Swire Properties: More on the ‘Nurturing Reward’ Q&A on the Progress the Company Has Made in HK/China and the US Over the Past Year

10 April 2015

Swire Properties: more on the ‘nurturing reward’ Q&A on the progress the company has made in HK/China and the US over the past year

See important disclosures, including any required research certifications, beginning on page 62. Swire Properties 10 April 2015

Contents

How is the unfolding of the ‘nurturing reward’ Q1 1 progressing? Is Greater Pacific Place becoming an increasingly Q2 5 important part of Greater Central? Is Island East an upcoming commercial hub on HK Q3 15 Island? Are Swire Properties’ China investments finally Q4 21 starting to take off? Q5 Is Miami another jewel in the making? 33

Q6 What is the fair value for Swire Properties? 37

Appendix 45

Company section: Swire Properties 55

Please also see: Cheung Kong/Hutch’s Bold Move: Swire Properties: The Hong Kong Property Toolkit: Q&A on the prospect of the group Initiation: a large ‘nurturing reward’ A step-by-step guide to the past, becoming a global play, with a awaits present and future of the Hong Kong valuation to match Property Sector 9 February 2015 22 May 2014 Autumn 2013 Jonas Kan, CFA (852) 2848 4439 Jonas Kan, CFA (852) 2848 4439 Jonas Kan, CFA (852) 2848 4439 ([email protected]) ([email protected]) ([email protected])

Swire Properties 10 April 2015

Contributing Daiwa Analyst: The ‘nurturing reward’: where are we now? This report follows our 22 May 2014 initiation report on Swire Properties, in which we argued that there was a so-called ‘nurturing reward’ awaiting the group, stemming from its differentiated business model in Hong Kong’s property market. This model has involved multi-decades of meticulous investment in a number of areas in Hong Kong, which is effectively transforming those areas.

Jonas Kan, CFA (852) 2848 4439 [email protected] We believe the benefits of such a nurturing award have continued to unfold and that they showed up clearly in the recent 2014 results. Moreover, the

various locations that are being transformed by Swire Properties have

continued to become stronger and more relevant commercial hubs since our May 2014 report was published, and we discuss our expectations for the

future direction of its various divisions in the latter sections of this report. Of particular importance, in our view, is the sustained growth in tenant sales in all of the group’s China malls and what we see as a promising debut for its Daci Temple project in Chengdu, which bodes well for the group’s prospects over the next few years.

This report also follows on the heels of our 9 February report on the Cheung Kong Hutchison Group, in which we considered the future direction of Hong Kong family business groups and how they see the valuation discount on their shares. We think this perspective throws an interesting light on Swire Properties, because among the major Hong Kong family business groups, it is probably one of the closest to its major Western counterparts, yet its valuation has not managed to escape “the Hong Kong discount”. As such, we see it as an attractive vehicle through which to play on the theme of any narrowing of “the Hong Kong discount”.

Jonas Kan, Head of Hong Kong and China Property

Swire Properties 10 April 2015

Question 1

How is the unfolding of the ‘nurturing reward’ progressing?

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Q1: How is the unfolding of the ‘nurturing reward’ progressing?

In our 22 May 2014 initiation report on Swire Properties (A large ‘nurturing reward’ awaits), we argued that there was a large ‘nurturing reward’ awaiting Swire Properties, which stems from it having adopted a special approach to the property business, which involves investing in key locations in order to transform them over a period of decades.

Essentially, we think Swire Properties’ business model is about the creation of locations, as it usually starts with securing a large strategic site in a location that is not yet prominent, and it then works on meticulously transforming the area into a stronger and more relevant location for commercial properties. The caveat of this business model is that it requires significant management efforts and commitment in the initial years, but the merits of such an approach continue to improve over time, with the assets it has been nurturing gradually becoming able to generate large and improving free cash flow. Having a large and low-cost income-producing property portfolio in upcoming locations, meanwhile, puts Swire Properties in an advantageous position in terms of participating in the future growth and expansion of that location.

We see this type of business model as long-term and back-end loaded in which the largest portion of what we call the ‘nurturing reward’ kicks in most strongly in the last phase. The benefits come from having a large and expanding portfolio in some increasingly strong and relevant locations where it dominates, as the following diagram illustrates.

The economics of Swire Properties’ approach to property

Source: Daiwa

However, once the basic ingredients and structure have been put in place and start driving a continuous upgrading of the property and location, such a ‘nurturing reward’ should start to become evident, resulting in the property asset showing a more resilient performance during down-cycles and its rental and capital values being able to perform better during the upcycles. As and when the portfolio is able to make another major leap forward, then the rental and capital values of the portfolio should have another leap forward.

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In our opinion, such a ‘nurturing reward’ has started to unfold for Swire Properties and we think one main feature of its 2014 results was that the rise in its underlying net profit was driven by an across-the-board improvement in all of its key businesses – thus, what we call the ‘nurturing reward’ is emerging.

Swire Properties: movement in underlying profit (HKDm) 7,500 +76 +259 7,152 7,000 +346 -29

+152 6,500 6,348

6,000

5,500 Underlying profit Increase in profit Increase in profit Net changes from Increase in profit Increase in profit Underlying profit 2013 from HK prop from PRC prop other prop from trading prop from hotels 2014 investment investment investment Source: Company

Below is our take on the position of the 4 key locations (Pacific Place Hong Kong, Island East Hong Kong, China and Miami [US]) that Swire Properties has been nurturing. After more than 10 months since the release of our last report and after reading the various quarterly KPIs provided by Swire Properties since then, our interpretation is that these 4 locations have been making steady progress in terms of becoming stronger and more important commercial property locations, with Pacific Place showing resilience against competition from Citibank Plaza, and Island East seeing continuous positive rental reversions and on track for a new face. Moreover, the group’s Miami project has also been making solid progress with Saks Fifth Avenue having signed up as the anchor tenant in the mall, and some 80% of the units in the first residential tower of the Brickell City Centre having been sold.

Swire Properties: industry positioning of various locations on which it focuses

. Source: Daiwa

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In our opinion, the group’s biggest progress so far has been in China, with its quarterly KPIs showing across-the- board sustained growth in tenant sales in all its China malls. We also think the recent opening of the mall in its Daci Temple project (Taikoo Li Chengdu) is an important development. While we do not have any official sales figures on the performance of this mall at this point, anecdotal evidence suggests this mall has received good feedback. We recently visited the project and our view is that Swire’s Taikoo Li Chengdu project, together with Wharf’s IFS, is having a transformational impact on the Chengdu retail property market. Basically, we see the China retail property market as an ongoing “battle” between shopping malls, department stores and pedestrian areas. Our read is that Chengdu is seeing the first major win for the shopping malls over the department stores. In this light, Swire’s Daci Temple project could have a wider significance for the industry in that it is a new product type for the industry. As such, its successful execution could signal that the group has made considerable progress in the execution of its commercial property projects in China (see the answer to Question 4 for further details).

The China Retail property sector

Source: Daiwa

In what follows, we discuss further the current position and future prospects of the 4 key locations Swire Properties has been nurturing for the past 10-30 years: i) Pacific Place, Hong Kong, ii) Island East, Hong Kong, iii) China, and iv) Miami. Their respective positions in what we see as the development path for the four locations are illustrated in the diagram above.

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Question 2

Is Greater Pacific Place becoming an increasingly important part of Greater Central?

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Q2: Is Greater Pacific Place becoming an increasingly important part

of Greater Central?

The position of Pacific Place in Hong Kong’s commercial property sector changed over the years. It started off as an unproven new area on the fringes of Central, and later established itself as a distinct area for commercial properties. Since 2003, Wanchai South has evolved as an extension of Pacific Place, forming what we refer to as Greater Pacific Place, which we believe is becoming a more important commercial hub in Greater Central.

The evolution of Pacific Place Period The location 1980s The former Victoria Barracks, a large piece of land close to the edge of Central 1990s Pacific Place became recognised as one of the most high-end integrated commercial property complexes in Hong Kong, with the Pacific Place offices being seen as a major office area in fringe Central 2000s It becomes an integral part of Central area and Pacific Place's eastward expansion is driving the expansion of the boundary of Greater Central By 2020 The eastward expansion into Wanchai South continues to improve the scale and importance of this new cluster of commercial properties within the Greater Central area, which will be helped by the completion of 2 rail lines (South Island Line by 2015 and Shatin-Central Link over 2018-20) 2030s Redevelopment of the 3 government buildings in North Wanchai and potentially some other sites could improve the scale and importance of this cluster in the Greater Central CBD Source: Daiwa

There has been a lot of talk in the market over the past 12 months about de-centralisation and whether this trend is slowing. We see de-centralisation continuing (in the sense that corporations will still relocate out of Central), given that there is still a large gap between grade-A office rents in Central and those in other locations. Moreover, in recent years, the psychological barrier that had hindered multinationals from moving outside Central – or even across the harbour – has been broken. That said, we do not see the increased importance of other areas as a sign of weakness for Central. On the contrary, another way to interpret this phenomenon is to see it as Central expanding into other areas.

In our view, Pacific Place has already evolved into an integral part of Central and its extension into Wanchai has been a major force driving Central’s extension into Wanchai. Indeed, over the longer term, it is not inconceivable that Central-Wanchai-Causeway Bay may develop into a single commercial hub. Over time, we envisage Hong Kong as having 4 main commercial hubs: Greater Central (which we believe is on track to include at least part of Southern Wanchai and could even extend to include Causeway Bay over time), Island East, Greater Tsimshatsui (we expect that it may merge with West Kowloon and probably Hunghom in the future) and East Kowloon (we expect this to include Kwun Tong, Kowloon Bay, the old Kai Tak Airport and potentially San Po Kong as well).

