Company report Industrials Air Freight & Logistics abc

Equity – Hong Kong Global Research

Kerry Logistics Network (636 HK)

Underweight (V) Initiate at UW(V): The world’s local logistics provider Target price (HKD) 11.75  Growth driven by mainland China, profitability driven by Share price (HKD) 12.98 Forecast dividend yield (%) 0.9 Hong Kong Potential return (%) -8.6  Yet the reality is that contract logistics is a low margin Note: Potential return equals the percentage difference between the current share price and business and growth is likely to be hotly contested the target price, plus the forecast dividend yield Dec 2012 a 2013 e 2014 e  Initiate with an Underweight (V) rating and multiple-based HSBC EPS 0.00 0.53 0.57 HSBC PE 24.3 22.9 HKD11.75 target price Performance 1M 3M 12M Absolute (%) 27.0 Relative^ (%) 34.3 KLN is a solid company with a good track record and strong positioning in Hong Kong Note: (V) = volatile (please see disclosure appendix) where it is the No 1 third-party logistics (3PL) provider. It is well positioned to capitalize on growth in the Chinese domestic market, and the business it conducts there, it is arguably conducting well. But we believe there is a disconnect between KLN’s valuation, market expectations and the realities of operating an asset heavy, contract logistics-led 28 January 2014 freight forwarding model. Julia Winarso* Analyst Contract logistics is a low margin, competitive business: KLN’s profitability is largely HSBC Bank plc driven by Hong Kong logistics and its warehousing business, where it acts as landlord. +44 20 7991 2168 [email protected] These account for, we calculate, c58% of its net profit. This is a structurally mature, low growth market, but defensible. Mainland China logistics accounts for just 21% of KLN’s Mark Webb* Head of Conglomerate and Transport profit, equating to a 4% margin. This is an industry standard margin – so KLN is faring no Research, Asia Pacific better nor worse than peers. Mainland China is an attractive market for growth; The Hongkong and Shanghai Banking Corporation Limited underpenetrated, with massive inefficiencies to be capitalized on by 3PLs. But it is +852 2996 6574 competitive and fragmented, and scale does not necessarily confer an advantage when [email protected] tendering for contracts. There is definite potential in China, but translating growth into Satheesh Kailasam* profitability may not be simple. KLN’s asset heavy model means it will need to invest to Associate fulfil growth ambitions, while the rationale for property ownership in mainland China Bangalore where space is not scarce, is less obvious. View HSBC Global Research at: http://www.research.hsbc.com Initiate at UW(V) and target price of HKD11.75: Since listing on 18 December 2013, *Employed by a non-US affiliate of KLN shares have risen 27.3%. It trades ahead of its peer group at 22.9x 2014e PE vs. the HSBC Securities (USA) Inc, and is not sector average of 20.5x. We forecast 8.1% earnings growth for 2014-15e for KLN. To put registered/qualified pursuant to FINRA regulations into context, this compares to CH Robinson and KNIN, two much higher return Issuer of report: HSBC Bank plc companies, on 19.8x and 23.6x 2014e earnings with forecast CAGRs of 9.6% and 6.9% Disclaimer & over 2014-15 respectively. Our peer multiple-based valuation gives us a target of HKD11.75 per share (20.7x 2014e earnings). Disclosures This report must be read with the disclosures and the analyst certifications in Index^ HANG SENG INDEX Free float (%) 42 the Disclosure appendix, Index level 21,976 Market cap (USDm) 2,825 and with the Disclaimer, RIC 0636.HK Market cap (HKDm) 21,935 Bloomberg 636 HK which forms part of it Source: HSBC Source: HSBC Kerry Logistics Network (636 HK) Air Freight & Logistics abc 28 January 2014

Financials & valuation

Financial statements Valuation data Year to 12/2012a 12/2013e 12/2014e 12/2015e Year to 12/2012a 12/2013e 12/2014e 12/2015e Profit & loss summary (HKDm) EV/sales n/a 1.0 1.1 1.0 EV/EBITDA n/a 10.6 11.7 10.8 Revenue 19,295 20,659 22,165 23,596 EV/IC n/a 1.2 1.4 1.3 EBITDA 1,657 1,879 2,046 2,195 PE* n/a 19.5 22.9 21.2 Depreciation & amortisation -367 -438 -460 -486 P/Book value n/a 1.4 1.6 1.5 Operating profit/EBIT 1,555 1,941 1,586 1,709 FCF yield (%) n/a 0.3% 2.9% 3.4% Net interest -38 -55 -52 -42 Dividend yield (%) n/a 1.0% 0.9% 0.9% PBT 1,657 2,031 1,664 1,803 HSBC PBT 1,392 1,531 1,664 1,803 Note: * = Based on HSBC EPS (fully diluted) Taxation -305 -337 -369 -404 Net profit 1,069 1,384 958 1,035 HSBC net profit 804 884 958 1,035 Price relative 16 16 Cash flow summary (HKDm) 15 15 Cash flow from operations 871 1,209 1,425 1,562 Capex -1,468 -1,182 -813 -843 14 14 Cash flow from investment -1,693 -1,602 -813 -843 13 13 Dividends 0 -177 -177 -192 Change in net debt 835 708 -790 -562 12 12

11 11 Balance sheet summary (HKDm) 10 10 Intangible fixed assets 1,774 1,774 1,774 1,774 Jan-14 Kerry Logistics Network Rel to HANG SENG INDEX Tangible fixed assets 6,599 6,908 7,261 7,618 Current assets 7,389 7,960 8,529 8,857 Source: HSBC Cash & others 2,940 3,167 3,457 3,518 Total assets 22,468 23,948 25,000 25,821 Operating liabilities 8,887 4,801 4,913 5,026 Note: price at close of 27 Jan 2014 Gross debt 1,965 2,900 2,400 1,900 Net debt -975 -267 -1,057 -1,618 Shareholders funds 8,358 12,679 13,783 14,627 Invested capital 3,934 8,674 9,195 9,705

Ratio, growth and per share analysis Year to 12/2012a 12/2013e 12/2014e 12/2015e Y-o-y % change Revenue 20.3 7.1 7.3 6.5 EBITDA 15.5 13.4 8.9 7.3 Operating profit 22.5 24.8 -18.3 7.8 PBT 20.5 22.6 -18.1 8.3 HSBC EPS 6.3 8.1 Ratios (%) Revenue/IC (x) 6.1 3.3 2.5 2.5 ROIC 33.3 19.1 13.8 14.0 ROE 10.2 8.4 7.2 7.3 ROA 6.7 7.6 5.6 5.7 EBITDA margin 8.6 9.1 9.2 9.3 Operating profit margin 8.1 9.4 7.2 7.2 EBITDA/net interest (x) 43.3 34.4 39.4 52.9 Net debt/equity -8.8 -1.7 -6.1 -8.8 Net debt/EBITDA (x) -0.6 -0.1 -0.5 -0.7 CF from operations/net debt Per share data (HKD) EPS reported (fully diluted) 0.00 0.83 0.57 0.61 HSBC EPS (fully diluted) 0.00 0.53 0.57 0.61 DPS 0.00 0.11 0.11 0.12 Book value 0.00 7.65 8.16 8.66

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Overview

 Growth driven by mainland China, profitability still driven by Hong Kong  But contract logistics is a low margin business and growth is likely to be hotly contested  Initiate with an UW(V) rating; target price at HKD11.75

“Asia Specialist, China Focus, Shareholding structure Other Public Kerry Group Global Network” shareholders shareholders Limited of KPL Kerry Logistics Network Limited (KLN) is ~56% ~44% headquartered in Hong Kong and is the largest Hong Kong-based international third-party logistics (3PL) provider. It also has extensive Kerry Directors and Properties operations across Greater China and other subsidiaries Limited (KPL) countries in Asia. It is principally engaged in integrated logistics and international freight ~33.4% ~23.8% ~42.5% ~0.3% forwarding. It currently has more than 400 service locations across 35 countries and territories in Kerry Logistics Asia, Australia, Europe and the Americas. KLN Network Limited (KLN) was listed on the HKSE on 18 December 2013 Source: KLN, Bloomberg, HSBC under the ticker 636 HK. It is 42.5% owned by Kerry Properties Ltd which itself is listed on the HKSE (683 HK) and 23.8% by Kerry Group Ltd. This gives KLN a 33.4% free float.

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It’s complicated HSBC estimate of recurring profit breakdown in 2012 TJ Log Other Revenue breakdown (2012) * 8% -1% CCT 12%

Logistics operations 39% HK 53% PRC Intl freight 21% forw arding 58% AAT HK 5% w arehouse Source: Company and HSBC estimates 3% *Revenue including intersegment revenues Source: KLN, HSBC KLN is a beneficiary of the increasing complexity

of supply chains and outsourcing trends. KLN EBIT breakdown (2012)* offers supply chain solutions to simplify and Intl freight streamline operations for its customers in order to forw arding 21% cut costs and to allow them to focus on their own core competences. It benefits from the mismatch in supply and demand, orders and production and Logistics operations sales and inventory that its customers seek to 51% minimise.

