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Sensitivity Analysis on UK/Europe and Sector Exposure

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Sensitivity Analysis on UK/Europe and Sector Exposure June 14, 2016 COMPANY UPDATE CK Hutchison Holdings (0001.HK) Buy Equity Research Sensitivity analysis on UK/Europe and sector exposure What's changed Investment Profile In view of the macro uncertainties, we conduct a sensitivity analysis to Low High assess CKH’s UK and European exposure. The impact could be two-fold: Growth Growth Returns * Returns * (1) lower translated earnings and NAV with weaker GBP and Euro. Multiple Multiple Although we do not take a view on the outcome, our economists estimate Volatility Volatility GBP/Euro could devalue by 10%/4% vs. USD in the event of Brexit; (2) Percentile 20th 40th 60th 80th 100th earnings impact from weaker economies and trade activities. Should CK Hutchison Holdings (0001.HK) uncertainties persist, it may affect the group’s future expansion strategies Asia Pacific Conglomerates Peer Group Average * Returns = Return on Capital For a complete description of the investment and how it would deploy strong annual FCF in excess of HK$20bn. profile measures please refer to the disclosure section of this document. Implications Key data Current Price (HK$) 89.05 Since 2009, CKH has spent HK$53bn to acquire assets in Europe. Together 12 month price target (HK$) 122.00 with improved operating efficiency, especially in telco and retail, EBIT Market cap (HK$ mn / US$ mn) 343,704.4 / 44,276.4 Foreign ownership (%) -- exposure in Europe would increase from 29% in 2011 to 55% in FY17E, including 36% in UK. Every 10% movement in GBP/Euro would translate to 12/15 12/16E 12/17E 12/18E EPS (HK$) New 8.08 8.48 9.68 10.40 4%/2% change in group earnings. As for the potential impact of a macro EPS revision (%) 0.0 1.1 (1.1) 0.6 downturn, if we strip out 24% contribution from defensive regulated utility EPS growth (%) (48.7) 5.0 14.1 7.4 EPS (dil) (HK$) New 8.08 8.48 9.68 10.40 assets, we estimate European telco, retail and ports account for 20%, 9% P/E (X) 12.4 10.5 9.2 8.6 P/B (X) 0.9 0.8 0.7 0.7 and 3% of group 2017E EBIT, with 9%, 3% and 1% from UK. Experience EV/EBITDA (X) 13.2 11.4 10.6 9.9 during the GFC in 2008-2009 indicates telco and retail were resilient, while Dividend yield (%) 2.5 3.1 3.5 3.8 ROE (%) 7.0 7.4 8.1 8.2 softer demand could affect port volume not only for UK, but also for its CROCI (%) 7.6 9.9 10.2 10.2 trading partners (e.g., Europe, PRC). Price performance chart Valuation 120 32,000 115 30,000 After removing value accretion originally assigned for the O2 UK deal, 110 28,000 updating macro assumptions and rolling our valuation base year over to 105 26,000 2017, we fine-tune FY16E-FY18E EPS for CKH but maintain our 12-m NAV- 100 24,000 based TP at HK$122.0. Trading at 38% NAV discount and 9.3X 2017E P/E, 95 22,000 the stock appears to have discounted a degree of macro slowdown in 90 20,000 85 18,000 Europe/UK. Our base case has not incorporated any value from the Jun-15 Sep-15 Dec-15 Mar-16 proposed Wind merger pending regulatory approval by mid-August. CK Hutchison Holdings (L) Hang Seng Index (R) Key risks Severe macro downturn and political uncertainties, currency movements. Share price performance (%) 3 month 6 month 12 month Absolute (10.1) (12.3) (21.3) INVESTMENT LIST MEMBERSHIP Rel. to Hang Seng Index (9.9) (8.3) 5.3 Asia Pacific Buy List Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 6/14/2016 close. Asia Pacific Conviction Buy List Coverage View: Neutral Simon Cheung, CFA +852-2978-6102 [email protected] Goldman Sachs (Asia) L.L.C. Goldman Sachs does and seeks to do business with companies Alex Ye covered in its research reports. As a result, investors should be +852-2978-6666 [email protected] Goldman Sachs (Asia) L.L.C. aware that the firm may have a conflict of interest that could Michelle Han affect the objectivity of this report. Investors should consider +65-6654-5264 [email protected] Goldman Sachs (Singapore) Pte this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research June 14, 2016 CK Hutchison Holdings (0001.HK) CK Hutchison Holdings: Summary Financials Profit model (HK$ mn) 12/15 12/16E 12/17E 12/18E Balance sheet (HK$ mn) 12/15 12/16E 12/17E 12/18E Total revenue 277,317.0 281,059.3 294,281.3 307,656.5 Cash & equivalents 121,171.0 90,419.7 51,903.1 