There are also a number of other emerging commercial locations in Hong Kong, such as Wong Chuk Hang and Tung Chung. Importantly, we think Swire Properties appears well positioned to benefit from what we see as the newly emerging structure of the Hong Kong office market. For it has established a strong foothold in the commercial property landscape in Hong Kong, as it occupies an important position in Central and Island East, while also having established an initial position in Kowloon East, Wong Chuk Hang and Tung Chung, as illustrated in the following diagram.

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The Hong Kong commercial property landscape

Source: Daiwa

Importantly, we think Greater Pacific Place (ie, the original Pacific Place and its Wanchai extension) will occupy an increasingly important position in the Greater Central commercial hub. With Swire Properties having acquired a number of old buildings in the Wanchai South area over the past 2-3 decades, we see the company gradually redeveloping some of these buildings over the next few years, which would help enlarge and strengthen Greater Pacific Place’s position in the Greater Central commercial hub.

The development of Greater Pacific Place will also likely be helped by government planning and the development of transport infrastructure in Hong Kong. As the following diagrams and tables show, Admiralty will become 1 of the 2 locations in Hong Kong (the other being Central) where 4 subway lines intersect each other. In addition, the Wanchai area is poised to see a number of new developments over the next few years, which could well facilitate the further eastward extension of Greater Central.

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Admiralty station: the terminus for the South Island Line

Source: MTR, Daiwa

Admiralty: the station where 4 subway lines cross

Source: MTR, Daiwa

Admiralty station: the terminus for the Shatin-Central Link

Source: MTR, Daiwa

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Wanchai South: new developments Events Year Developers Remarks Completion of The Avenue 2015 Hopewell/ Sino A large-scale residential development with 1,300 units Land/URA The Avenue will also have a retail area of about 86,000 sq ft, which will be connected to the subway and should enhance the accessibility of Wanchai South Completion of the South Island Line 2015 HK Gov’t/ MTRC The terminus is Admiralty station. This will significantly improve the accessibility of Admiralty and Wanchai to people living in the southern part of Hong Kong Island Renovation of Hopewell Centre 2016 Hopewell Completion of Hopewell Centre II 2018 Hopewell 1.1m sq ft GFA, with 1,024 hotel rooms and 0.3m sq ft of retail area The government may tender the office 2015-2020 HK Gov’t The site could be developed into about 0.36m sq ft of offices and would be an site in the Tamar Basin opportunity for Swire Properties to expand its Pacific Place portfolio Completion of phase two of the 2020 HK Gov’t/ MTRC The terminus is Admiralty station. This will significantly improve the accessibility Shatin-Central Link of Admiralty and Wanchai to people living in Kowloon and the New Territories The government is due to complete 2020 SAR The redevelopment of the 3 government buildings in Wanchai could provide the relocation of the Immigration sites for developing up to about 2m sq ft of offices Department to Tseung Kwan O Source: Daiwa

Our read on the quarterly KPIs from Swire Properties is that rentals in Pacific Place have been holding up well over the past 12 months, despite the high vacancy rate in Citibank Plaza, and that in the past, rents in Citibank Plaza were HKD10-20/sq ft higher than in Pacific Place. We see these as signs that Pacific Place’s position in the overall Hong Kong grade-A office sector has been moving up.

Swire Properties: rental income from Pacific Place offices vs. Central grade-A offices (HKDm) Pacific Place office rental income (Rebased) 2,500 outperforms the Office Rental Index 1,400 1,200 2,000 1,000 1,500 800 1,000 600 400 500 200 0 0 19891990199119921993199419951996199719981999200020012002200320042005200620072008200920102011201220132014 Pacific Place office rental income (LHS) Pacific Place office rental income - rebased (RHS) Office Rental Index (Central Grade A) - rebased (RHS) Source: CEIC, Company, Daiwa

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Swire Properties: quarterly KPIs (office properties) 9M12 2012 1Q13 1H13 9M13 2013 1Q14 1H14 9M14 2014 HONG KONG Pacific Place offices Occupancy (period end) 98% 97% 97% 97% 97% 91% 91% 93% 95% 94% New and renewed area let 175,135 215,720 351,628 418,676 441,523 466,831 41,852 141,574 198,418 201,128 (sq ft) Reversion +34% +32% +36% +29% +27% +27% +8% +5% +7% +7% Spot rents 95-110 95-110 95-110 90-110 90-110 90-110 90-110 90-110 90-110 90-110 (period end, HKD/sq ft) Cityplaza offices Occupancy (period end) 98% 98% 99% 99% 98% 97% 98% 98% 99% 100% New and renewed area let 188,118 191,928 189,835 256,854 284,184 286,030 223,470 235,636 281,953 284,955 (sq ft) Reversion +30% +30% +54% +51% +52% +53% +26% +24% +25% +25% Spot rents low-mid 40s low-mid 40s low-mid 40s low-mid 40s low-mid 40s low-mid 40s low-mid 40s low-mid 40s low-mid 40s mid-high 40s (period end, HKD/sq ft) Taikoo Place Occupancy (period end) 98% 99% 99% 99% 99% 99% 99% 99% 98% 98% New and renewed area let 564,459 571,226 281,830 325,447 413,090 429,664 401,833 508,121 541,444 545,464 (sq ft) Reversion +30% +29% +52% +51% +48% +48% +26% +27% +27% +27% Spot rents low-mid 40s low-mid 40s low-mid 40s low-mid 40s low-mid 40s low-mid 40s low-mid 40s low-high 40s low-high 40s low-high 40s (period end, HKD/sq ft) One Island East Occupancy (period end) 100% 100% 98% 100% 100% 100% 99% 100% 98% 98% New and renewed area let na na 36,697 63,872 67,415 67,415 110,459 171,117 171,117 171,117 (sq ft) Reversion +51% +51% +82% +85% +85% +85% +17% +14% +14% +14% Spot rents mid 50s mid 50s mid 50s mid 50s mid 50s mid 50s mid 50s mid 50s mid 50s mid 50s (period end, HKD/sq ft) -high 60s -high 60s -high 60s -high 60s -high 60s -high 60s -high 60s -high 60s -high 60s -high 60s Techno-centres Occupancy (period end) 97% 100% 100% 100% 100% 100% 99% 100% 100% 100% New and renewed area let 153,683 153,683 204,981 204,981 237,911 237,911 61,061 61,061 61,061 61,061 (sq ft) Reversion +20% +20% +25% +25% +25% +25% +13% +13% +13% +12% Spot rents low-mid 20s low-mid 20s low-mid 20s low-mid 20s low-mid 20s low-mid 20s mid 20s mid 20s mid 20s mid 20s (period end, HKD/sq ft) Source: Company, Daiwa

Swire Properties: quarterly KPIs (retail properties) 9M12 2012 1Q13 1H13 9M13 2013 1Q14 1H14 9M14 2014 HONG KONG Pacific Place Mall Occupancy (period end) 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Retail sales growth +2.4% +0.3% -1.0% +1.9% +2.1% +0.7% 0% +0.8% -1.1% -6.1% Cityplaza Mall Occupancy (period end) 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Retail sales growth +6.8% +6.0% +3.5% +2.9% +2.7% +2.4% -5.6% -5.6% -3.4% -0.4% Citygate Mall Occupancy (period end) 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Retail sales growth +21.6% +21.2% +19.2% +19.2% +16.5% +13.5% +7.5% +5.3% +6.0% +4.6% Source: Company, Daiwa

Nonetheless, retail sales in Pacific Place Mall have been stagnant in recent years, and in fact fell by 6.1% YoY for 2014. We see this as an issue to be addressed, but are not overly concerned at this stage. Our view is that high-end malls do not require heavy foot traffic; rather the key is whether there are enough people from wealthy and the high income groups who like the mall, and that high-end retailers see locating to the mall as necessary to penetrate their target customer groups.

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In retrospect, one issue faced by Pacific Place is that its size, at 0.7m sq ft, is not large compared with some other malls in Hong Kong such as Harbour City, and as such, when there was a surge in market demand for luxury goods a few years ago, Swire Properties had to take space from some F&B tenants and mid-end retailers in order to open more luxury goods stores. This means that its foot traffic has to be affected (luxury stores generally do not attract a lot of foot traffic) and that the mall has become more vulnerable to the volatility of luxury spending. That said, we note that Swire Properties’s rental income from Pacific Place continued to rise in 2014, despite a 6.1% YoY decline in its tenants’ retail sales in 2014. We estimate that the Pacific Place Mall posted tenant sales of about HKD8bn in 2014 (about 2% of Hong Kong’s overall retail sales and with sales per sq ft of more than USD2,500. This is in line with the top tier malls in the US, and is a level that we consider respectable).

Another point to note is that Pacific Place is an area that has 4 high-end hotels and we expect Admiralty to become an increasingly important transport hub in Hong Kong, especially after the South Island Line and Shatin-Central Link have opened by 2018. Moreover, Pacific Place Mall has started giving out leaflets about restaurants and stores in its “Stars Street Precinct”. Our read is that Swire Properties appears to be putting more emphasis on strengthening its F&B trade and its Wanchai South footprint.

While we see areas for improvement for the Pacific Place Mall, we do not consider them to be overly concerning. After all, over 60% of Swire Properties’ Hong Kong gross rental income comes from offices, and the Pacific Place Mall accounts for less than 15% of the company’s annual gross rental income, on our estimates. We also see the mall at Pacific Place is part of a much larger mixed property complex. As a location, we think Greater Pacific Place is getting stronger and expect to see continuous news flow and new developments for its Wanchai South extension over the coming years, which should increasingly catch the attention of the stock market.

