Vidya Vishal Jerry Wang Grace Zhao Gaobo Zhou February 27th, 2006 Hutchison Whampoa Limited: Invest in the Phase II Shanghai Deep-water Port? Vidya Vishal Jerry Wang Grace Zhao Gaobo Zhou February 27th, 2006

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

Case Overview - Geography Yangshan Islands

Case Overview Case timeline: September 2004 Constraints at existing Shanghai Ports Deep-water Port on Yangshan Island Phase I Under Construction – Est. Completion: EOY 2005 Phase II Under Planning Open to Private Investors HWL’s Question – Invest in Phase II or not?

Hutchison Whampoa Limited (HWL) HK-based international corporation Highly diversified company Consolidated turnover ~$2.3 bn Operations in 54 countries; 200,000 employees World’s leading port operator Operates 242 berths in 41 ports spread over 20 countries First foreign firm to invest in and operate container terminals in Shanghai HWL owned by Hong Kong tycoon Li-Ka Shing, Asia’s richest and most influential businessman Five core businesses – ports & related services, - telecommunications - property & hotels - retail & mfg - energy & infrastructure

China Economy Tremendous economic prosperity since the reform started from late 1970s GDP doubled every 7 years since 1987 Strong economic performance attracts the foreign investment China surpassed U.S. and became the most attractive destination for FDI. FDI totaled $60.6 billion with growth rate 13.3% Low operating cost and huge existing/potential market Fast growing foreign trade Foreign trade has increased by 30 times in 24 years Opening up to private investment? Exports rose 35.4% to $593.4 billion, while imports surged 36.0% to $561.4 billion. , reached $1.65 trillion in 2004, with growth rate of 9.5%

Port Industry in China Bohai Bay Zhujiang Delta Changjiang Delta Under the drive of the fast-growing national economy, cargo handling capacity of ports in China keeps a rapid growth and breaks the record again in 2004. The handling capacity of major coastal ports reached 1.8 billion tons with a growth rate of 13.5% year on year, while major inland ports handled 734.3 million tons, a 17.8% increase compared with the year 2003. Dalian Port Tianjin Port Qingdao Port Shanghai Port Ningbo Port Xiamen Port Shenzhen Port Guangzhou Port Changjiang Delta

Port Industry in China (cont’d) Nationwide cargo throughput will increase at declining growth rate Increase of cargo throughput is much higher than growth of foreign trade and growth of GDP Estimated annual increase of cargo throughput 10% - 20% for the next ten years Competition among ports will intensify Various new ports and port expansion projects Low utilization rate and excess capacity Some ports may have to lower their service charge 1991-2004, growth rate of cargo throughput is 30%, while 18% for foreign trade and 9.7% for GDP

Shanghai Ports Shanghai port is the largest port in China 3 ports Shanghai is China’s business center 99% of Shanghai's foreign-trade goods are handled by its ports Cargo handling capacity of 400 million tons Container handling capacity of 18 million TEUs 3 ports Waigaoqiao port (not deep-water port) Huangpujiang port (not deep-water port) Yangshan deep-water port (under construction) Located at the mouth of the Yangtze River, currently boasts a cargo handling capacity of 4.21 million TEUs (Twenty Foot Equivalent Unit). The importance of the port is increasing at a rapid pace, particularly as a gateway for container transport. As a result of accelerated export demand, the growth rate at the port averaged 29% per year in the past three years, and is expected to continue once China is accepted into the World Trade Organization (WTO).

Yangshan Deep Water Port Project

Phase I Construction started in 2002 Operational In EOY 2005 Total Investment: 1.25 Billion with 50% debt financing Four major components: Port zone Five berths 2.2 MM TEUs capacity Allow 6th Generation Ships Donghai Bridge 32 Kilometers Connecting Shanghai And Yangshan 5 MM TEUs capacity Lu-Hu Freeway 43 Kilometers Connecting Luchaogang and Shanghai Luchaogang city Yangshan Deep Water Port Zone: the Phase I port area with the first five container berths from Xiao Yangshan islands to Huogaitang. The total handling capacity of the five berths would be 2-2.5 million TEUs. The channels would be 15.5 meters deep, allowing fifth and sixth generation ships. It is projected to be completed by 2005. According to the plan, container throughput will be 2.2 million TEUs in 2005, 5.5 million TEUs in 2010 and 13.4 million TEUs in 2020. The planned ship types focus on the 5th and 6th generations of container ships and 8000TEU ultra large ships may be accepted. By final completion of the project in 2020, Yangshan port will have 50 berths and a total capacity of 15 million TEUs. Donghai Bridge: A bridge connecting Big Yangshan, Little Yangshan to Luchaogang, the closest on-shore point in Shanghai. The bridge is 32 kilometers in length, with 6 lanes and annual throughput capacity of 400 million TEUs. Lu-Hu Freeway: A freeway connecting Luchao and Shanghai. It is designed with 43 kilometers in length and 100 kilometer per hour in speed. Luchao District: the district provides a land area of 1.5 sq. km, with storage area of 720,000 sq. m. and 15 container cranes. It is also designed to become a new port city in Luchaogang, to provide comprehensive logistics support, storage, processing, and other auxiliary services.

