Hutchison Whampoa Limited: Invest in the Phase II Shanghai Deep-water Port?

Vidya VishalJerry WangGrace ZhaoGaobo Zhou

February 27th, 2006

2

Agenda

Case overview Hutchison Whampoa Limited China’s economy, port industry, and Shanghai ports The Yangshan Deep-water Port Project The Yangshan Deep-water Port phase II (expansion) Other potential investors The question Our analysis

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Case Overview - Geography

Yangshan Islands

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Case Overview

Case timeline: September 2004 Constraints at existing Shanghai Ports Deep-water Port on Yangshan Island

Phase I Under Construction – Est. Completion: EOY 2005

Phase II Under Planning Open to Private Investors

HWL’s Question – Invest in Phase II or not?

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Hutchison Whampoa Limited (HWL) HK-based international corporation Highly diversified company Consolidated turnover ~$2.3 bn Operations in 54 countries; 200,000 employees World’s leading port operator

Operates 242 berths in 41 ports spread over 20 countries First foreign firm to invest in and operate container terminals in

Shanghai

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China Economy

Tremendous economic prosperity since the reform started from late 1970s GDP doubled every 7 years since 1987

Strong economic performance attracts the foreign investment China surpassed U.S. and became the most attractive destination for

FDI. FDI totaled $60.6 billion with growth rate 13.3% Low operating cost and huge existing/potential market

Fast growing foreign trade Foreign trade has increased by 30 times in 24 years

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Port Industry in China

Port

EOY 2004 Throughput

Capacity (million TEUs)

2005-2010 Growth in Capacity

(million TEUs)

Annual Growth

Rate

Bohai Bay Region

Dalian 2.2 6.2 30.7% Tianjin 4.8 6.0 17.6% Qingdao 6.5 4.5 11.1%Subtotal 13.5 16.7 17.5%

Changjiang Delta

Shanghai 8.4 15.0 22.8% Ningbo 3.0 11.4 36.9%Subtotal 11.4 26.4 27.2%

Zhujiang Delta

Xiamen 3.7 4.6 17.5% Shenzhen 6.2 8.1 18.1% Guangzhou 4.2 4.2 14.9%

Subtotal 14.1 16.9 16.8%

Total 39.0 60.0 20.5%

Source: Huatai Securi t i es Co. (Chi na)

Bohai Bay

Zhujiang Delta

Changjiang Delta

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Port Industry in China (cont’d)

Nationwide cargo throughput will increase at declining growth rate Increase of cargo throughput is much higher than growth of foreign

trade and growth of GDP Estimated annual increase of cargo throughput 10% - 20% for the next

ten years

Competition among ports will intensify Various new ports and port expansion projects Low utilization rate and excess capacity Some ports may have to lower their service charge

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Shanghai Ports

Shanghai port is the largest port in China Shanghai is China’s business center 99% of Shanghai's foreign-trade goods are handled by its ports Cargo handling capacity of 400 million tons Container handling capacity of 18 million TEUs

3 ports Waigaoqiao port (not deep-water port) Huangpujiang port (not deep-water port) Yangshan deep-water port (under construction)

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Yangshan Deep Water Port Project

Phase I Phase II Phase III Phase IV Phase V Phase VI Phase VII Total

Completion Time 2005 2006 2008 2010 2020 2020

Total Investment(billion)

1.25 0.8 11.75 12.2

AccumulatedAnnual Capacity

(TEU, million)2.2 15 20 20

Number ofBerths

5 4 4 3 14 30

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Phase I Construction started in 2002 Operational In EOY 2005 Total Investment: 1.25 Billion with

50% debt financing Four major components:

Port zone Five berths 2.2 MM TEUs capacity Allow 6th Generation Ships

Donghai Bridge 32 Kilometers Connecting Shanghai And

Yangshan 5 MM TEUs capacity

Lu-Hu Freeway 43 Kilometers Connecting Luchaogang and

Shanghai Luchaogang city

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Deal Structure for Phase I

Shanghai InternationalGroup CorporationLimited (SIG)