HK Investment view w arehouse 28% KLN is a solid company with a good track

record and strong positioning in Hong Kong *Segment revenues include intersegment revenues Source: KLN, HSBC where it is the No 1 3PL provider. It is well positioned to capitalize on growth in the Chinese Total revenue by geography (2012) * domestic market, and the business it conducts Others Europe 3% there, it is arguably conducting well. But we 16% believe that there is a disconnect between the valuation of the company, market expectations

South and PRC and the realities of operating an asset heavy, 45% South East contract logistics led freight forwarding model. Asia 13% Contract logistics is low margin, competitive business: KLN’s profitability is still largely driven Taiwan 10% Hong Kong by Hong Kong logistics and its warehousing 13% business, where it acts as landlord. These account *Integrated Logistics and International Freight Forwarding divisions combined for, we calculate, c58% of its net profit. This is a Source: KLN, HSBC structurally mature, low growth market, but defensible as there is no new warehousing space

coming onstream until 2016 and it is not a particularly attractive market for new entrants. We calculate its Hong Kong margins to be 19.4%,

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structurally inflated by the pure warehousing and light models. KLN owns approximately 55% of its landlord business. 39m square feet of logistics facilities under management with a significant proportion of this Mainland China logistics accounts for just 21% of (c26%) in Hong Kong KLN believes asset KLN’s profit, equating to a 4% margin. This is an ownership in Asia can be of strategic advantage in industry standard margin – so KLN is faring no securing customers where the quality and security better nor worse than peers. Mainland China is an of leased warehouses can be variable. It provides attractive market for growth; with a high the flexibility of making specific modifications and urbanisation rate, underpenetrated, with massive avoids exposure to significant rental escalation inefficiencies to be capitalized on by 3PLs. But it clauses in long duration leases which can be is competitive and fragmented, and scale does not difficult to write into customer contracts. necessarily confer an advantage when tendering KLN’s asset heavy approach has benefitted it in for contracts. There is definite potential in China, Hong Kong as space is at a premium property and but translating growth into profitability will not prices have risen, but the rationale for property necessarily be simple. KLN’s asset heavy model ownership mainland China is less obvious – which means it will need to invest to fulfil growth is where KLN is largely focusing its growth and ambitions, while the rationale for property investment ambitions. There is therefore a risk that ownership in mainland China where space is not growth could come at the expense of margins and scarce, is less obvious. returns.

Kerry is a well-recognized brand within Hong Sale and lease back potential: We remain Kong, China and to a lesser extent wider Asia. unconvinced by KLN’s asset heavy strategy as it Though the Asian market is immature, it is very expands outside of Hong Kong. But we do competitive. KLN may offer more sophisticated recognise that should KLN see significant growth solutions than local players and has a well- opportunities in the future we see the potential for recognised brand within Asia. With over 40 of the KLN to free up capital through sale and top 100 Interbrand ranked brands as its customers, leasebacks. we believe KLN is well positioned to grow with these multinationals and the local market. While the market offers high growth, we envisage that over time smaller players will too become more sophisticated and services more commoditised, as has occurred in the US and European markets, margins will come structurally under pressure. Market share in contract logistics does not have much bearing on profitability or ability to win new contracts, unless a player is dominant in a certain market, but rather local knowledge, customer relationships and the ability to get things done have a much greater bearing.

Given its heritage, KLN has a natural bias toward property ownership, more so than its global peers who have gravitated toward more asset

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Moving forward neither the revenue nor the EBIT of Kerry Siam Seaport, but on the basis that it comprises a Going forward, KLN plans to maintain and significant proportion of the Southeast Asian increase its leading market position in China and revenue our best estimate is that it could be Asia. It has significant expansion plans in contributing HKD100-200m in EBIT. mainland China, with an additional 12% of managed GFA under construction. We believe in Post these two adjustments we get normalized the near term this will remain its primary focus margins of 4.5-5%. The Asian logistics market is though it will also seek to build out further across still immature and despite being high growth, as Southeast Asia and to take advantage of the has occurred in Europe and the US, we would removal of tariffs by 2015 in the ASEAN region. expect margins to come down over time. Its freight forwarding arm, while well positioned Forecasts in Greater China, remains small versus competitors and KLN will seek to grow both We forecast core net profit growth of 8.3%, 8.4% organically and through acquisition to build out and 8.1% over 2013-15, respectively. This coverage and density of volumes in order to bring compares to a CAGR of 10.7% over 2010-12, greater scale economies and purchasing power. which has been heavily driven by acquisitions and These volumes may also tie into its integrated the full consolidation of Kerry TJ Logistics (Not logistics division. rated). We calculate underlying EBIT growth of 6% in 2012 excluding acquisitions and c5% in Margins 1H13. While we make no assumption for KLN has an overall EBIT margin of 7% (2013e), acquisitions, and our growth rate is higher than significantly higher than its forwarder-contract has been the organic trend, we note that KLN has logistics peers at an average of 3-4%. Our analysis added a significant amount of square footage suggests that this is largely as a result of a through 2013 and has 6% of its existing portfolio function of its relatively low ownership costs as it under construction – which will come onstream does not depreciate investment property but largely in 2014. We also assume KLN will lease instead revalues annually. The flip side of having new facilities. Our central assumptions are that high margins due to high asset intensity is lower the capex has been largely front-end-loaded into returns on invested capital. KLN’s 2014e ROIC is 2013 and that the growth from the opening of 7.1% versus KNIN on 22.5% and DSV on 13.8% these new facilities will materialize in 2014 and on our estimates. 2015. After this, we assume growth rates normalize to 5-6%. As a percentage of revenue, we calculate KLN’s ownership costs (depreciation and leases) were around 3.5% in 2012. Analysis of peers suggests more normalized ownership costs are 5.5-7% of revenue. Adjusting for this results in EBIT margin of 5-5.5%, though this is still at the higher end of the peer range. KLN also owns a 79.5% stake in Kerry Siam Seaport and as ports have structurally high margins (typically 30%+) this is likely to be inflating the overall margin. KLN discloses

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KLN financial summary  Competition could intensify, pressuring HKDm 2010 2011 2012 2013e 2014e 2015e margins or costs base inflation could be Revenue 10,880 16,034 19,295 20,659 22,165 23,596 higher than we forecast. Adj op profit* 805 1,139 1,290 1,441 1,586 1,709 Net profit 833 871 1,069 1,384 958 1,035  Working capital intensity could be higher Core net profit** 665 741 816 884 958 1,035 than we anticipate as KLN seeks to grow with Growth* Revenue 47.4% 20.3% 7.1% 7.3% 6.5% big customers. Adj EBIT 41.6% 13.2% 11.7% 10.1% 7.8% Core net profit** 11.4% 10.1% 8.3% 8.4% 8.1% Valuation

Margins* Initiate at UW(V); TP HKD11.75: Since listing EBITDA 9.3% 9.0% 8.6% 9.1% 9.2% 9.3% Adj EBIT 7.4% 7.1% 6.7% 7.0% 7.2% 7.2% KLN shares have risen 27.3%. It trades ahead of

Other* its peer group at 22.9x 2014e earnings vs. the ROIC 5.3% 6.8% 6.5% 6.7% 7.1% 7.4% sector average of 20.5x. We forecast 8.1% Asset turn 0.7x 0.8x 0.9x 0.9x 0.9x 0.9x Net 2.1x 1.5x 2.0x -0.1x -0.5x -0.7x earnings growth for 2014-15e for KLN. In debt/EBITDA Fixed charges 34.9x 20.6x 20.4x 17.1x 19.0x 22.5x context, this compares to CH Robinson and coverage KNIN, two much higher return companies on **Core net profit is not a standard measure under HFRSs. It represents the profit attributable to the company’s shareholder before the after-tax effect of change in fair value of investment 19.8x and 23.6x 2014e earnings with forecast * HSBC calculations CAGRs of 9.6% and 6.9% respectively. Our peer Source: KLN, 2013-15 are HSBC estimates multiple-based valuation gives us a target price of Risks to our forecasts HKD11.75 per share (20.7x 2014e earnings).

The company has not provided much disclosure in Under our research model, the Neutral rating band the way of forecasts. We have therefore had to make for volatile Hong Kong stocks equals the local significant assumptions in preparing our forecasts. hurdle rate of 8.5% plus or minus 10ppt. Our target price of HKD11.75 implies a potential  We have made assumptions as to the number negative return of 8.6%, including a forecast of new facilities constructed each year and the dividend yield of 0.9%. This is below the Neutral size and cost of these facilities. These could band; therefore, we initiate with an Underweight be materially incorrect. (V) rating. Potential return equals the percentage  We have not accounted for any possible difference between the current share price and the future acquisitions due to the uncertain nature target price, including the forecast dividend yield and timing yet the company has a stated when indicated.

strategy of (and has been growing through) Core valuation (based on 2014 forecasts) acquisition in the past few years. Multiple Valuation (HKDm)  Our assumptions for domestic consumption PE 21.0x 20,116 EV/EBIT 14.0x 19,990 and demand growth could be too high or low EV/EBITDA 10.5x 19,453 Average 19,853 and will depend on global GDP and Chinese Price per share HKD 11.75

governmental policy decisions. **EBIT/EBITDA adjusted for minority interests (25% of the earnings stream). To derive the equity value we add a net cash of HKD1.14bn (2014e) and add in the market value of the associates HKD2.2bn.  We have not assumed a material impact from Source: HSBC estimates the introduction of VAT in China on services.

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Implied KLN valuation based on our target price Risks 2013e 2014e 2015e Upside risks to our rating and target price include: PE 19.5 20.7 19.2 EV/EBITDA 10.6 10.6 9.7 EV/EBIT 13.8 13.7 12.4  Better-than-expected economic development

Source: HSBC estimates in China could lead to an increase in domestic consumption which would positively impact

Summary comp table (x) KLN’s customers and its own volumes.

