Acquiring Jingdong Expressway, Capturing Central China

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Acquiring Jingdong Expressway,Capturing Central
Chinas Rapid GrowthJoe Zhang ???Chief
Operating Officer Executive Director2 August
2006Disclaimers on final page

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Asset disposals in progress
City Govt
Public

55.9
44
SHENZHEN INVESTMENT (0604)
80
24.3
19
31.1
91
Transport
Property development
Mawan Power
Road King

• Industrial
• Color Display
• PJLD, metal

Jingdong Expressway
Cable TV
Property investment (HK2bn)
For sale
3
Three major risks for our company

• We are an SOE, and are much more rigidly managed
  than those in the private sector, and therefore,
  our efficiency is lower.
• Our incentives system does not work as nearly
  effectively as in the private sector.
• Our businesses are very volatile and cyclical and
  subject to policy risks. Some of our associates
  are beyond our control and we are in the process
  of selling them.

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Asset disposals well on track

• In April, we said to investors We will sell
  substantially all non-core assets in one year.
• Now, we aim to complete the program sooner
• Aim Not to make capital gains out of disposals,
  but rather to free up cash for core businesses,
  focus our efforts, and develop core competency
• If we did not want to maximize the disposal
  proceeds, we would complete the process by
  end-2006

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Jingdong Expressway?? ???? - ?????

• 63 kilometers, two-way, 4 lanes
• Part of the Erlianhaote to Guangzhou National
  Trunk Line (from Inner Mongolia to Shanxi, Henan,
  Hubei, Hunan, and Guangdong)
• At the intersection of 207 and the 318
  Hu-Rong (?? Shanghai to Chengdu) National Trunk
  Lines
• Much of road is on elevated structure ( 9
  bridges). Therefore, the government allows higher
  toll charges, and we expect much lower
  maintenance costs in the roads life
• It links Jingzhou Bridge, the only bridge on
  Yangtze in central Hubei. Next bridge to the west
  is in Yichang (?? about 110km), and that to the
  east is in Wuhan (?? about 240km)
• Concession 31 years from Aug-06 (early
  completion)
• Expected IRR for our investment 10.6 (internal
  Worst-case scenario) or 14.7 (Sallmanns)
• Will add HK0.35-0.50 to our market-based NAV,
  and strengthen our infrastructure division, and
  add to long-term earnings stability

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Part of a national trunk line
Erlianhaote (Inner Mongolia)
Beijing

Taiyuan
Zhengzhou
Luoyang
Yangtze River
Huangshi
Yichang
Wuhan
Jingzhou
Dongyuemiao
Changde
Guangzhou
Hong Kong
Zhuhai
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Linking the West with the EastZhang Jiajie
Resort ??? is to the southwest
Erlianhaote (Inner Mongolia)
Taiyuan
Luoyang
Shanghai
Nanjing
Hefei
Chengdu
Yichang
Wuhan
Jingzhou
Dongyuemiao
Zhang Jiajie Resort
Changde
Guangzhou
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Question 1 Why toll roads?Toll roads vs.
investment property

• Toll roads, like ports/airports, are best geared
  to Chinas growth
• Toll roads business is our second pillar
• Property development is very profitable and
  fast-growing, but will always be cyclical and
  volatile (plus macro policy risks)
• To us, toll roads are similar to (and better
  than) investment property (stable cash flows,
  lower cyclicality, potential for asset
  appreciation and thus high re-sale value)
• Compared to elsewhere, Chinese property tends to
  have a short economic life due to construction
  quality poor maintenance
• We have accumulated expertise in the roads sector
  via our partnership with Road King, and at the
  parent company level
• We have built a pool of expertise with
  significant recent hires

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15 expressways revenue average 7-yr CAGR 22.95
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National NBS data Passengers rely more on
highways at expense of railways
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NBS Freight opting for highways, too
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Question 2. Why us? Long history in toll roads
sector

• Parent has operated Dong Baosong ???, a toll road
  manager for a decade
• Since 2005, parent has been building Guanghe ??
  and Huiao?? Expressways. Total investments will
  soon exceed HK10bn
• In 2006, we hired Mr. Liu Xiuqi (???), one of the
  most prominent visionaries in Chinese
  infrastructure sector to head our efforts. He won
  the State Councils medals for his achievement
  and was Head of Hebei Institute of Transport
  Planning Architecture. ??????????, ????????????
• As a 25 shareholder of Road King, we have
  actively participated in its operations and
  learned from the fine team there

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Question 3 Why this road?

