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KLN is a solid company with a good track record and strong positioning in Hong Kong

where it is the No 1 third-party logistics (3PL) provider. It is well positioned to capitalize

on growth in the Chinese domestic market, and the business it conducts there, it is

arguably conducting well. But we believe there is a disconnect between KLN’s valuation,

market expectations and the realities of operating an asset heavy, contract logistics-led

freight forwarding model.

Contract logistics is a low margin, competitive business: KLN’s profitability is largely

driven by Hong Kong logistics and its warehousing business, where it acts as landlord.

These account for, we calculate, c58% of its net profit. This is a structurally mature, low

growth market, but defensible. Mainland China logistics accounts for just 21% of KLN’s

profit, equating to a 4% margin. This is an industry standard margin – so KLN is faring no

better nor worse than peers. Mainland China is an attractive market for growth;

underpenetrated, with massive inefficiencies to be capitalized on by 3PLs. But it is

competitive and fragmented, and scale does not necessarily confer an advantage when

tendering for contracts. There is definite potential in China, but translating growth into

profitability may not be simple. KLN’s asset heavy model means it will need to invest to

fulfil growth ambitions, while the rationale for property ownership in mainland China

where space is not scarce, is less obvious.

Initiate at UW(V) and target price of HKD11.75: Since listing on 18 December 2013,

KLN shares have risen 27.3%. It trades ahead of its peer group at 22.9x 2014e PE vs. the

sector average of 20.5x. We forecast 8.1% earnings growth for 2014-15e for KLN. To put

into context, this compares to CH Robinson and KNIN, two much higher return

companies, on 19.8x and 23.6x 2014e earnings with forecast CAGRs of 9.6% and 6.9%

over 2014-15 respectively. Our peer multiple-based valuation gives us a target of

HKD11.75 per share (20.7x 2014e earnings).

Kerry Logistics Network (636 HK)

Initiate at UW(V): The world’s local logistics provider

Growth driven by mainland China, profitability driven by Hong Kong

Yet the reality is that contract logistics is a low margin business and growth is likely to be hotly contested

Initiate with an Underweight (V) rating and multiple-based HKD11.75 target price

Industrials Air Freight & Logistics Equity – Hong Kong

Company report

Index^ HANG SENG INDEXIndex level 21,976RIC 0636.HKBloomberg 636 HK

Source: HSBC

Underweight (V) Target price (HKD) 11.75 Share price (HKD) 12.98 Forecast dividend yield (%) 0.9 Potential return (%) -8.6

Note: Potential return equals the percentage difference between the current share price and the target price, plus the forecast dividend yield

Dec 2012 a 2013 e 2014 e

HSBC EPS 0.00 0.53 0.57 HSBC PE 24.3 22.9

Performance 1M 3M 12M

Absolute (%) 27.0 Relative^ (%) 34.3

Note: (V) = volatile (please see disclosure appendix)

Free float (%) 42Market cap (USDm) 2,825Market cap (HKDm) 21,935

Source: HSBC

28 January 2014

Julia Winarso* Analyst HSBC Bank plc +44 20 7991 2168 [email protected]

Mark Webb* Head of Conglomerate and Transport Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6574 [email protected]

Satheesh Kailasam* Associate Bangalore

View HSBC Global Research at: http://www.research.hsbc.com

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations

Issuer of report: HSBC Bank plc

Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

http://www.research.hsbc.com/

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Kerry Logistics Network (636 HK) Air Freight & Logistics 28 January 2014

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Financials & valuation Financial statements

Year to 12/2012a 12/2013e 12/2014e 12/2015e

Profit & loss summary (HKDm)

Revenue 19,295 20,659 22,165 23,596EBITDA 1,657 1,879 2,046 2,195Depreciation & amortisation -367 -438 -460 -486Operating profit/EBIT 1,555 1,941 1,586 1,709Net interest -38 -55 -52 -42PBT 1,657 2,031 1,664 1,803HSBC PBT 1,392 1,531 1,664 1,803Taxation -305 -337 -369 -404Net profit 1,069 1,384 958 1,035HSBC net profit 804 884 958 1,035

Cash flow summary (HKDm)

Cash flow from operations 871 1,209 1,425 1,562Capex -1,468 -1,182 -813 -843Cash flow from investment -1,693 -1,602 -813 -843Dividends 0 -177 -177 -192Change in net debt 835 708 -790 -562

Balance sheet summary (HKDm)

Intangible fixed assets 1,774 1,774 1,774 1,774Tangible fixed assets 6,599 6,908 7,261 7,618Current assets 7,389 7,960 8,529 8,857Cash & others 2,940 3,167 3,457 3,518Total assets 22,468 23,948 25,000 25,821Operating liabilities 8,887 4,801 4,913 5,026Gross debt 1,965 2,900 2,400 1,900Net debt -975 -267 -1,057 -1,618Shareholders funds 8,358 12,679 13,783 14,627Invested capital 3,934 8,674 9,195 9,705

Ratio, growth and per share analysis

Year to 12/2012a 12/2013e 12/2014e 12/2015e

Y-o-y % change

Revenue 20.3 7.1 7.3 6.5EBITDA 15.5 13.4 8.9 7.3Operating profit 22.5 24.8 -18.3 7.8PBT 20.5 22.6 -18.1 8.3HSBC EPS 6.3 8.1

Ratios (%)

Revenue/IC (x) 6.1 3.3 2.5 2.5ROIC 33.3 19.1 13.8 14.0ROE 10.2 8.4 7.2 7.3ROA 6.7 7.6 5.6 5.7EBITDA margin 8.6 9.1 9.2 9.3Operating profit margin 8.1 9.4 7.2 7.2EBITDA/net interest (x) 43.3 34.4 39.4 52.9Net debt/equity -8.8 -1.7 -6.1 -8.8Net debt/EBITDA (x) -0.6 -0.1 -0.5 -0.7CF from operations/net debt

Per share data (HKD)

EPS reported (fully diluted) 0.00 0.83 0.57 0.61HSBC EPS (fully diluted) 0.00 0.53 0.57 0.61DPS 0.00 0.11 0.11 0.12Book value 0.00 7.65 8.16 8.66

Valuation data

Year to 12/2012a 12/2013e 12/2014e 12/2015e

EV/sales n/a 1.0 1.1 1.0EV/EBITDA n/a 10.6 11.7 10.8EV/IC n/a 1.2 1.4 1.3PE* n/a 19.5 22.9 21.2P/Book value n/a 1.4 1.6 1.5FCF yield (%) n/a 0.3% 2.9% 3.4%Dividend yield (%) n/a 1.0% 0.9% 0.9%

Note: * = Based on HSBC EPS (fully diluted)

Price relative

Source: HSBC Note: price at close of 27 Jan 2014

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Jan-14Kerry Logistics Network Rel to HANG SENG INDEX

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“Asia Specialist, China Focus, Global Network”

Kerry Logistics Network Limited (KLN) is

headquartered in Hong Kong and is the largest

Hong Kong-based international third-party

logistics (3PL) provider. It also has extensive

operations across Greater China and other

countries in Asia. It is principally engaged in

integrated logistics and international freight

forwarding. It currently has more than 400 service

locations across 35 countries and territories in

Asia, Australia, Europe and the Americas. KLN

was listed on the HKSE on 18 December 2013

under the ticker 636 HK. It is 42.5% owned by

Kerry Properties Ltd which itself is listed on the

HKSE (683 HK) and 23.8% by Kerry Group Ltd.

This gives KLN a 33.4% free float.

Shareholding structure

Source: KLN, Bloomberg, HSBC

Public shareholders

Other shareholders

of KPL

Kerry Logistics Network

Limited (KLN)

~23.8% ~42.5%

~44%~56%

Kerry Properties

Limited (KPL)

Kerry Group Limited

~33.4%

Directors and subsidiaries

~0.3%

Overview

Growth driven by mainland China, profitability still driven by Hong

Kong

But contract logistics is a low margin business and growth is likely

to be hotly contested

Initiate with an UW(V) rating; target price at HKD11.75

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It’s complicated Revenue breakdown (2012) *

*Revenue including intersegment revenues

Source: KLN, HSBC

EBIT breakdown (2012)*

*Segment revenues include intersegment revenues

Source: KLN, HSBC

Total revenue by geography (2012) *

*Integrated Logistics and International Freight Forwarding divisions combined

Source: KLN, HSBC

HSBC estimate of recurring profit breakdown in 2012

Source: Company and HSBC estimates

KLN is a beneficiary of the increasing complexity

of supply chains and outsourcing trends. KLN

offers supply chain solutions to simplify and

streamline operations for its customers in order to

cut costs and to allow them to focus on their own

core competences. It benefits from the mismatch

in supply and demand, orders and production and

sales and inventory that its customers seek to

minimise.

Investment view

KLN is a solid company with a good track

record and strong positioning in Hong Kong

where it is the No 1 3PL provider. It is well

positioned to capitalize on growth in the Chinese

domestic market, and the business it conducts

there, it is arguably conducting well. But we

believe that there is a disconnect between the

valuation of the company, market expectations

and the realities of operating an asset heavy,

contract logistics led freight forwarding model.

Contract logistics is low margin, competitive

business: KLN’s profitability is still largely driven

by Hong Kong logistics and its warehousing

business, where it acts as landlord. These account

for, we calculate, c58% of its net profit. This is a

structurally mature, low growth market, but

defensible as there is no new warehousing space

coming onstream until 2016 and it is not a

particularly attractive market for new entrants. We

calculate its Hong Kong margins to be 19.4%,

Logistics operations

39%

HK w arehouse

3%

Intl freight forw arding

58%


51%

HK w arehouse

28%


21%

PRC45%

Hong Kong13%

Taiw an10%

South and South East

Asia13%

Europe16%

Others3%

HK53%

AAT5%

PRC21%

CCT12%

TJ Log8%

Other-1%

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structurally inflated by the pure warehousing and

landlord business.

Mainland China logistics accounts for just 21% of

KLN’s profit, equating to a 4% margin. This is an

industry standard margin – so KLN is faring no

better nor worse than peers. Mainland China is an

attractive market for growth; with a high

urbanisation rate, underpenetrated, with massive

inefficiencies to be capitalized on by 3PLs. But it

is competitive and fragmented, and scale does not

necessarily confer an advantage when tendering

for contracts. There is definite potential in China,

but translating growth into profitability will not

necessarily be simple. KLN’s asset heavy model

means it will need to invest to fulfil growth

ambitions, while the rationale for property

ownership in mainland China where space is not

scarce, is less obvious.

Kerry is a well-recognized brand within Hong

Kong, China and to a lesser extent wider Asia.

Though the Asian market is immature, it is very

competitive. KLN may offer more sophisticated

solutions than local players and has a well-

recognised brand within Asia. With over 40 of the

top 100 Interbrand ranked brands as its customers,

we believe KLN is well positioned to grow with

these multinationals and the local market. While

the market offers high growth, we envisage that

over time smaller players will too become more

sophisticated and services more commoditised, as

has occurred in the US and European markets,

margins will come structurally under pressure.

Market share in contract logistics does not have

much bearing on profitability or ability to win

new contracts, unless a player is dominant in a

certain market, but rather local knowledge,

customer relationships and the ability to get things

done have a much greater bearing.

Given its heritage, KLN has a natural bias

toward property ownership, more so than its

global peers who have gravitated toward more asset

light models. KLN owns approximately 55% of its

39m square feet of logistics facilities under

management with a significant proportion of this

(c26%) in Hong Kong KLN believes asset

ownership in Asia can be of strategic advantage in

securing customers where the quality and security

of leased warehouses can be variable. It provides

the flexibility of making specific modifications and

avoids exposure to significant rental escalation

clauses in long duration leases which can be

difficult to write into customer contracts.

KLN’s asset heavy approach has benefitted it in

Hong Kong as space is at a premium property and

prices have risen, but the rationale for property

ownership mainland China is less obvious – which

is where KLN is largely focusing its growth and

investment ambitions. There is therefore a risk that

growth could come at the expense of margins and

returns.

Sale and lease back potential: We remain

unconvinced by KLN’s asset heavy strategy as it

expands outside of Hong Kong. But we do

recognise that should KLN see significant growth

opportunities in the future we see the potential for

KLN to free up capital through sale and

leasebacks.

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Moving forward

Going forward, KLN plans to maintain and

increase its leading market position in China and

Asia. It has significant expansion plans in

mainland China, with an additional 12% of

managed GFA under construction. We believe in

the near term this will remain its primary focus

though it will also seek to build out further across

Southeast Asia and to take advantage of the

removal of tariffs by 2015 in the ASEAN region.

Its freight forwarding arm, while well positioned

in Greater China, remains small versus

competitors and KLN will seek to grow both

organically and through acquisition to build out

coverage and density of volumes in order to bring

greater scale economies and purchasing power.

These volumes may also tie into its integrated

logistics division.

Margins

KLN has an overall EBIT margin of 7% (2013e),

significantly higher than its forwarder-contract

logistics peers at an average of 3-4%. Our analysis

suggests that this is largely as a result of a

function of its relatively low ownership costs as it

does not depreciate investment property but

instead revalues annually. The flip side of having

high margins due to high asset intensity is lower

returns on invested capital. KLN’s 2014e ROIC is

7.1% versus KNIN on 22.5% and DSV on 13.8%

on our estimates.

As a percentage of revenue, we calculate KLN’s

ownership costs (depreciation and leases) were

around 3.5% in 2012. Analysis of peers suggests

more normalized ownership costs are 5.5-7% of

revenue. Adjusting for this results in EBIT margin

of 5-5.5%, though this is still at the higher end of

the peer range. KLN also owns a 79.5% stake in

Kerry Siam Seaport and as ports have structurally

high margins (typically 30%+) this is likely to be

inflating the overall margin. KLN discloses

neither the revenue nor the EBIT of Kerry Siam

Seaport, but on the basis that it comprises a

significant proportion of the Southeast Asian

revenue our best estimate is that it could be

contributing HKD100-200m in EBIT.

Post these two adjustments we get normalized

margins of 4.5-5%. The Asian logistics market is

still immature and despite being high growth, as

has occurred in Europe and the US, we would

expect margins to come down over time.

Forecasts

We forecast core net profit growth of 8.3%, 8.4%

and 8.1% over 2013-15, respectively. This

compares to a CAGR of 10.7% over 2010-12,

which has been heavily driven by acquisitions and

the full consolidation of Kerry TJ Logistics (Not

rated). We calculate underlying EBIT growth of

6% in 2012 excluding acquisitions and c5% in

1H13. While we make no assumption for

acquisitions, and our growth rate is higher than

has been the organic trend, we note that KLN has

added a significant amount of square footage

through 2013 and has 6% of its existing portfolio

under construction – which will come onstream

largely in 2014. We also assume KLN will lease

new facilities. Our central assumptions are that

the capex has been largely front-end-loaded into

2013 and that the growth from the opening of

these new facilities will materialize in 2014 and

2015. After this, we assume growth rates

normalize to 5-6%.

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KLN financial summary

HKDm 2010 2011 2012 2013e 2014e 2015e

Revenue 10,880 16,034 19,295 20,659 22,165 23,596 Adj op profit* 805 1,139 1,290 1,441 1,586 1,709 Net profit 833 871 1,069 1,384 958 1,035 Core net profit** 665 741 816 884 958 1,035 Growth* Revenue 47.4% 20.3% 7.1% 7.3% 6.5% Adj EBIT 41.6% 13.2% 11.7% 10.1% 7.8% Core net profit** 11.4% 10.1% 8.3% 8.4% 8.1% Margins* EBITDA 9.3% 9.0% 8.6% 9.1% 9.2% 9.3% Adj EBIT 7.4% 7.1% 6.7% 7.0% 7.2% 7.2% Other* ROIC 5.3% 6.8% 6.5% 6.7% 7.1% 7.4% Asset turn 0.7x 0.8x 0.9x 0.9x 0.9x 0.9x Net debt/EBITDA

2.1x 1.5x 2.0x -0.1x -0.5x -0.7x

Fixed charges coverage

34.9x 20.6x 20.4x 17.1x 19.0x 22.5x

**Core net profit is not a standard measure under HFRSs. It represents the profit attributable to the company’s shareholder before the after-tax effect of change in fair value of investment

* HSBC calculations

Source: KLN, 2013-15 are HSBC estimates

Risks to our forecasts

The company has not provided much disclosure in

the way of forecasts. We have therefore had to make

significant assumptions in preparing our forecasts.