Greater Pacific Place

Source: Daiwa

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The 8 main streets of Wanchai

Source: Daiwa

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The 8 main streets of Wanchai (cont’d)

Source: Daiwa

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Question 3

Is Island East an upcoming commercial hub on HK Island?

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Q3: Is Island East an upcoming commercial hub in Hong Kong?

We believe the transformation of Island East has been impressive. From what many would regard as an old and run- down part of town some 20 years ago, the area has established itself as a core office location in Hong Kong since the late 1990s, and we believe it is on its way to become the largest commercial hub in Hong Kong after Central.

The evolution of Island East Period The location’s evolution 1970s A dockyard in a remote part of Hong Kong Island 1980s Became a residential area, with Taikoo Shing recognised as a classic mass residential housing estate for the middle and upper-middle class, with more than 12,000 residential units 1990s Island East first started as an office location for banks' back offices but later became recognised as a new area for decentralised offices 2000s Island East became the first large-scale commercial centre outside Central, with a GFA of over 8m sq ft of office space By 2020 Could become a premier and the largest commercial hub outside Central Could be a major commercial hub with sizeable office spaces alongside a vibrant retail area, hotels, as well as cultural and entertainment components Source: Daiwa

Most importantly, the area’s image is set to undergo a major uplift over the next 3-5 years, as 3 techno-centres there are to be redeveloped into 2 modern high-rise grade-A office buildings, also leaving space to create a large landscaped square, comparable to Statue Square in Central in size.

Swire Properties: proposed redevelopment of techno-centres

Source: Company

Note that only a limited number of new office buildings have been completed in Hong Kong over the past 10 years. Exacerbating this situation is the fact that the office specifications required by financial tenants have continued to rise, and as such, it is possible that the number of office buildings that can meet the needs of modern financial firms and MNCs will continue to contract. While seeming unlikely at this point, we would not be surprised if some major financial firms start to accept Island East as a feasible location for their offices over the next few years. If this were to happen, rentals and capital values in the Island East area could be given a good boost, in our view.

A glance at the quarterly KPIs of Swire Properties suggests that Island East office rents have been moving up in the Hong Kong grade-A office sector. Rents at Cityplaza rose from low-to-mid HKD40s/sq ft before 3Q14 to mid-to-high HKD40s/sq ft in 4Q14, while office rents at Taikoo Place have also risen from low-to-mid HKD40s/sq ft in 1Q14 to low-to-high HKD40s/sq ft since 2Q14.

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Moreover, another encouraging sign is that retail sales at Cityplaza are off to a good start in 2015, with positive growth YTD, notwithstanding the decline in overall Hong Kong retail sales growth. This suggests that the group’s revamp of this mall has started producing results, and bodes well for the whole Island East area becoming a more important commercial hub in the years to come.

Like its Pacific Place portfolio, Swire Properties has been pursuing continuous expansion of its Taikoo Place portfolio, including the redevelopment of old buildings. Moreover, the company has gained an initial foothold in Kowloon East, which we think could have long-term strategic importance for both its portfolio at Island East and its potential to become a more sizeable player in Kowloon East.

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Taikoo Place

Source: Company, Daiwa

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The 5 main streets in the Taikoo Place, Island East

Source: Daiwa

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Question 4

Are Swire Properties’ China investments finally starting to take off?

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Q4: Are Swire Properties’ China investments finally starting to take off?

Swire Properties started investing in China in 2002, but in the initial years (2002-10), did not make much progress in terms of earnings contribution from its Mainland business. Things started to change around 2011, with an improving gross rental income in China.

Swire Properties: investments in China property Date Major events 2002 Acquired the land for Taikoo Hui 2006 Acquired a 50% stake in the Dazhongli project in Shanghai from HKR International 2007 Acquired 80% stake in Sanlitun Village, Beijing 2008 Formed a 50/50 joint-venture with Sino-Ocean to take a 50% stake in the INDIGO project in Beijing Opening of Sanlitun Village South and The Opposite House 2010 Opening of Sanlitun Village North Formed a 50/50 joint-venture with Sino-Ocean to acquire the Daci Temple site in Chengdu 2011 Opening of Taikoo Hui Opening of INDIGO's office tower, ONE INDIGO Mar-12 Phased opening of the mall of INDIGO Beijing Jan-13 Opening of Mandarin Oriental Guangzhou at Taikoo Hui Apr-13 Renamed its mixed-use commercial property project in Beijing from "Beijing Sanlitun Village" to "Taikoo Li Sanlitun" Aug-13 Sold 89% Pinnacle One (office of the Daci Temple project) for CNY2.1bn Jan-14 Signed a framework agreement with CITIC Real Estate and Dalian Port Real Estate to jointly develop (Swire will has a 50% stake) a project in the Zhongshan District of the Dalian city's CBD. Feb-14 Acquired the remaining 20% stake in Taikoo Li Sanlitun from Gaw Capital Partners Jan-15 Opening of the mall at its Daci Temple project in Chengdu

Source: Company, Daiwa

Swire Properties: China rental income growth (HKDm) 2,000

1,600

1,200

800

400

0 2008 2009 2010 2011 2012 2013 2014 China retail rental income China office rental income China serviced apartments Source: Company

Swire Properties: gross rental income from China (HKDm) 2008 2009 2010 2011 2012 2013 2014 Taikoo Hui Guangzhou 19 19 19 322 903 1,097 1,262 Taikoo Li Sanlitun, Beijing 163 239 325 457 469 526 635 INDIGO, Beijing ----47214278 Daci Temple, Chengdu ------30 Dazhongli, Shanghai ------Taikoo Hui, Dalian ------181 258 344 779 1,419 1,837 2,205 Source: Company, Daiwa estimates Note: *including gross rental from associates and JCEs

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Swire Properties: China property portfolio

Source: Company, Daiwa

Swire Properties: expansion of China portfolio Year of Office GFA Retail GFA Residential GFA Hotel GFA (sq ft)/ Project Area completion (sq ft) (sq ft) (sq ft) (rooms) Total GFA (sq ft) Hui Fang Guangzhou 2008 0 90,847 0 0 90,847 Taikoo Li Sanlitun Beijing 2008 0 1,296,308 0 169,463 (99) 1,465,771 Taikoo Hui Guangzhou 2011 1,731,766 1,472,730 51,517 584,184 (263) 3,840,197 INDIGO Beijing 2012 595,464 939,493 0 358,269 (185) 1,893,226 Daci Temple Chengdu 2014 0 1,141,598 82,076 163,828 (100) 1,387,502 Dazongli Shanghai 2016 1,844,842 1,081,362 0 543,194 (200) 3,469,398 Dalian Port Dalian 2018 0 952,968 0 0 952,968 Total 4,172,072 6,975,306 133,593 1,818,938 (847) 13,099,909 Source: Company

Chiefly, looking at the quarterly KPIs of Swire Properties, we note that its China businesses are showing improving momentum, with all of them recording double-digit growth in tenant sales since 2013, despite the overall challenging retail environment in China. Encouraging to us is that the improvement in tenant sales at Swire Properties’ China malls seems to have been across-the-board, with its INDIGO mall in Beijing ramping up quickly from a low base, and both Taikoo Li Sanlitun and Taikoo Hui Mall in Guangzhou sustaining double-digit growth in tenant sales in 2014, after having outperformed the industry markedly in 2013.

Meanwhile, Swire Properties also indicated during the latest results announcements that all its malls in China have had a good start to 2015, with double-digit tenant sales growth continuing. We see these all as signs that the group may have finally found the skill-set suited to the successful execution of shopping malls in China.

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Swire Properties: quarterly KPIs (office properties) 9M12 2012 1Q13 1H13 9M13 2013 1Q14 1H14 9M14 2014 CHINA Taikoo Hui Offices Occupancy (period end) 77% 79% 82% 85% 86% 89% 93% 99% 100% 89% New and renewed area let 18,206 21,812 5,007 9,890 11,413 16,879 6,438 14,900 17,571 22,832 (sq m) Reversion (%) na na na na na na na na na na Spot rents mid-high mid-high mid-high mid-high mid-high mid-high mid-high mid-high mid-high mid-high (period end, CNY/sq m) 100s 100s 100s 100s 100s 100s 100s 100s 100s 100s ONE INDIGO Occupancy (period end) 91% 95% 91% 95% 97% 97% 96% 96% 97% 100% New and renewed area let 22,274 24,194 442 2,800 3,409 3,409 2,953 10,027 17,101 22,832 (sq m) Reversion (%) na na na na na na na na na na Spot rents Low 100s- low-mid low-mid low-mid low-mid low-mid mid-high mid-high mid-high mid-high (period end, CNY/sq m) mid 200s 200s 200s 200s 200s 200s 200s 200s 200s 200s Source: Company, Daiwa

Swire Properties: quarterly KPIs (retail properties) 9M12 2012 1Q13 1H13 9M13 2013 1Q14 1H14 9M14 2014 CHINA Taikoo Hui Mall Occupancy (period end) 100% 99% 100% 99% 99% 99% 99% 99% 99% 99% Retail sales growth na na +33.1% +28.8% +25.6% +24.9% +13.1% +13.0% +10.9% +11.0% Taikoo Li Sanlitun Occupancy (period end) 93% 94% 93% 92% 94% 94% 94% 97% 97% 95% Retail sales growth na na +12.7% +15.5% +16.0% +17.0% +20.5% +22.8% +22.4% +18.8% INDIGO Mall Occupancy (period end) 83% 84% 87% 88% 95% 96% 94% 95% 95% 95% Retail sales growth na na na na na na +106% +94.4% +78.4% +66.1% Source: Company, Daiwa

However, we think the most important development in Swire Properties’ China business is its Taikoo Li project in Chengdu, which appears to be off to a good start in 2015. We visited this mall and spoke to shoppers and tenants, and our impression is that it has made a promising start. In line with this, our read is that Wharf’s Chengdu IFS also had a good start, with its achieved tenant sales in its first year (2014) reaching CNY2.2bn, the highest first-year tenant sales figure for a new mall in China – next is probably China Resources Land’s Nanning MIXc in Nanning, with CNY1.8bn in tenant sales in its first year of operation. Most importantly, it appears to us that Swire Properties’ Taikoo Li Chengdu could add further momentum to the trend started by the Chengdu IFS in terms of making the cluster of malls in the Chuanxi Road district increasingly popular for shoppers.