Ticker CP^ Rating EV/EBIT EV/EBITDA PE  A decrease in trade restrictions or embargoes in 13e 14e 13e 14e 13e 14e

DPW DPW GR 26.5 N 11.9 13.3 8.1 9.2 17.1 17.4 key countries in which KLN operates. TNTE TNTE NA 6.7 UW (V) 15.1 11.6 9.0 7.8 36.6 21.3 KNIN KNIN VX 123.7 UW 16.6 17.2 13.2 14.0 25.1 23.6  Positive changes in government policies within PWTN PWTN SW 150.0 UW 19.4 23.3 14.1 16.5 39.3 33.3 DSV DSV DC 181.0 N 13.5 14.5 11.2 12.0 19.6 18.4 China to stimulate domestic consumption. KLN 636 HK 13.0 UW (V) 13.8 15.1 10.6 11.7 19.5 22.9 FDX FDX US 140.2 NR* 13.3 11.9 7.4 7.2 22.7 17.2 UPS UPS US 97.9 NR* 14.4 14.1 11.4 11.4 21.3 18.4  Increase in outsourcing trends stimulating Asia- UTI WW UTIW US 17.2 NR* 36.1 17.9 15.8 10.0 85.3 31.5 CH CHRW US 59.1 NR* 13.3 12.6 12.3 11.6 21.8 19.8 outbound volumes. Robinson Exp- EXPD US 43.6 NR* 13.4 11.8 12.4 11.0 25.0 22.2 editors  Accretive acquisitions. Win- WIN LN 1.5 NR* 11.6 10.9 7.6 7.4 9.3 9.7 canton Sino- 598 HK 3.3 NR* 9.1 7.7 6.0 5.2 16.8 13.7  A positive movement in property values in trans Hong Kong or mainland China. Note: UTI WW is a January ending company, FedEx is a May ending company and Wincanton is a March ending company. Hence the values have been calendarized.  Better-than-expected general trading or ^Current price in local currency *NR = Not rated significant new contract wins. Source: HSBC estimates for DPW, TNTE, PWTN, DSV, KNIN and KLN. Bloomberg consensus for FDX, UPS, UTI WW, CH Robinson, Expeditors, Wincanton and Sinotrans; Prices as of 23 January 2014 for DPW, TNTE, KNIN, PWTN, DSV, FDX, UPS, UTI WW, CH Robinson, Expeditors and Wincanton; as of 24 January for KLN and Sinotrans

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Risks

 Economic upturn could lead to higher domestic consumption and higher international trade  With significant investment property holdings in Hong Kong, an increase in property prices would be positive for the share  Reduction in trade barriers and embargoes would be beneficial

The economy Property ownership and leasing Transportation and logistics are driven by global GDP and local consumption. KLN is engaged in One of KLN’s strategies is property ownership in logistics operations across Asia and provides most key markets and it has significant investment of its freight forwarding services intra-Asia and property holdings in Hong Kong. It is therefore Asia-Europe. An economic upturn within China in significantly leveraged to movements in asset particular could lead to a general increase in prices and rental yields. domestic consumption and international trade. Equally, an upturn in the global economy and Consolidation and acquisitions within mature markets could stimulate outbound The sector with highly fragmented; therefore volumes from Asia and have knock-on effects on significant consolidation could have a positive Asian economies. effect. KLN has historically grown through Shifts in outsourcing trends acquisitions and though this can be risky, it could also be accretive in adding density, new Increases in customer outsourcing strategies to geographies and areas of expertise. and within Asia would be beneficial for KLN as a 3PL provider in terms of contacts wins and Other points to note: volumes. These trends could impact outbound There is an unclear allocation of space within volumes out of China, in particular the Asia- investment property between own and tenant use Europe and Asia-US freight forwarding activities which distorts pure logistics margins and makes of KLN. In addition this could impact the peer comparison difficult. Furthermore KLN has activities of KLN’s associates CCT and AAT as numerous related companies, as part of the Kerry well as its fully consolidated Kerry Siam Seaport Group. Transactions could occur that are not at in Thailand. arms-length, which could be disadvantageous to minority shareholders.

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KLN has a significant minority interest balance. Although it purports to exercise control over these companies, it may not necessarily be the case. It consolidates Kerry TJ Logistics although it holds just 36.5% of its share capital.

In previous periods the company has failed to comply with Section 122 of the Companies Ordinance which requires accounts to be submitted to shareholders and presented at an AGM no more than nine months after the balance sheet date. The directors of the company could be subject to imprisonment or fine although the company has stated that this is unlikely as it believes none of the directors willfully committed this breach.

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Kerry Logistics Network

 Largest 3PL provider in Hong Kong….  …contract logistics led freight forwarder…  …with an asset heavy approach

Overview Shareholders

KLN is headquartered in Hong Kong and is the KLN is 23.8% owned by Kerry Group Ltd and largest Hong Kong-based international 3PL 42.5% owned by Kerry Properties Ltd (KPL), in provider, based on warehouse square footage. It also which Kerry Group has a 56% stake. has extensive operations across Greater China and other countries in Asia. It is principally engaged in integrated logistics and international freight forwarding. It currently has more than 400 service locations across 35 countries and territories in Asia, Australia, Europe and North America.

Key statistics

1. From Armstrong report Source: KLN

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Shareholding structure notable acquisitions being: Other Public Kerry Group shareholders 2000: Freight forwarding company in Hong Kong, shareholders Limited of KPL which marked its venture into freight forwarding ~56% ~44% 2002: Kerry Logistics (UK) Ltd, a freight forwarding arm in the UK

Kerry 2005: A 70% equity interest in Kerry EAS Directors and Properties subsidiaries Logistics, a leading logistics company in China Limited (KPL)

~33.4% ~23.8% ~42.5% ~0.3% 2008: An initial 18.52% stake in Kerry TJ Logistics, a company that is listed on the TWSE. It now owns c36.5%. Kerry Logistics Network Activities Limited (KLN)

Source: Bloomberg, Kerry, HSBC KLN’s core activities are Integrated Logistics (IL) and International Freight Forwarding (IFF). It also Details on Kerry / Kuok Group companies can be has three infrastructure investments, a 25% found in Appendix 1. interest in Chiwan Container Terminal Co, Ltd

History (CCT), a 15% interest in Asia Airfreight Terminal Company Limited (AAT) and a79.5% interest in KLN developed its first warehouse in Hong Kong in Kerry Siam Seaport Limited in Thailand (fully 1981 and in 1996 became a direct wholly-owned consolidated) subsidiary of KPL which was then listed on the Stock Exchange of Hong Kong. KLN has grown both organically and through acquisition with

Milestones of Kerry Logistics

Source: KLN

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Revenue breakdown (2012)* Operating margin 2010 2011 2012 Logistics operations 9.6% 8.5% 9.1% Logistics HK warehouse 56.8% 56.7% 58.3% operations Intl freight forwarding 1.4% 2.7% 2.5% 39% Operating margin* 7.4% 7.1% 6.7% Note: Revenues including intersegment revenues Intl freight *Group operating margin post central costs forw arding Source: KLN, HSBC calculation for total operating margin 58% Integrated Logistics (IL) HK w arehouse KLN provides third-party integrated logistics 3% *Revenue including intersegment revenues services for manufacturers, retailers and other Source: KLN, HSBC customers worldwide. Its logistics services include

storage and value-added services as well as returns EBIT breakdown (2012)* logistics to manufacturers, retailers and other Intl freight forw arding customers out of regional and local logistics centres. 21% KLN also operates trucking and distribution services to transport goods to local and national Logistics distribution centres and retail outlets as well as to operations 51% transport cargo from airports and ports and can provide door-to-door distribution in each of its HK major markets in Asia. It also offers express w arehouse 28% services for LTL (less-than-truckload) cargo in China, Taiwan, Thailand and Vietnam. It uses a *Segment revenues includes intersegment revenues mixture of owned vehicles and subcontractors. Source: KLN, HSBC

The chart below shows an example of how KLN provides value-added services to a fashion industry customer.

Services offered to customers in the fashion and lifestyle industry

Inspection, Labeling Garment- Pre-retail Packing Creaseless Quality and Security On-Hanger Preparation Garment Control and >>>>>Tagging Storage Delivery Safety Tests