We have made assumptions as to the number

of new facilities constructed each year and the

size and cost of these facilities. These could

be materially incorrect.

We have not accounted for any possible

future acquisitions due to the uncertain nature

and timing yet the company has a stated

strategy of (and has been growing through)

acquisition in the past few years.

Our assumptions for domestic consumption

and demand growth could be too high or low

and will depend on global GDP and Chinese

governmental policy decisions.

We have not assumed a material impact from

the introduction of VAT in China on services.

Competition could intensify, pressuring

margins or costs base inflation could be

higher than we forecast.

Working capital intensity could be higher

than we anticipate as KLN seeks to grow with

big customers.

Valuation

Initiate at UW(V); TP HKD11.75: Since listing

KLN shares have risen 27.3%. It trades ahead of

its peer group at 22.9x 2014e earnings vs. the

sector average of 20.5x. We forecast 8.1%

earnings growth for 2014-15e for KLN. In

context, this compares to CH Robinson and

KNIN, two much higher return companies on

19.8x and 23.6x 2014e earnings with forecast

CAGRs of 9.6% and 6.9% respectively. Our peer

multiple-based valuation gives us a target price of

HKD11.75 per share (20.7x 2014e earnings).

Under our research model, the Neutral rating band

for volatile Hong Kong stocks equals the local

hurdle rate of 8.5% plus or minus 10ppt. Our

target price of HKD11.75 implies a potential

negative return of 8.6%, including a forecast

dividend yield of 0.9%. This is below the Neutral

band; therefore, we initiate with an Underweight

(V) rating. Potential return equals the percentage

difference between the current share price and the

target price, including the forecast dividend yield

when indicated.

Core valuation (based on 2014 forecasts)

Multiple Valuation (HKDm)

PE 21.0x 20,116 EV/EBIT 14.0x 19,990 EV/EBITDA 10.5x 19,453 Average 19,853 Price per share HKD 11.75

**EBIT/EBITDA adjusted for minority interests (25% of the earnings stream). To derive the equity value we add a net cash of HKD1.14bn (2014e) and add in the market value of the associates HKD2.2bn.

Source: HSBC estimates

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Implied KLN valuation based on our target price

2013e 2014e 2015e

PE 19.5 20.7 19.2 EV/EBITDA 10.6 10.6 9.7 EV/EBIT 13.8 13.7 12.4


Summary comp table (x)

Ticker CP^ Rating EV/EBIT EV/EBITDA PE 13e 14e 13e 14e 13e 14e

DPW DPW GR 26.5 N 11.9 13.3 8.1 9.2 17.1 17.4 TNTE TNTE NA 6.7 UW (V) 15.1 11.6 9.0 7.8 36.6 21.3 KNIN KNIN VX 123.7 UW 16.6 17.2 13.2 14.0 25.1 23.6 PWTN PWTN SW 150.0 UW 19.4 23.3 14.1 16.5 39.3 33.3 DSV DSV DC 181.0 N 13.5 14.5 11.2 12.0 19.6 18.4 KLN 636 HK 13.0 UW (V) 13.8 15.1 10.6 11.7 19.5 22.9 FDX FDX US 140.2 NR* 13.3 11.9 7.4 7.2 22.7 17.2 UPS UPS US 97.9 NR* 14.4 14.1 11.4 11.4 21.3 18.4 UTI WW UTIW US 17.2 NR* 36.1 17.9 15.8 10.0 85.3 31.5 CH Robinson

CHRW US 59.1 NR* 13.3 12.6 12.3 11.6 21.8 19.8

Exp-editors

EXPD US 43.6 NR* 13.4 11.8 12.4 11.0 25.0 22.2

Win-canton

WIN LN 1.5 NR* 11.6 10.9 7.6 7.4 9.3 9.7

Sino-trans

598 HK 3.3 NR* 9.1 7.7 6.0 5.2 16.8 13.7

Note: UTI WW is a January ending company, FedEx is a May ending company and Wincanton is a March ending company. Hence the values have been calendarized.

^Current price in local currency

*NR = Not rated

Source: HSBC estimates for DPW, TNTE, PWTN, DSV, KNIN and KLN. Bloomberg consensus for FDX, UPS, UTI WW, CH Robinson, Expeditors, Wincanton and Sinotrans; Prices as of 23 January 2014 for DPW, TNTE, KNIN, PWTN, DSV, FDX, UPS, UTI WW, CH Robinson, Expeditors and Wincanton; as of 24 January for KLN and Sinotrans

Risks

Upside risks to our rating and target price include:

Better-than-expected economic development

in China could lead to an increase in domestic

consumption which would positively impact

KLN’s customers and its own volumes.

A decrease in trade restrictions or embargoes in

key countries in which KLN operates.

Positive changes in government policies within

China to stimulate domestic consumption.

Increase in outsourcing trends stimulating Asia-

outbound volumes.

Accretive acquisitions.

A positive movement in property values in

Hong Kong or mainland China.

Better-than-expected general trading or

significant new contract wins.

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The economy

Transportation and logistics are driven by global

GDP and local consumption. KLN is engaged in

logistics operations across Asia and provides most

of its freight forwarding services intra-Asia and

Asia-Europe. An economic upturn within China in

particular could lead to a general increase in

domestic consumption and international trade.

Equally, an upturn in the global economy and

within mature markets could stimulate outbound

volumes from Asia and have knock-on effects on

Asian economies.

Shifts in outsourcing trends

Increases in customer outsourcing strategies to

and within Asia would be beneficial for KLN as a

3PL provider in terms of contacts wins and

volumes. These trends could impact outbound

volumes out of China, in particular the Asia-

Europe and Asia-US freight forwarding activities

of KLN. In addition this could impact the

activities of KLN’s associates CCT and AAT as

well as its fully consolidated Kerry Siam Seaport

in Thailand.

Property ownership and leasing One of KLN’s strategies is property ownership in

key markets and it has significant investment

property holdings in Hong Kong. It is therefore

significantly leveraged to movements in asset

prices and rental yields.

Consolidation and acquisitions

The sector with highly fragmented; therefore

significant consolidation could have a positive

effect. KLN has historically grown through

acquisitions and though this can be risky, it could

also be accretive in adding density, new

geographies and areas of expertise.

Other points to note:

There is an unclear allocation of space within

investment property between own and tenant use

which distorts pure logistics margins and makes

peer comparison difficult. Furthermore KLN has

numerous related companies, as part of the Kerry

Group. Transactions could occur that are not at

arms-length, which could be disadvantageous to

minority shareholders.

Risks

Economic upturn could lead to higher domestic consumption and

higher international trade

With significant investment property holdings in Hong Kong, an

increase in property prices would be positive for the share

Reduction in trade barriers and embargoes would be beneficial

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KLN has a significant minority interest balance.

Although it purports to exercise control over these

companies, it may not necessarily be the case. It

consolidates Kerry TJ Logistics although it holds

just 36.5% of its share capital.

In previous periods the company has failed to

comply with Section 122 of the Companies

Ordinance which requires accounts to be submitted

to shareholders and presented at an AGM no more

than nine months after the balance sheet date. The

directors of the company could be subject to

imprisonment or fine although the company has

stated that this is unlikely as it believes none of the

directors willfully committed this breach.

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Overview

KLN is headquartered in Hong Kong and is the

largest Hong Kong-based international 3PL

provider, based on warehouse square footage. It also

has extensive operations across Greater China and

other countries in Asia. It is principally engaged in

integrated logistics and international freight

forwarding. It currently has more than 400 service

locations across 35 countries and territories in Asia,

Australia, Europe and North America.

Shareholders

KLN is 23.8% owned by Kerry Group Ltd and

42.5% owned by Kerry Properties Ltd (KPL), in

which Kerry Group has a 56% stake.


Largest 3PL provider in Hong Kong….

…contract logistics led freight forwarder…

…with an asset heavy approach

Key statistics

1. From Armstrong report

Source: KLN

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Shareholding structure

Source: Bloomberg, Kerry, HSBC

Details on Kerry / Kuok Group companies can be

found in Appendix 1. History

KLN developed its first warehouse in Hong Kong in

1981 and in 1996 became a direct wholly-owned

subsidiary of KPL which was then listed on the

Stock Exchange of Hong Kong. KLN has grown

both organically and through acquisition with

notable acquisitions being:

2000: Freight forwarding company in Hong Kong,

which marked its venture into freight forwarding

2002: Kerry Logistics (UK) Ltd, a freight

forwarding arm in the UK

2005: A 70% equity interest in Kerry EAS

Logistics, a leading logistics company in China

2008: An initial 18.52% stake in Kerry TJ

Logistics, a company that is listed on the TWSE.

It now owns c36.5%.

Activities

KLN’s core activities are Integrated Logistics (IL)

and International Freight Forwarding (IFF). It also

has three infrastructure investments, a 25%

interest in Chiwan Container Terminal Co, Ltd

(CCT), a 15% interest in Asia Airfreight Terminal

Company Limited (AAT) and a79.5% interest in

Kerry Siam Seaport Limited in Thailand (fully

consolidated)

Public shareholders

Other shareholders

of KPL


Limited (KLN)

~23.8% ~42.5%

~44%~56%

Kerry Properties

Limited (KPL)

Kerry Group Limited

~33.4%

Directors and subsidiaries

~0.3%

Milestones of Kerry Logistics

Source: KLN

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Revenue breakdown (2012)*

*Revenue including intersegment revenues

Source: KLN, HSBC

EBIT breakdown (2012)*

*Segment revenues includes intersegment revenues

Source: KLN, HSBC

Operating margin

2010 2011 2012

Logistics operations 9.6% 8.5% 9.1% HK warehouse 56.8% 56.7% 58.3% Intl freight forwarding 1.4% 2.7% 2.5% Operating margin* 7.4% 7.1% 6.7%

Note: Revenues including intersegment revenues

*Group operating margin post central costs

Source: KLN, HSBC calculation for total operating margin

Integrated Logistics (IL)

KLN provides third-party integrated logistics

services for manufacturers, retailers and other

customers worldwide. Its logistics services include

storage and value-added services as well as returns

logistics to manufacturers, retailers and other

customers out of regional and local logistics centres.

KLN also operates trucking and distribution

services to transport goods to local and national

distribution centres and retail outlets as well as to

transport cargo from airports and ports and can

provide door-to-door distribution in each of its

major markets in Asia. It also offers express

services for LTL (less-than-truckload) cargo in

China, Taiwan, Thailand and Vietnam. It uses a

mixture of owned vehicles and subcontractors.

The chart below shows an example of how KLN

provides value-added services to a fashion

industry customer.


39%

HK w arehouse

3%


58%


51%

HK w arehouse

28%


21%

Services offered to customers in the fashion and lifestyle industry

Source: KLN, HSBC

> > > > >Inspection, Quality Control and Safety Tests

Labeling and Security Tagging

Garment-On-HangerStorage

Pre-retailPreparation

Packing Creaseless Garment Delivery

Returns Management and Clearance Sales

14


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KLN typically operates 1-3 year contracts with a

renewal option. It also operates much longer

contracts, typically where it has invested in

building specific property, modifications or

specialised equipment. It charges a monthly fee

based on a unit rate and variable rate dependent

on the quantity of services provided. Most

contracts are volume driven with a floor and

contain price adjustment clauses.

Within its IL division, KLN has a 79.5% interest

in Kerry Siam Seaport Ltd in Thailand where it

manages an onshore inland container depot. It

also operates a rail terminal in Adelaide and a

trading business in Hong Kong where it trades

food goods, beverages and pharmaceuticals.

KLN also operates Hong Kong warehouses

where it leases warehousing space to customers

and to its logistics arm. It has nine warehouses in

Hong Kong with a total gross floor area (GFA) of

5m square feet and a valuation of HKD5,194m (as

at 30 September 2013). Most of the warehouses in

Hong Kong are used as joint warehouses and

logistics centres. There has been a gradual increase

in space used by the logistics arm; if KLN can

achieve higher returns from conversion for

logistics use it reallocates this space – we discuss

this division in more detail later in the report.

Intercompany revenues of HK warehouse division as % of total HK warehouse revenue

Source: KLN, HSBC

Generic warehousing by nature is property

management and is a service that most contract

logistics players provide. Costs are depreciation,

rates, utilities and some labour. However KLN

does not depreciate its investment property – which

is largely its Hong Kong warehouses. The Hong

Kong warehouse margin at c57-58% compares

with other property company margins of 80%+.

Having shared warehousing space allows KLN to

optimise seasonality patterns which may vary

from customer to customer.

Types of shared warehousing uses

General cargo warehouses Specialty warehouses

1) Provides long-term or short-term leases of certain warehouse units

1) Mainly cold storage for temperature-controlled food

2) Long-term leases are generally for 2-3 years

2) Also storage for bonded goods and dangerous goods

3) Monthly charge by type and size of leased space

3) Monthly warehousing fee by volume of goods stored and certain handling fees

4) Maintenance, handling and transportation - generally sole responsibility of customers

Source: KLN, HSBC

Property angle

As part of its IL business, KLN manages a variety of

self-owned and leased logistics facilities including

warehouses, a port terminal and rail terminal.

Completed logistics facilities

Gross floor area sq ft (’000)

Attributable owned

Total owned

Leased % owned*

China 4,369 4,941 6,298 44% HK 5,537 5,537 817 87% Macau 15 0% Taiwan 843 2,312 4,887 32% Thailand 4,397 5,538 3,240 63% Vietnam 893 893 171 84% Singapore 437 481 16 97% Malaysia 119 221 299 43% Philippines 12 0% India 268 773 458 63% Bangladesh 13 0% South Korea 11 0% Others 806 806 1,268 39% Total 17,669 21,502 17,505 55%

*Based on total GFA owned (not attributable)

Source: KLN, HSBC

0%

5%

10%

15%

20%

25%

30%

35%

40%

2010 2011 2012 1H13

15


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We believe that asset ownership is a natural focus

for KLN due to its history and parentage.

The company has stated that its asset ownership is a

core strength as it believes many customers based in

Asia seek the security and flexibility of asset

ownership from their logistics providers. In Asia,

quality of warehouses can be a concern, and not all

warehouses available on lease are good quality. That

KLN owns its assets and is responsible for their

maintenance and upkeep can provide comfort to

customers over the quality of its assets. This also

allows it to meet customers’ demands for long-term

service agreements with certainty of space and it can

also offer better customisation of warehouses to

meet their needs and avoids significant rental

escalation which can be difficult to work into

customer contracts. The merits of this argument are

subject to debate; it is possible to take out long leases

and to also lease properties and customise the

installations to customers’ needs. Indeed many of

KLN’s global brand customers, with no cultural bias,

we believe are likely to be asset-ownership agnostic

though security and quality of warehousing space are

important.

Many of KLN’s peers (K+N, DHL, DSV) have

taken a divergent strategy – moving away from

asset ownership, choosing to free up capital and

where possible to sign back-to-back lease

contracts with customers.

Around 55% of KLN’s logistics space is owned

with a bias toward Hong Kong. We think that

KLN’s asset heavy positioning, particularly in its

core market of Hong Kong, has key advantages.

Space for new warehouses is hard to come by and

having the space is a competitive advantage and

one of the key reasons behind KLN’s No 1

position in the Hong Kong market. That property

prices have increased significantly in Hong Kong

is also a bonus.

As KLN expands out of Hong Kong, we would

expect the relative proportion of leased space to

grow. Should KLN need to free up capital in the

future for expansion, there remains the potential

for sale and leasebacks on its estate.

Investment property

KLN’s properties held for long-term rental yields

and/or capital appreciation where less than 50% is

occupied by KLN are classified as investment

properties. Other properties are classified as

property, plant and equipment. Approximately

4.6m square feet of GFA are treated as investment

property in Hong Kong.

Property investment (GFA) by location as of 30 Sept 2013

Source: KLN, HSBC

The majority of this investment property by both

floor space and value are situated in Hong Kong.

