Page 1

Investment Grade Sample Hutchison Whampoa


Credit Monitor

SUTHERLAND GLOBAL SERVICES February 16, 2009 OPERATING AND FINANCIAL PERFORMANCE

Conglomerate

Hutchison Whampoa limited

Address 22nd Flr,10 Harcourt Road Hutchison House. HK (+85221281188) Phone Website http://www.hutchison-whampoa.com Business Description

Hutchison’s revenue, in H1'08 was HK $119.1bn, up 21.2% from HK $98.3bn in H1’07. Ports and Related Services revenue was HK $17.3bn, up 10.9% y-o-y, driven by a 4.0% increase in throughput. Property and Hotels revenue increased 1.2% y-o-y to HK $2.7bn due to increased rental income from investment properties in Hong Kong and the Mainland, reflecting higher lease renewal rates. Retail segment revenue increased 10.2% y-o-y to HK $49.2bn mainly due to increased sales from health and beauty operations in Europe, the retail operations in Asia and luxury perfumeries and cosmetics operations in the Benelux

Hutchison Whampoa Limited (HWL) is an international

countries and the UK. Energy, Infrastructure, Finance and Investments segment revenues decreased 6.6% y-o-y to HK $5.9bn

conglomerate operating a variety of businesses in 56 countries.

due to a 10.6% y-o-y decrease in finance and investment revenue. Total telecommunications segment revenues increased 51.3%

Hutchison has five core businesses: Ports and Related Services

y-o-y to HK $44.1bn in H1’08 due to gains from the sale and leaseback of certain Indonesian mobile tower assets and a 7.0%

(15% of LTM revenues); Property and Hotels (2%); Retail (41%);

increase in 3G customer base. Average Revenue per User (ARPU) on a 12-month trailing average active customer basis

Energy, Infrastructure, Finance and Investments and Others (6%),

declined 7.0% compared to FY 2007 reflecting industry trends, regulatory reductions in mobile termination rates and increasing

and Telecommunications (36%). It is one of the world’s largest

proportion of mobile broadband customers added during the period. EBITDA margin increased to 34.5% in H1’08 from 23.7%

port operators, has over 8000 retail outlets in Asia and Europe,

in H1’07, resulting from an improvement in the EBIT margins of Ports & Related Services, Retail, Property and Hotels and

operates 3G telephony businesses in Europe and Asia and

Telecommunication segments. Other operating expenses declined to 26.1% (of revenue) in H1'08 from 31.4% in H1'07 and

controls Cheung Kong Infrastructure and Husky Energy.

telecommunication customer acquisition cost declined to 1.5% from 2.7%. FCF margin was19.2% in H1’08, up from 9.0% in

Hutchison's revenue for the LTM period ended June 30, '08

H1’07 primarily due to the increase in EBITDA. Liquidity is sufficient with cash balance of HK $117bn. The leverage ratio has

stood at HK $239.5bn.

improved to 3.8x as of Jun 30, '08 from 4.5x as of Dec 31,'07 due to a 26% increase in LTM EBITDA over FY 2007.

(Moody's/S&P/Fitch) Stable / Stable / Stable (HKD mn) 2005 2006 Revenue 182,584 183,812 EBITDA 33,857 49,162 % Margin 18.5% 26.7% (1,215) 21,287 Free Cash Flow % Margin -0.7% 11.6% Secured Debt 26,967 30,385 Unsecured Debt 232,515 252,655 Total Debt 259,482 283,040 49,717 64,151 Cash & Cash Eqv. Net Debt 209,765 218,889 Shareholders' Equity 243,554 273,794 Total Capitalization 503,036 556,834 Total Leverage 7.7x 5.8x 6.2x 4.5x Net Leverage EBITDA/Interest 2.2x 3.0x FCF Conversion -3.6% 43.3% Liquidity 49,717 64,151

LTM* 239,545 86,399 36.1% 43,445 18.1% 24,367 300,552 324,919 117,729 207,190 310,966 635,885 3.8x 2.4x 4.6x 50.3% 117,729

35.7%

40%

19.0%

0.7%

20%

9.5%

2006

2007

Revenue (HKD mn)