Returns Management and Clearance Sales

Source: KLN, HSBC

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KLN typically operates 1-3 year contracts with a Generic warehousing by nature is property renewal option. It also operates much longer management and is a service that most contract contracts, typically where it has invested in logistics players provide. Costs are depreciation, building specific property, modifications or rates, utilities and some labour. However KLN specialised equipment. It charges a monthly fee does not depreciate its investment property – which based on a unit rate and variable rate dependent is largely its Hong Kong warehouses. The Hong on the quantity of services provided. Most Kong warehouse margin at c57-58% compares contracts are volume driven with a floor and with other property company margins of 80%+. contain price adjustment clauses. Having shared warehousing space allows KLN to Within its IL division, KLN has a 79.5% interest optimise seasonality patterns which may vary in Kerry Siam Seaport Ltd in Thailand where it from customer to customer. manages an onshore inland container depot. It Types of shared warehousing uses also operates a rail terminal in Adelaide and a General cargo warehouses Specialty warehouses trading business in Hong Kong where it trades 1) Provides long-term or short- 1) Mainly cold storage for food goods, beverages and pharmaceuticals. term leases of certain warehouse temperature-controlled food units KLN also operates Hong Kong warehouses 2) Long-term leases are generally 2) Also storage for bonded goods for 2-3 years and dangerous goods where it leases warehousing space to customers 3) Monthly charge by type and 3) Monthly warehousing fee by size of leased space volume of goods stored and and to its logistics arm. It has nine warehouses in certain handling fees Hong Kong with a total gross floor area (GFA) of 4) Maintenance, handling and transportation - generally sole 5m square feet and a valuation of HKD5,194m (as responsibility of customers at 30 September 2013). Most of the warehouses in Source: KLN, HSBC Hong Kong are used as joint warehouses and logistics centres. There has been a gradual increase Property angle in space used by the logistics arm; if KLN can As part of its IL business, KLN manages a variety of achieve higher returns from conversion for self-owned and leased logistics facilities including logistics use it reallocates this space – we discuss warehouses, a port terminal and rail terminal. this division in more detail later in the report. Completed logistics facilities Intercompany revenues of HK warehouse division as % of Gross floor Attributable Total Leased % owned* total HK warehouse revenue area sq ft owned owned 40% (’000) 35% China 4,369 4,941 6,298 44% HK 5,537 5,537 817 87% 30% Macau 15 0% 25% Taiwan 843 2,312 4,887 32% Thailand 4,397 5,538 3,240 63% 20% Vietnam 893 893 171 84% Singapore 437 481 16 97% 15% Malaysia 119 221 299 43% 10% Philippines 12 0% India 268 773 458 63% 5% Bangladesh 13 0% South Korea 11 0% 0% Others 806 806 1,268 39% 2010 2011 2012 1H13 Total 17,669 21,502 17,505 55% Source: KLN, HSBC *Based on total GFA owned (not attributable) Source: KLN, HSBC

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We believe that asset ownership is a natural focus grow. Should KLN need to free up capital in the for KLN due to its history and parentage. future for expansion, there remains the potential for sale and leasebacks on its estate. The company has stated that its asset ownership is a core strength as it believes many customers based in Investment property Asia seek the security and flexibility of asset KLN’s properties held for long-term rental yields ownership from their logistics providers. In Asia, and/or capital appreciation where less than 50% is quality of warehouses can be a concern, and not all occupied by KLN are classified as investment warehouses available on lease are good quality. That properties. Other properties are classified as KLN owns its assets and is responsible for their property, plant and equipment. Approximately maintenance and upkeep can provide comfort to 4.6m square feet of GFA are treated as investment customers over the quality of its assets. This also property in Hong Kong. allows it to meet customers’ demands for long-term service agreements with certainty of space and it can Property investment (GFA) by location as of 30 Sept 2013 also offer better customisation of warehouses to S'pore meet their needs and avoids significant rental Vietnam 5% 13% escalation which can be difficult to work into customer contracts. The merits of this argument are subject to debate; it is possible to take out long leases China (ex- and to also lease properties and customise the HK) 15% installations to customers’ needs. Indeed many of HK KLN’s global brand customers, with no cultural bias, 67% we believe are likely to be asset-ownership agnostic though security and quality of warehousing space are important. Source: KLN, HSBC

Many of KLN’s peers (K+N, DHL, DSV) have The majority of this investment property by both taken a divergent strategy – moving away from floor space and value are situated in Hong Kong. asset ownership, choosing to free up capital and KLN’s Hong Kong portfolio comprises nine where possible to sign back-to-back lease warehouses, five of which are located in Kwai contracts with customers. Chung, close to Hong Kong’s container terminals.

Around 55% of KLN’s logistics space is owned As we highlight above, these properties are with a bias toward Hong Kong. We think that partially used as investment properties (i.e., the KLN’s asset heavy positioning, particularly in its space leased out to third-party tenants) and partly core market of Hong Kong, has key advantages. for KLN’s own logistics business. Based on Space for new warehouses is hard to come by and KLN’s segmental disclosure, we estimate that having the space is a competitive advantage and roughly 35% of revenues are generated from one of the key reasons behind KLN’s No 1 KLN’s own logistics business. Given the Hong position in the Hong Kong market. That property Kong investment properties make up substantially prices have increased significantly in Hong Kong all of the portfolio, our analysis will focus on the is also a bonus. Hong Kong market.

As KLN expands out of Hong Kong, we would expect the relative proportion of leased space to

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Investment property portfolio and exports provide a reasonable proxy for the Property Completion Interest GFA volume growth rate of container and air cargo Year % ’000 sq ft over this period. Kerry Warehouse (Chai Wan) 1986/88 100% 535 Kerry TC Warehouse 1 1991 100% 180 HKIA and China container port throughput growth Kerry Warehouse (Shatin) 1988 100% 432 Kerry Warehouse (Sheung Shui) 1991 100% 356 50% Kerry Warehouse (Fanling 1) 1994 100% 284 40% Kerry Warehouse (Kwai Chung) 1981 100% 287 Kerry TC Warehouse 2 1997 100% 491 30% Kerry Warehouse (Tsuen Wan) 1998 100% 592 20% Kerry Cargo centre 1999 100% 1,443 10% HK Sub-total 4,599 EAS Building 1994/95 70% 150 0% 4 Blocks of Buildings (Tianjin) 1980 70% 72 -10% Level 18, Block B, Wuhan Int'l 1990 70% 8 Unit C, L22, Dihao Plaza 1990 70% 2 -20% (Hainan) Jul-10 Jul-11 Jul-12 Jul-13

Block 1, No 64 Boashan Rd 1990 70% 5 Jan-10 Jan-11 Jan-12 Jan-13 (Qingdao) HKIA China key ports Shenzhen Kerry Futian Logistics 2006 100% 269 Kerry Fuzhou Logistics Centre 2004 100% 109 Source: Hong Kong International Airport, CEIC, HSBC Kerry Hefei Logistics Centre 2008 100% 204 Kerry Chongqing Logistics 2011 100% 225 Centre - Phase 1 While demand has been relatively soft (and we Mainland China sub-total 1,044 expect it to remain so), the supply outlook is Kerry Vietnam Logistics Centre 2010/11 100% 671 Kerry Danang Logistics Centre 2011 100% 115 highly constrained. Jones Lang Lasalle estimates, Kerry Hung Yen Logistics Centre 2010 100% 108 Vietnam sub-total 893 after a relatively large addition to warehouse Kerry Tampines Logistics Centre 2012 100% 371 space in 2012, that there will be no new Singapore sub-total 371 Total 6,907 warehouse space opened in 2013-15. Based on Source: KLN, HSBC data provided by Jones Lang Lasalle indicating

60m square feet of warehousing space in Hong Industrial property market in Hong Kong, we calculate KLN has an 8% market share. Kong Net increase of Industrial property space in Hong Kong Demand for warehouse space in Hong Kong is (GFA ’000 sq ft) essentially driven by the space required for 6,000 logistics services. This primarily relates to the 5,000 export of goods manufactured in the Pearl River 4,000 Delta and elsewhere in Asia and the import of 3,000 goods for consumption in Hong Kong. As 2,000 illustrated by the air cargo throughput at Hong Kong International Airport and the container 1,000 throughput at key China ports, demand has been 0

-1,000 2004 2005 2006 2007 2008 2009 2010 2011 2012

relatively lacklustre over the past two years. We 2013e 2014e 2015e believe the outlook for air cargo and container Source: Jones Lang Lasalle, HSBC throughput in Hong Kong remains relatively soft. HSBC’s Economics team forecasts that Hong Kong private consumption will grow 3-4% pa during 2013-15; it forecasts exports from Hong Kong will grow 6-8% pa over the same period (Global Economics Quarterly Q1 2014, 20 December 2013). We argue private consumption

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Industrials property rentals in HK (HKD psf per month) KLN’s IFF margins at 2.7% (2013e) are broadly 12 standard for the freight forwarding industry. 10 These compare with Kuehne & Nagel at 3.3% and

8 DHL at 3.2%. The company does not disclose gross profit per unit as is standard for the industry; 6 therefore it is difficult to evaluate how these 4 compare versus peers. As the company grows its 2 volumes further, we would expect to see some 0 productivity benefits and some small uplift to

1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 margins from better negotiated rates with carriers.

Source: Jones Lang Lasalle, HSBC However, the Asia-Europe and Intra-Asia routes are highly competitive and some of these benefits We calculate that KLN’s EBIT margin for its could be given back to customers in order to gain warehouse business averaged 57% in 2010-1H13. further volumes. As freight forwarding is an asset- This margin appears to be relatively low – HSBC’s light business, we believe adding volumes at the Real Estate team estimates for its property investor expense of margin can still enhance returns. coverage in Hong Kong that the average EBIT As part of its stated strategy, KLN is looking to margin is c80% (HK Real Estate: Seeking shelter grow its freight forwarding business both from stronger headwinds, 27 January 2014). It is organically and through acquisition. Acquisitions unclear why KLN’s property investment margin is in freight forwarding can be difficult as they are so low. As this margin has remained relatively people and relationship-driven businesses, consistent throughout the period 2010-1H13, we therefore acquisitions need to add further niche assume it continues throughout the forecast period. businesses or geographies. International Freight Forwarding (IFF) KLN offers a cross-border freight forwarding KLN’s freight forwarding services are service – Kerry Asia Road Transport (KART). predominantly international freight services This is an open platform to connect China to between Asia and Europe and intra-Asia. This selected countries across the ASEAN region. It includes air and ocean freight forwarding as well owns 150 trucks to run this service and illustrates as cross-border road freight forwarding services. KLN’s capabilities in efficiently dealing with KLN’s IFF business is relatively small versus some cross-border cargo transportation across Asia of its larger global peers with revenue of USD1.5bn (which can involve significant administration versus Kuehne & Nagel at USD17.4bn in 2012. particularly when dealing with LTL cargo). This road network should give it a strategic advantage Freight forwarding benefits from economies of when the tariff free policy is achieved for all scale in the sense that higher volumes lead to product trades among ASEAN countries in 2015. better rates negotiated with carriers which in turn means either better margins or better ability to compete for volumes on price. KLN typically takes on no more than 12-month commitments in airfreight (though when required it charters full aircraft) and typically does not give volume-based commitments to carriers in sea freight. KLN owns more than 6,500 vehicles.