KLN’s Hong Kong portfolio comprises nine

warehouses, five of which are located in Kwai

Chung, close to Hong Kong’s container terminals.

As we highlight above, these properties are

partially used as investment properties (i.e., the

space leased out to third-party tenants) and partly

for KLN’s own logistics business. Based on

KLN’s segmental disclosure, we estimate that

roughly 35% of revenues are generated from

KLN’s own logistics business. Given the Hong

Kong investment properties make up substantially

all of the portfolio, our analysis will focus on the

Hong Kong market.

HK67%

China (ex -HK)15%

Vietnam13%

S'pore5%

16


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Investment property portfolio

Property Completion Interest GFA Year % ’000 sq ft

Kerry Warehouse (Chai Wan) 1986/88 100% 535 Kerry TC Warehouse 1 1991 100% 180 Kerry Warehouse (Shatin) 1988 100% 432 Kerry Warehouse (Sheung Shui) 1991 100% 356 Kerry Warehouse (Fanling 1) 1994 100% 284 Kerry Warehouse (Kwai Chung) 1981 100% 287 Kerry TC Warehouse 2 1997 100% 491 Kerry Warehouse (Tsuen Wan) 1998 100% 592 Kerry Cargo centre 1999 100% 1,443 HK Sub-total 4,599 EAS Building 1994/95 70% 150 4 Blocks of Buildings (Tianjin) 1980 70% 72 Level 18, Block B, Wuhan Int'l 1990 70% 8 Unit C, L22, Dihao Plaza (Hainan)

1990 70% 2

Block 1, No 64 Boashan Rd (Qingdao)

1990 70% 5

Shenzhen Kerry Futian Logistics 2006 100% 269 Kerry Fuzhou Logistics Centre 2004 100% 109 Kerry Hefei Logistics Centre 2008 100% 204 Kerry Chongqing Logistics Centre - Phase 1

2011 100% 225

Mainland China sub-total 1,044 Kerry Vietnam Logistics Centre 2010/11 100% 671 Kerry Danang Logistics Centre 2011 100% 115 Kerry Hung Yen Logistics Centre 2010 100% 108 Vietnam sub-total 893 Kerry Tampines Logistics Centre 2012 100% 371 Singapore sub-total 371 Total 6,907

Source: KLN, HSBC

Industrial property market in Hong Kong

Demand for warehouse space in Hong Kong is

essentially driven by the space required for

logistics services. This primarily relates to the

export of goods manufactured in the Pearl River

Delta and elsewhere in Asia and the import of

goods for consumption in Hong Kong. As

illustrated by the air cargo throughput at Hong

Kong International Airport and the container

throughput at key China ports, demand has been

relatively lacklustre over the past two years. We

believe the outlook for air cargo and container

throughput in Hong Kong remains relatively soft.

HSBC’s Economics team forecasts that Hong

Kong private consumption will grow 3-4% pa

during 2013-15; it forecasts exports from Hong

Kong will grow 6-8% pa over the same period

(Global Economics Quarterly Q1 2014, 20

December 2013). We argue private consumption

and exports provide a reasonable proxy for the

volume growth rate of container and air cargo

over this period.

HKIA and China container port throughput growth

Source: Hong Kong International Airport, CEIC, HSBC

While demand has been relatively soft (and we

expect it to remain so), the supply outlook is

highly constrained. Jones Lang Lasalle estimates,

after a relatively large addition to warehouse

space in 2012, that there will be no new

warehouse space opened in 2013-15. Based on

data provided by Jones Lang Lasalle indicating

60m square feet of warehousing space in Hong

Kong, we calculate KLN has an 8% market share.

Net increase of Industrial property space in Hong Kong (GFA ’000 sq ft)

Source: Jones Lang Lasalle, HSBC

-20%

-10%

0%

10%

20%

30%

40%

50%

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

HKIA China key ports

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

e

2014

e

2015

e

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Industrials property rentals in HK (HKD psf per month)


We calculate that KLN’s EBIT margin for its

warehouse business averaged 57% in 2010-1H13.

This margin appears to be relatively low – HSBC’s

Real Estate team estimates for its property investor

coverage in Hong Kong that the average EBIT

margin is c80% (HK Real Estate: Seeking shelter

from stronger headwinds, 27 January 2014). It is

unclear why KLN’s property investment margin is

so low. As this margin has remained relatively

consistent throughout the period 2010-1H13, we

assume it continues throughout the forecast period.

International Freight Forwarding (IFF)

KLN’s freight forwarding services are

predominantly international freight services

between Asia and Europe and intra-Asia. This

includes air and ocean freight forwarding as well

as cross-border road freight forwarding services.

KLN’s IFF business is relatively small versus some

of its larger global peers with revenue of USD1.5bn

versus Kuehne & Nagel at USD17.4bn in 2012.

Freight forwarding benefits from economies of

scale in the sense that higher volumes lead to

better rates negotiated with carriers which in turn

means either better margins or better ability to

compete for volumes on price. KLN typically

takes on no more than 12-month commitments in

airfreight (though when required it charters full

aircraft) and typically does not give volume-based

commitments to carriers in sea freight. KLN owns

more than 6,500 vehicles.

KLN’s IFF margins at 2.7% (2013e) are broadly

standard for the freight forwarding industry.

These compare with Kuehne & Nagel at 3.3% and

DHL at 3.2%. The company does not disclose

gross profit per unit as is standard for the industry;

therefore it is difficult to evaluate how these

compare versus peers. As the company grows its

volumes further, we would expect to see some

productivity benefits and some small uplift to

margins from better negotiated rates with carriers.

However, the Asia-Europe and Intra-Asia routes

are highly competitive and some of these benefits

could be given back to customers in order to gain

further volumes. As freight forwarding is an asset-

light business, we believe adding volumes at the

expense of margin can still enhance returns.

As part of its stated strategy, KLN is looking to

grow its freight forwarding business both

organically and through acquisition. Acquisitions

in freight forwarding can be difficult as they are

people and relationship-driven businesses,

therefore acquisitions need to add further niche

businesses or geographies.

KLN offers a cross-border freight forwarding

service – Kerry Asia Road Transport (KART).

This is an open platform to connect China to

selected countries across the ASEAN region. It

owns 150 trucks to run this service and illustrates

KLN’s capabilities in efficiently dealing with

cross-border cargo transportation across Asia

(which can involve significant administration

particularly when dealing with LTL cargo). This

road network should give it a strategic advantage

when the tariff free policy is achieved for all

product trades among ASEAN countries in 2015.

0

2

4

6

8

10

12

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=dAlVgKeND8&n=401424.PDF


18


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Key routes run by KART

Source: KLN, HSBC

Customer profile

KLN services regional and local operations of

global brands as well as local and regional

customers. It has 40 of the top 100 Interbrand

brands as its customers. However it is does not

have an over-reliance on a single customer, with

its top-five customers representing 7.8% of its

revenue (in 1H13).

As per the company website, KLN recently

secured a contract from ASOS in China to support

the company’s e-commerce platform in Shanghai

and managing freight from the UK hub into

China. In the past, it has announced the following

contract wins:

Samsonite, Thailand to manage its supply chain

to deliver to more than 40 department stores and

retail outlets in Bangkok and major cities

including Phuket, Pattaya and Chiang Mai;

Daimler North East Asia Trading and

Services Co Ltd (a fully-owned subsidiary of

Daimler, China) – it is building an automotive

parts logistics facility;

Continental Tyres, Thailand to manage the

company’s warehouse storage and local

transportation and express distribution across

the country;

Hugo Boss Logistics for Greater China;

IKEA in Thailand; and

Marks & Spencer in Greater China.

Thailand

Vietnam

Hanoi

Lao Bao

Danang

Ho Chi Minh City

Malaysia

Singapore

Kuala Lumpur

Penang

Bangkok

Myanmar LaosVientiane

Cambodia

KumingChina

Nanning

Shenzhen

Shanghai

Phnom Penh

Route 1

Route 2

Route 3

Route 4Route 5

International freight forwarding

Air freight Ocean freight Cross-border road freight

Services provided 1. Air transportation of high-value goods, perishable goods and time-sensitive shipments

2. Air charter services for urgent shipments or planned project cargo

1. Transportation of full container load (FCL) and less than container load (LCL) cargo by sea

2. Project logistics services for outsized cargoes and heavy lifts

Cross-border trucking solution through Kerry Asia Road Transport (KART)

Operations 1. Procurement of air cargo space from airlines based on actual shipment needs 2. Terms of supply contracts is typically no more than 12 months

1. Procurement of ocean cargo space from shipping lines based on actual shipments 2. Cargo consolidation to increase utilisation of containers

1. KART was launched in 2007 and provides cross-border long-haul trucking connecting countries across ASEAN region2. KART was expanded to connect ASEAN region and China in 2011

Fleet and infrastructure IATA agent with access to space procurement for air cargo routes worldwide

Booking agent for a number of shipping lines with direct access to space allocation

Fleet of more than 150 self-owned trucks dedicated for KART services

Routes operated 1. Intra-Asia routes, such as between China and Hong Kong

2. Routes between Greater China and the UK

1. To many ports worldwide

2. Major lanes include those among ASEAN countries

1. Two routes between ASEAN and China

2. Three routes between ASEAN countries

3. Covers Singapore, Thailand, Vietnam, Cambodia and Laos, as well as Kunming, Shenzhen and Shanghai in China

Source: KLN, HSBC

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Demand drivers Total revenue by geography (2012) *

*Integrated Logistics and International Freight Forwarding divisions combined

Source: KLN, HSBC

The IL division is driven largely by new contract

wins and domestic consumption within China in

particular and other Asian countries in which it

operates. KLN’s results are therefore highly

geared to the demand for new products

manufactured or sold by its customers and the

demand for international brands of the growing

middle classes. It is therefore influenced by GDP

growth, income level and inflation, availability of

consumer credit, consumer confidence, import

taxes and rate of urbanisation.

In 2012 the Asia-Pacific 3PL market was 40% larger

than the 3PL markets in North America and Europe.

It has been the fastest growing market in the world,

with growth driven by outsourcing and offshoring

operations to lower cost countries.

GDP growth estimates by major regions (CAGR)

*Asia Pac excluding Greater China and Japan

Source: KLN (which sources Armstrong report), HSBC

Logistics spend growth by major regions (CAGR)

*Asia Pac excluding Greater China and Japan


China

Hong Kong is a relatively mature market. Therefore

growth expectations are more muted than in

mainland China and will be broadly GDP driven

with some gearing to increasing postponement

(assembly/packaging of goods at the last minute).

In mainland China, GDP growth and high

urbanisation rates make for a favourable backdrop.

Within Asia Pacific, the penetration rate of 3PL

providers is relatively low versus the US and

Europe. Furthermore in Greater China, the logistics

spend as a percentage of GDP is high, suggesting the

potential for greater efficiencies from improving

infrastructure and deployment of best practices.

3PL revenue by major region (USDbn)

Source: KLN (sourced from Armstrong report), HSBC

See Appendix 2 for detail on China’s 3PL market

structure, shortcomings and initiatives taken by

the government.

PRC45%

Hong Kong13%

Taiw an10%

South and South East

Asia13%

Europe16%

Others3%

18.9%

9.5%

13.5%

3.3% 3.2%

-1.0%

7.9%

4.9% 3.6%2.2% 1.5% 1.0%

-5%

0%

5%

10%

15%

20%

GreaterChina

AsiaPacific*

S.America

N.America

Japan Europe

2007-12 2012-15e

16.3%

7.6%10.3%

0.2%

2.7%

-2.6%

8.0%

5.0% 3.6%2.3% 1.5% 1.0%

-5%

0%

5%

10%

15%

20%

GreaterChina

AsiaPacific*

S.America

N.America

Japan Europe

2007-12 2012-15e

211

154 151

40

245

171 156

44

289

193 161

49

0

50

100

150

200

250

300

350

Asia Pacific North America Europe South America

2010 2012 2015e

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Greater China has higher logistics spend as % of GDP vs. other regions…

*Excluding Greater China and Japan

Source: KLN. HSBC

…and Asia Pacific has much lower 3PL penetration rate than the US and Europe (2012)

Penetration rate is the percentage of current 3PL revenue out of total potential 3PL market


In terms of net revenue, KLN is one of the biggest

players within Greater China, after Sinotrans and

DHL. It is the largest player in terms of total GFA

of managed warehouses. Although it

predominantly specialises in Asia-Europe and

intra-Asian forwarding it is the second largest

player in Asia-US and US-Asia forwarding.

The IFF division is influenced by outbound

volumes to Europe and intra-Asia as well as

inbound volumes from Europe to Asia. Volumes are

driven by GDP growth in both Europe and Asia as

well as shifting trade lanes and outsourcing or near

sourcing of manufacturing. While labour cost

inflation has seen some relocation of manufacturing

from China to lower cost countries within Asia, this

is not necessarily negative to KLN if it also has

operations in those countries. What could be more

problematic is if a trend of near-sourcing continues

or picks up pace towards lower cost Eastern

European countries or Mexico.

Profit and margin by country

Note that KLN did not disclose in the prospectus the

recurring net profit contribution by country / territory

nor the EBIT margin by country / territory.

However, in the notes to the accountants report it

discloses Hong Kong profits tax, China taxation

and overseas taxation. In addition, Kerry TJ

Logistics (2608 TT, Not rated) is separately listed

and reports its results.

From this information we can calculate a rough

estimate of profit by country/territory based on the

following assumptions:

HK effective tax rate of 16.5%, China

effective tax rate of 25%;

All material recurring profit is recognised

either through the current or deferred tax

charge;

All deferred tax on changes to in fair value of

investment properties attributable to the

company’s shareholders relates to China; and

There are no material differences between

recurring profit reported by Kerry TJ

Logistics and the recurring profit relating to

this business reported by KLN.

0%

5%

10%

15%

20%

0

500

1000

1500

2000

NorthAmerica

GreaterChina

Europe AsiaPac*

Japan SouthAmerica

Logistics spend in USDbn (LHS)Logistics spend as % of GDP (RHS)

0%

5%

10%

15%

20%

25%

US Europe Asia Pacific

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HSBC estimate of recurring profit breakdown in 2012

Source: Company, HSBC estimates

Our estimates indicate that 58% of recurring is

generated in Hong Kong, with 53% from its

Logistics, freight forwarding and warehouse

business and 5% from its stake in HKIA air cargo

terminal AAT. The contribution from mainland

China is 33% with 21% from the logistics, freight

forwarding and warehouse business and 12%

from container port CCT.

Using this approach, we can also estimate the

profit before tax margin excluding associates. The

Hong Kong pre-tax margin of 21% is inflated by

the HK warehouse business that had a 2012 EBIT

margin of 58%. If we strip this out, we estimate

pre-tax (ex-associates) margin for logistics and

freight forwarding is 6%.

While the China pre-tax profit margin (ex-

associates) looks low at about 4%, this figure is in

line with the global logistics sector.

HSBC estimate of PBT margin (ex-associates) in 2012

Source: Company, HSBC estimates

Strategy

KLN’s stated strategy is to:

Maintain and increase its leading market

position in Greater China and Asia. It is

specifically seeking to further penetrate

China, Hong Kong, Taiwan, Thailand and

Vietnam and increase its market share in

India, Indonesia, Malaysia, Singapore and the

Philippines.

Grow its international freight forwarding

coverage organically and through

acquisitions, particularly in the Americas

region.

Offer sophisticated integrated logistics

solutions underpinned by local capabilities.

To further invest in IT and human capital.

Key strengths and opportunities

KLN’s leading position and strong links in the

Hong Kong property market are a key strategic

advantage given the space limitations and

limited new land released by the government.

Strong brand recognition within Asia which

makes it a trusted partner of many global

companies.

Long-standing relationships with a wide and

diversified customer base

HK53%

AAT5%

PRC21%

CCT12%

TJ Log8%

Other-1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

HK Taiwan PRC Other

22


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High Asian exposure and presence within fast

growing and underpenetrated markets.

Experienced management team with a proven

track record.

Proprietary IT systems globally deployed and

compatible with customer ERP systems.