Swire Properties: Taikoo Li Chengdu

Source: Company, Daiwa

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Of note is that Taikoo Li Chengdu is a new and revolutionary product for Swire Properties, and probably the China mall sector as well, in that it is an outdoor mall with stores featuring a blend of modern and heritage architecture. Strictly speaking, Swire Properties’ Sanlitun mall in Beijing is the group’s first attempt at this kind of outdoor mall. However, there are no heritage and tourist elements to Swire’s Sanlitun in Beijing. As such, we think Taiko Li Chengdu is a bold new product by Swire Properties in that it is probably the first mall in the country to blend heritage, tourism and shopping elements together in an outdoor mall format.

One observation we have about this mall is that it seems to have a greater emphasis on modern F&B outlets versus other typical malls in China. We consider this a new experiment in Swire Properties’ retail portfolio and our understanding is that this product has attracted considerable attention both from the people of Chengdu as well as from people outside the city, including probably provincial governments from other cities as well, as this new mall seems to be making a positive impact on the city’s tourist sector. Meanwhile, perhaps a greater emphasis on shopping as an ‘experience’ could be a way for developers like Swire Properties to cope with the competitive threat from online shopping in China (after all, while people can shop online, they can’t eat online). As such, we believe modern F&B outlets have become an important trade for shopping malls.

Swire Properties: Specialty F&B tenants in Taikoo Li Chengdu

Source: Company, Daiwa

We have visited the F&B outlets in this mall and we don’t see them as conventional F&B restaurants where a meal can last for 2 hours. We would describe many of the F&B outlets as specialty F&Bs that do not occupy a large area, and where customers do not sit at the table for that long. Our observation is that the customer turnover rate for these outlets is higher than it is at traditional F&Bs, and that their revenue potential should be helped by takeaway orders from office workers nearby and tourists who visit the temple. We found that on unit price basis, products offered in these specialty F&Bs are not that expensive, with many items in the CNY15-100 range. That said, we believe the achieved margin for the retailers will be quite high.

Another observation we have about these specialty F&B outlets is that their opening hours are long. As they are not located inside a mall, the operator seems to have greater flexibility in terms of closing hours, and longer opening hours could be yet another factor to enhance the sales productivity of these spaces, in our view. We think Taikoo Li Chengdu is a bold experiment (ie, a new type of retail format in China) and our initial impression is that the rent- paying capability of some of these specialty F&Bs could be in the same range as that paid by the fashion retailers. As such, the specialty F&Bs could well become a much more important component of China’s modern malls in terms of GFA and rental income contribution.

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We see the China retail property sector as a battle between shopping malls and department stores/pedestrian streets. Chengdu is a city in which we think shopping malls would reign supreme over department stores and pedestrian streets, given that the city boasts 2 mega-sized malls located right in the heart of the city (Wharf’s Chengdu IFS and Swire Properties’ Taikoo Li Chengdu), both of which appear to have complementary strategies.

Taikoo Li Chengdu , Chengdu IFS and the Chuanxi Road retail hub

Source: Company, Daiwa

With a combined GFA of over 3.5m sq ft, we think the products offered by these 2 malls by Wharf and Swire Properties should be wide enough to cover most of the needs of the city’s wealthy and middle class. As such, we expect they will be a magnet in attracting shoppers from other areas or other parts of the Chuanxi Road cluster. After talking to some retailers in both Chengdu IFS and Taikoo Li Chengdu, our impression is that these 2 malls have taken market share from nearby retail properties such as the department stores, Isetan, and probably also shoppers who previously shopped in other districts.

Basically, our read about the retail property sector in general is that there is often a tendency for the strongest malls to receive a disproportionate share of the retail spending in the district, as the most productive retailers and the biggest spenders tend to gravitate towards them. We believe Sino-Ocean Taikoo Li has had a good start so far and if Swire Properties’ Taikoo Li Chengdu project becomes a major success, we believe it would provide a significant boost to Swire Properties’ potential in the China commercial property sector. One obvious benefit is that it could result in other provincial governments becoming keen to have similar projects in their own cities, and being run by Swire Properties as well. This should help enhance the prospects of Swire Properties in terms of securing more attractive projects in China in the years ahead, in our view.

Most importantly, after more than 8 years of running shopping malls in China, we think Swire Properties has found a way to manage commercial property assets in the Mainland much more effectively than before. We see the promising debut of the Taikoo Li Chengdu project as an important development to note, and if the group’s results in 2015 and 2016 show continued improvement in all its malls in China, as well as a gradual take-off for Taikoo Li, then Swire Properties’ credentials as a major player in the China commercial property sector should significantly improve, which should be gradually reflected in the share price (we think prime commercial properties in China appear to have been mispriced by the stock market). While we believe the industry as a whole is facing many challenges, we think that the prime commercial property assets in the main China cities, and those that are really managed by competent property asset managers, should perform much better than the overall market, but this has yet to be recognised by the stock market, in our view.

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Taikoo Li Chengdu: the blending of heritage and modernity; shopping and tourism; a place to shop and an experience to feel

Source: Company, Daiwa

Overall, we think there is significant potential for value creation associated with property companies that have the capital, skills, vision and management to develop and sustain best-in-class prime commercial properties in China, but we don’t think this has been recognised yet by the market. Our read is that Swire Properties could be on the verge of making another major leap in terms of the execution of its large-scale commercial property projects in China, and that this constitutes yet another source of hidden value for the group.

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Daci Temple project, Chengdu

Source: Company, Google, Daiwa

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INDIGO

Source: Company, Google, Daiwa

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Taikoo Li Sanlitun

Source: Company, Google, Daiwa

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Taikoo Hui, Guangzhou

Source: Company, Google, Daiwa

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Question 5

Is Miami another jewel in the making?

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Q5: Can Miami become another jewel for Swire Properties?

While Miami currently is not a major component of Swire Properties’ earnings, we see it as another location that could become more important to Swire Properties over time. While it may appear unusual to some that Swire Properties has projects in Miami, the group in fact has a long history of investing in the Miami area, as its parent Swire Pacific, was a bottler for Coca-Cola in several regions in the southern USA for several decades. Also, Swire Properties is not new to the residential property market in Miami, having had residential projects there for more than a decade.

Residential property projects developed by Swire Properties in Miami Year Project Stake GFA (m sq ft) 2001 Three Tequesta point 100% 0.51 2002 Courts Brickell Key 100% 0.46 2004 Jade Residences 63% 0.65 2005 The Cartonell 100% 0.56 2008 ASIA 100% 0.32 Source: Company, Daiwa

Swire Properties: current residential landbank in Miami and vicinity Project Area Stake GFA (sq ft) South Brickell Key Miami 100% 421,800 Fort Lauderdale site Fort Lauderdale 75% 787,414 ASIA Miami 100% 5,359 River Court Fort Lauderdale 75% 12,586 Brickell City Centre Miami 100% 1,564,000 2,791,159 Source: Company, Daiwa

Moreover, we see a similarity between Hong Kong and Miami, in that they could both be considered gateway cities, Hong Kong for China, and Miami for Latin America. Given that the financial and currency systems in Latin America are less sophisticated than those in the US, wealthy Latin Americans will likely continue to park their wealth in Miami. We also note that while large-scale mixed developments are common in Asia, there are not as many such projects in the US. As such, we see this Miami project as having potential long-term significance for Swire Properties in that other than strengthening the group’s presence in the Miami area, this project could lead to potential opportunities for the group in other US cities as well. Our observation is that many US cities are spread out and not that many have many high-rise buildings concentrated in core city areas. As such, if urbanisation really develops into a trend in US cities, we do not think it is inconceivable that similar opportunities as the group’s Brickell City Centre project (Miami) could arise in Miami or other US cities in the future.

We would argue that Swire Properties’ Brickell City Centre project is like its Pacific Place equivalent in Miami. Like Pacific Place in Hong Kong, the Brickell City Centre is located in the centre of the city of Miami. Indeed, one could say that in terms of location, Brickell City Centre is more central than Pacific Place was in the 1980s, as Brickell City Centre is a sizeable site located right at the centre of the Brickell financial district in Miami. Crucially, we believe Swire Properties has secured a low-cost entry into the Miami property market (through its Brickell project) as the various sites for the Brickell City Centre projects were acquired in the aftermath of the GFC in 2008.