66,249.1 Cost of goods sold (107,152.2) (108,598.2) (113,707.0) (118,875.0) Accounts receivable 52,042.0 51,080.8 50,005.8 49,566.9 SG&A (44,349.7) (44,948.2) (47,062.7) (49,201.7) Inventory 19,761.0 19,070.1 18,573.6 18,801.2 R&D -- -- -- -- Other current assets 0.0 0.0 0.0 0.0 Other operating profit/(expense) (73,681.3) (71,271.1) (73,654.4) (77,258.5) Total current assets 192,974.0 160,570.6 120,482.5 134,617.2 EBITDA 52,133.8 56,241.9 59,857.2 62,321.2 Net PP&E 187,404.0 202,709.4 215,972.5 228,069.8 Depreciation & amortization (14,381.7) (15,013.8) (16,049.9) (16,951.1) Net intangibles 32,608.0 32,608.0 32,608.0 32,608.0 EBIT 37,752.1 41,228.0 43,807.2 45,370.1 Total investments 251,052.0 255,335.0 260,059.5 265,061.2 Interest income -- -- -- -- Other long-term assets 368,906.0 368,906.0 368,906.0 368,906.0 Interest expense (6,842.6) (6,733.3) (6,274.0) (6,190.5) Total assets 1,032,944.0 1,020,129.0 998,028.5 1,029,262.1 Income/(loss) from uncons. subs. 18,588.5 17,896.6 21,281.5 23,830.8 Others 0.0 0.0 0.0 0.0 Accounts payable 0.0 0.0 0.0 0.0 Pretax profits 49,498.0 52,391.3 58,814.7 63,010.4 Short-term debt 33,016.0 62,798.0 12,144.0 29,569.0 Income tax (7,197.0) (8,386.8) (9,729.7) (10,491.1) Other current liabilities 97,287.0 97,788.7 98,877.8 100,717.1 Minorities (10,040.0) (10,631.3) (11,264.6) (12,052.7) Total current liabilities 130,303.0 160,586.7 111,021.8 130,286.1 Long-term debt 270,536.0 201,615.0 199,348.0 179,656.0 Net income pre-preferred dividends 32,261.0 33,373.2 37,820.4 40,466.6 Other long-term liabilities 82,994.0 82,994.0 82,994.0 82,994.0 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 353,530.0 284,609.0 282,342.0 262,650.0 Net income (pre-exceptionals) 32,261.0 33,373.2 37,820.4 40,466.6 Total liabilities 483,833.0 445,195.7 393,363.8 392,936.1 Post-tax exceptionals (1,093.0) (635.2) (460.0) (325.9) Net income 31,168.0 32,738.0 37,360.4 40,140.7 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 428,588.0 450,499.6 475,951.0 502,991.7 EPS (basic, pre-except) (HK$) 8.36 8.65 9.80 10.48 Minority interest 120,523.0 124,433.7 128,713.8 133,334.3 EPS (basic, post-except) (HK$) 8.08 8.48 9.68 10.40 EPS (diluted, post-except) (HK$) 8.08 8.48 9.68 10.40 Total liabilities & equity 1,032,944.0 1,020,129.0 998,028.5 1,029,262.1 DPS (HK$) 2.552.813.093.39 Dividend payout ratio (%) 31.6 33.1 31.9 32.6 BVPS (HK$) 111.04 116.72 123.31 130.32 Free cash flow yield (%) 3.5 4.5 6.1 6.7 Growth & margins (%) 12/15 12/16E 12/17E 12/18E Ratios 12/15 12/16E 12/17E 12/18E Sales growth 1.9 1.3 4.7 4.5 CROCI (%) 7.6 9.9 10.2 10.2 EBITDA growth 0.5 7.9 6.4 4.1 ROE (%) 7.0 7.4 8.1 8.2 EBIT growth 8.3 9.2 6.3 3.6 ROA (%) 3.3 3.2 3.7 4.0 Net income growth (53.6) 5.0 14.1 7.4 ROACE (%) 7.0 6.7 7.2 7.5 EPS growth (48.7) 5.0 14.1 7.4 Inventory days 66.5 65.3 60.4 57.4 Gross margin 61.4 61.4 61.4 61.4 Receivables days 78.1 67.0 62.7 59.1 EBITDA margin 18.8 20.0 20.3 20.3 Payable days -- -- -- -- EBIT margin 13.6 14.7 14.9 14.7 Net debt/equity (%) 42.6 38.6 33.5 28.4 Interest cover - EBIT (X) 5.5 6.1 7.0 7.3 Cash flow statement (HK$ mn) 12/15 12/16E 12/17E 12/18E Valuation 12/15 12/16E 12/17E 12/18E Net income pre-preferred dividends 32,261.0 33,373.2 37,820.4 40,466.6 D&A add-back 14,381.7 15,013.8 16,049.9 16,951.1 P/E (analyst) (X) 12.4 10.5 9.2 8.6 Minorities interests add-back 10,040.0 10,631.3 11,264.6 12,052.7 P/B (X) 0.9 0.8 0.7 0.7 Net (inc)/dec working capital 2,832.0 2,153.8 2,660.5 2,050.7 EV/EBITDA (X) 13.2 11.4 10.6 9.9 Other operating cash flow (19,034.7) (8,941.8) (9,625.8) (10,389.8) EV/GCI (X) 1.1 1.0 0.9 0.9 Cash flow from operations 40,480.0 52,230.4 58,169.7 61,131.2 Dividend yield (%) 2.5 3.1 3.5 3.8 Capital expenditures (22,494.0) (30,954.5) (29,334.0) (28,935.3) Acquisitions 85,390.0 (2,061.8) (2,522.2) (2,483.1) Divestitures 9,672.0 0.0 0.0 0.0 Others 76,403.0 0.0 0.0 0.0 Cash flow from investments 148,971.0 (33,016.3) (31,856.2) (31,418.3) Dividends paid (common & pref) (9,687.0) (10,826.4) (11,909.0) (13,099.9) Inc/(dec) in debt (37,963.0) (39,139.0) (52,921.0) (2,267.0) Common stock issuance (repurchase) (14,313.0) 0.0 0.0 0.0 Other financing cash flows (131,635.0) 0.0 0.0 0.0 Cash flow from financing (193,598.0) (49,965.4) (64,830.0) (15,366.9) Total cash flow (4,147.0) (30,751.3) (38,516.6) 14,346.0 Note: Last actual year may include reported and estimated data.
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