Early-mover advantage in building a road

network (KART) to capitalise on the removal of

tariffs in the ASEAN free trade area by 2015.

Key challenges and risks

Continuing to develop value-added services

to tie in volumes and customers and to offset

margin pressure.

Maintaining its quality differentiation and

perception among customers as other players in

the market become increasingly sophisticated.

Expanding through acquisition is risky,

particularly in freight forwarding where the

assets are intangible and labour and

relationships can leave.

KLN’s bias towards owning assets leaves it

exposed to decreases in asset prices. If trade

or consumption patterns shift, then KLN may

be left with assets that are underutilised.

There is on-going margin pressure in freight

forwarding. The intra-Asian market is highly

competitive and volumes are lacklustre on the

Asia-Europe trade lanes, which makes for a

difficult operating environment. KLN will

need to continue to make productivity

improvements through IT investment.

As most contracts have a volume-related

element KLN is subject to volume risk and

changing demand for its customers’ products.

Conclusion

Hong Kong is a stable mature market where we

believe KLN has a strong strategic positioning.

Mainland China offers growth opportunities,

though this market is competitive and there are

political risks. KLN remains subscale in

international freight forwarding and has the

potential for growth and margin expansion through

productivity improvements. But pure forwarding is

heavily commoditised and we believe KLN will

make the greatest gains where it can tie these

forwarding volumes to its logistics business.

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Competitor analysis in Greater China (2012) Net revenue (USDm) Total GFA of warehouses (m sq ft)*

*DHL Supply Chain and Global Forwarding


*For third-party logistics providers


0

200

400

600

800

1000

1200

1400

Sinotrans DHL* Kerry CEVA Panalpina0

5

10

15

20

25

Kerry Sinotrans CEVA IDS Group Wuhu Annto

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Third-party logistics

Logistics is the process of getting something from

A to B in the form, quantity and timeframe

required. This is more than simply transportation.

3PL is doing something for someone or an

organisation that they do not want to do, or do not

have the capability of doing themselves. Since the

1990s, as supply chains have become more

complex, with global sourcing and offshoring of

operations, manufacturing and distribution there

has been growth in 3PL providers that can often

provide cheaper, more efficient solutions than

companies may be able to themselves.

The logistics of logistics

Outsourcing is driven by the increasing complexity of supply

chains

This plays to the strengths of logistics providers that have the

expertise to simplify and standardise

But the contract logistics and freight forwarding markets are

heavily fragmented, becoming increasingly commoditised and

competition is often fierce

Business model of a 3PL provider

Source: DSV presentation

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Key drivers of 3PL market growth


As the demand for 3PL has grown, so too has the

range of services provided. 3PL providers

generally aim to be a one-stop-shop for their

customers, believing the greater the range of

services offered, the more integrated they are in

their customers’ business, the higher the switching

costs and the more pricing power they have in

what is essentially a very low margin industry.

The range of activities is wide: extending from the

very basic warehousing in multiple user facilities

to pick and pack, inventory management, delivery

and returns to highly customised solutions such as

the above wing services that DHL provides for

British Airways or UPS’s management of the

London 2012 inbound logistics.

3PL market growth by industry – Fortune 500 Global


DP-DHL estimates the total size of the contract

logistics market was EUR154bn in 2011. KLN’s

integrated logistics segment had revenues of

HKD6.9bn (EUR677.2m). This is just 0.44% of

the global market.

A fourth-party logistics provider (4PL) is an

integrator that assembles the services, resources

and capabilities of its own organization and others

to design and build comprehensive supply chain

solutions, in essence managing other 3PLs,

truckers, forwarders, customs house agents etc.

Most of the larger contract logistics players also

have freight forwarding arms. There has been a

dual principle in the creation of these arms, some

of the larger freight forwarders (KNIN, Panalpina,

DSV) – international transport managers (ITM)

have created contract logistics divisions as a way

to try to tie in volumes to their forwarding

Increasing supply chain

complexity

Regulatory compliance

Offshoring and

outsourced manufacturi

ng

Core competency

focus

Expanding IT requirements

Need regional

and local market

expertise

Operational efficiencies

Cost reductions

Low-cost country

sourcing

0%

2%

4%

6%

8%

10%

12%

0

20

40

60

80

Tech

.

Auto

mot

ive

Reta

iling

Elem

ents

Gro

cerie

s

Indu

stria

l

Heal

thca

re

Cons

Goo

ds

Oth

ers

2005 (LHS) 2013e (LHS)2005-13e CAGR (RHS)

Logistics supply chain

Source: HSBC

> > > >Accept goods

at seaport/ airport

Overland trucking to distribution

centre

Unloading, unpacking, entry into inventory

system

Assembly, repacking, relabeling,

repairs

Overland delivery to

retail stores

Returns Management and Clearance Sales

Returns

26


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business and to try to reduce price pressure on

these volumes. Others, such as KLN (which

focuses more on value-added warehousing and

distribution (VAWD)), have developed freight

forwarding capabilities as an add-on service for

their contract logistics customers. These two

activities are a natural fit and complementary, but

it is often only when tied together that they add

the most value. Generic low value-add services

are low return and customers can be transitory.

Third-party logistics value-added services

Both - 3PL/4PL Domestic and Intl Transport management

Value-added warehousing and distribution

4 PL/Lead Logistics Provider

Cargo insurance Bonded facilities

Call Centres Carrier contracting/brokering

Easily deployable IT and work processes

Consolidation/ deconsolidation

Customs brokerage Installation/Removal

EDI Handling Duty drawback processing

JIT/Kanban

Exception Handling Freight forwarding Kitting/Pick & Pack Financial services Incoterms

management Light manufacturing/assembly

Food Grade/Temperature controlled

Letters of credit Order fulfilment

Hazmat skills Merge-in transit Reverse logistics ISO certification Multimodal

transportation Subassembly

Inventory/vendor management

Project logistics

Lean management skills

Transportation execution

Order management Transportation network planning/optimization

Pool distribution Radio frequency/RFID Security processes Sourcing/procurement skills

Supply chain systems


A fragmented industry

The 3PL industry is very fragmented at a global

level and arguably also at a local level. This

means that price competition is intense.

In the third-party contract logistics market, the top

10 players have just a 21.4% market share (refer

table below). There are a few ‘global’ players,

with the biggest being DHL with a c8% market

share, having achieved significant scale post the

merger with Exel in 2005. There are regional

specialists too – KLN is the largest international

3PL based in Hong Kong with the largest

portfolio of logistics facilities based on warehouse

square footage managed in Greater China and

ASEAN. And there are many local companies

operating the odd warehouse or a limited local

distribution network.

Contract logistics market, 2011

DHL 7.8% CEVA 2.4% KNIN 2.2% Hitachi 1.7% Wincanton 1.4% Penske 1.3% Sankyu 1.2% UPS SCS 1.2% CAT 1.1% Rhenus 1.1% Top 10 total market share 21.4% Figures are estimated except for DHL, CEVA and KNIN; as at May 2012

Source: Deutsche Post 2012 Annual Report (which sources Transport Intelligence), HSBC

The freight forwarding industry is also highly

fragmented, with the biggest global player in

airfreight having just 6.8% of the market and the

biggest sea freight player having 2% of the market

(refer tables below). Again, there are global

players, regional specialists and players that

operate on just one or a handful of trade lanes.

Airfreight market is fragmented; top 10 players account for c26% of the market (2011)

DHL 6.8% DB Schenker 3.5% KNIN 3.0% Panalpina 2.9% UPS 1.8% Nippon Express 1.7% CEVA 1.7% Agility 1.5% Expeditors 1.5% Sinotrans 1.4% Top 10 total market share c26%

Source: Rolland Berger strategy consultants, HSBC

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Ocean freight market is even more fragmented; top 10 account for 9% of the market (2011)

KNIN 2.0% DHL 1.5% DB Schenker 1.0% Panalpina 0.9% Expeditors 0.7% Agility 0.5% Nippon Express 0.5% SDV 0.5% Sinotrans 0.5% DAMCO 0.4% Top 10 total market share c9%

Source: Rolland Berger strategy consultants, HSBC

Competitor analysis

KLN is naturally much more Asia exposed than

its global peers.

Regional exposure (2012)

*HK+PRC+Taiwan+South and South East Asia have been combined into Asia-Pacific for comparison purposes. A small percentage of ‘others’ (c3%) has been reported. The details of that segment is not known

^DHL Supply chain

Source: Respective company reports, HSBC

KLN is also a contract logistics led freight

forwarder as opposed to KNIN, Panalpina and

DSV who are more focused on forwarding

operations with contract logistics serving to tie in

volumes.

Revenue contribution of contract logistics and freight forwarding (2012)

KLN KNIN PWTN DSV DP-DHL* CEVA

Contract Logistics 41% 21% 14% 11% 49% 54% Freight forwarding 59% 78% 86% 89% 51% 46%

*Taken into account just supply chain and freight forwarding divisions in calculating the percentages


Integrated Logistics

Like peers, in KLN’s IL division, each contract is

negotiated individually; therefore it is difficult to

generalize as to how precisely the business

charges for its services. Some contracts may

charge for warehousing space, plus, a charge per

piece picked and packed, others may be an all-

encompassing contract with some volume linked

element. Duration of contracts varies as does the

degree of risk that KLN will assume to fulfill its

obligations – which may include building or

customization of facilities for some customers.

Open book vs. closed book

As is common in the industry – KLN has a mixture

of open and closed book contracts – with a greater

bias towards closed book. DHL, by contrast, reduces

its risk by maintaining an approximate 50/50 mix. In

some cases contracts can start as open book but then

progress to closed book.

Open book: A typical cost plus model. The

customer has visibility over project costs and the

3PL provider makes a margin. There may be some

cost linked incentives but typically this type of

contract provides good visibility for both parties

and limits risk, but also limits upside for the 3PL

provider.

Closed book: The 3PL provider agrees with a set

price and charging mechanism for the contract with

the customer. It is then up to the 3PL provider to run

the contract as efficiently as possible – with the

upside being generated through tight cost

management and some volume linked clauses.

Contract duration

The duration of a contract will vary from

customer to customer. The more specialized,

customized and value added, which typically

mean greater ramp-up costs for the 3PL, the

longer the contract. In most cases contracts can

last 3-5 years with some spanning 10 years or

more. In cases such as these, 3PL players will try

0% 20% 40% 60% 80% 100%

Kerry*

DHL SC^

KNIN

Panalpina

CEVA

Asia Pacific Americas Europe/Middle East/Africa Others

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to structure back-to-back contracts with

warehouse leases and client contracts.

Margins

Contract logistics is generally a low margin business.

The aim is to be become so integral to a customer

that their switching costs are high, which generates a

degree of pricing power. But for the most basic

warehousing functions, switching costs can be low

and therefore unless there is a shortage of

warehousing space or a company holds a dominant

position, there is perpetual pricing pressure and

customers typically demand more for less.

In a typical five-year contract:

Y1: Contract begins, project has ramp-up costs

Y2: Margins increase

Y3: Decent margins but a renegotiation clause – a

customer may demand more for less

Y4: Margin may come down from Y3

Y5: Contract retendered – many companies

including local players may tender and in order to

retain price may need to be lowered.

Adjusted operating profit margin – Contract logistics (2012)

*This is the operating profit for the contract logistics division for CEVA - which has 2 divisions (freight management and contract logistics). The exact bifurcation of special items and depreciation is not provided. The number provided here is based on equal split assumed for special items and depreciation between the 2 divisions

**This includes Logistics operations + HK warehouse

***KLN Logistics is only for KLN Logistics and excludes HK warehouse numbers


KLN has overall margins of 7% (2013e),

significantly higher than its forwarder-contract

logistics peers making on average of 3-4%. Our

analysis suggests that this is largely as a function

of its relatively low ownership costs.

Ownership costs as % revenue

For Exel periods 2001-04 prior to its acquisition by DHL

Ownership costs defined as depreciation + operating leases

KNIN has a much greater bias towards freight forwarding

Source: Respective company data, HSBC

It does not depreciate investment property but

instead revalues annually (and strips

movements out to report core net profit). It

has HKD6.3bn investment property on its

balance sheet versus HKD6.4bn in property,

plant and equipment.

It has an HKD3.8bn interest free loan (as at

June 2013) from its parent company to fund

property purchases and expansion.

As a percentage of revenue, we calculate KLN’s

ownership costs (depreciation and leases) at

around 3.5% in 2012. Analysis of peers suggests

more normalized ownership costs are 5.5-7% of

revenue.

If we adjust KLN’s ownership costs to reflect

more normalized costs (c5.5% revenue), this

would reduce margins significantly, though they

remain at the higher end of the peer range at 5-

5.5%. KLN also owns Kerry Siam Seaport and as

ports have structurally high margins (typically

30%+), this is likely inflating the overall margin.

0%2%4%6%8%

10%12%14%

CEVA

*

KNIN

Sche

nker

DHL

DSV

KLN*

*

KLN

- Log

istic

s***

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2009 2010 2011 2012CEVA Kerry Exel KNIN

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KLN discloses neither the revenue nor the EBIT

of Kerry Siam Seaport, but on the basis that it

comprises a significant proportion of the South

East Asian revenue, our best estimate is that it

could be contributing HKD100-200m in EBIT.

Post these two adjustments we calculate

normalized margins of 4.5-5%.

KLN – EBIT margins post adjustment for ownership costs and Seaport

Normalised ownership costs approximated at 5.5% revenues

We estimate c HKD600m revenue for Kerry Siam Seaport and HKD150m EBIT

Source: Respective company data, HSBC estimates

Margins for peers have been broadly declining,

which illustrates the pressure on price over time

as contracts are renegotiated and the market

matures. Although the Asian market is immature,

we believe over time as it matures and other

players become more sophisticated the same will

happen to margins.

Adjusted operating margin – Contract logistics

Tibett and Britten, Exel and TDG are no longer separately reported. They have been acquired. Hence, the historical values for them have been taken from Factset and adjusted for exceptional items

For Exel, have taken the group adjusted operating margin

Source: Respective company data, Factset, HSBC adjustments

International transport management

In its most simplest form, freight forwarding is the

buying and selling (brokerage of space) with

freight forwarders able to buy in bulk and sell to

small and medium sized customers who do not

want to deal directly with airlines/container

shipping companies, do not need a full container

(LCL), can achieve a better price by using a

forwarder or want end-to-end logistics solutions

(door-to-door as opposed to port-to-port).

But generic freight forwarding is very

commoditized and therefore forwarders have

developed other add-on services to increase the

invoiced amount, such as documentation and

customs brokerage, insurance, and compliance.

Price pressure has reduced the generic freight

component of an invoice; whereas the general

space brokerage used to be 70% of an invoice it is

now around 30-40%.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2010 2011 2012 2013 2014 2015KLN EBIT margin Ownership cost adjusted Seaport adjusted

-5%

0%

5%

10%

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

KNIN Tibett and BrittenTDG DSVDHL contract logistics ExelCEVA Wincanton

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Kuehne & Nagel’s GP/TEU (in USD)

Source: Kuehne & Nagel, HSBC

Freight forwarders have to grow in order to stand

still. In every given year there is around 2% price

pressure and 2-3% cost base inflation. This means

that forwarders need volumes to grow c5% pa in

order to maintain their bottom line. In addition, they

have to generate 3-5% productivity improvements

(usually driven by IT enhancements). In an

environment of anemic growth, particularly on the

Asia-Europe trade lane, growth is not easy to come

by, which makes the competition even more fierce.

Growth drivers

Forwarding is a GDP-driven business but GDP

multipliers have decreased significantly since

2008 (pre-2008 2-2.5x GDP for sea freight),

reflecting the almost completion of containerization

and the significant reduction in availability of

cheap consumer credit. We see sea freight

volumes growing at 1-1.5x GDP with a lower

multiplier in the near term as European countries

continue to unwind their debt burdens.

GDP multipliers trending down since 2010

Source: KNIN, HSBC

Around 98% of air cargo is handled by freight

forwarders, but in the sea freight market, carriers

still deal with customers directly and freight

forwarders have just a c35-40% market share.

However this has been increasing as customers

increasingly look for door-to-door delivery rather

than just port-to-port. KNIN forecasts that

forwarders will have 50% market share by 2016.