Our research suggests that Brickell City Centre is the largest mixed-use commercial property project in Miami and could be one of the largest projects of its kind in the whole of the US. As such, it could have long-term significance for Swire Properties’ earnings and NAV in the near future. This project is still at an early stage of its development, but we are encouraged by 1) its mall securing Saks Fifth Avenue as its anchor tenant, 2) that its residential towers – The Reach – are now about 80% sold, and 3) that its second tower, The Rise, has also been launched, with an achieved price for it and The Reach being among the highest in Miami city.

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Brickell City Centre

Source: Company, Google, Daiwa

As we see it, in the initial years, the return on Brickell City Centre will come more from its residential portion. The response the project has achieved so far suggests to us that Swire Properties’ brand-name and skill-set in developing high-end residential properties could be an underutilised asset of the group. In our opinion, the continued sale of luxury units in Hong Kong will help underpin Swire Properties’ earnings in the near future, and we see Miami becoming a supplementary earnings driver for the group from 2016 onwards.

Swire Properties: quarterly KPIs (residential properties) Total no. No. of units sold of units 9M12 2012 1Q13 1H13 9M13 2013 1Q14 1H14 9M14 2014 HONG KONG AZURA 126 103 108 111 111 118 119 120 122 122 122 ARGENTA 30 - 6 7 7 10 13 16 22 27 27 Dunbar Place 53 - - 21 21 24 34 44 48 53 52 Mount Parker Residences 92 ------58 71 83 84 AREZZO 127 ------66 78

MIAMI ASIA 123 111 111 112 112 122 122 122 122 122 122 REACH, Brickell City Centre 390 ------184 281 299 RISE, Brickell City Centre 390 ------43 Source: Company, Daiwa

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Question 6

What is the fair value for Swire Properties?

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Q6: Can Swire Prop be priced as a premier stock in global property?

Our fair value estimate for Swire Properties is HKD33/share, based on a 30% discount applied to our end-2015 NAV estimate of HKD47.10/share, of which some HKD16.80/share is for its assets in Pacific Place and HKD20.40/share for its assets in Island East.

Given that it is not uncommon for premier global property stocks to trade at close to NAV, or even at a premium to NAV, we see room for Swire Properties’ existing discount to NAV to narrow over time.

With some 4.0m sq ft of commercial property assets in Pacific Place and 9.8m sq ft in Island East, Swire Properties has ample scope to continue upgrading these locations. Any rise in the per sq ft capital value of its properties in these locations will be spread over a sizeable portfolio, and hence should result in a big lift to the company’s absolute NAV. We are confident that the company’s redevelopment of its 3 techno-centres in Island East into 2 prime grade-A office properties can lead to NAV expansion in the next few years.

Based on information disclosed in Swire Properties’ 2 IPO prospectuses and media reports, we believe the company owns old buildings in Wanchai South and Island East totalling at least 0.3m sq ft. These are essentially “hidden assets” that many analysts have not taken into account when valuing the company, in our opinion.

Swire Properties: PBR PBR (x)

1.0 Current PBR: 0.71x 0.9

0.8 +1SD: 0.78x average since IPO: 0.70x 0.7

0.6 -1SD: 0.63x

0.5

0.4 2012 2013 2014 2015 Source: Company, Datastream, Daiwa

We show in the tables below our estimated breakdown of Swire Properties’ NAV (based on usage as well as the location of these assets) and the implied psf prices of these assets. In our view, these implied prices are not aggressive, relative to many transactions we have seen in the physical property market over the past 3-4 years.

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Swire Properties: NAV (2015E) NAV Blended price NAV (HKDm) (HKD/share) (%) Size (m sq ft) (HKD/sq ft) HONG KONG Greater Pacific Place, Greater Central - Office 61,225 10.5 19.7% 2.4 25,374 - Retail 21,824 3.7 7.0% 0.7 29,539 - Residential/ serviced apartments 9,305 1.6 3.0% 0.4 21,000 - Hotel 4,976 0.9 1.6% 0.4 11,245 - Car parks 996 0.2 0.3% 98,325 16.8 31.6% 4.04 24,355 Taikoo Place, Island East - - Office 90,944 15.5 29.2% 8.1 11,278 - Retail 19,461 3.3 6.2% 1.5 12,983 - Residential/ serviced apartments 752 0.1 0.2% 0.1 12,000 - Hotel 2,070 0.4 0.7% 0.2 10,369 - Car parks 5,936 1.0 1.9% 119,163 20.4 38.3% 9.83 12,128

- Old building assets in Greater Pacific Place and Taikoo Place* 7,077 1.2 2.3% 0.3 25,015 Investment properties in Greater Pacific Place and Taikoo Place 224,565 38.4 72.1% 14.1 15,875 Other locations in HK Tung Chung 3,041 0.5 1.0% 0.27 11,215 Kowloon East 2,560 0.4 0.8% 0.56 4,612 Wong Chuk Hang 1,148 0.2 0.4% 0.19 6,000 Other investment properties in HK 5,394 0.9 1.7% 0.76 7,074 12,142 2.1 3.9% 1.78 6,822 Investment properties in HK 236,707 40.5 76.0% 15.9 14,863 Development properties in HK 8,140 1.4 2.6% 0.8 9,690 HK property assets 244,847 41.9 78.6% 16.8 14,604

Mainland China Beijing 19,036 3.3 6.1% 2.4 7,891 Guangzhou 22,777 3.9 7.3% 3.8 5,969 Chengdu 5,655 1.0 1.8% 0.8 7,167 Shanghai 9,067 1.5 2.9% 1.7 5,227 Dalian ---- - China property assets 56,535 9.7 18.2% 8.8 6,460

Miami, UK and overseas Miami commercial property assets 8,331 1.4 2.7% 2.6 3,155 Miami residential property assets 954 0.2 0.3% 2.6 370 UK hotels 798 0.1 0.3% 0.2 3,824 10,082 1.72 3.2% 5.4 1,858

Gross NAV 311,464 53.2 100.0% 30.9 10,066 Net debt (36,047) (6.2) NAV 275,417 47.1 Source: Daiwa Note: * Includes 82,909 sq ft of old building assets which can be identified and 0.2m sq ft GFA that we assume it already owns

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Swire Properties: NAV breakdown by usage (2015E) NAV Blended price NAV (HKDm) (HKD/share) (%) Size(m sq ft) (HKD/sq ft) HONG KONG Greater Pacific Place and Taikoo Place - Office 152,169 26.01 48.9% 10.48 14,524 - Retail 41,285 7.06 13.3% 2.24 18,449 - Residential/ serviced apartments 10,056 1.72 3.2% 0.51 19,885 - Hotel 7,046 1.20 2.3% 0.64 10,973 - Car parks 6,932 1.18 2.2% - - - Old buildings 7,077 1.21 2.3% 0.28 25,015 224,565 38.4 72.1% 14.1 15,875 Other locations in HK - Office 5,967 1.02 1.9% 1.41 4,243 - Retail 3,650 0.62 1.2% 0.29 12,778 - Residential/ serviced apartments 2,032 0.35 0.7% 0.04 50,000 - Hotel 352 0.06 0.1% 0.05 7,437 - Car parks 141 0.02 0.0% - - - Old buildings ---- - 12,142 2.08 3.9% 1.78 6,822 Investment properties in HK 236,707 40.5 76.0% 15.9 14,863 Development properties in HK 8,140 1.4 2.6% 0.8 9,690 HK property assets 244,847 41.9 78.6% 16.8 14,604

MAINLAND CHINA - Office 10,876 1.9 3.5% 3.0 3,631 - Retail 42,484 7.3 13.6% 4.4 9,662 - Residential/ serviced apartments 316 0.05 0.1% 0.1 3,470 - Hotel 2,498 0.4 0.8% 1.3 1,969 - Car parks 361 0.1 0.1% - - 56,535 9.7 18.2% 8.8 6,460

Miami, UK and overseas - Office 1,618 0.3 0.5% 0.8 2,129 - Retail 3,796 0.6 1.2% 1.0 3,818 - Residential/ serviced apartments 1,612 0.2 0.5% 3.0 540 - Hotel 2,785 0.5 0.9% 0.7 4,063 - Car parks 271 0.05 0.1% - - 10,082 1.6 3.2% 5.4 1,858 Gross NAV 311,464 53.1 1.0 30.9 10,066 Net debt (36,047) (6.2) NAV 275,417 47.1 Source: Daiwa

Another important point to note about Swire Properties is that it should be on track to see a major expansion in the size of its rental portfolio. We observe that the various investments that Swire Properties has made in the past few years have paved the way for a major and sustained expansion in its rental income. Essentially, the size of Swire Properties’ rental portfolio should expand by 28% to 27.2m sq ft by 2021, which should drive a continuous improvement in its achieved gross rental income.