• Strategic location (intersection of two national
  trunk lines)
• Low costs of construction (about Rmb40m/km) due
  to effective management
• Construction phase was cut by from 4 to lt3 years
• Central Chinas economy is about to take off, and
  land and resettlement costs are still much lower
  than in coastal China
• Hubei-focused partner (Huayin ??) has extensive
  experience in property infrastructure, has an
  enviable reputation, and will retain a 9 stake
  in the road

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A major road to transport coal other commodities

• Inner Mongolia, Shanxi, Shaanxi, and Henan
  Provinces are major producers of coal, alumina,
  iron ore and soft commodities (wheat)
• Hubei, Hunan and Henan are major wheat/grain
  producers
• Labour migration is significant between central
  and southern China
• Coastal Chinas OEM economy faces mounting
  challenges from exchange rates, anti-dumping,
  rising raw materials prices, and a saturated
  world of low-end manufactures
• Central China is based on domestic consumption
  and production of commodities (hard and soft)
• A key passage from Wuhan?? and east Hubei to
  Zhang Jiajie Resort ??? (in northwest Hunan)

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Financial arrangement

• We pay Rmb1.05bn to Huayin (road developer) for a
  91 stake in Jingdong Expressway, plus
• If the road achieves a revenue target of Rmb140m
  in year 1, we will pay another Rmb201m (we will
  make the payment by April-07, collateralized by
  Huayins 9 stake and general guarantee)
• We will meet all payments with internal cash (our
  net gearing was 14 as of end-2005)
• Our cash flows from non-core asset disposals
  (total book value about Rmb1.2bn) will be used to
  increase land bank and/or investments in toll
  roads bridges
• Unlikely to issue new shares in next 12 months
• Dividend payout ratio to stay above 50

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Consultants 15 IRR for our investment and 12
at road level

• We engaged Parsons Brinckerhoff (Asia),
  Sallmanns, BOCI, and Zhongqihua for traffic
  financial analysis
• They forecast 15 IRR for our investment and 12
  IRR at road level
• Our internal forecast on worst-case scenario
  10.6 IRR for our investment, assuming a much
  lower starting traffic and a flatter growth
  trajectory
• Internal analysis in a 5-month period plus 4
  months of cooling-off
• More leverage at operating level to enhance ROE
  IRR
• Expected lower maintenance costs due to the
  roads elevated structure

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IRR to our investment sensitivityInternal
analysis Worst-case scenario

Gross toll revenue (Year 1) (Rmb m) Total investment (Rmb m) IRR to us
137 (Worst-case) 1,050 10.6
237 (Consultants forecast) 1,250 14.7
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Asset re-sale as fall-back

• We are very bullish on Jingdong Expressway, and
  believe it will prove to be rewarding to our
  shareholders
• However, we do not reject asset trades if/when
  necessary
• We consider the rising re-sale value of toll
  roads in general as extra comfort for our
  investment secondary-market liquidity
• Value of toll roads across China has appreciated
  in the past decade along with urbanisation
  globalisation
• We expect this trend to continue, particularly in
  central China
• The focus of Chinas economy is shifting to
  central from the coast due to pressure on the OEM
  economy

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More roads bridges

• We are analysing 3 toll bridges in Hubei (??)
  given their strategic locations, including
  Yangtze River bridges in Jingzhou ??, Yichang ??,
  and Huangshi ?? for potential acquisitions
• Toll roads will eclipse our portfolio of
  investment property
• Relative to investment property, we consider toll
  roads as having similar cash flow profile, better
  appreciation potential but less managerial risks
• Our partner Huayin has been mandated by the
  Central Government to build a Yangtze River
  bridge in Huangshi ??, Hubei (the project has
  started)
• More partnership projects between us and Huayin
  are in the making