Deal Structure for Phase I

Yangshan Deep-water Port Phase II Specs Additional 4 berths Waterway depth: 15m, accommodate 8,000 TEU ships Designed throughput: 2.1 MM TEU/year Estimated cost: $800 MM Completion date: EOY 2006 Construction Acquire 0.64 km2 land via sea-fill Thick mud foundation complicates construction Phase II Phase I Five techniques to prepare foundation

Yangshan Deep-water Port Phase II Operation Expand SH container throughput Attract international transit shipments Competition Pusan port: under expansion (2006) Ningbo Beilun port Better port condition Cross-harbor bridge to shorten distance to Shanghai (2009) Silt blockage: Dredging needed Environment hazard: stir-up sea floor Inclement weather could close the port as many as 50 days per year

Other Potential Investors Port of Singapore Authority World’s largest container terminal operator AP Moeller-Maersk Focus On Shipping, Oil-drilling, Shipbuiliding, retail Orient Overseas Container Line Limited Largest Container Transportation Company COSCO Group Focus On Shipping And Logistics China Shipping Group State-owned Shipping Conglomerate Orient Overseas Container Line Limited Public company listed on HKSE Largest int’l container transportation cos AP Moeller-Maersk Int’l enterprise headquartered in Copenhagen Shipping, Oil-drilling, Shipbuiliding, retail Port of Singapore Authority World’s largest container terminal operator Synergy among investors Government investor will be unlikely to take controlling interest in the future. COSCO Group The China Ocean Shipping (Group) Company (COSCO) is a diversified service company focusing mainly on shipping and logistic business. China Shipping (Group) Company China Shipping Group (China Shipping) is a shipping conglomerate that operates across different regions and sectors. It is a state-owned enterprise under the direct administration of China’s Central Government and has assets to totaling $5 billion. OOCL The Orient Overseas Container Line Limited (OOCL) is a wholly owned subsidiary of the Orient Overseas (International) Limited (OOIL), a public company listed on the Hong Kong Stock Exchange. OOCL is one of the world's largest integrated international container transportation, logistics and terminal companies The A.P. Moller - Maersk Group is an international enterprise with activities covering diverse areas such as shipping, oil drilling, shipbuilding, industry and retail. It is headquartered in Esplanaden, Copenhagen and has total assets exceeding $32 billion. The Port of Singapore Authority (PSA) is the world's largest container terminal operator. It operates 19 ports in 11 countries around the world, the largest of which is the world’s number 1 container shipping port, the Singapore port, which has a designed capacity of 22.6 million TEU a year.

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

Our Analysis Pros China economy booming and Shanghai maturing as an economic and trade center Investors have international port management experience Shipping investors guarantee part of demand Real option: “Foot in the door” for investment in future expansion projects Cons Demand risk Nationwide cargo throughput increase slowing down Competition from other ports Disadvantages of private investors Speed of construction, permits, etc Higher expropriation risk Bridge capacity constraints Weather-related risks Environmental issues

Our Analysis NPV of project: $29 million Cost of capital: 14.19% in 2005, decrease annually with improvement of China’s country rating Our conclusion: Marginally successful with IRR of 17.7% Real options – convenient access to future investment opportunities in expansion projects

What Happened Phase I began operation on 12/10/2005 Reached designed operation level in Jan 2006 Phase II investment agreement signed on 12/19/2005 Hutchison Whampoa Limited 32% AP Moeller-Maersk 32% Shanghai International Port Group 16% COSCO Group 10% China Shipping Group 10%