0%

TTM2

36.1%

31.4%

26.7%

18.5%

2005

2006

2007

2. Declining Coal Prices - Spot coal prices have declined drastically due to lower demand. The spot price for high quality coal is expected to come down by 12.0% in 2009 to HK $610/tonne, below the current spot price of HK $693/tonne. As a result, Husky Energy’s (a subsidiary of HWL) earnings are expected to increase 22.0% in FY 2009. 3. Improving 3G Business – HWL's 3G business has shown a consistent improvement. It witnessed a reduction in its operating loss from HK -$38.4bn in FY 2004 to HK -$18.0bn in FY 2007. Moreover, the EBIT has improved to HK -$3.2bn in H1 2008. It is expected to contribute HK $1.3bn of positive EBIT in 2009. The total subscriber base is expected to reach 19.2mn in 2010 with post-paid subscribers (offering higher margins) accounting for 54% of the total. 4. Diversified Business - The company has well diversified assets across markets and appealing businesses. The group generates its revenues through seven business segments showing a well spread revenue base. Moreover, the group's geographical spread is also diverse with presence in Hong Kong, Europe, Asia Pacific and Mainland China. Negatives

1. Slowing Trade – HWL's throughput capacity is closely related to China’s export growth. China announced a 2.2% y-o-y decrease in exports in Nov’08. This is further expected to decline in H1’09. Also, HWL is over-exposed to the Pearl River Delta (PRD) where industrial growth has slowed substantially in the past 12 months due to lower global growth, an appreciating Yuan, increasing labor cost and more stringent enforcement of environmental regulations. 2. Reduction in Mobile Termination Rates (MTR) – MTR in Europe have historically been higher than equivalent fixed charges. During 2008, the spread of MTRs in Europe was between €0.02 and €0.18 per minute as compared to a fixed termination charge of €0.01. However, in June 2008, the European Commission recommended a 70% cut spread over three years in MTRs. This is likely to impact the revenues of HWL given its high dependence on the European telecom market. 3. Weakening Property Demand – China is witnessing a decline in property demand. In 2008, the rental income from HWL’s properties is expected to decline by 18.0% and 5.0% in Hong Kong and China, respectively. Residential prices are also expected

businesses in an equal joint venture which will be named VHA Pty. Ltd with a combined market share of 25.0% - 27.0%. Feb 05, 2009 - Hong Kong Electric Holdings Ltd. (HEH) entered into an agreement with Cheung Kong Infrastructure Holdings

0.0%

Ltd. (CKI), an 86.4% subsidiary of HWL, to purchase from it the entire issued share capital of Outram Limited (Outram). The consideration for the transaction is $5.7bn.

recession has affected all economies of the world leaving no sector immune to the decline. 18.1%

20.0%

Retail has been amongst the worst-hit sectors as consumers have been cutting back on spending as higher unemployment and

10.0%

tighter credit conditions erode confidence in the economic outlook. European retail sales witnessed its seventh straight decline in as many months with sales declining by 1.6% y-o-y for the seven months ended Dec,’08. On the other hand, 2008 proved to

0.0%

0 2006

2007

FCF (HKD mn)

5. Declining European Economy – The company derives most of its retail revenue from the European region. Hence recession in

INDUSTRY OVERVIEW A perceptible decline in consumer sentiment driven by the global credit crunch and escalating fears of a global economic

-0.7% 2005

is expected to fall by 30.0% to 105,000 barrels in 2009 resulting in a 45.0% decline in 2009 earnings.

20.0%

Margin

13.5%

11.6%

40,000

result, Husky's average realized oil price is expected to decline 50.0% in 2009 to USD $48/barrel. The average daily production

40.0%

FCF & Margin 60,000

4. Declining Oil Prices – As a result of economic slowdown, demand for oil and hence the prices have reduced substantially. As a

segment declined from a peak of 18% in 2004 to 8% in 2007. RECENT DEVELOPMENTS Feb 10, 2009 - Vodafone Ltd. and Hutchison Whampoa Ltd. announced a merger of their Australian mobile telecommunications

TTM2

EBITDA (HKD mn)

(20,000)

LTM period from 13.5% in FY 2007 and 11.6% in FY 2006.

the European economy and declining consumer spending is expected to affect the company's retail revenue. ROCE for the

Percentage Growth

EBITDA & Margin

20,000

the LTM period over FY 2007 with a margin improvement of 470bps. Owing to this, the FCF margin increased to 18.1% for the

to fall in China by 20% in 2009.