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Key routes run by KART As per the company website, KLN recently secured a contract from ASOS in China to support Shanghai the company’s e-commerce platform in Shanghai and managing freight from the UK hub into China Kuming China. In the past, it has announced the following contract wins:

Nanning Vietnam  Samsonite, Thailand to manage its supply chain Myanmar Laos Shenzhen Vientiane Hanoi to deliver to more than 40 department stores and retail outlets in Bangkok and major cities Lao Bao Thailand Danang including Phuket, Pattaya and Chiang Mai;

Bangkok Cambodia  Daimler North East Asia Trading and Phnom Route 1 Penh Ho Chi Minh City Services Co Ltd (a fully-owned subsidiary of Route 2 Route 3 Daimler, China) – it is building an automotive

Penang Malaysia Route 4 parts logistics facility; Route 5 Kuala Lumpur  Continental Tyres, Thailand to manage the Singapore company’s warehouse storage and local Source: KLN, HSBC transportation and express distribution across Customer profile the country;

KLN services regional and local operations of  Hugo Boss Logistics for Greater China; global brands as well as local and regional  IKEA in Thailand; and customers. It has 40 of the top 100 Interbrand brands as its customers. However it is does not  Marks & Spencer in Greater China. have an over-reliance on a single customer, with its top-five customers representing 7.8% of its revenue (in 1H13).

International freight forwarding Air freight Ocean freight Cross-border road freight Services provided 1. Air transportation of high-value goods, 1. Transportation of full container load (FCL) and less Cross-border trucking solution through perishable goods and time-sensitive shipments than container load (LCL) cargo by sea Kerry Asia Road Transport (KART) 2. Air charter services for urgent shipments or 2. Project logistics services for outsized cargoes and planned project cargo heavy lifts Operations 1. Procurement of air cargo space from airlines 1. Procurement of ocean cargo space from shipping 1. KART was launched in 2007 and based on actual shipment needs lines based on actual shipments provides cross-border long-haul trucking 2. Terms of supply contracts is typically no connecting countries across ASEAN region more than 12 months 2. Cargo consolidation to increase utilisation of 2. KART was expanded to connect ASEAN containers region and China in 2011 Fleet and infrastructure IATA agent with access to space procurement Booking agent for a number of shipping lines with direct Fleet of more than 150 self-owned trucks for air cargo routes worldwide access to space allocation dedicated for KART services Routes operated 1. Intra-Asia routes, such as between China 1. To many ports worldwide 1. Two routes between ASEAN and China and Hong Kong 2. Major lanes include those among ASEAN countries 2. Three routes between ASEAN countries 2. Routes between Greater China and the UK 3. Covers Singapore, Thailand, Vietnam, Cambodia and Laos, as well as Kunming, Shenzhen and Shanghai in China

Source: KLN, HSBC

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Demand drivers Logistics spend growth by major regions (CAGR) 20% 16.3% Total revenue by geography (2012) * 15% Others 10.3% Europe 3% 16% 10% 8.0% 7.6% 5.0% 3.6% 5% 2.3% 2.7% 1.5% 1.0% 0.2% -2.6% South and PRC 0% South East 45% Greater Asia S. N. Japan Europe Asia -5% China Pacific* America America 13%

2007-12 2012-15e Taiwan 10% *Asia Pac excluding Greater China and Japan Hong Kong 13% Source: KLN (which sources Armstrong report), HSBC

*Integrated Logistics and International Freight Forwarding divisions combined Source: KLN, HSBC China

The IL division is driven largely by new contract Hong Kong is a relatively mature market. Therefore wins and domestic consumption within China in growth expectations are more muted than in particular and other Asian countries in which it mainland China and will be broadly GDP driven operates. KLN’s results are therefore highly with some gearing to increasing postponement geared to the demand for new products (assembly/packaging of goods at the last minute). manufactured or sold by its customers and the In mainland China, GDP growth and high demand for international brands of the growing urbanisation rates make for a favourable backdrop. middle classes. It is therefore influenced by GDP Within Asia Pacific, the penetration rate of 3PL growth, income level and inflation, availability of providers is relatively low versus the US and consumer credit, consumer confidence, import Europe. Furthermore in Greater China, the logistics taxes and rate of urbanisation. spend as a percentage of GDP is high, suggesting the In 2012 the Asia-Pacific 3PL market was 40% larger potential for greater efficiencies from improving than the 3PL markets in North America and Europe. infrastructure and deployment of best practices.

It has been the fastest growing market in the world, 3PL revenue by major region (USDbn) with growth driven by outsourcing and offshoring 350 289 operations to lower cost countries. 300 245 250 211 GDP growth estimates by major regions (CAGR) 193 161 200 171 156 20% 18.9% 154 151 150 15% 13.5% 100 9.5% 40 44 49 10% 7.9% 50 4.9% 3.6% 0 5% 3.3% 3.2% 2.2% 1.5% 1.0% Asia Pacific North America Europe South America -1.0% 0% 2010 2012 2015e Greater Asia S. N. Japan Europe -5% China Pacific* America America Source: KLN (sourced from Armstrong report), HSBC

2007-12 2012-15e See Appendix 2 for detail on China’s 3PL market

*Asia Pac excluding Greater China and Japan structure, shortcomings and initiatives taken by Source: KLN (which sources Armstrong report), HSBC the government.

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Greater China has higher logistics spend as % of GDP vs. operations in those countries. What could be more other regions… 2000 20% problematic is if a trend of near-sourcing continues or picks up pace towards lower cost Eastern 1500 15% European countries or Mexico. 1000 10% Profit and margin by country

500 5% Note that KLN did not disclose in the prospectus the

0 0% recurring net profit contribution by country / territory North Greater Europe Asia Japan South nor the EBIT margin by country / territory. America China Pac* America Logistics spend in USDbn (LHS) Logistics spend as % of GDP (RHS) However, in the notes to the accountants report it discloses Hong Kong profits tax, China taxation *Excluding Greater China and Japan Source: KLN. HSBC and overseas taxation. In addition, Kerry TJ

Logistics (2608 TT, Not rated) is separately listed …and Asia Pacific has much lower 3PL penetration rate than and reports its results. the US and Europe (2012) 25% From this information we can calculate a rough estimate of profit by country/territory based on the 20% following assumptions: 15%  HK effective tax rate of 16.5%, China 10% effective tax rate of 25%;

5%  All material recurring profit is recognised either through the current or deferred tax 0% charge; US Europe Asia Pacific Penetration rate is the percentage of current 3PL revenue out of total potential 3PL market  All deferred tax on changes to in fair value of Source: KLN (sourced from Armstrong report), HSBC investment properties attributable to the In terms of net revenue, KLN is one of the biggest company’s shareholders relates to China; and players within Greater China, after Sinotrans and  There are no material differences between DHL. It is the largest player in terms of total GFA recurring profit reported by Kerry TJ of managed warehouses. Although it Logistics and the recurring profit relating to predominantly specialises in Asia-Europe and this business reported by KLN. intra-Asian forwarding it is the second largest player in Asia-US and US-Asia forwarding.

The IFF division is influenced by outbound volumes to Europe and intra-Asia as well as inbound volumes from Europe to Asia. Volumes are driven by GDP growth in both Europe and Asia as well as shifting trade lanes and outsourcing or near sourcing of manufacturing. While labour cost inflation has seen some relocation of manufacturing from China to lower cost countries within Asia, this is not necessarily negative to KLN if it also has

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HSBC estimate of recurring profit breakdown in 2012 HSBC estimate of PBT margin (ex-associates) in 2012 TJ Log Other 25.0% 8% -1% CCT 20.0% 12% 15.0%

HK 10.0% 53% PRC 5.0% 21% 0.0% HK Taiwan PRC Other AAT 5% Source: Company, HSBC estimates Source: Company, HSBC estimates

Our estimates indicate that 58% of recurring is Strategy generated in Hong Kong, with 53% from its KLN’s stated strategy is to: Logistics, freight forwarding and warehouse business and 5% from its stake in HKIA air cargo  Maintain and increase its leading market terminal AAT. The contribution from mainland position in Greater China and Asia. It is China is 33% with 21% from the logistics, freight specifically seeking to further penetrate forwarding and warehouse business and 12% China, Hong Kong, Taiwan, Thailand and from container port CCT. Vietnam and increase its market share in India, Indonesia, Malaysia, Singapore and the Using this approach, we can also estimate the Philippines. profit before tax margin excluding associates. The Hong Kong pre-tax margin of 21% is inflated by  Grow its international freight forwarding the HK warehouse business that had a 2012 EBIT coverage organically and through margin of 58%. If we strip this out, we estimate acquisitions, particularly in the Americas pre-tax (ex-associates) margin for logistics and region. freight forwarding is 6%.  Offer sophisticated integrated logistics While the China pre-tax profit margin (ex- solutions underpinned by local capabilities. associates) looks low at about 4%, this figure is in  To further invest in IT and human capital. line with the global logistics sector. Key strengths and opportunities

 KLN’s leading position and strong links in the Hong Kong property market are a key strategic advantage given the space limitations and limited new land released by the government.