Industry trends

Near-sourcing and shifting production:

Since the early 1990s there has been a shift to

outsourcing of production to lower cost

countries such as China which has meant the

lengthening and increased complexity of

supply chains. However in recent years high

labour cost inflation has seen a shift in

production towards still emerging economies

such as Vietnam, the Philippines and

Bangladesh. Furthermore as transportation

costs have increased due to high oil prices, a

trend of more near-sourcing (Eastern Europe

and Mexico) has emerged. Though it is

difficult to quantify the impact that this has

had on volumes to date, it looks like a trend

that could continue.

300

350

400

450

500

2007 2008 2009 2010 2011 2012

-2

-1

0

1

2

3

4

5

2005 2006 2007 2008 2009 2010 2011 2012

Container multiplier Airfreight multiplier

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Modal shift: High oil prices and greater

sophistication of technology and supply chain

solutions are behind a modal shift from air

freight to sea freight. Air freight typically grows

at 1-2ppt below sea freight.

Lighter shipments: As technology has

advanced there has been a shift towards lighter

shipments (due to smaller components and tech

products). As forwarders charge by weight but

productivity is determined by shipments

processed, this has put pressure on margins.

The need to add value, especially in mature

markets: We see industry players such as

KNIN moving away from multi user facilities in

places like the US, preferring where possible to

secure back-to-back contracts with core

customers. KNIN has been withdrawing from

facilities and exiting low margin contracts with

customers where they do not provide other tie in

services.

Market share does not matter unless land

and space is limited: Similarly, there is an

ongoing debate as to whether being global

matters as local companies with local

knowledge and relationships often have an equal

footing when it comes to tendering for contracts.

Many global companies do however want to

work with a trusted partner, with globally

recognized and accepted practices.

There is no one-size-fits-all approach to

asset ownership: Flexibility is key and asset

ownership is generally not a value proposition to

customers. Most of the industry players have

shied away from ownership.

Customer quality matters: Even if contracts

and leased facilities are structured back-to-

back, it is the 3PL provider that takes on the

risk of the facilities and labour if the customer

goes bankrupt - as was evidenced with DHL

and Arcandor in 2009 (as per DP DHL

annual report).

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Financials

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Divisional summary

Year to Dec (HKDm) 2010 2011 2012 2013e 2014e 2015e

Revenue by segment

Logistics operations 4,541 6,903 8,052 9,384 10,590 11,713 yoy growth % 52% 17% 17% 13% 11% HK warehouse 615 654 705 740 770 800 yoy growth % 6% 8% 5% 4% 4% Total integrated logistics 5,156 7,557 8,756 10,124 11,360 12,514 yoy growth % 47% 16% 16% 12% 10% Total GFA managed (m sq ft) 25 32 32 37 41 44 yoy growth % 28% 0% 16% 10% 8% Revenue/sq ft 206 236 274 274 279 285 yoy growth % 14% 16% 0% 2% 2% Intl freight forwarding 6,654 9,589 11,908 12,028 12,388 12,760 yoy growth % 44% 24% 1% 3% 3% Inter-segment eliminations (930) (1,111) (1,370) (1,493) (1,583) (1,678) yoy growth % 20% 23% 9% 6% 6% Total revenues 10,880 16,034 19,295 20,659 22,165 23,596 yoy growth % 47% 20% 7% 7% 6% Operating profit by segment Cost/sq ft 175 206 238 239 245 251 yoy growth % 18% 15% 0% 3% 2% Logistics operations 434 589 730 863 953 1,031 Margin 9.6% 8.5% 9.1% 9.2% 9.0% 8.8% HK warehouse 349 371 411 422 439 456 Margin 56.8% 56.7% 58.3% 57.0% 57.0% 57.0% Total integrated logistics 783 959 1,141 1,285 1,392 1,487 Margin 15.2% 12.7% 13.0% 12.7% 12.3% 11.9% Operating costs 6,558 9,333 11,608 11,703 12,017 12,352 yoy growth % 42% 24% 1% 3% 3% International freight forwarding 96 256 300 325 372 408 Margin 1.4% 2.7% 2.5% 2.7% 3.0% 3.2% Central costs (74) (76) (151) (169) (178) (186) yoy growth % 3% 99% 12% 5% 5% Total operating profit 805 1,139 1,290 1,441 1,586 1,709 yoy growth % 42% 13% 12% 10% 8% Margin 7.4% 7.1% 6.7% 7.0% 7.2% 7.2%

** We forecast a time weighted average square footage. As at 30 June 2013 the company had 36m sq ft under management. This has subsequently risen to 39m sq ft.

Source: KLN, HSBC estimates 2013-15

Income statement

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We forecast revenue and operating profit by

segment: logistics operations, Hong Kong

warehouse (combined Integrated Logistics) and

International Freight Forwarding.


KLN does not disclose segmental revenue by

geography. However different countries will have

different revenue drivers which impact the overall

growth and margin mix. We have approximated

the revenue mix from the breakdown of square

footage – estimating c35% of the Hong Kong

warehouse space is used internally by the logistics

division. Clearly there is a difference in revenue

per square foot by region, with Hong Kong rents

inherently much higher than those in mainland

China, Thailand and Taiwan.

We estimate that just 15% of logistics revenue

comes from Hong Kong, with 27% from mainland

China, 19% from Taiwan and 23% from Thailand.

As KLN expands away from Hong Kong, the

revenue per square foot of its logistics operations

will likely go down but the revenue per square

foot of its entire property portfolio will likely

increase as we expect its integrated logistics and

value-added services to outpace its Hong Kong

warehouse growth.

HSBC estimated split of revenues (2012)


KLN has c2.3m square feet of logistics facilities

under development – c6% of its current total

square footage, with 1.3m square feet in China.

These facilities are due for completion over 2014-

15. It added 4m square feet in 1H13, mainly in

mainland China.

Logistics facilities under development

Approximate GFA owned

Total _______ Attributable _______ ’000 sq ft ’000 sq ft %

China 1,326 1,326 100 Thailand 878 792 75.9-100 Vietnam 119 119 100

Total 2,323 2,237

Source: KLN, HSBC

Below we show our forecasts for growth in square

footage – we assume that KLN will continue to

pursue an ownership/leasing strategy. As KLN

invests outside of Hong Kong, we expect the leasing

proportion to increase (at present broadly 55/45).

Growth in square footage*

Source: KLN, HSBC estimates 2013-15

*Estimates are based on average time weighted square footage calculated

We note that near term KLN has substantial

facilities under development which we expect to

open largely in 2014. We therefore expect KLN to

grow ahead of the market; the Armstong report

forecasts an 8% CAGR over 2012-15 for the

logistics market in China and 5% in Asia Pacific

(ex-China and Japan). Longer term we assume its

growth will converge more towards market trends.

China27%

HK15%

Taiwan19%

Thailand23%

Others16%

0%

5%

10%

15%

20%

25%

30%

-

10

20

30

40

50

2010 2011 2012 2013e 2014e 2015e

Total GFA managed (m sq ft) - LHSyoy growth % - RHS

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Logistics spend growth by major regions (CAGR)


* APAC excluding Greater China and Japan

Revenue

Hong Kong

The Hong Kong logistics market is relatively

mature and competitive. There is a shortage of

warehousing space which is why KLN believes it

has an advantage through ownership of its

properties in this market. We assume that this

market will grow broadly in line with domestic

consumption (with KLN leasing or purchasing

new space as and when it becomes available) as

well as inflation. This gets us to a broad

assumption of 4% revenue growth pa.

Mainland China

The logistics market in mainland China remains

immature and fragmented. There are less space

constraints than in Hong Kong but warehousing

space is not always easy to secure as local

authorities often prefer to give space for

development to offices or retail facilities. Revenue

growth here will depend on domestic

consumption, new contract wins and in

conjunction with this, the development of new

logistics facilities. KLN has 1.3m square feet of

logistics facilities under construction in China due

to be completed between 2014 and 2015. This

represents around 12% of its current square

footage in mainland China.

Contract wins and development of new facilities

are inherently difficult to forecast. The Armstrong

report forecast an 8% logistics spend CAGR over

2012-15 in China, though near term we assume

higher growth due to the current high investment

in new facilities.

Thailand

About 61% of the square footage in Thailand

relates to Kerry Siam Seaport Ltd, the volumes of

which are driven by imports and exports out of

Thailand to the US and Europe and within Asia.

Growth will therefore broadly correlate with

global imports and exports as well as with new

contract wins within Thailand. Revenues and

profitability of this asset are not disclosed but we

note that port assets tend to be high margin (e.g.,

DP World has an EBIT margin of 30%).

Revenues of the South East Asian region for 2012

were HKD2.3bn – assuming a 50% forwarding

split and a 30% EBIT margin suggest that profits

coming from Kerry Siam Seaport could be in the

region of HKD100-200m. We believe the

inclusion of the port within the logistics segment

is artificially inflating margins compared with

other logistics operators.

KLN is adding 878,000 square feet of logistics space

in 2014 in Thailand. This represents 10% of the total

square footage currently managed in Thailand. We

forecast c5% revenue growth pa.

Taiwan

We believe growth will be driven by new contract

wins and domestic consumption. We forecast

revenue growth of c5% pa.

16.3%

7.6%10.3%

0.2%

2.7%

-2.6%

8.0%

5.0% 3.6%2.3% 1.5% 1.0%

-5%

0%

5%

10%

15%

20%

GreaterChina

AsiaPacific*

S.America

N.America

Japan Europe

2007-12 2012-15e

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Margin dynamics

Within the logistics segment we expect margins to

structurally decrease as:

Services become more commoditized as

competitors become more sophisticated and

markets mature. While Asia remains an

immature and underpenetrated market, this has

been evidenced in Europe and the US over time.

Growth occurs away from the high margin

Kerry Siam Seaport.

New facilities could have higher depreciation

costs relative to much older facilities (and

investment property) in Hong Kong. If the

company increases its proportion of leased

facilities, this may give more flexibility but will

likely be more expensive and depress margins.

Hong Kong warehouse

We assume that the square footage remains

relatively static, that the utilisation is already

relatively high and that the amount used for the

logistics operations does not change materially

(though in practice KLN will take the warehousing

space and use it for logistics operations where the

returns are higher), and that there are no mix

effects from more specialty warehousing.

We therefore forecast rental income increasing in

line with Hong Kong inflation, at c4%, and static

margins.

International Freight Forwarding

Growth is governed primarily by Asia-Europe and

intra-Asia flows. KLN does not disclose its

exposure by trade lane. Global GDP multipliers

have contracted and growth should remain muted

as European economies continue to unwind their

debt burden. We forecast 2014-15 sea freight

volume growth just ahead of global GDP growth

at 4% and air volume growth at 2% as we believe

that the structural shift from air to sea will

continue. We also expect continued price pressure

as is typical in a brokerage business.

Given the unpredictability of timing and size we

do not forecast acquisitions.

All this considered we forecast revenue growth of

c3% pa.

The potential for margin expansion comes

through economies of scale and productivity

improvements; we estimate KLN could almost

double its volumes with existing customers

without adding headcount, though this would not

be possible with new customers.

Interest

KLN had a net debt position of HKD3.85bn (as at

30 June 2013), which included an interest-free

shareholder loan of HKD3.78bn. The shareholder

loan has subsequently been capitalized and repaid

as part of the IPO process. The company has a

mixture of floating and fixed interest rate debt and

is currently paying interest between 1.32% and

5.8% on interest bearing debt.

Associates

Share of results from associates is primarily made

up of the results from AAT (15% stake) and CCT

(25% stake).

The opening of Cathay Pacific’s own cargo

terminal in 4Q13 could have a negative impact on

AAT’s volumes.

Exceptionals

We include small one-off items that come as a

course of doing business (general asset sale gains

and losses) within EBIT. We do however classify

the revaluations of investment property as

exceptional items and strip these out to give a better

idea of the underlying performance of the company.

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Tax

We forecast an effective tax rate of 22%, 22.2%

and 22.4% over 2013-15 (excluding property

gains) in line with prior years and increasing

progressively due to as the company grows further

in China and the tax rate trends towards 25%.

Minority interests

Minority interests relate to companies that KLN

controls and consolidates but does not fully own.

These are principally:

Kerry TJ Logistics 36.46%

Kerry EAS Logistics 70%

Kerry Siam Seaport 79.52%

Net profit and core net profit

We forecast earnings growth of 8.3%, 8.4% and

8.1% for 2013-15, respectively. This compares to

a CAGR of 10.7% over 2010-12, which was

driven by acquisitions and the full consolidation

of Kerry TJ Logistics (Not rated). We calculate

underlying EBIT growth of 6% in 2012 excluding

acquisitions and c5% in 1H13. While we make no

assumption for acquisitions, and our growth rate

is higher than has been the organic trend, we note

that KLN has added a significant amount of

square footage through 2013 and has 6% of its

existing portfolio under construction – which will

come onstream largely in 2014. We also assume

KLN will lease new facilities. Our central

assumptions are that the capex has been largely

front-end-loaded into 2013 and that the growth

from the opening of these new facilities will

materialize in 2014 and 2015. After this, we

assume growth rates normalize to 5-6%.

Risks to our forecasts

The company has not provided much

disclosure in the way of forecasts. We have

therefore had to make significant assumptions

in preparing our forecasts.

We have made assumptions as to the number

of new facilities constructed each year and the

size and cost of these facilities. This could be

materially incorrect.

We have not forecast acquisitions due to the

uncertain nature and timing; yet the company

has a stated strategy of (and has been)

growing through acquisition in the past few

years.

Our assumptions for domestic consumption

and demand growth could be too high or low

and will depend on global GDP and Chinese

governmental policy decisions.

We have not assumed a material impact from

the introduction of VAT in China on services.

Competition could intensify, pressuring

margins. Furthermore, cost base inflation

could be higher than we forecast.

Working capital intensity could be higher

than we anticipate as KLN seeks to grow with

big customers.

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Income statement


Revenue 10,880 16,034 19,295 20,659 22,165 23,596 yoy growth % 47% 20% 7% 7% 6% Total costs (excl D&A) 9,865 14,599 17,638 18,780 20,119 21,401 Adj EBITDA 1,015 1,435 1,657 1,879 2,046 2,195 D&A 210 296 367 438 460 486 Adj EBIT 805 1,139 1,290 1,441 1,586 1,709 EBIT margin 7.4% 7.1% 6.7% 7.0% 7.2% 7.2% Exceptionals 176 130 265 500 EBIT 981 1,270 1,555 1,941 1,586 1,709 Interest income 11 13 25 29 32 35 Interest expense (23) (55) (63) (84) (84) (76) Net finance costs (12) (43) (38) (55) (52) (42) Share of profit from associates 209 148 140 145 130 135 PBT 1,178 1,375 1,657 2,031 1,664 1,803 Adj PBT 1,002 1,245 1,392 1,531 1,664 1,803 Income tax expense (200) (254) (305) (337) (369) (404) Tax % of adjusted PBT 20.0% 20.4% 21.9% 22.0% 22.2% 22.4% Net profit 978 1,121 1,352 1,694 1,294 1,399 Attributable to company's shareholders 833 871 1,069 1,384 958 1,035 Non-controlling interest 145 251 282 311 337 364 as % of net income 18% 25% 26% 26% 26% 26% Adj net income attributable to company's shareholders

657 740 804 884 958 1,035

Core net profit^ 665 741 816 884 958 1,035 yoy growth % 11.4% 10.1% 8.3% 8.4% 8.1% Basic EPS 0.83 0.57 0.61 Adj EPS 0.53 0.57 0.61

^ Core net profit is not a standard measure under HFRS. It represents the profit attributable to the company’s shareholders before

the after-tax effect of change in fair value of investment properties

Source: KLN, HSBC estimates for 2013-15

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Leverage

There is a wide spectrum of leverage profiles

among the logistics players. The Swiss freight

forwarders (Panalpina and K+N) tend to sit with

very conservative net cash balances and K+N is

likely to pay a special dividend in 2014. DSV on

the other hand, tries to maintain an efficient

capital structure with a target leverage ratio of 2x

net debt/EBITDA. After having to raise equity in

2009, DSV reduced its gearing policy from 3-3.5x

net debt/EBITDA.