Revenue & Growth

2005

90,000 60,000 30,000 0

1. Healthy FCF Generation – Company’s FCF generation has improved considerably since FY 2005. EBITDA increased 26% for

SA M

*ended June 30, 2008 300,000 200,000 100,000 0

2007 218,726 68,584 31.4% 29,441 13.5% 24,367 285,974 310,341 111,307 199,034 310,014 620,355 4.5x 2.9x 3.6x 42.9% 111,307

POSITIVES AND NEGATIVES Positives

PL E

Competitors China Resource Enterprise Ltd., Dalian Port (PDA) Company Ltd., NWS Holdings Ltd., China Mobile Ltd., China Unicom (HK) Ltd. Customers Customers in telecommunication, retail and real estate end markets. Toys and garment manufacturers etc Vital Statistics A3 / A- / ACorporate Rating

TTM2

be an exceptional year for retailers in Hong Kong with total sales value and total sales volume increasing y-o-y by 10.5% and

-10.0%

5.0%, respectively. However, retail is expected to experience major operational headwinds in 2009. The container terminal

Margin

industry has witnessed heavy M&A activity in recent years resulting in five major players controlling nearly 50.0% of total global throughput capacity in 2007. The industry has high entry barriers as government regulations for foreign operators are strict and

Debt Amortization (HKD mn) 71,238

initial start-up costs are very high. The port container volume in Hong Kong is expected to increase at a 3.0% CAGR over 2007 2010 substantially lower than the 15.0% CAGR during the Asian financial crisis and 7.0% during the 2001 recession. The global telecommunications business has been witnessing a decline in churn rate and enormous pricing pressure due to fierce competition. By the end of FY 2008, the mobile subscriber base in Hong Kong expanded by over 10.0% to reach 11.67mn.

r

Thereafte

2012

4,945 2011

40,841

2010

46,935

2009

46,492

2008

120,000 80,000 40,000 0

114,468

Although the proportion of 3G customers was equivalent to less than 28.0% of the total, the actual 3G penetration was somewhat higher. In 2009, the industry is likely to suffer from cuts in mobile termination rates particularly in Europe.

2


Credit Monitor

Hutchison Whampoa limited 2005 26,561

2006 29,081 9.5%

14.2%

12.0%

4,275

4,889

5,317

5,348

14.4%

8.8%

4.5%

78,850

86,876

94,663

99,202

10.2%

9.0%

8.7%

2,508

2,207

2,403

2,537

-12.0%

8.9%

13.1%

8,527

10,248

11,094

10,541

4.3%

20.2%

8.3%

-5.5%

24,480

-

12,618

23,984

YoY Growth

Property and Hotels YoY Growth

Retail YoY Growth

Cheung Kong Infrastructure YoY Growth

Finance & investments and Other YoY Growth

Hutchison Telecommunictions International YoY Growth

Telecommunications - 3 Group YoY Growth

Total Revenue

EBIT Margin

Net Interest Dep. & Amort. Taxes Net Income Cash & Cash Eqv. Current Assets Total Assets Current Liabilities Total Debt Shareholders' Equity Cash Flow from Operations Cash Flow from Investments Cash Flow from Financing EBITDA

63.9%

NM

NM

NM

50,511

59,424

63,029

137.5%

35.1%

17.6%

14.2%

182,584

183,812

218,726

239,545

0.7%

19.0%

21.5%

62,804 104,842 26,932

67,114 89,041 42,204

73,977 139,571 20,518

77,970 141,169 38,993

H2 04 15,445

H1 05 12,805

H2 05 13,756 -10.9%

5.5%

13.2%

15.4%

13.2%

10.9%

2,597

2,058

2,217

2,413

2,476

2,644

2,673

2,675

-14.6%

17.2%

11.7%

9.6%

8.0%

1.2%

32,771

35,447

43,403

40,228

46,648

44,633

50,030

49,172

32.4%

13.5%

7.5%

11.0%

7.3%

10.2%

1,455

1,263

1,245

1,077

1,130

1,113

1,290

1,247

-14.4%

-14.7%

-9.2%

3.3%

14.2%

12.0%

5,965

3,968

4,559

4,309

5,939

5,219

5,875

4,666

-23.6%

8.6%

30.3%

21.1%

-1.1%

-10.6%

8,012

10,654

13,826

-

-

965

11,653

12,331

72.6%

NM

NM

NM

NM

1177.8%

11,331

17,256

20,127

23,509

27,002

28,191

31,233

31,796

77.6%

36.2%

34.2%

19.9%

15.7%

H1 06 13,506

H2 06 15,575

H1 07 15,580

H2 07 17,627

H1 08 17,277

12.8%

85,042

98,770

98,345

120,381

119,164

77,576

83,451

99,133 27.8%

1.9%

-0.4%

15.6%

21.9%

21.2%

27,964 48,636 3,008

27,913 47,293 13,543

34,891 57,549 13,389

30,996 32,266 28,567

36,118 56,775 13,637

34,297 65,637 4,775

39,680 73,934 15,743

38,290 67,235 23,250

14.8%

23.0%

9.4%

16.3%

3.9%

16.2%

13.5%

33.6%

13.8%

4.9%

13.1%

19.5%

(15,405) 35,727 2,027 13,554 49,717 106,208 597,064 84,125 259,482 243,554 6,510 (40,913) 10,322 33,857