Shanghai Port AuthorityPredecessor of SIPG

Shanghai State-ownedAsset ManagementCompany

State-owned AssetSupervision &Admistration Commissionof Shanghai Government

China Merchants Holding(International) Group(CMG)

Shanghai TongshengInvestment Group(SHTS)founded in 2002

Shanghai State-ownedAsset ManagementCompany

Shanghai MunicipalGovernment

Shanghai ShengdongInternational ContainerCo. Ltd. (SHSD)founded in 2004

Shanghai DashengHoldings Co., Ltd.founded in 2002

100%

Shanghai InternationalPort (Group) Co. Ltd.(SIPG)

Shanghai InternationalPort Group (SIPG)

Shanghai Port ContainerCo.,Ltd.(SPCCO)

Shanghai Port ContainerComprehensiveDevelopment Co., Ltd.(SPCCD)founded ini 1992

Hong Kong HutchisonWhampoa Ltd.(WHL)

Restructured in2005

75%

Restructured in1998

52%

50% 30% 19% 0.5% 0.5%

49%

51%

Shanghai ContainerTerminals Co., Ltd.(SCT)founded in 1993

50%

50%

SHSD purchased Yangshan PortPhase I from SHTS in 2004

Yangshan Port Phase IConstruction & Operation Apr. 2002 - Dec. 2005

40% 8%

Shanghai Port AuthorityPredecessor of SIPG

Yangshan Port Phase IIConstruction & Operation 2005 -?

Shanghai InternationalPort (Group) Co. Ltd.(SIPG)

? ?

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Yangshan Deep-water Port Phase II

Specs Additional 4 berths Waterway depth: 15m,

accommodate 8,000 TEU ships Designed throughput: 2.1 MM

TEU/year Estimated cost: $800 MM Completion date: EOY 2006

Construction Acquire 0.64 km2 land via sea-fill Thick mud foundation complicates

construction

Phase II

Phase I

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Yangshan Deep-water Port Phase II Operation

Expand SH container throughput Attract international transit shipments Competition

Pusan port: under expansion (2006) Ningbo Beilun port

Better port condition Cross-harbor bridge to shorten distance

to Shanghai (2009)

Silt blockage: Dredging needed Environment hazard: stir-up sea floor Inclement weather could close the

port as many as 50 days per year

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Other Potential Investors

Port of Singapore Authority World’s largest container terminal operator

AP Moeller-Maersk Focus On Shipping, Oil-drilling, Shipbuiliding, retail

Orient Overseas Container Line Limited Largest Container Transportation Company

COSCO Group Focus On Shipping And Logistics

China Shipping Group State-owned Shipping Conglomerate

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The Question

Should HWL invest in the Phase II Shanghai Deep-water Port?

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Our Analysis

Pros China economy booming and

Shanghai maturing as an economic and trade center

Investors have international port management experience

Shipping investors guarantee part of demand

Real option: “Foot in the door” for investment in

future expansion projects

Cons Demand risk

Nationwide cargo throughput increase slowing down

Competition from other ports Disadvantages of private investors

Speed of construction, permits, etc Higher expropriation risk

Bridge capacity constraints Weather-related risks Environmental issues

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Our Analysis

NPV of project: $29 million Cost of capital:

14.19% in 2005, decrease annually with improvement of China’s country rating

Our conclusion: Marginally successful with IRR of 17.7% Real options – convenient access to future investment opportunities in

expansion projects

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What Happened

Phase I began operation on 12/10/2005 Reached designed operation level in Jan 2006

Phase II investment agreement signed on 12/19/2005

Hutchison Whampoa Limited 32%

AP Moeller-Maersk 32%

Shanghai International Port Group 16%

COSCO Group 10%

China Shipping Group 10%