACC Goldman Model

28. Why DDM? • Stable Growth – See following table • Dividend – long term earning power & Profitability • Dividend vs. EPS – foreseeability • Suitable for non-controlling perspective

29. Justified Value of Stock • DDM Formula: Current EPS * (1+Growth of Earnings) * Payout Ratio / (Cost of Equity - Growth of Earnings) • Current EPS – Obtained from Bloomberg • Payout Ratio – Most recent year • Growth of Earnings – Growth of DPS • Cost of Equity - CAPM

30. Justified Value of Stock HK$26.68 Value of Stock Today HK$44.60

31. Sensitivity Analysis Growth Rate • Key driver of the value of stock • As the economic outlook improves, higher growth rate assumption can be achieved Equity Beta • Linear Relationship • Less Sensitive

32. Stock Valuation Suggests… • Based on the numerical calculation alone, we conclude with a SELL recommendation for Cheung Kong. • However, there is more to the value of the stock than just numbers…

33. Agenda Background & Overview Real Estate Market in Asia Investment Risk & Concern Company Performance Stock Valuation Analysis of Stock Valuation Recommendation

34. Brand Image • Corporate Governance • Ticker: 0001 • Publicized in 1972 • Today: Market Cap of HK$ 405 Billion • Diversification • Li Ka Shing • Hong Kong’s Wealthiest Man • World’s 23rd • Single Largest Shareholder: 36.53% • Successful Dealmaker

35. Stable Dividend Growth • Market Recession • Average Rate for Bank Deposit < 1% • Invest in Defensive Stocks • Utilities, Health Care, Consumer Staples, High Dividend Yield…etc. • Stable Dividend Distribution • Cheung Kong: 3.0% Dividend Growth • Pay Premium for Constant Return

36. Instability of Earnings Per Share • Fluctuation of Payout Ratio • Earnings Dependent on Associates and Jointly Controlled Entities • 49.9% Interest in Hutchison Whampoa • Sold off the British telecom operator, Orange PLC resulted in $22 Billion Profit for Shareholder In 1999 • Rapid growth of EPS from 1998’s 2.66% to 25.84% in 1999

37. Hong Kong Property Market • Diminishing and Saturated Market • Government Policy • Subsidized apartment vs. Private Flat • Cheung Kong’s Surviving Techniques • Mark-to-Market Pricing Strategy • Market Development – China, UK…etc.

38. Agenda Background & Overview Real Estate Market in Asia Investment Risk & Concern Company Performance Stock Valuation Analysis of Stock Valuation Recommendation

39. Recommendation HOLD Cheung Kong Holdings

40. Questions?