 Strong brand recognition within Asia which makes it a trusted partner of many global companies.

 Long-standing relationships with a wide and diversified customer base

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 High Asian exposure and presence within fast Conclusion growing and underpenetrated markets. Hong Kong is a stable mature market where we  Experienced management team with a proven believe KLN has a strong strategic positioning. track record. Mainland China offers growth opportunities, though this market is competitive and there are  Proprietary IT systems globally deployed and political risks. KLN remains subscale in compatible with customer ERP systems. international freight forwarding and has the  Early-mover advantage in building a road potential for growth and margin expansion through network (KART) to capitalise on the removal of productivity improvements. But pure forwarding is tariffs in the ASEAN free trade area by 2015. heavily commoditised and we believe KLN will make the greatest gains where it can tie these Key challenges and risks forwarding volumes to its logistics business.  Continuing to develop value-added services to tie in volumes and customers and to offset margin pressure.

 Maintaining its quality differentiation and perception among customers as other players in the market become increasingly sophisticated.

 Expanding through acquisition is risky, particularly in freight forwarding where the assets are intangible and labour and relationships can leave.

 KLN’s bias towards owning assets leaves it exposed to decreases in asset prices. If trade or consumption patterns shift, then KLN may be left with assets that are underutilised.

 There is on-going margin pressure in freight forwarding. The intra-Asian market is highly competitive and volumes are lacklustre on the Asia-Europe trade lanes, which makes for a difficult operating environment. KLN will need to continue to make productivity improvements through IT investment.

 As most contracts have a volume-related element KLN is subject to volume risk and changing demand for its customers’ products.

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Competitor analysis in Greater China (2012)

Net revenue (USDm) Total GFA of warehouses (m sq ft)* 1400 25

1200 20 1000

800 15

600 10 400 5 200

0 0 Sinotrans DHL* Kerry CEVA Panalpina Kerry Sinotrans CEVA IDS Group Wuhu Annto *DHL Supply Chain and Global Forwarding *For third-party logistics providers Source: KLN (which sources Armstrong report), HSBC Source: KLN (which sources Armstrong report), HSBC

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The logistics of logistics

 Outsourcing is driven by the increasing complexity of supply chains  This plays to the strengths of logistics providers that have the expertise to simplify and standardise  But the contract logistics and freight forwarding markets are heavily fragmented, becoming increasingly commoditised and competition is often fierce

Third-party logistics operations, manufacturing and distribution there has been growth in 3PL providers that can often Logistics is the process of getting something from provide cheaper, more efficient solutions than A to B in the form, quantity and timeframe companies may be able to themselves. required. This is more than simply transportation. 3PL is doing something for someone or an organisation that they do not want to do, or do not have the capability of doing themselves. Since the 1990s, as supply chains have become more complex, with global sourcing and offshoring of

Business model of a 3PL provider

Source: DSV presentation

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Key drivers of 3PL market growth 3PL market growth by industry – Fortune 500 Global 80 12% Regulatory 10% compliance 60 Offshoring 8% Low-cost and country outsourced sourcing manufacturi 40 6% ng 4% 20 2% Increasing Cost supply Core 0 0% competency reductions chain focus complexity Tech. Others Retailing Industrial Elements Groceries Healthcare Automotive 2005 (LHS) 2013e (LHS) Goods Cons Operational Expanding IT 2005-13e CAGR (RHS) efficiencies requirements Need regional Source: KLN (sourced from Armstrong report), HSBC and local market expertise DP-DHL estimates the total size of the contract Source: KLN (sourced from Armstrong report), HSBC logistics market was EUR154bn in 2011. KLN’s As the demand for 3PL has grown, so too has the integrated logistics segment had revenues of range of services provided. 3PL providers HKD6.9bn (EUR677.2m). This is just 0.44% of generally aim to be a one-stop-shop for their the global market. customers, believing the greater the range of A fourth-party logistics provider (4PL) is an services offered, the more integrated they are in integrator that assembles the services, resources their customers’ business, the higher the switching and capabilities of its own organization and others costs and the more pricing power they have in to design and build comprehensive supply chain what is essentially a very low margin industry. solutions, in essence managing other 3PLs, The range of activities is wide: extending from the truckers, forwarders, customs house agents etc. very basic warehousing in multiple user facilities to pick and pack, inventory management, delivery Most of the larger contract logistics players also and returns to highly customised solutions such as have freight forwarding arms. There has been a the above wing services that DHL provides for dual principle in the creation of these arms, some British Airways or UPS’s management of the of the larger freight forwarders (KNIN, Panalpina, London 2012 inbound logistics. DSV) – international transport managers (ITM) have created contract logistics divisions as a way to try to tie in volumes to their forwarding

Logistics supply chain

Unloading, Accept goods Overland unpacking, Assembly, Overland at seaport/ trucking to entry into repacking, delivery to airport >>>>distribution inventory relabeling, retail stores centre system repairs

Returns Management Returns and Clearance Sales

Source: HSBC

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business and to try to reduce price pressure on with the biggest being DHL with a c8% market these volumes. Others, such as KLN (which share, having achieved significant scale post the focuses more on value-added warehousing and merger with Exel in 2005. There are regional distribution (VAWD)), have developed freight specialists too – KLN is the largest international forwarding capabilities as an add-on service for 3PL based in Hong Kong with the largest their contract logistics customers. These two portfolio of logistics facilities based on warehouse activities are a natural fit and complementary, but square footage managed in Greater China and it is often only when tied together that they add ASEAN. And there are many local companies the most value. Generic low value-add services operating the odd warehouse or a limited local are low return and customers can be transitory. distribution network.

Third-party logistics value-added services Contract logistics market, 2011 Both - 3PL/4PL Domestic and Intl Value-added DHL 7.8% Transport warehousing and CEVA 2.4% management distribution KNIN 2.2% Hitachi 1.7% 4 PL/Lead Logistics Cargo insurance Bonded facilities Wincanton 1.4% Provider Penske 1.3% Call Centres Carrier Easily deployable IT Sankyu 1.2% contracting/brokering and work processes UPS SCS 1.2% Consolidation/ Customs brokerage Installation/Removal CAT 1.1% deconsolidation Rhenus 1.1% EDI Handling Duty drawback JIT/Kanban Top 10 total market share 21.4% processing Figures are estimated except for DHL, CEVA and KNIN; as at May 2012 Exception Handling Freight forwarding Kitting/Pick & Pack Financial services Incoterms Light Source: Deutsche Post 2012 Annual Report (which sources Transport Intelligence), HSBC management manufacturing/assem bly Food Letters of credit Order fulfilment The freight forwarding industry is also highly Grade/Temperature fragmented, with the biggest global player in controlled Hazmat skills Merge-in transit Reverse logistics airfreight having just 6.8% of the market and the ISO certification Multimodal Subassembly biggest sea freight player having 2% of the market transportation Inventory/vendor Project logistics (refer tables below). Again, there are global management Lean management Transportation players, regional specialists and players that skills execution operate on just one or a handful of trade lanes. Order management Transportation network planning/optimization Airfreight market is fragmented; top 10 players account for c26% Pool distribution of the market (2011) Radio frequency/RFID DHL 6.8% Security processes DB Schenker 3.5% Sourcing/procurement KNIN 3.0% skills Panalpina 2.9% Supply chain systems UPS 1.8% Source: KLN (sourced from Armstrong report), HSBC Nippon Express 1.7% CEVA 1.7% Agility 1.5% A fragmented industry Expeditors 1.5% Sinotrans 1.4% The 3PL industry is very fragmented at a global Top 10 total market share c26% level and arguably also at a local level. This Source: Rolland Berger strategy consultants, HSBC means that price competition is intense.

In the third-party contract logistics market, the top 10 players have just a 21.4% market share (refer table below). There are a few ‘global’ players,

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Ocean freight market is even more fragmented; top 10 account Integrated Logistics for 9% of the market (2011) KNIN 2.0% Like peers, in KLN’s IL division, each contract is DHL 1.5% negotiated individually; therefore it is difficult to DB Schenker 1.0% Panalpina 0.9% generalize as to how precisely the business Expeditors 0.7% Agility 0.5% charges for its services. Some contracts may Nippon Express 0.5% charge for warehousing space, plus, a charge per SDV 0.5% Sinotrans 0.5% piece picked and packed, others may be an all- DAMCO 0.4% encompassing contract with some volume linked Top 10 total market share c9%

Source: Rolland Berger strategy consultants, HSBC element. Duration of contracts varies as does the

degree of risk that KLN will assume to fulfill its Competitor analysis obligations – which may include building or customization of facilities for some customers. KLN is naturally much more Asia exposed than its global peers. Open book vs. closed book

Regional exposure (2012) As is common in the industry – KLN has a mixture

CEVA of open and closed book contracts – with a greater bias towards closed book. DHL, by contrast, reduces Panalpina its risk by maintaining an approximate 50/50 mix. In KNIN some cases contracts can start as open book but then progress to closed book. DHL SC^ Open book: A typical cost plus model. The Kerry* customer has visibility over project costs and the 0% 20% 40% 60% 80% 100% 3PL provider makes a margin. There may be some Asia Pacific Americas Europe/Middle East/Africa Others cost linked incentives but typically this type of *HK+PRC+Taiwan+South and South East Asia have been combined into Asia-Pacific for comparison purposes. A small percentage of ‘others’ (c3%) has been reported. The contract provides good visibility for both parties details of that segment is not known and limits risk, but also limits upside for the 3PL ^DHL Supply chain Source: Respective company reports, HSBC provider.

