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

Hutchison Whampoa Limited:
Invest in the Phase II Shanghai Deepwater Port?
Vidya Vishal
Jerry Wang
Grace Zhao
Gaobo Zhou
February 27th, 2006
Agenda
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Case overview
Hutchison Whampoa Limited
China’s economy, port industry, and Shanghai ports
The Yangshan Deep-water Port Project
The Yangshan Deep-water Port phase II (expansion)
Other potential investors
The question
Our analysis
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Case Overview - Geography
Yangshan Islands
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Case Overview
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Case timeline: September 2004
Constraints at existing Shanghai Ports
Deep-water Port on Yangshan Island
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Phase I
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Phase II
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Under Construction – Est. Completion: EOY 2005
Under Planning
Open to Private Investors
HWL’s Question – Invest in Phase II or not?
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Hutchison Whampoa Limited (HWL)
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HK-based international corporation
Highly diversified company
Consolidated turnover ~$2.3 bn
Operations in 54 countries; 200,000 employees
World’s leading port operator
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Operates 242 berths in 41 ports spread over 20 countries
First foreign firm to invest in and operate container terminals in
Shanghai
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China Economy
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Tremendous economic prosperity since the reform started from late
1970s
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Strong economic performance attracts the foreign investment
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GDP doubled every 7 years since 1987
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
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Foreign trade has increased by 30 times in 24 years
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Port Industry in China
Port
EOY 2004
2005-2010
Throughput
Growth in
Capacity
Capacity
(million TEUs) (million TEUs)
Annual
Growth
Rate
Bohai Bay Region
Dalian
Tianjin
Qingdao
Subtotal
Changjiang Delta
2.2
4.8
6.5
13.5
6.2
6.0
4.5
16.7
30.7%
17.6%
11.1%
17.5%
Shanghai
Ningbo
Subtotal
Zhujiang Delta
8.4
3.0
11.4
15.0
11.4
26.4
22.8%
36.9%
27.2%
Xiamen
Shenzhen
Guangzhou
Subtotal
3.7
6.2
4.2
4.6
8.1
4.2
17.5%
18.1%
14.9%
14.1
16.9
16.8%
Total
39.0
60.0
20.5%
Sour ce: Huat ai Secur i t i es Co. ( Chi na)
Bohai
Bay
Zhujiang
Delta
Changjiang
Delta
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Port Industry in China (cont’d)
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Nationwide cargo throughput will increase at declining growth rate
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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
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Various new ports and port expansion projects
Low utilization rate and excess capacity
Some ports may have to lower their service charge
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Shanghai Ports
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Shanghai port is the largest port in China
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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
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Waigaoqiao port (not deep-water port)
Huangpujiang port (not deep-water port)
Yangshan deep-water port (under construction)
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Yangshan Deep Water Port Project
Phase I Phase II Phase III Phase IV Phase V Phase VI Phase VII Total
Completion Time
2005
2006
Total Investment
(billion)
1.25
0.8
Accumulated
Annual Capacity
(TEU, million)
2.2
Number of
Berths
5
2008
2010
2020
11.75
12.2
15
4
4
3
2020
20
14
20
30
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Phase I
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Construction started in 2002
Operational In EOY 2005
Total Investment: 1.25 Billion with
50% debt financing
Four major components:
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Port zone
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Donghai Bridge
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32 Kilometers
Connecting Shanghai And
Yangshan
5 MM TEUs capacity
Lu-Hu Freeway
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Five berths
2.2 MM TEUs capacity
Allow 6th Generation Ships
43 Kilometers
Connecting Luchaogang and
Shanghai
Luchaogang city
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Deal Structure for Phase I
Shanghai Municipal
Government
Shanghai International
Group Corporation
Limited (SIG)
52%
Shanghai Port Authority
Predecessor of SIPG
State-owned Asset
Supervision &
Admistration Commission
of Shanghai Government
30%
Shanghai International
Port Group (SIPG)
Restructured in
2005
Shanghai Tongsheng
Investment Group
(SHTS)
founded in 2002
19%
100%
Shanghai State-owned
Asset Management
Company
8%
40%
China Merchants Holding
(International) Group
(CMG)
50%
Shanghai Port Authority
Predecessor of SIPG
Shanghai State-owned
Asset Management
Company
0.5%
Yangshan Port Phase I
Construction & Operation
Apr. 2002 - Dec. 2005
Shanghai International
Port (Group) Co. Ltd.
(SIPG)
Shanghai Dasheng
Holdings Co., Ltd.
founded in 2002
0.5%
Yangshan Port Phase II
Construction & Operation
2005 -?
SHSD purchased Yangshan Port
Phase I from SHTS in 2004
49%
Shanghai Shengdong
International Container
Co. Ltd. (SHSD)
founded in 2004
75%
Shanghai Port Container
Comprehensive
Development Co., Ltd.
(SPCCD)
founded ini 1992
Restructured in
1998
Shanghai Port Container
Co.,Ltd.
(SPCCO)
Shanghai International
Port (Group) Co. Ltd.
(SIPG)
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51%
50%
Hong Kong Hutchison
Whampoa Ltd.
(WHL)
50%
Shanghai Container
Terminals Co., Ltd.
(SCT)
founded in 1993
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Yangshan Deep-water Port Phase II
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Specs
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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
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Acquire 0.64 km2 land via sea-fill
Thick mud foundation complicates
construction
Phase II
Phase I
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Yangshan Deep-water Port Phase II
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Operation
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Expand SH container throughput
Attract international transit shipments
Competition
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Pusan port: under expansion (2006)
Ningbo Beilun port
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Better port condition
Cross-harbor bridge to shorten distance
to Shanghai (2009)
Silt blockage: Dredging needed
Environment hazard: stir-up sea floor
Inclement weather could close the
port as many as 50 days per year
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Other Potential Investors
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Port of Singapore Authority
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AP Moeller-Maersk
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Largest Container Transportation Company
COSCO Group
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Focus On Shipping, Oil-drilling, Shipbuiliding, retail
Orient Overseas Container Line Limited
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World’s largest container terminal operator
Focus On Shipping And Logistics
China Shipping Group
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State-owned Shipping Conglomerate
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The Question
Should HWL invest in the Phase II Shanghai Deep-water
Port?
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Our Analysis
Pros
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Cons
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:
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“Foot in the door” for investment in
future expansion projects
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Demand risk
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Disadvantages of private investors
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Nationwide cargo throughput
increase slowing down
Competition from other ports
Speed of construction, permits, etc
Higher expropriation risk
Bridge capacity constraints
Weather-related risks
Environmental issues
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Our Analysis
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NPV of project: $29 million
Cost of capital:
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14.19% in 2005, decrease annually with improvement of China’s
country rating
Our conclusion:
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Marginally successful with IRR of 17.7%
Real options – convenient access to future investment opportunities in
expansion projects
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What Happened
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Phase I began operation on 12/10/2005
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Reached designed operation level in Jan 2006
Phase II investment agreement signed on 12/19/2005
Hutchison Whampoa Limited
AP Moeller-Maersk
Shanghai International Port Group
COSCO Group
China Shipping Group
32%
32%
16%
10%
10%
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