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Swire Properties: key investments in recent years Time Investments Locations Remarks Time Investments Locations Remarks Mar 2013 A joint venture led by Swire Properties (20% owned) Tung Chung, The price was notably above market expectations and reflects won the tender for developing the site next to its Lantau Island that Swire Properties is keen to strengthen its strategic foothold Citygate mall in Tung Chung on Lantau Island Jul 2013 Acquired a plot of land adjacent to its Brickell City Miami Indicates that Swire Properties is keen to strengthen its strategic Centre (BCC) project for the purpose of building an 80- foothold in Miami storey mixed-use tower as phase II of the BCC project Nov 2013 Won the tender for a site in Kowloon Bay to be Kowloon Bay Indicates that Swire Properties is keen to secure a strategic developed into an office tower of 0.55m sq ft GFA foothold in Kowloon Bay Dec 2013 A joint venture led by Swire Properties (50% owned) Island East This building is located next to the company’s Oxford House and acquired Dah Chong Hong Commercial Centre from should notably strengthen Swire Properties' control over the area CITIC Pacific for HKD3,900m Jan 2014 Entered into a framework agreement to jointly develop China Indicates that Swire Properties is keen to expand its presence in a mixed-use site for retail and apartments in Dalian China. This is also the first Swire project in China that has a residential component Feb 2014 Acquired the remaining 20% interest of Taikoo Li China The profitability of Taikoo Li Sanlitun has improved appreciably Sanlitun, taking Swire's stake to 100% after having been open for 5 years Paid the government a land premium of HKD1,070m to Wong Chuk Hang Indicates that Swire Properties is keen to secure a strategic convert an industrial site at 8-10 Wong Chuk Hang foothold in Wong Chuk Hang in Island South Road (50% owned by Swire Properties) into an office development (about 0.38m sq ft GFA) Entered into an agreement with the SAR Government Island East This has unified Swire Properties' ownership in Cornwall House to acquire the remaining interest in Cornwall House and should clear the way for the redevelopment of its 3 techno- centres in Island East into 2 grade-A office buildings The redevelopment of its 3 techno-centres should boost the image and quality of Swire's Island East portfolio, with the creation of a 69,000 sq ft landscaped square at the heart of its Island East portfolio Source: Company, Daiwa

Swire Properties: expected change in GFA composition over five years Attributable GFA by segment (m sq ft) Attributable GFA by region (m sq ft) 27.2 27.2 0.81.4 2.8 21.3 2.7 21.3 0.7 0.5 8.7 2.1 7.3 6.8 6.4

15.0 15.7 12.1 14.0

2014 2021E 2014 2021E

Office Retail Hotels Residential & SA Under planning HK Mainland China USA & others

Source: Company E – Swire guidance

Swire Properties: expected attributable GFA of completed investment properties (Attri.GFA, m sq ft) 30 27.2 26.3 26.3 25.0 25 22.5 23.4 23.7 20.2 21.3 20

0 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E onwards

Hong Kong Mainland China US and UK Source: Company Note: As at 31 Dec 2014 E – Swire guidance

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Importantly, relative to the group’s likely rental income stream over the coming years, we believe that Swire Properties’ valuation today is attractive, with a gross yield on a market capitalisation of 7.5%, based on its 2014 gross rental income and current market capitalisation of HKD146bn. The gross yield rises to 10.8% based on our 2018E gross rental income forecast (HKD15.7bn) and 13.7% on our 2020E gross rental income forecast (HKD20bn).

Swire Properties: expansion of its investment property portfolio in coming years (detailed breakdown in Appendix 1) 2014 2020 (m sq ft) (m sq ft) Remarks Completed investment properties in HK Pacific Place 4.1 4.1 We have not factored in the redevelopment potential of its old buildings Island East 8.6 9.8 The 3 techno-centres will be replaced by 2m sq ft. of prime grade-A office space. There will be a 69,000 sq ft new landscaped square in Island East, and Cityplaza will be revamped Tung Chung 0.2 0.3 Citygate has become one of the most successful outlets and suburban malls in Hong Kong Kowloon Bay - 0.6 Many opportunities for further landbanking in Kowloon East in 2014-20 Wong Chuk Hang - 0.2 Wong Chuk Hang has the potential to become a new decentralised grade-A office area in Hong Kong Others 0.8 0.8 Many will benefit from the upgrading of Island East and will be monetised when opportunities arise 13.7 15.7 Both Pacific Place and Island East look on their way to becoming higher-grade commercial hubs by 2020 Completed investment properties in China Beijing 2.2 2.4 Taikoo Li Sanlitun should be the strongest mall in the embassy area, and INDIGO is located in an upcoming district in Beijing Guangzhou 3.8 3.8 Should remain one of the strongest, if not the strongest, high-end mall in Guangzhou over the next 5 years Chengdu - 0.8 The performance of the 2 malls managed by Wharf and Swire Properties at the heart of the Chunxi Road retail hub could symbolise the victory of modern malls over department stores and high-street retailing, which still dominate retail spending in China Shanghai - 1.7 Could drive the eastward expansion of the Nanjing Road commercial hub Dalian - - Swire Properties’ first China project that has residential flats for sale 6.0 8.7 Swire Properties’ attributable China portfolio could expand by over 4m sq ft if it buys out the stakes of its JV partners, as it did for Taikoo Li Sanlitun Completed investment properties in Miami, the UK, and other countries Miami 0.3 2.7 Swire Properties is on its way to becoming one of the largest landlord and residential developers in the Miami city centre UK and others 0.2 0.2 Swire Properties has its own hotel in the UK. Meanwhile, it has been looking at expanding into new cities such as Jakarta and Singapore 0.5 2.9 Total 20.2 27.2 Swire Properties will undergo an ambitious and sizeable expansion in Miami over the next few years

Gross rental income - Subsidiary level 10,320 18,222 Impressive, but even stronger if we take into account the additional contribution at the JV level, which is not as obvious - Joint-venture level 688 1,811 Contributions from these areas would become even larger and more visible if Swire Properties were to increase its stakes and turn them into subsidiary companies Total 11,008 20,033 Source: Daiwa

Swire Properties: expansion of completed investment properties (m sq ft) 30

0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E Hong Kong China Miami UK Source: Company, Daiwa forecasts

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Swire Properties: implied gross rental yield on market capitalisation under different scenarios Share price (HKD) 20 22 24 26 28 30 32 33 34 36 38 40 42 44 46 48 50 Number of shares (m) 5,850 5,850 5,850 5,850 5,850 5,850 5,850 5,850 5,850 5,850 5,850 5,850 5,850 5,850 5,850 5,850 5,850 Market capitalisation (HKDm) 117,000 128,700 140,400 152,100 163,800 175,500 187,200 193,050 198,900 210,600 222,300 234,000 245,700 257,400 269,100 280,800 292,500 Gross rental income for 2014 (HKDm)* 11,008 11,008 11,008 11,008 11,008 11,008 11,008 11,008 11,008 11,008 11,008 11,008 11,008 11,008 11,008 11,008 11,008 Daiwa's forecast of its gross rental income in 2020 (HKDm) 20,033 20,033 20,033 20,033 20,033 20,033 20,033 20,033 20,033 20,033 20,033 20,033 20,033 20,033 20,033 20,033 20,033 Gross rental yield on market cap (on 2014 gross rental income) (%) 9.4% 8.6% 7.8% 7.2% 6.7% 6.3% 5.9% 5.7% 5.5% 5.2% 5.0% 4.7% 4.5% 4.3% 4.1% 3.9% 3.8% Gross rental yield on market cap (on 2020 gross rental income) (%) 17.1% 15.6% 14.3% 13.2% 12.2% 11.4% 10.7% 10.4% 10.1% 9.5% 9.0% 8.6% 8.2% 7.8% 7.4% 7.1% 6.8% Source: Daiwa Note: * including contribution from associated and JCEs

All in all, we forecast sustained gross rental income growth for Swire Properties over the next 5-10 years, driven by a 27% expansion in the size of its investment property portfolio, and as its 4 key locations continue to mature. In our view, another positive aspect of Swire Properties’ model is that the additional rental income it earns from now on should be mostly free cash flow (we estimate the sales proceeds it can realise from the sale of its current residential landbank, as well as the rental income from existing investment properties, should be able to cover its capex needs to fund the construction of its current investment properties under development). If the locations it has invested in are moving along the path of a virtuous cycle, natural market forces should drive continuous growth in their rental and capital values. As such, Swire Properties, being the pioneer builder of a strong location, should have strong credentials and potential to dominate the area, or even effectively own it, over time. Since these strong locations often continue to expand outward, the organic growth potential they offer to the pioneer developer can be significant. We believe this is an example of the special economics of Swire Properties’ model for the property business.

Coventional wisdom has it that the key to property of all kinds is location. There are few companies in the global property market that can be the dominant players in strong commercial property locations. The few that fit into this category – the likes of Mitsubishi Real Estate and Boston Properties -- are some of the most valuable companies in global property.

In terms of asset quality, asset structure, recurrent income base, and track record, we think Swire Properties is not inferior to the premier global name. But it has not escaped from the traditional “Hong Kong discount”, and hence it trades at a large discount to book value and NAV compared with the premier names in global property, according to our research.

All things considered, we think Swire Properties’ asset quality, special business model and earnings structure give it an opportunity to become the next major Hong Kong property stock after the Link REIT that can command valuations comparable to those of global peers. In this context, we view Swire Properties as a play on the potential narrowing of the typical valuation anomaly (ie, high discounts to NAV) faced by Hong Kong property stocks.

