Jackie Chan:

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• Jackie Chan
• Should I give them the money or the stock?

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

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Agenda
Background Overview
Real Estate Market in Asia
Investment Risk Concern
Company Performance
Stock Valuation
Analysis of Stock Valuation
Recommendation
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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
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• Cheung Kong (Holdings), Ltd.
• Companys 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

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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

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Continued

• By August 2001, China regained its growth
  momentum
• Increase in external demand
• Property prices in Shanghai rose 30 50

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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.

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

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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

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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.

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Foreign Market Developments

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

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

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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

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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

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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

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Investment Risks of Cheung Kong

• Currency Exchange Rate Risks
• Most of Cheung Kongs 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 Kongs ability to utilize its revenue to
  fund business activities

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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

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

• Current Ratio gt 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

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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

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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

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Agenda
Background Overview
Real Estate Market in Asia
Investment Risk Concern
Company Performance
Stock Valuation
Analysis of Stock Valuation
Recommendation
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CAPM
Hang Seng Index Hang Seng Index
Date Adj. Close
Dec-88 2,687.40
Dec-89 2,836.60
Dec-90 3,024.00
Dec-91 4,297.30
Dec-92 5,512.40
Dec-93 11,888.40
Dec-94 8,191.00
Dec-95 10,073.40
Dec-96 13,451.50
Dec-97 10,722.80
Dec-98 10,048.58
Dec-99 16,962.10
Dec-00 15,095.53
Dec-01 10,598.55
Dec-02 9,561.63
(Geometric Avg.) 8.83

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

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Altmans 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

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WACC Goldman Model

Equity-to-Total Capital 88.50
Debt-to-Total Capital 11.50
Cost of Equity 9.18
Cost of Debt 6.20
Tax Rate 9.10
WACC 8.77

HK Risk Free Rate 4.40
US Risk Free Rate 3.93
SYS 0.47
Beta 1.079
World Market Return 8.07
World Market Premium 4.14
Int'l Cost of Capital 9.35
WACC
Goldman Model
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Why DDM?

• Stable Growth See following table
• Dividend long term earning power
  Profitability
• Dividend vs. EPS foreseeability
• Suitable for non-controlling perspective

1996 1997 1998 1999 2000 2001
DPS 1.38 1.62 1.16 1.38 1.60 1.60
Growth of DPS 3.00
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Justified Value of Stock

• DDM Formula
• Current EPS (1Growth 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

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• Value of Stock Today
• HK44.60

• Justified Value of Stock
• HK26.68

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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

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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

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Agenda
Background Overview
Real Estate Market in Asia
Investment Risk Concern
Company Performance
Stock Valuation
Analysis of Stock Valuation
Recommendation
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Brand Image

• Corporate Governance
• Ticker 0001
• Publicized in 1972
• Today Market Cap of HK 405 Billion
• Diversification
• Li Ka Shing
• Hong Kongs Wealthiest Man
• Worlds 23rd
• Single Largest Shareholder 36.53
• Successful Dealmaker

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Stable Dividend Growth

• Market Recession
• Average Rate for Bank Deposit lt 1
• Invest in Defensive Stocks
• Utilities, Health Care, Consumer Staples, High
  Dividend Yieldetc.
• Stable Dividend Distribution
• Cheung Kong 3.0 Dividend Growth
• Pay Premium for Constant Return

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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 1998s 2.66 to 25.84
  in 1999

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Hong Kong Property Market

• Diminishing and Saturated Market
• Government Policy
• Subsidized apartment vs. Private Flat
• Cheung Kongs Surviving Techniques
• Mark-to-Market Pricing Strategy
• Market Development China, UKetc.

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Agenda
Background Overview
Real Estate Market in Asia
Investment Risk Concern
Company Performance
Stock Valuation
Analysis of Stock Valuation
Recommendation
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Recommendation
HOLD
Cheung Kong Holdings
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Questions?