Post IPO, KLN sits with a small net cash balance.

It could comfortably releverage or sale and

leaseback its freehold properties. However we are

not aware this is something management is

considering at present.

Balance sheet ratios comparison

2013e 2014e 2015e

Net debt/EBITDA (x)

KLN -0.1 -0.5 -0.7 Panalpina -2.1 -2.1 -2.0 KNIN -1.2 -1.3 -1.5 DSV 1.9 1.3 0.7 DP-DHL 0.4 0.3 0.2

Interest cover - EBIT KLN 17.1 19.0 22.5 Panalpina 15.4 n/m n/m KNIN n/m n/m n/m DSV 8.3 9.6 12.8 DP-DHL 9.8 8.8 10.2

Cash % of sales KLN 14% 14% 15% Panalpina 5% 6% 7% KNIN 7% 8% 9% DSV 3% 5% 8% DP-DHL 5% 5% 6%

Net debt/equity KLN -1% -6% -8% Panalpina* -47% -49% -53% KNIN* -44% -49% -53% DSV 87% 51% 24% DP-DHL 17% 13% 8%

*net cash


Net debt/EBITDA


-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2010 2011 2012 2013e 2014e 2015e

Balance sheet

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Debt breakdown and funding profile

Total borrowings (HKDm)

Source: KLN, HSBC

Maturity of bank loans

Note: As of 30 June 2013

Source: KLN, HSBC

Breakdown of bank loans (HKDm)

Source: KLN, HSBC. Excludes KPL loan

Working capital

Forwarders tend to maintain a conservative capital

structure as a result of the big swings in working

capital that can occur due to big changes in freight

rates, customers getting into difficulty or changes in

customer mix (with bigger customers demanding

longer payment terms). The low growth environment

in Europe in particular has led to intense competition

for volumes, the result being customers offered

longer payment terms which has stretched cash

flows for some forwarders.

KLN has seen its debtor days increase notably,

particularly in 1H13, due to an increase in

customer size with longer payment terms and a

change in the revenue contributions.

Average trade receivables turnover days

Source: KLN, HSBC

The increase in the revenue contribution by the air

and ocean freight consolidation operations (which

have longer credit terms) has driven an increase in

payables days.

-

2,000

4,000

6,000

8,000

2,010 2,011 2,012 2013e 2014e 2015eBank overdraftsLoan from non-controlling interestsLoans from fellow subsidiariesBank Loans

Within 1 y ear22%

Betw een 1 and 2 y ears

10%

Betw een 3 and 5 y ears

66%

Ov er 5 y ears

2%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2010 2011 2012 1H13Current unsecured Current securedNon-current unsecured Non-current secured

0

10

20

30

40

50

60

70

80

2010 2011 2012 1H13

42


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Average trade payables turnover days

Source: KLN, HSBC

Covenants

Some covenants exist with regard to the

company’s bank debt which preclude the

company from changing the general nature of its

business or disposing of a material part of its

assets. There are also financial covenants,

including consolidated tangible net worth, ratio

of consolidated total financial indebtedness to

aggregate consolidated tangible net worth and

minority interests, and ratio of consolidated total

liabilities to aggregate consolidated tangible net

worth and minority interests.

0

5

10

15

20

25

30

35

40

45

50

2010 2011 2012 1H13

43


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Balance sheet

As at 31 Dec (HKDm) 2010 2011 2012 2013e 2014e 2015e

Intangible assets 835 1,186 1,774 1,774 1,774 1,774 Investment properties 4,999 5,143 5,768 6,179 6,179 6,179 Leasehold land and land use rights 409 576 539 539 539 539 Property, plant and equipment 4,503 4,989 5,999 6,308 6,660 7,017 Associates 818 1,002 939 1,128 1,258 1,393 Available for sale investments 51 52 61 61 61 61 Non-current assets 11,614 12,949 15,079 15,988 16,471 16,963 Inventories 131 110 110 124 133 142 Accounts receivable 2,029 2,405 3,389 3,719 3,990 4,247 Prepayments and deposits 481 954 936 936 936 936 Tax recoverable 5 11 9 9 9 9 Restricted and pledged bank dep. 16 5 5 5 5 5 Cash and bank balances 2,211 2,908 2,940 3,167 3,457 3,518 Current assets 4,871 6,392 7,389 7,960 8,529 8,857 Total assets 16,486 19,341 22,468 23,948 25,000 25,821 Accounts payable 788 1,287 1,663 1,758 1,870 1,983 Deposits received and acc. charges 1,525 2,066 2,260 2,260 2,260 2,260 Loans from fellow subsidiaries 3,491 3,891 4,182 Amount due to imm. holding co. 75 94 65 65 65 65 Amount due to a related company 5 7 4 4 4 4 Taxation 129 83 117 117 117 117 ST bank loans 417 694 601 601 601 601 Bank overdrafts 21 16 26 26 26 26 Current liabilities 6,451 8,137 8,917 4,830 4,942 5,055 Loans from non-controlling interests 83 131 222 222 222 222 Long term bank loans 237 405 1,365 2,300 1,800 1,300 Deferred taxation 466 443 490 490 490 490 Retirement benefit obligations 311 320 349 349 349 349 Non-current liabilities 1,097 1,300 2,425 3,360 2,860 2,360 Share capital 1 1 1 109 109 109 Retained profits 5,458 6,315 7,361 8,245 9,026 9,870 Other reserves 1,083 1,082 996 4,326 4,649 4,649 Shareholders’ equity 6,542 7,398 8,358 12,679 13,783 14,627 Non-controlling interests 2,395 2,506 2,768 3,078 3,415 3,778 Total Equity 8,937 9,904 11,126 15,757 17,198 18,405

Total liabilities and shareholders’ equity 16,486 19,341 22,468 23,948 25,000 25,821


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Quality of earnings

Quality of earnings even adjusted for property

revaluations has been volatile – mainly due to

swings in working capital.

Quality of earnings

Calculated as operating cash flow less depreciation adjusted for property revaluations


Working capital

As the forwarding side of the business continues to

grow and KLN takes on large customers with longer

payment terms, we would expect the working capital

intensity of the business to naturally increase.

Capex

KLN spent on average HKD975m pa on property,

plant and equipment over 2010-12. The company

aims to make investments in new facilities when it

has identified a specific customer or has built

sufficient volumes in areas such that it can be

confident of achieving good utilisation of its new

sites upon opening. Capex can be lumpy depending

on winning new contracts or identifying suitable

sites or properties. We expect the company to look

to build around 3-4 significant facilities pa in

mainland China.

We estimate maintenance capex of c2% sales in

line with peers and then assume investment in 4

facilities pa at around HKD100m per facility and

around 250,000 square feet per facility. Due to the

time lag between capex for construction and

completion, revenue growth does not necessarily

follow the capex profile.

Capex/Sales


Capex/Depreciation


-

0.2

0.4

0.6

0.8

1.0

1.2

2010 2011 2012 2013e 2014e 2015e

0%

1%

2%

3%

4%

5%

6%

7%

8%

2010 2011 2012 2013e 2014e 2015e

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2010 2011 2012 2013e 2014e 2015e

Cash flow

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Capital commitments

KLN has HKD461m in capital commitments in

terms of property plant and equipment and

acquisition of subsidiaries as at 30 June 2013.

Free cash flow profile

Though the company intends to grow its IF division

through acquisition, we do not forecast acquisitions

due to the uncertainty in nature and timing.

Based on this, plus inherently lower capex and

more muted working capital outflows, the cash

flow profile of KLN improves significantly in

2014 and 2015.

Free cash flow (post investment capex and acquisitions) (HKDm)


(400)

(200)

-

200

400

600

800

1,000

2010 2011 2012 2013e 2014e 2015e

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Cash flow statement


Profit before taxation 1,178 1,375 1,657 2,031 1,664 1,801 Share of results of associates (209) (148) (136) (145) (130) (135) Interest income (11) (13) (28) (29) (32) (33) Dividend income from AFS investments (2) (2) (0) Finance costs 23 55 63 84 84 76 Others (152) (112) (187) (500) - - D&A 210 296 367 438 460 486 Operating cash flow before WC changes 1,038 1,451 1,736 1,879 2,046 2,195 Increase in inventories and accounts receivable, prepayments and deposits

(425) (269) (703) (344) (280) (266)

Increase/(decrease) in current liabilities, 163 204 179 95 112 113 Change in net pension liabilities (10) (20) (25) Dec in contingent payment for acq. of sub. (8) Net cash generated from operations 765 1,367 1,179 1,630 1,878 2,042 Interest paid (18) (49) (58) (84) (84) (76) Income tax paid (140) (298) (250) (337) (369) (404) Net cash generated from op. activities 607 1,019 871 1,209 1,425 1,562 Additions of PP&E (604) (853) (1,468) (1,182) (813) (843) Additions of investment properties (4) (0) Purchase of AFS investments (3) Purchase of leasehold land and land use rights (4) (102) (22) Proceeds from sale of PP&E 42 101 84 35 Proceeds from sale of investment in associates 2 6 1 Proceeds from sale of an AFS investment 1 Dividend income from AFS investments 2 2 0 Dividends received from associates 159 31 296 Increase in balance with associates (0) (39) (71) Decrease in balance with associates 9 8 32 63 Interest received 11 13 28 29 32 33 Acquisition of subsidiaries 65 (194) (492) (411) Increase in investments in associates (55) (53) (107) Change in restricted and pledged bank dep (15) 11 0 Net cash used in investing activities (388) (1,024) (1,665) (1,573) (782) (809) Increase in loans from fellow subsidiaries 299 394 285 Decrease in loans from fellow subsidiaries (2,400) Repayment of bank loans (123) (351) (927) (1,600) (500) (500) Drawdown of bank loans 302 770 1,771 2,535 Dividends of subsidiaries paid to non-controlling interests

(6) (66) (80)

Capital injection from non-controlling interests 33 13 Drawdown of loans from non-cont interests 2 60 90 Repayment of loans from non-cont interests (1) (13) Settlement of recharge of share based payment with immediate holding company

(104)

Acquisition of additional interest in subsidiaries (42) (151) (256) Disposal of partial interest in subsidiaries 0 Dividends paid to shareholders (177) (192) (207) IPO net proceeds 2,056 323 Net cash generated from financing activities 431 676 793 591 (354) (692) Change in cash and cash equivalents 650 671 (2) 227 290 62 Effect of exchange rate changes 63 26 33 Cash and cash eq at the beg of the year 1,498 2,211 2,908 2,940 3,167 3,457 Cash and cash eq at the end of the year 2,211 2,908 2,940 3,167 3,457 3,518

Source:: KLN, HSBC estimates for 2013-15

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Valuation methodology

KLN is a predominantly Asian contract logistics

led freight forwarding business with some

express/road activities and a Thai port as well as a

holding in a container and airfreight terminal.

There is no pure play listed peer which is why we

use a broad peer group of US and European

freight forwarders, global integrators, European

contract logistics operators as well as Chinese

state owned logistics hybrids to derive our

valuation.

KLN’s peer group is trading over a broad range of

multiples reflecting divergent returns profiles and

growth expectations. We take the average 2014e

PE, EV/EBIT and EV/EBITDA multiples across

the sector and apply these to KLN’s 2014

estimates, adjusting for the value of associates

(CCT and AAT HKD2.2bn) and minority interests

(KLN fully consolidates Kerry TJ Logistics

although it only owns 36% ). This gets us to our

target price of HKD11.75.

Under our research model, the Neutral rating band

for volatile Hong Kong stocks equals the local

hurdle rate of 8.5% plus or minus 10ppt. Our

target price of HKD11.75 implies a potential

negative return of 8.6%, including the forecast

dividend yield of 0.9%. This is below the Neutral

band; therefore, we initiate with an Underweight

(V) rating. Potential return equals the percentage

difference between the current share price and the

target price, including the forecast dividend yield

when indicated.

We then cross-check this valuation range with

EV/IC vs. ROIC and historic peer multiples.

Core valuation (based on 2014 forecasts)

Multiple Valuation (HKDm)

P/E 21.0x 20,116 EV/EBIT 14.0x 19,990 EV/EBITDA 10.5x 19,453 Average 19,853 Target price -HKD 11.75

**EBIT/EBITDA adjusted for minority interests (25% of the earnings stream). To derive the equity value we add a net cash of HKD1.14bn (2014e) and add in the market value of the associates HKD2.2bn.


Implied KLN valuation based on our target price

2013e 2014e 2015e

P/E 19.5 20.7 19.2 EV/EBITDA 10.6 10.6 9.7 EV/EBIT 13.8 13.7 12.4

Note: these are headline multiples that include the book value of associates/JV and minority interests rather than the market value


Valuation

KLN is more asset heavy than peers, making multiple comparison tricky

We cross-check our multiple-based valuation with listed peers

We arrive at a target price of HKD11.75 and initiate with an UW(V) rating

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Challenging peer analysis

Peer comparison is imperfect and KLN’s peers are

trading at a range of multiples which we reflect in

our valuation range presented above.

Comparative analysis is challenging as:

There is a shortage of listed logistics

companies within Asia and those that exist

(Sinotrans) are state owned hybrids.

Some of the listed logistics companies are

undergoing significant restructuring and/or

earnings are distressed.

Listed logistics companies in Europe and the US

are forwarding rather than contract logistics led.

Most of the significant stand-alone contract

logistics-led players within Europe that could

have been relevant have been acquired.

Listed logistic peers have gravitated towards a

more asset-light model and shy away from

property ownership, unlike KLN.

KLN has higher margins than peers

benefitting from low ownership costs

(investment properties are not depreciated).

The flip side of having high margins due to

high asset intensity is lower returns on

invested capital. KLN’s 2014e ROIC is 7.1%

versus KNIN on 22.5% and DSV on 13.8%.

KLN has a high degree of minority interests –

representing c26% of net income.

We present below a multiples comparison table

for what we believe to be the most relevant peers.

Within this, we have a mixture of:

Pee

Peer multiples

Ticker CP^ Rating ___________ PB (x) ____________ ________ Dividend yield ________ 13e 14e 15e 13e 14e 15e

DPW DPW GR 26.5 N 3.2 3.0 2.7 3.2% 3.4% 3.6% TNTE TNTE NA 6.7 UW (V) 1.7 1.6 1.5 1.1% 1.9% 2.5% KNIN KNIN VX 123.7 UW 5.8 5.4 5.0 3.1% 3.2% 3.4% PWTN PWTN SW 150.0 UW 4.5 4.2 3.9 1.4% 1.7% 1.8% DSV DSV DC 181.0 N 5.0 4.0 3.4 0.7% 0.8% 0.8% KLN 636 HK 13.0 UW (V) 1.4 1.6 1.5 1.0% 0.9% 0.9% FDX FDX US 140.2 NR* 2.5 2.2 2.0 0.4% 0.5% 0.6% UPS UPS US 97.9 NR* 31.2 32.8 28.5 2.5% 2.7% 2.9% UTI WW UTIW US 17.2 NR* 2.3 2.1 1.8 0.3% 0.4% 0.3% CH Robinson CHRW US 59.1 NR* 8.0 7.6 7.9 2.3% 2.5% 2.7% Expeditors EXPD US 43.6 NR* 4.2 4.0 3.5 1.4% 1.7% 1.9% Wincanton WIN LN 1.5 NR* n/m n/m n/m 0.0% 0.0% 0.0% Sinotrans 598 HK 3.3 NR* 1.2 1.2 1.1 1.2% 1.4% 1.6% Average** 3.9 3.6 3.3 1.4% 1.6% 1.8%

Note: UTI WW is a January ending company, FedEx is a May ending company and Wincanton is a March ending company. Hence the values have been calendarized.