Global property stocks ranked by market capitalization (USDbn) 70 60 50 40 30 20 10 0 COLI Wharf Ventas HCP Inc Vornado ProLogis CR Land CR Brookfield Health Care Health China VankeChina Swire Pacific Swire Cheung Kong Cheung Public Storage Public Weyerhaeuser Mitsui Fudosan Simon Property Simon Properties SHK Land Securities Land Anerican Tower Anerican Hongkong Land Hongkong General Growth… General Westfield Group Westfield Swire Properties Swire Henderson Land Mitsubishi Estate Sumitomo Realty Unibail-Rodamco Emaar Properties Emaar Boston Properties Boston Equity Residential Equity Host Hotel & Resorts & Hotel Host Hang Lung Properties Avalonbay Communities Avalonbay Source: Bloomberg, Daiwa Note: as of 9 April 2015

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Hong Kong: major developers’ PBRs (x) Weighted-average PBR of four developers

3.0 Current PBR: 0.81x 2.5 +2 SD: 2.02x 2.0 +1 SD: 1.63x 1.5 Average: 1.24x 1.0 -1 SD: 0.85x 0.5 -2 SD: 0.46x 0.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Companies, Datastream, Daiwa

Hong Kong: major investors’ PBRs PBR (x) Weighted average PBR of six major investors 1.6 1.4 Current PBR: 0.61x 1.2 +1SD: 0.98x 1.0 0.8 0.6 -1SD: 0.63x 0.4 Average since 1990: 0.79x 0.2 0.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Companies, Datastream, Daiwa

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Appendix

Daci Temple project, Chengdu/ Sino-Ocean Taikoo Li Chengdu

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Taikoo Li Chengdu: Positioning

Source: Daiwa

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Taikoo Li Chengdu: Positioning (Cont’d)

Source: Daiwa

Taikoo Li Chengdu, Chegndu IFS and the Chuanxi Road retail hub

Source: Daiwa

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Taikoo Li Chengdu, Chegndu IFS and the Chuanxi Road retail hub (Cont’d)

Source: Daiwa

Taikoo Li Chengdu; Structure

Source: Daiwa

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Taikoo Li Chengdu; Structure (cont’d)

Source: Daiwa

Taikoo Li Chengdu; target shoppers

Source: Daiwa

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Taikoo Li Chengdu; target shoppers (Cont’d)

Source: Daiwa

Taikoo Li Chengdu; The luxury brands

Source: Daiwa

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Taikoo Li Chengdu; The luxury brands (Cont’d)

Source: Daiwa

Taikoo Li Chengdu: mass market tenants

Source: Daiwa

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Taikoo Li Chengdu: mass market tenants (Cont’d)

Source: Daiwa

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Taikoo Li Chengdu; F&B tenants

Source: Daiwa

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Taikoo Li Chengdu; F&B tenants (Cont’d)

Source: Daiwa

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Financials / Hong Kong 1972 HK Financials / Hong Kong 10 April 2015

Swire Properties

Swire Properties Target (HKD): 33.00  33.00 Upside: 33.1% 1972 HK 9 Apr price (HKD): 24.80

Promising progress 1 Buy (unchanged) • Rental prospects for its Pacific Place and Island East portfolio are 2 Outperform reassuring, with sustained positive rental growth 3 Hold • China assets are finally showing their promise and look on track to 4 Underperform make a larger earnings contribution in 2015 and beyond 5 Sell • Reaffirm our Buy (1) call, with our 12-month target price of HKD33.0 implying 33% potential upside

redeveloping its 3 techno-centres believe the market has yet to into 2 prime grade-A office recognise the value of Swire buildings. We believe a continuous Properties’ distinct approach to its upgrading of Island East as a property business.

commercial hub bodes well for Swire Forecast revisions (%) Jonas Kan, CFA Properties’ rental income and NAV. Year to 31 Dec 15E 16E 17E (852) 2848 4439 Revenue change --- [email protected] Promising progress in China. In Net profit change --- Core EPS (FD) change - - - 2014, the company saw across-the- board sustained tenant sales growth Source: Daiwa forecasts ■ What's new for all of its China malls. Of note, the Following our initiation report on Daci Temple project in Chengdu Share price performance Swire Properties (A large ‘nurturing appears to have made a good start (HKD) (%) reward’ awaits, 22 May 2014), we 28 115 (in terms of attracting shoppers), have analysed the company’s 26 109 and we see Swire Properties as ready progress in nurturing 2 key locations 25 103 to enter a harvesting period in China 23 96 in Hong Kong, as well as China and over the coming years. 22 90 Miami. In our view, the company’s Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 plans for a multi-year Miami: jewel in the making? Swire Prop (LHS) Relative to HSI (RHS) transformation of these key The company’s Brickell City Centre locations position it to realise project (Miami) is well located and is 12-month range 22.45-27.10 sustained growth in recurrent rental well positioned to ride on the growth Market cap (USDbn) 18.72 income and NAV. of Miami as a financial centre for 3m avg daily turnover (USDm) 8.27 Shares outstanding (m) 5,850 Latin America, in our view. ■ What's the impact Major shareholder Swire Pacific (82.0%) Solid Hong Kong business. ■ What we recommend Rents in the flagship Pacific Place Financial summary (HKD) We reaffirm our Buy (1) call and 12- are holding up and positive rental Year to 31 Dec 15E 16E 17E month target price of HKD33.0, reversion continues for its offices in Revenue (m) 15,791 17,573 19,352 based on a 30% discount applied to Operating profit (m) 9,767 10,695 11,429 Island East. The Cityplaza mall is our end-2015 NAV estimate of Net profit (m) 7,700 8,450 9,180 starting to make a bigger HKD47.10. The main risk to our call Core EPS (fully-diluted) 1.316 1.445 1.569 contribution to its rental income, EPS change (%) 7.7 9.7 8.6 would be a deterioration in the and the group has new rental Daiwa vs Cons. EPS (%) 5.8 12.5 18.2 economic outlooks for Hong Kong properties scheduled to enter the PER (x) 18.8 17.2 15.8 and China. Dividend yield (%) 2.8 3.0 3.5 market over the coming years. DPS 0.700 0.750 0.880 ■ How we differ PBR (x) 0.7 0.7 0.7 New face for Island East by EV/EBITDA (x) 16.1 14.7 13.8 Our 2015-16E EPS are 6-13% above ROE (%) 3.7 4.0 4.2 2017. The group is currently the Bloomberg consensus, as we Source: FactSet, Daiwa forecasts

See important disclosures, including any required research certifications, beginning on page 62 Financials / Hong Kong 1972 HK 10 April 2015

Financial summary

 Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Completed investment properties in 14.1 12.9 13.2 13.4 13.6 13.6 13.6 13.6 HK (m sq ft) Blended average rent in Pacific Place 63.2 64.9 66.0 65.9 71.0 76.7 82.1 87.5 portfolio (on GFA) (HKD/sq ft) Blended average rent in Taikoo Place 27.4 30.2 34.0 35.3 36.9 38.8 39.6 41.0 portfolio (on GFA) (HKD/sq ft) Completed investment properties in 1.6 1.6 4.7 6.0 6.0 7.0 7.1 8.9 China (m sq ft) Pay-out ratio (%) 0.0 80.3 50.6 55.2 54.0 53.2 51.9 56.1

 Profit and loss (HKDm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Gross rental income 7,875 8,557 9,015 9,677 10,456 11,338 12,147 12,797 Property trading 400 213 4,147 2,207 3,842 3,200 4,061 5,073 Other Revenue 596 811 890 1,052 1,089 1,253 1,365 1,482 Total Revenue 8,871 9,581 14,052 12,936 15,387 15,791 17,573 19,352 Other income 00000000 COGS (2,261) (2,334) (3,770) (3,531) (5,176) (4,704) (5,504) (6,492) SG&A (911) (1,029) (873) (974) (1,010) (1,050) (1,092) (1,136) Other op.expenses (224) (222) (222) (244) (257) (270) (282) (295) Operating profit 5,475 5,996 9,187 8,187 8,944 9,767 10,695 11,429 Net-interest inc./(exp.) (1,237) (1,477) (1,367) (1,447) (1,227) (1,340) (1,378) (1,433) Assoc/forex/extraord./others 584 890 453 500 505 873 738 923 Pre-tax profit 4,822 5,409 8,273 7,240 8,222 9,299 10,055 10,920 Tax (940) (770) (1,199) (769) (892) (1,408) (1,401) (1,522) Min. int./pref. div./others (49) (267) (142) (111) (178) (190) (204) (218) Net profit (reported) 3,833 4,372 6,932 6,360 7,152 7,700 8,450 9,180 Net profit (adjusted) 3,833 4,372 6,932 6,360 7,152 7,700 8,450 9,180 EPS (reported)(HKD) n.a. 0.747 1.185 1.087 1.223 1.316 1.445 1.569 EPS (adjusted)(HKD) n.a. 0.747 1.185 1.087 1.223 1.316 1.445 1.569 EPS (adjusted fully-diluted)(HKD) n.a. 0.747 1.185 1.087 1.223 1.316 1.445 1.569 DPS (HKD) 0.000 0.600 0.600 0.600 0.660 0.700 0.750 0.880 EBIT 5,475 5,996 9,187 8,187 8,944 9,767 10,695 11,429 EBITDA 5,699 6,218 9,409 8,431 9,201 10,036 10,977 11,725

 Cash flow (HKDm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Profit before tax 4,822 5,409 8,273 7,240 8,222 9,299 10,055 10,920 Depreciation and amortisation 224 222 222 244 257 270 282 295 Tax paid (420) (485) (875) (615) (842) (983) (1,049) (1,232) Change in working capital 285 415 153 167 606 645 650 672 Other operational CF items 671 139 (1,928) 808 1,264 528 450 284 Cash flow from operations 5,582 5,700 5,845 7,844 9,507 9,759 10,388 10,939 Capex (3,910) (5,265) (3,004) (7,398) (7,890) (6,020) (6,360) (7,060) Net (acquisitions)/disposals 0 18,305 0 0 0 0 0 0 Other investing CF items (425) (1,322) (1,367) (145) (165) (185) (194) (214) Cash flow from investing (4,335) 11,718 (4,371) (7,543) (8,055) (6,205) (6,554) (7,274) Change in debt 0 0 0 0 0 0 0 0 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid 0 (12,439) (2,340) (3,393) (3,510) (3,744) (4,154) (4,505) Other financing CF items 750 4,157 (355) 0 0 0 0 0 Cash flow from financing 750 (8,282) (2,695) (3,393) (3,510) (3,744) (4,154) (4,505) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 1,997 9,136 (1,221) (3,092) (2,058) (190) (320) (840) Free cash flow 1,672 435 2,841 446 1,617 3,739 4,028 3,879 Source: FactSet, Daiwa forecasts