Closed book: The 3PL provider agrees with a set KLN is also a contract logistics led freight price and charging mechanism for the contract with forwarder as opposed to KNIN, Panalpina and the customer. It is then up to the 3PL provider to run DSV who are more focused on forwarding the contract as efficiently as possible – with the operations with contract logistics serving to tie in upside being generated through tight cost volumes. management and some volume linked clauses. Revenue contribution of contract logistics and freight forwarding (2012) Contract duration KLN KNIN PWTN DSV DP-DHL* CEVA The duration of a contract will vary from Contract Logistics 41% 21% 14% 11% 49% 54% customer to customer. The more specialized, Freight forwarding 59% 78% 86% 89% 51% 46% customized and value added, which typically *Taken into account just supply chain and freight forwarding divisions in calculating the percentages mean greater ramp-up costs for the 3PL, the Source: Respective company reports, HSBC longer the contract. In most cases contracts can last 3-5 years with some spanning 10 years or more. In cases such as these, 3PL players will try

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to structure back-to-back contracts with KLN has overall margins of 7% (2013e), warehouse leases and client contracts. significantly higher than its forwarder-contract logistics peers making on average of 3-4%. Our Margins analysis suggests that this is largely as a function Contract logistics is generally a low margin business. of its relatively low ownership costs. The aim is to be become so integral to a customer that their switching costs are high, which generates a Ownership costs as % revenue 8.0% degree of pricing power. But for the most basic 7.0% warehousing functions, switching costs can be low 6.0% and therefore unless there is a shortage of 5.0% warehousing space or a company holds a dominant 4.0% position, there is perpetual pricing pressure and 3.0% customers typically demand more for less. 2.0% 1.0% In a typical five-year contract: 0.0% 2009 2010 2011 2012 CEVA Kerry Exel KNIN Y1: Contract begins, project has ramp-up costs For Exel periods 2001-04 prior to its acquisition by DHL Y2: Margins increase Ownership costs defined as depreciation + operating leases KNIN has a much greater bias towards freight forwarding Y3: Decent margins but a renegotiation clause – a Source: Respective company data, HSBC customer may demand more for less  It does not depreciate investment property but Y4: Margin may come down from Y3 instead revalues annually (and strips Y5: Contract retendered – many companies movements out to report core net profit). It including local players may tender and in order to has HKD6.3bn investment property on its retain price may need to be lowered. balance sheet versus HKD6.4bn in property, plant and equipment. Adjusted operating profit margin – Contract logistics (2012) 14%  It has an HKD3.8bn interest free loan (as at 12% June 2013) from its parent company to fund 10% 8% property purchases and expansion. 6% 4% As a percentage of revenue, we calculate KLN’s 2% ownership costs (depreciation and leases) at 0% around 3.5% in 2012. Analysis of peers suggests DHL DSV KNIN KLN**

CEVA* more normalized ownership costs are 5.5-7% of Schenker revenue.

KLN - KLN Logistics*** *This is the operating profit for the contract logistics division for CEVA - which has 2 If we adjust KLN’s ownership costs to reflect divisions (freight management and contract logistics). The exact bifurcation of special more normalized costs (c5.5% revenue), this items and depreciation is not provided. The number provided here is based on equal split assumed for special items and depreciation between the 2 divisions would reduce margins significantly, though they **This includes Logistics operations + HK warehouse ***KLN Logistics is only for KLN Logistics and excludes HK warehouse numbers remain at the higher end of the peer range at 5- Source: Respective company reports, HSBC 5.5%. KLN also owns Kerry Siam Seaport and as

ports have structurally high margins (typically 30%+), this is likely inflating the overall margin.

28 Kerry Logistics Network (636 HK) Air Freight & Logistics abc 28 January 2014

KLN discloses neither the revenue nor the EBIT Adjusted operating margin – Contract logistics of Kerry Siam Seaport, but on the basis that it 10% comprises a significant proportion of the South East Asian revenue, our best estimate is that it 5% could be contributing HKD100-200m in EBIT.

Post these two adjustments we calculate 0% normalized margins of 4.5-5%. 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

KNIN Tibett and Britten KLN – EBIT margins post adjustment for ownership costs and Seaport TDG DSV -5% DHL contract logistics Exel 8.0% CEVA Wincanton 7.0% Tibett and Britten, Exel and TDG are no longer separately reported. They have been 6.0% acquired. Hence, the historical values for them have been taken from Factset and adjusted for exceptional items 5.0% For Exel, have taken the group adjusted operating margin 4.0% Source: Respective company data, Factset, HSBC adjustments

3.0% 2.0% International transport 1.0% management 0.0% 2010 2011 2012 2013 2014 2015 KLN EBIT margin Ownership cost adjusted Seaport adjusted In its most simplest form, freight forwarding is the buying and selling (brokerage of space) with Normalised ownership costs approximated at 5.5% revenues We estimate c HKD600m revenue for Kerry Siam Seaport and HKD150m EBIT freight forwarders able to buy in bulk and sell to Source: Respective company data, HSBC estimates small and medium sized customers who do not

want to deal directly with airlines/container Margins for peers have been broadly declining, shipping companies, do not need a full container which illustrates the pressure on price over time (LCL), can achieve a better price by using a as contracts are renegotiated and the market forwarder or want end-to-end logistics solutions matures. Although the Asian market is immature, (door-to-door as opposed to port-to-port). we believe over time as it matures and other players become more sophisticated the same will But generic freight forwarding is very happen to margins. commoditized and therefore forwarders have developed other add-on services to increase the invoiced amount, such as documentation and customs brokerage, insurance, and compliance. Price pressure has reduced the generic freight component of an invoice; whereas the general space brokerage used to be 70% of an invoice it is now around 30-40%.

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Kuehne & Nagel’s GP/TEU (in USD) GDP multipliers trending down since 2010

500 5 4 450 3 2 400 1 0 350 -1 2005 2006 2007 2008 2009 2010 2011 2012 -2 300 2007 2008 2009 2010 2011 2012 Container multiplier Airfreight multiplier

Source: Kuehne & Nagel, HSBC Source: KNIN, HSBC

Freight forwarders have to grow in order to stand Around 98% of air cargo is handled by freight still. In every given year there is around 2% price forwarders, but in the sea freight market, carriers pressure and 2-3% cost base inflation. This means still deal with customers directly and freight that forwarders need volumes to grow c5% pa in forwarders have just a c35-40% market share. order to maintain their bottom line. In addition, they However this has been increasing as customers have to generate 3-5% productivity improvements increasingly look for door-to-door delivery rather (usually driven by IT enhancements). In an than just port-to-port. KNIN forecasts that environment of anemic growth, particularly on the forwarders will have 50% market share by 2016. Asia-Europe trade lane, growth is not easy to come by, which makes the competition even more fierce. Industry trends  Near-sourcing and shifting production: Growth drivers Since the early 1990s there has been a shift to Forwarding is a GDP-driven business but GDP outsourcing of production to lower cost multipliers have decreased significantly since countries such as China which has meant the 2008 (pre-2008 2-2.5x GDP for sea freight), lengthening and increased complexity of reflecting the almost completion of containerization supply chains. However in recent years high and the significant reduction in availability of labour cost inflation has seen a shift in cheap consumer credit. We see sea freight production towards still emerging economies volumes growing at 1-1.5x GDP with a lower such as Vietnam, the Philippines and multiplier in the near term as European countries Bangladesh. Furthermore as transportation continue to unwind their debt burdens. costs have increased due to high oil prices, a trend of more near-sourcing (Eastern Europe and Mexico) has emerged. Though it is difficult to quantify the impact that this has had on volumes to date, it looks like a trend that could continue.

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 Modal shift: High oil prices and greater  Market share does not matter unless land sophistication of technology and supply chain and space is limited: Similarly, there is an solutions are behind a modal shift from air ongoing debate as to whether being global freight to sea freight. Air freight typically grows matters as local companies with local at 1-2ppt below sea freight. knowledge and relationships often have an equal footing when it comes to tendering for contracts.  Lighter shipments: As technology has Many global companies do however want to advanced there has been a shift towards lighter work with a trusted partner, with globally shipments (due to smaller components and tech recognized and accepted practices. products). As forwarders charge by weight but productivity is determined by shipments  There is no one-size-fits-all approach to processed, this has put pressure on margins. asset ownership: Flexibility is key and asset ownership is generally not a value proposition to  The need to add value, especially in mature customers. Most of the industry players have markets: We see industry players such as shied away from ownership. KNIN moving away from multi user facilities in places like the US, preferring where possible to  Customer quality matters: Even if contracts secure back-to-back contracts with core and leased facilities are structured back-to- customers. KNIN has been withdrawing from back, it is the 3PL provider that takes on the facilities and exiting low margin contracts with risk of the facilities and labour if the customer customers where they do not provide other tie in goes bankrupt - as was evidenced with DHL services. and Arcandor in 2009 (as per DP DHL annual report).