*NR = Not rated

**PB average excludes Sinotrans and UPS. Dividend yield averages includes all the values

Source: HSBC estimates for DPW, TNTE, PWTN, KNIN, DSV, KLN. Bloomberg estimates for FDX, UPS, UTI WW, CH Robinson, Expeditors, Wincanton and Sinotrans

Prices as of 23 January 2014 for DPW, TNTE, KNIN, PWTN, DSV, FDX, UPS, UTI WW, CH Robinson, Expeditors and Wincanton as of 24 January for KLN and Sinotrans

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Freight forwarding led contract logistics

players: Kuehne + Nagel, DSV, Panalpina

(European), Expeditors, UTI Worldwide, CH

Robinson (US)

Global integrators: Deutsche Post-DHL, TNT,

FedEx, UPS

Local contract logistics led players:

Wincanton (Europe)

Asian integrator: Sinotrans (though this also

provides marine transportation services)

We present below the earnings growth profile for

the peer group. KLN’s forecast earnings growth is

in the middle of the pack; slightly higher than

some of its European peers but lower in general

than its US peers and the asset heavy integrators.

Earnings growth

2012-13e 2013-14e 2014-15e 2012-15e CAGR

KLN 8.3% 8.4% 8.1% 8.2% Wincanton -22.8% -4.3% 10.0% -6.7% Sinotrans 28.7% 22.8% 19.4% 23.6% UTI -53.6% 173.2% 65.1% 27.9% CH Robinson -1.7% 10.0% 9.6% 5.9% DSV 4.8% 6.4% 6.1% 5.8% KNIN 10.1% 6.3% 6.9% 7.8% PWTN 67.7% 18.1% 22.3% 34.3% DP-DHL 27.5% -2.1% 13.8% 12.4% TNTE -36.8% 71.5% 34.9% 13.5% FedEx 4.9% 21.4% 23.4% 16.3% UPS 4.9% 15.5% 12.8% 11.0%

Source: HSBC estimates for KLN, DSV, KNIN, PWN, DP-DHL and TNTE. Bloomberg consensus for Wincanton, Sinotrans, UTI, CH Robinson, FedEx and UPS. Numbers have been calendarized

Peer multiples

Ticker CP^ Rating ______ EV/EBIT (x) _______ ____ EV/EBITDA (x) _____ ________ PE (x) ________ 13e 14e 15e 13e 14e 15e 13e 14e 15e

DPW DPW GR 26.5 N 11.9 13.3 11.7 8.1 9.2 8.3 17.1 17.4 15.3 TNTE TNTE NA 6.7 UW (V) 15.1 11.6 9.5 9.0 7.8 6.7 36.6 21.3 15.8 KNIN KNIN VX 123.7 UW 16.6 17.2 15.9 13.2 14.0 13.0 25.1 23.6 22.0 PWTN PWTN SW 150.0 UW 19.4 23.3 18.7 14.1 16.5 13.5 39.3 33.3 27.2 DSV DSV DC 181.0 N 13.5 14.5 13.4 11.2 12.0 11.2 19.6 18.4 17.3 KLN 636 HK 13.0 UW (V) 13.8 15.1 13.8 10.6 11.7 10.8 19.5 22.9 21.2 FDX FDX US 140.2 NR* 13.3 11.9 9.9 7.4 7.2 6.3 22.7 17.2 14.1 UPS UPS US 97.9 NR* 14.4 14.1 12.8 11.4 11.4 10.3 21.3 18.4 16.2 UTI WW UTIW US 17.2 NR* 36.1 17.9 10.6 15.8 10.0 7.1 85.3 31.5 19.3 CH Robinson CHRW US 59.1 NR* 13.3 12.6 11.9 12.3 11.6 10.9 21.8 19.8 18.0 Expeditors EXPD US 43.6 NR* 13.4 11.8 10.5 12.4 11.0 9.7 25.0 22.2 20.2 Wincanton WIN LN 1.5 NR* 11.6 10.9 10.8 7.6 7.4 7.1 9.3 9.7 8.8 Sinotrans 598 HK 3.3 NR* 9.1 7.7 6.5 6.0 5.2 4.5 16.8 13.7 11.5 Average** 15.6 13.9 11.9 10.7 10.3 9.0 28.3 20.5 17.2 Avg excl. high/low(1)

13.9 13.4 11.9 10.6 10.5 9.6 23.6 19.8 17.4

Avg excl. restructuring (2)

13.2 12.6 11.3 9.9 9.7 8.8 21.5 18.2 15.9

Avg just FF 14.2 14.0 12.9 12.3 12.2 11.2 22.9 21.0 19.4

Note: UTI WW is a January ending company, FedEx is May ending company and Wincanton is a March ending company. Hence the values have been calendarized.

(1) We exclude the two highest and lowest multiple peers

(2) Excluding companies undergoing significant restructuring or where earnings are distressed


*NR = Not rated

Source: HSBC estimates for DPW, TNTE, PWTN, KNIN, DSV and KLN.. Bloomberg estimates for FDX, UPS, UTI WW, CH Robinson, Expeditors, Wincanton and Sinotrans;

Prices as of 23 January 2014 for DPW, TNTE, KNIN, PWTN, DSV, FDX, UPS, UTI WW, CH Robinson, Expeditors and Wincanton as of 24 January for KLN and Sinotrans

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Historical multiples

There were more contract logistics driven

businesses listed in the past than there are in the

present. We therefore look back to sense-check

our multiples and valuation. If we look back to

1999-2004, which was a period of significant

growth of contract logistics within Europe and the

US when Exel, Tibett and Britten and Wincanton

were listed (Wincanton still is), we get an average

multiple of EV/EBIT of 12.6x and PE of 17.1x.

Historical PE (x)

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Exel 26.5 34.3 23.9 17.2 21.4 20.0 Wincanton 18.6 13.3 7.3 15.1 11.3 20.7 15.2 15.2 16.2 19.6 19.7 12.4 4.5 Tibbett + Britten 10.7 14.7 15.9 15.8 17.2 Sinotrans 15.5 16.9 15.7 27.8 22.7 16.1 18.6 13.4 12.1 8.5 DSV 8.7 13.0 16.4 22.0 20.7 16.3 17.8 17.9 15.8 14.3 KNIN 13.2 11.8 11.0 11.4 15.2 18.5 21.4 22.5 17.8 19.5 22.2 23.4 24.5 PWTN 20.8 24.2 23.2 20.5 16.8 23.2 15.3 27.9 20.2 18.9 40.3 DP-DHL 13.8 7.8 10.1 6.6 5.4 8.4 19.3 11.1 16.4 13.8 10.7 11.9 TNTE 25.3 20.0 10.7 29.0 FedEx 20.4 20.4 19.1 18.6 17.2 16.3 16.7 17.1 19.0 19.0 15.1 14.2 UPS 26.3 25.6 21.1 19.8 17.3 18.0 24.4 18.6 16.3 16.7 Average 18.6 18.9 15.5 15.4 16.5 17.8 16.2 18.5 19.8 16.4 21.0 18.1 15.0 18.2


Historical EV/EBIT (x)

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Exel 16.1 20.4 14.6 16.7 17.8 18.0 Wincanton 16.2 14.4 10.4 12.5 16.4 12.2 12.2 14.3 14.0 12.5 10.7 11.3 13.8 9.2 Tibbett 7.7 10.2 10.3 10.1 10.5 Sinotrans 0.6 0.7 2.2 3.9 5.1 3.1 3.7 3.4 DSV 7.7 9.8 12.5 16.5 15.0 14.7 13.5 13.1 12.8 12.4 KNIN 7.8 9.8 8.4 8.0 12.4 12.9 16.3 17.0 13.4 14.8 16.4 18.0 18.0 PWTN 15.0 16.0 16.3 13.8 11.0 15.9 8.9 13.3 12.4 11.6 25.8 DP-DHL 11.9 8.9 9.0 9.0 8.7 10.9 16.9 16.4 13.9 10.4 8.7 9.0 TNTE 14.6 10.6 6.2 15.9 FedEx 13.1 13.0 13.0 12.6 11.1 10.6 11.0 11.2 12.1 12.0 9.7 9.1 UPS 18.2 18.0 14.6 13.7 12.9 13.4 17.9 13.6 12.3 12.6 Average 13.3 13.2 11.7 12.1 12.9 12.1 12.2 11.7 13.1 11.8 12.9 11.4 10.8 12.8


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EV/IC vs. ROIC

We plot EV/IC versus ROIC for the sector in order

to sense-check our valuation, bearing in mind the

difference in capital intensity of KLN’s model

versus its peers and given that this should be

reflected in its multiples. KLN has a ROIC of 7.1%

(on our 2014 estimates) versus KNIN of 22.5%.

From our line of best fit, on the basis of a 7.1%

2013e ROIC and an invested capital base of

HKD17.4bn this would imply a valuation of

HKD11.5 per share.

EV/IC vs. ROIC (2013e)

Source: Respective company reports, HSBC estimates

Acquisition multiples

Acquisition multiples are illustrative of the

significant deviation in valuation across the sector

but are not useful for analysis. Acquisition

multiples have ranged from 8-21x EBIT. In 2005

Deutsche Post-DHL acquired Exel Logistics for

27x EBIT (or 13x post the cost synergies it at the

time expected to extract).

y = 22.258x - 0.0733

0

1

2

3

4

5

6

0% 5% 10% 15% 20% 25% 30%

KNIN

PWTNCH Robn

DSV

ROIC

EV/IC

DP-DHL

TNTE

UTI

KLNWincanton

Third-party logistics acquisitions

Target company Acquirer Acquisition date Target company yearly revenue

(USDm)

EBIT multiplier EBITDA multiplier

American Backhaulers C.H.Robinson Dec-99 280 10.5 Tibbett & Britten Exel Dec-04 2600 6.8 Ozburn-Hessey Logistics Welsch, Carlson, Anderson & Stone Jun-05 302 9.2 Exel Plc Deutsche Post Dec-05 13* BAX Global Deutsche Bahn Jan-06 2734 10.7 Barthco International Ozburn-Hessey Jul-06 120 9 Jacobson Companies Oak Hill Capital Jun-07 375 11 EGL Apollo Management/CEVA Jul-07 3200 14.5 Geodis SNCF Jul-08 7043 9.6 Express Logistics Group Toll Holdings Oct-09 113 8 Summit Logistics Intl Toll Holdings Feb-10 261 9.3 ATC Technology Corp GENCO Distribution System Jul-10 476 6.6 Total Logistic Control Ryder Dec-10 250 7 TDG Norbert Dentressangle Mar-11 1100 5.8 Exel Transportation Services Hub Group Apr-11 717 20.8 Caterpillar Logistics Platinum Equity May-12 660 11 Turbo Logistics XPO Logistics Oct-12 124 8 Phoenix International C.H.Robinson Nov-12 807 12.5

*Post the cost-synergies expected to extract

Source: KLN, HSBC

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Investment property

Below we show JLL’s estimate of the capital

value of warehouse space in Hong Kong.

Industrial property valuation (HKD psf) and capitalisation yields in Hong Kong


Capital values are a function of rents and

capitalisation rate applied to these rents. Based on

a perpetuity formula, the capitalisation rate is

driven by a combination of the risk-free rate, the

perceived risk premium for holding property

investment assets, and perceptions of the likely

future annual growth in rent in perpetuity.

What’s in the capitalisation rate?

If property value =

rent (pre-tax) which is rent (pre-tax) Yield equivalent to WACC – g

Then: yield = WACC-g Where WACC = pre-tax real risk free rate (Rf pre-tax) + inflation +

risk premium and: g = annual growth in rents

Source: HSBC

We assume an average beta for Hong Kong-

warehouse property investors of 1.0. The current

HKD 10-year swap rate is 2.6%, though this may

be subject to upside risk. If we assume an equity

risk premium of 5% and that, from relatively high

levels, warehouse rents grow at a 3% CAGR, this

implies a capitalisation rate of 4.6% for

warehouse property should be applied to the post-

tax profit from these properties. If we apply a

capitalisation rate to pre-tax income (i.e. EBIT),

the appropriate pre-tax capitalisation rate, given

that rental income is taxable, would be 4.6%

divided by 0.835 (i.e. 1 - 16.5%) = 5.4%.

Finally, if we apply this capitalisation rate to

revenue, then the cap rate used should be 5.4%

divided by the warehouse division’s EBIT margin

of 57% which gives a capitalisation rate of 9.5%.

This compares to the current cap rate of 5.8%

(source: Jones Lang Lasalle). We argue given the relatively strong rental

performance in recent years, the upside risks to

HKD 10-year interest rates, plus the relatively

weak outlook for demand, that the capitalization

rate for Hong Kong industrial space should be

relatively high. Indeed, KLN’s relatively old

warehouse properties – some of which rely on

lorry loading bays on some or all of the floors –

suggests its capitalization yield should be higher

than the levels suggested by JLL’s basket of

industrial space assets.

HSBC appraised valuation by country/territory


Given the relatively low EBIT margin generated

by KLN’s portfolio of assets, we estimate a

capitalization rate of 9.5% should be applied to

KLN’s 2013 revenues to value the property assets.

Therefore, based on our forecast of gross revenue

from this division of HKD730m, we value KLN’s

property assets at HKD7.7bn.

0%

1%

2%

3%

4%

5%

6%

7%

8%

0

500

1,000

1,500

2,000

2,500

1Q04 3Q05 1Q07 3Q08 1Q10 3Q11 1Q13HKD psf (LHS) Yield % (RHS)

HK88%

China (ex -HK)6%

Vietnam3%

S'pore3%

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HSBC’s Real Estate team argues that property

investors should trade at approximately a 30%

discount to appraised valuation (the investors are

trading at 40-45% discounts currently) (HK Real

Estate: Seeking shelter from stronger headwinds,

27 January 2014). If we applied a 30% discount to

our appraised valuation of KLN’s property portfolio,

then it implies a value of HKD5.4bn, which equates

to 15x 2013e post-tax profit from the Hong Kong

warehouse division.

Below we show our valuation of KLN’s investment

properties under three scenarios.

Base case – as we discuss above

Low – we assume HKD 10-year interest rates

of 3.6% versus 2.6% now

High – we assume warehouse rents grow in

perpetuity by 4% rather than the 3% we

assume in the base case

The risks to this valuation include a sharp decline in

demand for space by logistics companies in Hong

Kong, a significant strengthening of the HK/US

dollar and a rise in the HKD 10-year interest rate.

HSBC appraised valuation scenarios

Low Base High

HKD 10-yr 3.6% 2.6% 2.6% ERP 5.0% 5.0% 5.0% l-t growth 3.0% 3.0% 4.0% Post-tax cap rate 5.6% 4.6% 3.6% Pre-tax 6.6% 5.4% 4.3% Yield on revenue 11.6% 9.5% 7.4% Appraised value (HKDm) 6,292 7,683 9,864 Fair value to KLN (HKDm) 4,405 5,378 6,905 Implied PE (x) 13 15 20




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Appendices

.

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Kerry / Kuok Group

About: Private, diversified conglomerate with interests in shipping and transportation, food industries, real estate, media, financial activities, hotels, etc.

Owned by Kuok family (started as Kuok Brothers Limited in 1949). Robert Kuok is the chairman of the group

Key Group members Perlis Plantations Berhad (PPB) Federal Flour Mills Berhad (FFB) Jerneh Insurance Corporation Sdn. Berhad Hexagon Holdings Berhad Wilmar International Limited Transmile Group Pacific Carriers Limited (PCL) Allgreen Properties Limited Shangri-La International Hotel Management Limited Kerry Properties Limited South China Morning Post (SCMP) Kerry Logistics Limited

Source: Various news reports

Appendix 1

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China’s 3PL market structure

China's market structure 1. An estimation of over 10,000 3 PL service providers

2. Usually small/medium sized operating in only one province

3. Expectation of market consolidation led by large 3PLs

Current deficiencies 1. Vast disparity in quality of urban against rural transportation infrastructure makes managing logistics more complicated and costly

2. Without good transportation infrastructure, costs are higher

3. High warehousing and inventory carrying costs due to higher levels of inventory owing to longer delivery cycle times

Objectives of China's 12th 5 year plan 1. Aggressively develop 3PL, integrate existing logistics resources, reduce costs

2. Promote agricultural products, bulk mineral products, key industrial areas

3. Develop regional distribution systems and logistics parks

4. Promote development of modern logistics management and improve standardization

Source: Company presentation

Appendix 2

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Board of Directors

Name Position Profile

Yeo George Yong-boon Chairman/Executive Director

Mr. Yeo, age 59, is an Executive Director of the Company. He has been a Chairman since Aug 2012 and also deputy chairman and a director of KGL. From 1988 to 2011, Mr. Yeo served in the Singapore government as Minister of State for Finance, Minister of Information and the Arts, Health, Trade and Industry and Foreign Affairs. Prior to 1988 he has also served in various capacities in the Singapore Armed Forces.