(16,601) 33,091 (2,977) 22,626 64,151 130,721 677,516 90,186 283,040 273,794 26,622 (12,302) 114 49,162

(19,054) 38,872 (4,419) 32,865 111,307 187,680 799,226 142,620 310,341 310,014 55,414 7,600 (15,858) 68,584

(18,898) 39,577 (6,273) 16,944 117,729 196,685 813,593 153,088 324,919 310,966 45,292 (28,820) (12,227) 86,399

(5,037)

(7,223)

(8,182)

(9,048)

(9,157)

(9,897)

19,262 2,323 294 73,798 137,160 647,195 91,261 282,993 251,171 7,993 (31,234) 23,472 12,904

18,233 1,108 7,428 78,904 140,858 666,040 96,303 316,678 255,114 (847) (24,463) 30,416 13,306

17,494 919 6,126 49,717 106,208 597,064 84,125 259,482 243,554 7,357 (16,450) (20,094) 20,551

(7,553) 15,727 (1,268) 19,746 66,560 131,272 643,782 90,431 264,966 265,348 6,542 12,965 (2,664) 19,787

17,364 (1,709) 2,880 64,151 130,721 677,516 90,186 283,040 273,794 20,080 (25,267) 2,778 29,375

18,537 (952) 30,486 113,484 188,617 776,218 120,182 301,536 307,499 28,730 29,824 (9,221) 23,273

20,335 (3,467) 2,379 111,307 187,680 799,226 142,620 310,341 310,014 26,684 (22,224) (6,637) 45,311

(9,001) 19,242 (2,806) 14,565 117,729 196,685 813,593 153,088 324,919 310,966 18,608 (6,596) (5,590) 41,088

18.5%

26.7%

31.4%

36.1%

16.6%

15.9%

20.7%

23.3%

29.7%

23.7%

37.6%

34.5%

Cash Interest Cash Taxes Capex Changes in Working Capital Free Cash Flow

(14,559) (2,268) (10,837) (7,408) (1,215)

(15,990) (2,010) (10,895) 1,020 21,287

(18,508) (2,608) (13,883) (4,144) 29,441

(18,157) (3,394) (16,187) (5,216) 43,445

(6,531) (1,281) (7,263) 3,227 1,056

(7,003) (961) (4,651) (4,556) (3,865)

(7,556) (1,307) (6,186) (2,852) 2,650

(7,352) (1,035) (4,107) (3,903) 3,390

(8,638) (975) (6,788) 4,923 17,897

(8,953) (970) (3,958) (519) 8,873

(9,555) (1,638) (9,925) (3,625) 20,568

(8,602) (1,756) (6,262) (1,591) 22,877

Key Ratios EBITDA margin FCF Conversion Leverage, secured Leverage, Total Leverage, Net Net Debt/(EBITDA - Capex) Debt/Total Capitalization EBITDA / Interest EBITDA / Cash Interest

2005 18.5% -3.6% 0.8x 7.7x 6.2x 9.1x 52% 2.2x 2.3x

2006 26.7% 43.3% 0.6x 5.8x 4.5x 5.7x 51% 3.0x 3.1x

2007 31.4% 42.9% 0.4x 4.5x 2.9x 3.6x 50% 3.6x 3.7x

LTM 36.1% 50.3% 0.3x 3.8x 2.4x 3.0x 51% 4.6x 4.8x

Hutchison Whampoa A3/ASt/St 173,519.2 324,919.0 207,190.0 380,709.2 239,545.0 86,399.0