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Financial summary continued …

 Balance sheet (HKDm) As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Cash & short-term investment 1,042 1,180 1,940 2,521 2,874 2,685 2,365 2,320 Inventory 00000000 Accounts receivable 1,168 1,945 2,930 2,522 2,821 2,915 3,261 3,613 Other current assets 5,719 7,059 7,068 8,149 8,064 8,360 8,420 8,580 Total current assets 7,929 10,184 11,938 13,192 13,759 13,960 14,046 14,513 Fixed assets 6,333 6,615 6,837 7,225 7,703 7,768 8,155 8,543 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 191,450 201,435 218,285 231,540 238,893 242,345 247,081 252,200 Total assets 205,712 218,234 237,060 251,957 260,355 264,073 269,283 275,256 Short-term debt 9,322 8,630 4,664 7,609 4,201 4,201 4,201 4,201 Accounts payable 5,199 8,088 7,155 8,007 7,674 8,329 9,319 10,324 Other current liabilities 379 445 710 211 519 260 265 280 Total current liabilities 14,900 17,163 12,529 15,827 12,394 12,790 13,785 14,805 Long-term debt 28,556 20,250 26,197 26,946 32,744 32,744 32,744 33,539 Other non-current liabilities 3,900 4,246 5,078 6,054 6,670 6,350 6,480 6,590 Total liabilities 47,356 41,659 43,804 48,827 51,808 51,884 53,009 54,934 Share capital 5,690 5,850 5,850 5,850 10,449 10,449 10,449 10,449 Reserves/R.E./others 152,187 170,193 186,764 196,500 197,242 200,847 204,910 208,942 Shareholders' equity 157,877 176,043 192,614 202,350 207,691 211,296 215,359 219,391 Minority interests 479 532 642 800 856 893 915 930 Total equity & liabilities 205,712 218,234 237,060 251,977 260,355 264,073 269,283 275,256 EV 170,750 159,673 159,044 161,014 161,265 161,178 160,942 161,579 Net debt/(cash) 36,836 27,700 28,921 32,034 34,071 34,260 34,580 35,420 BVPS (HKD) n.a. 30.093 32.925 34.590 35.503 36.119 36.814 37.503

 Key ratios (%) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales (YoY) 8.3 8.0 46.7 (7.9) 18.9 2.6 11.3 10.1 EBITDA (YoY) 5.4 9.1 51.3 (10.4) 9.1 9.1 9.4 6.8 Operating profit (YoY) 5.4 9.5 53.2 (10.9) 9.2 9.2 9.5 6.9 Net profit (YoY) 2.9 14.1 58.6 (8.3) 12.5 7.7 9.7 8.6 Core EPS (fully-diluted) (YoY) n.a. n.a. 58.6 (8.3) 12.5 7.7 9.7 8.6 Gross-profit margin 74.5 75.6 73.2 72.7 66.4 70.2 68.7 66.5 EBITDA margin 64.2 64.9 67.0 65.2 59.8 63.6 62.5 60.6 Operating-profit margin 61.7 62.6 65.4 63.3 58.1 61.9 60.9 59.1 Net profit margin 43.2 45.6 49.3 49.2 46.5 48.8 48.1 47.4 ROAE 2.8 2.6 3.8 3.2 3.5 3.7 4.0 4.2 ROAA 2.0 2.1 3.0 2.6 2.8 2.9 3.2 3.4 ROCE 3.2 3.0 4.3 3.5 3.7 3.9 4.3 4.5 ROIC 2.6 2.6 3.7 3.2 3.3 3.4 3.7 3.9 Net debt to equity 23.3 15.7 15.0 15.8 16.4 16.2 16.1 16.1 Effective tax rate 19.5 14.2 14.5 10.6 10.8 15.1 13.9 13.9 Accounts receivable (days) 49.4 59.3 63.3 76.9 63.4 66.3 64.1 64.8 Current ratio (x) 0.5 0.6 1.0 0.8 1.1 1.1 1.0 1.0 Net interest cover (x) 4.4 4.1 6.7 5.7 7.3 7.3 7.8 8.0 Net dividend payout n.a. 80.3 50.6 55.2 54.0 53.2 51.9 56.1 Free cash flow yield 1.2 0.3 2.0 0.3 1.1 2.6 2.8 2.7 Source: FactSet, Daiwa forecasts

 Company profile Swire Properties is the property arm of Swire Pacific, one of the largest and oldest conglomerates in Hong Kong. The company is a leading developer, owner, and operator of mixed-use developments, principally commercial properties in Hong Kong, Mainland China, and the US. At the end of 2013, it owned some 20.2m sq ft attributable GFA of completed commercial properties and had a significant presence in 2 locations in Hong Kong: Admiralty (where it has built the Pacific Place) and Island East (Taikoo Place). Swire Properties was listed on the Hong Kong stock market in January 2012.

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Daiwa’s Asia Pacific Research Directory

HONG KONG SOUTH KOREA Hiroaki KATO (852) 2532 4121 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Kosuke MIZUNO (852) 2848 4949 / [email protected] Shipbuilding; Steel (852) 2773 8273 Mike OH (82) 2 787 9179 [email protected] Regional Research Co-head Banking; Capital Goods (Construction and Machinery) John HETHERINGTON (852) 2773 8787 [email protected] Iris PARK (82) 2 787 9165 [email protected] Regional Deputy Head of Asia Pacific Research Consumer/Retail Rohan DALZIELL (852) 2848 4938 [email protected] Jun Yong BANG (82) 2 787 9168 [email protected] Regional Head of Product Management Oil; Chemicals; Tyres Kevin LAI (852) 2848 4926 [email protected] Thomas Y KWON (82) 2 787 9181 [email protected] Chief Economist for Asia ex-Japan; Macro Economics (Regional) Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game Christie CHIEN (852) 2848 4482 [email protected] Macro Economics (Regional) TAIWAN Junjie TANG (852) 2773 8736 [email protected] Rick HSU (886) 2 8758 6261 [email protected] Macro Economics (China) Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Jonas KAN (852) 2848 4439 [email protected] (Regional) Head of Hong Kong and China Property Steven TSENG (886) 2 8758 6252 [email protected] Leon QI (852) 2532 4381 [email protected] IT/Technology Hardware (PC Hardware) Banking (Hong Kong, China); Broker (China); Insurance (China) Christine WANG (886) 2 8758 6249 [email protected] Anson CHAN (852) 2532 4350 [email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer Consumer (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] Jamie SOO (852) 2773 8529 [email protected] IT/Technology Hardware (Handsets and Components) Gaming and Leisure (Hong Kong/China) Helen CHIEN (886) 2 8758 6254 [email protected] Dennis IP (852) 2848 4068 [email protected] Small/Mid Cap Power; Utilities; Renewables and Environment (Hong Kong/China) John CHOI (852) 2773 8730 [email protected] INDIA Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Becky HAN (852) 2848 4464 [email protected] Head of India Research; Strategy; Banking/Finance Small/Mid Cap (Regional) Saurabh MEHTA (91) 22 6622 1009 [email protected] Joey CHEN (852) 2848 4483 [email protected] Capital Goods; Utilities Steel (China) Kelvin LAU (852) 2848 4467 [email protected] SINGAPORE Head of Transportation (Hong Kong/China); Transportation (Regional) Ramakrishna MARUVADA (65) 6499 6543 [email protected] Brian LAM (852) 2532 4341 [email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India) Transportation – Aviation (Hong Kong/China); Railway; Construction and Engineering Royston TAN (65) 6321 3086 [email protected] (China) Oil and Gas; Capital Goods Jibo MA (852) 2848 4489 [email protected] David LUM (65) 6329 2102 [email protected] Head of Custom Products Group Property and REITs Thomas HO (852) 2773 8716 [email protected] Evon TAN (65) 6499 6546 [email protected] Custom Products Group Property and REITs

Jame OSMAN (65) 6321 3092 [email protected] PHILIPPINES Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer Bianca SOLEMA (63) 2 737 3023 [email protected] (Singapore)

Utilities and Energy

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Disclaimer

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Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures.

Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co. Ltd (1107 HK); econtext Asia Ltd (1390 HK); Rexlot Holdings Ltd (555 HK); Neo Solar Power Corp (3576_TT); Accordia Golf Trust (AGT SP); Hua Hong Semiconductor Ltd (1347 HK). *Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.

Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. DHK market making DHK may from time to time make a market in securities covered by this research.

Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.

Australia This research is distributed in Australia by Daiwa Capital Markets Stockbroking Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

India This research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to, or use by any person, citizen or entity which is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analyst’s personal views about the securities and issuers that are subject of the Report, and that no part of the analyst’s compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non – US affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited.

Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.

Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE Link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.

Thailand This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”). This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. While the information is from sources believed to be reliable, neither the information nor the forecasts shall be taken as a representation or warranty for which Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees incur any responsibility. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any

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direct or consequential loss arising from any use of this research or its contents. The information and opinions contained herein have been compiled or arrived at from sources believed reliable. However, Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user. Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.

United Kingdom This research report is produced by Daiwa Capital Markets Europe Limited and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and/or its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and/or its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory . Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

Bahrain This research material is distributed by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113 This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent.

United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000).

Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.

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• For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements. • There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. • There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association