Mr. Yeo is a member of the Foundation Board of the World Economic Forum, the Berggruen Institute on Governance, the Asia-Pacific Advisory Board of Harvard Business School, the International Advisory Board of IESE Business School and Economic Development Commission, Hong Kong.

Mr. Yeo was awarded the Philippines’ Order of Sikatuna, India’s Padma Bushan and Australia’s Honorary Officer of the Order of Australia. Mr. Yeo graduated from Cambridge University with a double first in engineering in 1976 and also obtained a master of business administration degree (Baker Scholar) from Harvard Business School in 1985.

Ma Wing Kai William Group Managing Director/Executive Director

Mr. Ma, age 52, is an Executive Director. He has been a director since June 1999 and designated as Deputy Chairman and Managing Director since April 2004. He joined the KHL Group in September 1990 and served as an executive director of KPL since March 2004. He has also been a director of Kerry TJ Logistics since November 2008. Mr. Ma currently serves in the Logistics Development Council, the Aviation Development Advisory Committee and the Advisory Committee on Admission of Quality Migrants and Professionals of the Hong Kong Government. He is also a member of the Advisory Board of the Asian Institute of Supply Chain and Logistics of the Chinese University of Hong Kong and the Logistics Services Advisory Committee of the Hong Kong Trade Development Council. Mr. Ma obtained a bachelor of science (management sciences) degree from the University of Lancaster, the United Kingdom in 1985, and completed an executive supply chain programme at Harvard Business School in 2000.

Erni Edwardo Executive Director Mr. Erni, age 52, is an Executive Director. He has been a director since 2011 and also President of the China region. He joined the company in January 1994 and has c20 years of experience in the logistics industry of China.

Mr. Erni currently serves as vice-chairman of several industry associations including the China Federation of Logistics & Purchasing, the Integrated Transport Federation of China Communications and Transportation Association, and China Association of Warehouses and Storage. Mr. Erni obtained a master of business degree in logistics management from the Royal Melbourne Institute of Technology, Australia in 2005 and has completed various management and professional study programmes - a training course held by the Harvard Business School in association with the School of Management at Fudan University in 2013, and management courses held by Tianjin University in 2011, Beijing University in 2009 and Tsinghua University in 2008.

Kuok Khoon Hua Executive Director Mr. Kuok, age 34, is an Executive Director. He has also served as a director of KHL since January 2010, as a director of Kerry Wines Limited, a subsidiary of KGL, since March 2011, as deputy managing director of KHL since January 2012, and director of KGL since August 2012. He is currently involved in the management of KHL, including KHL’s investment, legal, human resources and wine divisions.

Mr. Kuok obtained a bachelor’s degree in economics from Harvard University in 2003.

Source: Company

Appendix 3

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Board of Directors (cont’d)


Qian Shaohua Non- executive Director Mr. Qian, age 56, is a Non-executive Director. He has been a director of KPL since September 2007, re-designated as an executive director of KPL in July 2009 and was subsequently re-designated as a co-managing director of KPL in August 2013. He served as vice president of development at Shangri-La Asia Limited from February 2004 to September 2007 and as general manager of Zhongshan ProvinceTourism Group Company, a state owned enterprise primarily engaged in the business of tourism development, from January 1996 to May 2002.

Mr. Qian is also a member of the executive committee of KPL and is responsible for KPL’s property development business in China. Mr. Qian graduated from South China Normal University in 1986 and completed an advanced management programme at Harvard Business School in 2002.

Wong Yu Pok Marina IndependentNon-executive Director

Ms. Wong, age 65, is an Independent non-executive Director. Ms. Wong has served as an independent non-executive director of KPL since May 2008. She had worked with PricewaterhouseCoopers for over 30 years, specialising in PRC tax and business advisory services, and has extensive experience in advising both Hong Kong and foreign investors on the structuring of their businesses and investments in China Ms. Wong is a Fellow Member of the Hong Kong Institute of Certified Public Accountants and the Association of Chartered Certified Accountants. Ms. Wong obtained a higher diploma in Accountancy from Hong Kong Technical College (now known as Hong Kong Polytechnic University) in 1968 after completing a three-year full-time course in accountancy from 1965 to 1968.

Wan Kam To Independent Non-executive Director

Mr. Wan, age 60, is an Independent non-executive Director. He was a former partner of PricewaterhouseCoopers Hong Kong & China, and has been a practicing accountant in Hong Kong for over 30years with extensive experience in auditing, finance, advisory and management. He has also served as independent non-executive director in companies such as China Resources Ltd, Dalian Port, KFM Kingdom Holdings etc. Mr. Wan is a Fellow Member of Hong Kong Institute of Certified Public Accountants and the Association of Chartered Certified Accountants. Mr. Wan graduated from the accounting department of Hong Kong Polytechnic (now known as Hong Kong Polytechnic University) with a higher diploma in 1975.

Yeo Philip Liat Kok IndependentNon-executive Director

Mr. Yeo, age 67, is an Independent non-executive Director. He is the chairman and independent director of Ascendas India Trust since June 2007 and an independent non-executive director of City Developments Limited since May 2009. Mr. Yeo has been a member of the United Nations Committee of Experts on Public Administration, special adviser for economic development in the Prime Minister’s office of the Singapore Government and senior adviser for the Ministry of Trade and Industry, Singapore Government, senior adviser for Science and Technology, chairman of the Agency for Science, Technology and Research, in Singapore, chairman and co-chairman for the Economic Development Board. Mr. Yeo also served as the Permanent Secretary in the Ministry of Defence for Defence Research, Logistics and Industry from September 1979 to December 1985. Mr. Yeo obtained a bachelor’s degree in applied science in industrial engineering in 1970 and an honorary doctorate degree in engineering from the University of Toronto, Canada in 1997. He obtained a master of science degree in systems engineering from the University of Singapore in 1974 and a master of business administration degree from Harvard University in 1976.He received a doctor of medicine degree from Karolinska Institutet, Sweden in May 2006, an honorary doctor of science degree from Imperial College London, United Kingdom in November 2007, the Order of the Rising Sun, Gold and Silver Star from the Japanese Government in December 2007, the Distinguished Service (Star) award from the Singapore’s Labour Movement, National Trade Unions Congress in May 2008, an honorary doctor of letters degree from the National University of Singapore in July 2011 and an honorary doctor of law degree from Monash University of Australia in November 2011.

Source: Company

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Senior Management


Ang Keng Lam Senior Advisor Mr. Ang, age 66, has been a Senior Advisor since August 2012, prior to which he was the Chairman from July 2000. He has also been a Director from December 1991 to August 2012. He has been a director of KHL since September 1999 and the chairman of China World Trade Center Co, Ltd. Mr. Ang was a member of the National Committee of the Chinese People’s Political Consultative Conference from January 1998 to March 2013. Mr. Ang obtained a bachelor’s degree in engineering from the University of Western Australia and a master’s degree in business administration from the University of Toronto. He also attended and completed the International Advanced Management Programme at Harvard Business School in 1998.

Benjaathonsirikul Kledchai Executive Director of Thailand

Mr. Benjaathonsirikul, age 58, joined the Group in 2000 as an executive Director of Thailand. He is also a Director of Kerry Logistics (Thailand) Limited, a subsidiary of the Company, and other subsidiaries in Thailand. Mr. Benjaathonsirikul is also an independent director and an audit committee member of Shangri-La Hotel Public Company Limited in Thailand. He has over 20 years of experience in port logistics and transport-related businesses. Prior to joining the company, he has worked at Kerry (Thailand), Siam Seaport Terminal and at KSSP. He obtained a bachelor of laws degree from the University of Birmingham, United Kingdom in 1978.

Cheng Chi Wai Chief Financial Officer Mr. Cheng, age 49, joined the group in August 2009 as Chief Financial Officer. Mr. Cheng has more than 25 years of experience in auditing, financial control and corporate finance and previously worked in an international accounting firm and held key finance positions in several companies whose shares are listed on the Main Board of the Hong Kong Stock Exchange. Prior to joining KLN, Mr. Cheng was the Chief Financial Officer of Miramar Hotel and InvestmentCompany, Limited from March 2007 to July 2009 and the Chief Financial Officer of Water Oasis Group Limited from September 1999 to February 2007. Mr. Cheng is a Fellow of the Association of Chartered Certified Accountants, the Hong Kong Institute of Certified Public Accountants, as well as a chartered accountant and a chartered secretary. He obtained a bachelor of arts degree in accountancy from The Hong Kong Polytechnic University in 1996 and an executive master’s degree in business administration from The Chinese University of Hong Kong in 2008.

Hung Wai Shing Group Financial Controller Mr. Hung, age 48, joined the Group in September 1999, and is currently the group financial controller since January 2010. Mr. Hung joined the warehouse division of KPL in May 1991. He was transferred to the Hong Kongproperties division of KPL in August 1993 before joining KLN. Mr. Hung is a Fellow of the Hong Kong Institute of Certified Public Accountants. He obtained a bachelor of arts degree from City Polytechnic of Hong Kong (now known as City University of Hong Kong) in 1992.

Ko Fuk Yuen Kenneth Executive Director of International Freight Forwarding

Mr. Ko, age 42, joined the Group in April 2010 as the executive director of international freight forwarding. Mr. Ko is also a director of Kerry Freight (Hong Kong) Limited, a wholly-owned subsidiary of the Company, and responsible for the development of the global freight forwarding business of our Group. He has over 20 years of experience in the logistics industry. Prior to joining KLN, Mr. Ko was the managing director, Hong Kong and South China, of Agility Logistics Limited and has worked with Expeditors Hong Kong Limited. He has also worked at Cathay Pacific Airways Limited for 14 years from 1989 to 2003. He serves as a vice-chairman of the executive committee of Hong Kong Association of Freight Forwarding and Logistics Limited since 2011. Mr. Ko obtained a bachelor of management studies degree from the University of Hong Kong in 2003.

Lee Wai Shun Wilson Director of Information Technology

Mr. Lee, age 46, joined the Group in April 2004 as Director of Information Technology. He is the Director of Information Technology and is responsible for overseeing the global information technology development of the Group. He has over 20 years of experience in information system development and technology management. Prior to joining KLN, Mr. Lee worked with Li & Fung (Trading) Limited from 1991 to 1998 and his last position was a department manager. He was a system development and support manager of Gap Inc. from 1998 to 2000 and was an information systems and services director of Limited Brands, Inc. from 2000 to 2004. Mr. Lee obtained a bachelor of science degree from The Chinese University of Hong Kong in 1989 and a master of science degree in corporate governance and directorship from Hong Kong Baptist University in 2010.

Shen Chung-Kui Chairman of Kerry TJ Logistics Company

Mr. Shen, age 70, has been the chairman of Kerry TJ Logistics since November 2008 (when he joined the Group). He has over 30 years of experience in the logistics industry, ranging from trucking, container terminal, port and warehousing businesses. He is responsible for overseeing the Taiwan logistics operations of the Group. Prior to joining Kerry TJ Logistics, Mr. Shen worked as a senior operation manager (Taiwan region) of United States Lines from 1977 to 1987. He subsequently worked at United Terminals Ltd, from 1987 to 2004. Mr. Shen is currently the chairman of Taiwan Route-Permitted Truck Transportation United Association. Mr. Shen graduated from the Shipping and Transportation Management Faculty of the National Taiwan Ocean University in 1972. He also completed various training courses, including Dale Carnegie Course Training in San Francisco, United States in 1983, General Management Program at Ashridge College in London, United Kingdom in 1993 and Shipping Management research study at China Maritime Institute, Taiwan in 1988.

Source: Company

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Senior Management (cont’d)


Tan Kai Whatt Robert Managing Director of South and South East Asia

Mr. Tan, age 56, joined the Group in January 2004 as a director of a subsidiary of the Company. Mr. Tan is the managing director in charge of the South East Asia logistics operation of the Group (since January 2008) and is responsible for the development and expansion of our network in South and South East Asia. Mr. Tan has 18 years of experience in the logistics industry. Prior to joining the Group, Mr. Tan had worked with Newship Agencies Pte. Ltd since 1994 and was seconded to its Indonesia office as marketing manager from 1996 to 1999, and as general manager for its Singapore office from 1999 to 2001. He was then transferred to PACC Container Line Pte Ltd as a manager (marketing) in charge of feeder businesses in Malaysia from 2002 to 2003. Mr. Tan obtained his master’s degree from the Asian Institute of Management in the Philippines in 2003.

Wilcock Gary Managing Director of Europe

Mr. Wilcock, age 52, joined the Group in April 2002 following the Company’s acquisition of Trident InternationalLimited (now known as Kerry Logistics (UK) Limited, where he started his career in May 1982. He is the managing director in charge of the European logistics operations of our Group since December 2007. He is also a director of Kerry Logistics Holding (Europe) Limited, a wholly-owned subsidiary of the Company headquartered in Europe, and the managing director of Kerry Logistics (UK) Limited. He has more than 30 years’ experience in the logistics industry and in particular trading between the United Kingdom and Asia

Source: Company

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Notes

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Notes

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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Julia Winarso and Mark Webb

Important disclosures

Equities: Stock ratings and basis for financial analysis

HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website.

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice.

Rating definitions for long-term investment opportunities

Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change.

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*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Rating distribution for long-term investment opportunities

As of 28 January 2014, the distribution of all ratings published is as follows: Overweight (Buy) 44% (34% of these provided with Investment Banking Services)

Neutral (Hold) 37% (32% of these provided with Investment Banking Services)

Underweight (Sell) 19% (30% of these provided with Investment Banking Services)

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HSBC & Analyst disclosures Disclosure checklist

Company Ticker Recent price Price Date Disclosure

KERRY LOGISTICS NETWORK 0636.HK 12.84 27-Jan-2014 1, 2, 5, 6, 7Source: HSBC

1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next

3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this

company. 4 As of 31 December 2013 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 30 November 2013, this company was a client of HSBC or had during the preceding 12 month period been a client

of and/or paid compensation to HSBC in respect of investment banking services. 6 As of 30 November 2013, this company was a client of HSBC or had during the preceding 12 month period been a client

of and/or paid compensation to HSBC in respect of non-investment banking securities-related services. 7 As of 30 November 2013, this company was a client of HSBC or had during the preceding 12 month period been a client

of and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as

detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this

company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in

securities in respect of this company HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

Additional disclosures 1 This report is dated as at 28 January 2014. 2 All market data included in this report are dated as at close 24 January 2014, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

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Disclaimer * Legal entities as at 8 August 2012 ‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR

Issuer of report HSBC Bank plc 8 Canada Square London, E14 5HQ, United Kingdom Telephone: +44 20 7991 8888 Fax: +44 20 7992 4880 Website: www.research.hsbc.com

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In Hong Kong, this document has been distributed by The Hongkong and Shanghai Banking Corporation Limited in the conduct of its Hong Kong regulated business for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited makes no representations that the products or services mentioned in this document are available to persons in Hong Kong or are necessarily suitable for any particular person or appropriate in accordance with local law. All inquiries by such recipients must be directed to The Hongkong and Shanghai Banking Corporation Limited. In Korea, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). 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In Canada, this document has been distributed by HSBC Bank Canada and/or its affiliates. Where this document contains market updates/overviews, or similar materials (collectively deemed “Commentary” in Canada although other affiliate jurisdictions may term “Commentary” as either “macro-research” or “research”), the Commentary is not an offer to sell, or a solicitation of an offer to sell or subscribe for, any financial product or instrument (including, without limitation, any currencies, securities, commodities or other financial instruments). HSBC Bank plc is registered in England No 14259, is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and is a member of the London Stock Exchange. (070905) © Copyright 2014, HSBC Bank plc, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Bank plc. MICA (P) 118/04/2013, MICA (P) 068/04/2013 and MICA (P) 077/01/2014

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