Dalian Port NA NA 2,529.0 1,762.3 1,008.7 3,537.7 1,739.2 1,145.5

NWS Holdings NA NA 20,801.7 8,790.9 4,793.1 25,594.8 18,889.5 1,216.5

China Resource NA NA 41,524.6 14,319.0 4,821.0 46,345.6 58,776.0 4,219.0

China Unicom NA NA 176,833 4,133 (3,530) 173,303.1 108,266 59,576

1.5x

2.3x

2.9x

3.7x

36.1% 4.4x 3.8x 2.4x 65.2% 4.6x 310

65.9% 3.1x 1.5x 0.9x 41.1% 12.1x NA

6.4% 21.0x 7.2x 3.9x 29.7% 4.1x NA

7.2% 11.0x 3.4x 1.1x 25.6% 7.5x NA

55.0% 2.9x 0.1x -0.1x 2.3% 518.3x NA

(EBITDA - Capex) / Interest Liquidity Unrestricted Cash

Total

Peer Comparisons

SA M

EBITDA Margin

LTM 34,904

37,383

YoY Growth

COGS Operating Expenses EBIT

2007 33,207

PL E

Summary Financials (HKD mn) Ports and Related Services

(HKD mn)

117,729

117,729

Maturity Profile 2008 2009 2010 2011

(HKD mn) % of Total

46,492 46,935 40,841 71,238

14.3% 14.4% 12.6% 21.9%

Thereafter

119,413

36.8%

Total

324,919

100.0%

Ratings (Moody's/S&P) Outlook Market Cap. (HKD mn) Total Debt (HKD mn) Net Debt (HKD mn) EV (HKD mn) LTM Revenue (HKD mn) LTM EBITDA (HKD mn) LTM EBITDA Margin EV/EBITDA Total Leverage Net Leverage Total Debt/Total Cap. EBITDA/Interest CDS Spread (bps) Z-Spread (bps)

485

NA

NA

NA

NA

Z-Spread/Leverage (bps)

129

NA

NA

NA

NA

Notes: Fiscal Year ends on 31st December

Debt Structure

LTM ended June 30, 2008

(6/30/08)

Exchange Rates for Peer Comparisons:

RMB-HKD

As on 6/30/2008

1.138

LTM (Avg)

1.073

2009 Sutherland Global Services Disclaimer This publication has been prepared on behalf of Sutherland Global Services solely for the information of its clients. It is not investment advice or an offer or solicitation for the purchase or sale of any financial instrument. While reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, Sutherland Global Services makes no representation that it is accurate or complete. The information contained herein is subject to change without notice. Sutherland Global Services and any of its officers, employees, related and discretionary accounts may, to the extent not disclosed above and to the extent permitted by law, have long or short positions or may otherwise be interested in any transactions or investments (including derivatives) referred to in this publication. In addition, Sutherland Global Services Group may provide banking, insurance or asset management services for, or solicit such business from, any company referred to in this publication. Neither Sutherland Global Services nor any of its officers or employees accepts any liability for any direct or consequential loss arising from any use of this publication or its contents. This publication may not be reproduced, distributed or published by any person for any purpose without the prior express consent of Sutherland Global Services. All rights are reserved. Any investments referred to herein may involve significant risk, are not necessarily available in all jurisdictions, may be illiquid and may not be suitable for all investors. The value of, or income from, any investments referred to herein may fluctuate and/or be affected by changes in exchange rates. Past performance is not indicative of future results. Investors should make their own investment decisions without relying on this publication. Only investors with sufficient knowledge and experience in financial matters to evaluate the merits and risks should consider an investment in any issuer or market discussed herein and other persons should not take any action on the basis of this publication.

Maturity

Coupon

Ratings

O/S

Leverage

(HKD mn)

Secured Bank and Other Loans Secured Debt Unsecured Bank and Other Loans Notes and Bonds USD Series B notes USD Series C notes USD Series D notes USD Senior Notes USD Senior Notes USD Senior Notes USD Senior Notes USD Senior Notes EUR Senior Notes EUR Senior Notes EUR Senior Notes GBP Bonds GBP Bonds GBP Bonds JPY Bonds NIS Bonds* Other Notes Total Debt Cash and Cash Equivalents Net Debt *Coupon - Israeli CPI+4.25%

24,367 24,367 157,569 2017 2027 2037 2010 2011 2013 2014 2033 2013 2015 2016 2017 2026 2015

7.45% 7.50% 6.99% 5.45% 7.00% 6.50% 6.25% 7.45% 5.88% 4.13% 4.63% 5.63% 5.63% 6.75% 3.50%

A3/AA3/AA3/AA3/AA3/AA3/AA3/AA3/AA3/AA3/AA3/AA3/AA3/ABaa1/A-

3,863 3,863 1,926 11,716 11,664 27,169 15,674 11,685 11,153 7,303 11,150 4,617 6,143 5,003 2,070 4,069 3,915 324,919 117,729 207,190

0.3x

3.8x 2.4x

3


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