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Forecasts by Sallmanns and us (Rmb m)We will use
traffic-adjusted depreciation
Adjusted for lower interest payment on the
basis of Sallmannss forecasts
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Toll roads depreciation some examples

• Straight-line method Anhui, Zhejiang and
  Shandong Expressways
• Traffic-adjusted method Shenzhen, Jiangsu,
  Sichuan, Fujian, Guangdong and Road King

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Jingdongs higher fee is due to uniqueness 9
bridges and much of road is on elevated structure
Vehicles Toll rate structure Toll rate structure Toll rate structure
Vehicles Anhui Hubei Jingdong
Type 1 0.4 0.4 0.7
Type 2 0.70 0.75 1.77
Type 3 1.00 1.00 2.12
Type 4 1.20 1.20 2.48
Basic toll rate by weight (RMB/ton. km) Basic toll rate by weight (RMB/ton. km) Basic toll rate by weight (RMB/ton. km)
Anhui Hubei Jingdong
0.08 0.08 0.12
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Internal forecast of worst-case scenario is on a
lower 2007 revenue, and lower CAGR in the 30 years
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Both internal forecast of worst-case scenario
consultants forecast assume a Rmb0.40/km per
base vehicle in 2007 but we have secured
Rmb0.70/km
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Parallel ???? Beijing - Guangdong Zhuhai
Expressway (Hubei section) Strong revenue
growthHigh fuel prices did not seem to matter
much
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Cross-check on our toll revenue forecasts31
expressways toll revenues (Part 1)
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31 expressways toll revenues (Part 2)
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10 expressways construction costs Rmb44.6m/km
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Chinas road construction costs rose 50 in a
decade. Fuel tax has become more elusive than
ever
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Our two-year plan

• Sell all non-core (legacy) assets (by April-2007)
• Increase landbank by 3m sqm
• Increase property development completion to
  500,000 sqm in 2008
• Acquire 1-2 toll bridges
• Overhaul our incentive system
• Dividend payout ratio gt50
• ROE to reach 20 by 2008

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Our NAV estimate (un-audited) (Jingdong
Expressway will add HK0.35-0.50 per share to the
figure below)Refer to disclaimers on final page
Per share NAV HK
1. Land bank 1.9m sqm GFA _at_Rmb2,500 Rmb4.75bn (HK4.56bn) 1.82
2. Projects under construction 0.79m sqm GFA_at_RMB4,000 Rmb3.16bn (HK3.03bn) 1.21
3. Investment property HK2.2bn (book) 0.88
4. Road King HK1,284m _at_HK8.75 0.51
5. Mawan Power HK864m (10x 2005 NPAT) For sale 0.35
6. Cable TV HK315m (15x 2004 NPAT) For sale 0.13
7. Transport HK128m (book)0.8HK102m For sale 0.04
8. Industrial HK397m (book)0.6HK238m For sale 0.1
Deduct Net debt HK674m - 0.27
Shares outstanding 2,501m
NAV per share 4.77 (Jingdong to add HK0.36-0.50)
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2005 results vs. 2004
2005 2004 , YOY
HK'000 restated HK'000
Sales 3,003,435 2,000,131 50.2
Net profit (attributable) 534,339 422,561 26.5
Operating cash flows 1,592,762 733,665 117.1
Free cash flows 1,140,144 -229,793
Net gearing (end-year) 14.1 40.07
EPS HK cents 21.52 17.02 26.4
DPS HK cents 13.00 5.00 160
Book value/share HK 1.93 1.50 29
ROE 12.6 11.9

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Disclaimers

• This presentation is prepared in good faith,
  based on audited financial data, publicly
  available information, and managements outlook
  as of today. Macroeconomic parameters could
  change unexpectedly. The companys operating
  environment and thus strategies could change as a
  result and without notice.
• This presentation does not constitute an
  invitation to trade this or any other stock.
  Stocks can go down as well as up. Historical
  performance is no guarantee for the future.
• The company has announced that it is in the
  process of selling some non-core assets. However,
  the NAV estimates in this document are for
  reference only, and have nothing to do with our
  views of potential realizable values.