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Financials

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Income statement

Divisional summary Year to Dec (HKDm) 2010 2011 2012 2013e 2014e 2015e Revenue by segment Logistics operations 4,541 6,903 8,052 9,384 10,590 11,713 yoy growth % 52% 17% 17% 13% 11% HK warehouse 615 654 705 740 770 800 yoy growth % 6% 8% 5% 4% 4% Total integrated logistics 5,156 7,557 8,756 10,124 11,360 12,514 yoy growth % 47% 16% 16% 12% 10%

Total GFA managed (m sq ft) 25 32 32 37 41 44 yoy growth % 28% 0% 16% 10% 8% Revenue/sq ft 206 236 274 274 279 285 yoy growth % 14% 16% 0% 2% 2%

Intl freight forwarding 6,654 9,589 11,908 12,028 12,388 12,760 yoy growth % 44% 24% 1% 3% 3%

Inter-segment eliminations (930) (1,111) (1,370) (1,493) (1,583) (1,678) yoy growth % 20% 23% 9% 6% 6% Total revenues 10,880 16,034 19,295 20,659 22,165 23,596 yoy growth % 47% 20% 7% 7% 6%

Operating profit by segment Cost/sq ft 175 206 238 239 245 251 yoy growth % 18% 15% 0% 3% 2% Logistics operations 434 589 730 863 953 1,031 Margin 9.6% 8.5% 9.1% 9.2% 9.0% 8.8% HK warehouse 349 371 411 422 439 456 Margin 56.8% 56.7% 58.3% 57.0% 57.0% 57.0% Total integrated logistics 783 959 1,141 1,285 1,392 1,487 Margin 15.2% 12.7% 13.0% 12.7% 12.3% 11.9%

Operating costs 6,558 9,333 11,608 11,703 12,017 12,352 yoy growth % 42% 24% 1% 3% 3% International freight forwarding 96 256 300 325 372 408 Margin 1.4% 2.7% 2.5% 2.7% 3.0% 3.2%

Central costs (74) (76) (151) (169) (178) (186) yoy growth % 3% 99% 12% 5% 5% Total operating profit 805 1,139 1,290 1,441 1,586 1,709 yoy growth % 42% 13% 12% 10% 8% Margin 7.4% 7.1% 6.7% 7.0% 7.2% 7.2%

** We forecast a time weighted average square footage. As at 30 June 2013 the company had 36m sq ft under management. This has subsequently risen to 39m sq ft. Source: KLN, HSBC estimates 2013-15

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We forecast revenue and operating profit by KLN has c2.3m square feet of logistics facilities segment: logistics operations, Hong Kong under development – c6% of its current total warehouse (combined Integrated Logistics) and square footage, with 1.3m square feet in China. International Freight Forwarding. These facilities are due for completion over 2014- Logistics operations 15. It added 4m square feet in 1H13, mainly in mainland China. KLN does not disclose segmental revenue by Logistics facilities under development geography. However different countries will have Approximate GFA owned different revenue drivers which impact the overall Total ______Attributable ______growth and margin mix. We have approximated ’000 sq ft ’000 sq ft % the revenue mix from the breakdown of square China 1,326 1,326 100 footage – estimating c35% of the Hong Kong Thailand 878 792 75.9-100 Vietnam 119 119 100 warehouse space is used internally by the logistics Total 2,323 2,237 division. Clearly there is a difference in revenue Source: KLN, HSBC per square foot by region, with Hong Kong rents inherently much higher than those in mainland Below we show our forecasts for growth in square China, Thailand and Taiwan. footage – we assume that KLN will continue to pursue an ownership/leasing strategy. As KLN We estimate that just 15% of logistics revenue invests outside of Hong Kong, we expect the leasing comes from Hong Kong, with 27% from mainland proportion to increase (at present broadly 55/45). China, 19% from Taiwan and 23% from Thailand. As KLN expands away from Hong Kong, the Growth in square footage* revenue per square foot of its logistics operations 50 30% will likely go down but the revenue per square 40 25% 20% foot of its entire property portfolio will likely 30 increase as we expect its integrated logistics and 15% 20 value-added services to outpace its Hong Kong 10% warehouse growth. 10 5% - 0% HSBC estimated split of revenues (2012) 2010 2011 2012 2013e 2014e 2015e Others Total GFA managed (m sq ft) - LHS 16% yoy growth % - RHS China 27% Source: KLN, HSBC estimates 2013-15 *Estimates are based on average time weighted square footage calculated

We note that near term KLN has substantial Thailand 23% facilities under development which we expect to open largely in 2014. We therefore expect KLN to HK 15% grow ahead of the market; the Armstong report Taiwan forecasts an 8% CAGR over 2012-15 for the 19% Source: HSBC estimates logistics market in China and 5% in Asia Pacific (ex-China and Japan). Longer term we assume its growth will converge more towards market trends.

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Logistics spend growth by major regions (CAGR) Contract wins and development of new facilities 20% 16.3% are inherently difficult to forecast. The Armstrong 15% report forecast an 8% logistics spend CAGR over 10.3% 10% 8.0% 7.6% 2012-15 in China, though near term we assume

5.0% 3.6% higher growth due to the current high investment 5% 2.3% 2.7% 1.5% 1.0% in new facilities. 0.2% -2.6% 0% Greater Asia S. N. Japan Europe Thailand -5% China Pacific* America America About 61% of the square footage in Thailand 2007-12 2012-15e relates to Kerry Siam Seaport Ltd, the volumes of

Source: KLN (sourced from Armstrong report), HSBC which are driven by imports and exports out of * APAC excluding Greater China and Japan Thailand to the US and Europe and within Asia.

Growth will therefore broadly correlate with Revenue global imports and exports as well as with new Hong Kong contract wins within Thailand. Revenues and The Hong Kong logistics market is relatively profitability of this asset are not disclosed but we mature and competitive. There is a shortage of note that port assets tend to be high margin (e.g., warehousing space which is why KLN believes it DP World has an EBIT margin of 30%). has an advantage through ownership of its Revenues of the South East Asian region for 2012 properties in this market. We assume that this were HKD2.3bn – assuming a 50% forwarding market will grow broadly in line with domestic split and a 30% EBIT margin suggest that profits consumption (with KLN leasing or purchasing coming from Kerry Siam Seaport could be in the new space as and when it becomes available) as region of HKD100-200m. We believe the well as inflation. This gets us to a broad inclusion of the port within the logistics segment assumption of 4% revenue growth pa. is artificially inflating margins compared with other logistics operators. Mainland China KLN is adding 878,000 square feet of logistics space The logistics market in mainland China remains in 2014 in Thailand. This represents 10% of the total immature and fragmented. There are less space square footage currently managed in Thailand. We constraints than in Hong Kong but warehousing forecast c5% revenue growth pa. space is not always easy to secure as local authorities often prefer to give space for Taiwan development to offices or retail facilities. Revenue We believe growth will be driven by new contract growth here will depend on domestic wins and domestic consumption. We forecast consumption, new contract wins and in revenue growth of c5% pa. conjunction with this, the development of new logistics facilities. KLN has 1.3m square feet of logistics facilities under construction in China due to be completed between 2014 and 2015. This represents around 12% of its current square footage in mainland China.

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Margin dynamics at 4% and air volume growth at 2% as we believe that the structural shift from air to sea will Within the logistics segment we expect margins to continue. We also expect continued price pressure structurally decrease as: as is typical in a brokerage business.  Services become more commoditized as Given the unpredictability of timing and size we competitors become more sophisticated and do not forecast acquisitions. markets mature. While Asia remains an immature and underpenetrated market, this has All this considered we forecast revenue growth of been evidenced in Europe and the US over time. c3% pa.

 Growth occurs away from the high margin The potential for margin expansion comes Kerry Siam Seaport. through economies of scale and productivity improvements; we estimate KLN could almost  New facilities could have higher depreciation double its volumes with existing customers costs relative to much older facilities (and without adding headcount, though this would not investment property) in Hong Kong. If the be possible with new customers. company increases its proportion of leased facilities, this may give more flexibility but will Interest likely be more expensive and depress margins. KLN had a net debt position of HKD3.85bn (as at Hong Kong warehouse 30 June 2013), which included an interest-free shareholder loan of HKD3.78bn. The shareholder We assume that the square footage remains loan has subsequently been capitalized and repaid relatively static, that the utilisation is already as part of the IPO process. The company has a relatively high and that the amount used for the mixture of floating and fixed interest rate debt and logistics operations does not change materially is currently paying interest between 1.32% and (though in practice KLN will take the warehousing 5.8% on interest bearing debt. space and use it for logistics operations where the returns are higher), and that there are no mix Associates effects from more specialty warehousing. Share of results from associates is primarily made We therefore forecast rental income increasing in up of the results from AAT (15% stake) and CCT line with Hong Kong inflation, at c4%, and static (25% stake). margins. The opening of Cathay Pacific’s own cargo International Freight terminal in 4Q13 could have a negative impact on Forwarding AAT’s volumes. Growth is governed primarily by Asia-Europe and Exceptionals intra-Asia flows. KLN does not disclose its We include small one-off items that come as a exposure by trade lane. Global GDP multipliers course of doing business (general asset sale gains have contracted and growth should remain muted and losses) within EBIT. We do however classify as European economies continue to unwind their the revaluations of investment property as debt burden. We forecast 2014-15 sea freight exceptional items and strip these out to give a better volume growth just ahead of global GDP growth idea of the underlying performance of the company.

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Tax Risks to our forecasts

We forecast an effective tax rate of 22%, 22.2%  The company has not provided much and 22.4% over 2013-15 (excluding property disclosure in the way of forecasts. We have gains) in line with prior years and increasing therefore had to make significant assumptions progressively due to as the company grows further in preparing our forecasts. in China and the tax rate trends towards 25%.  We have made assumptions as to the number Minority interests of new facilities constructed each year and the size and cost of these facilities. This could be Minority interests relate to companies that KLN materially incorrect. controls and consolidates but does not fully own. These are principally:  We have not forecast acquisitions due to the uncertain nature and timing; yet the company  Kerry TJ Logistics 36.46% has a stated strategy of (and has been)  Kerry EAS Logistics 70% growing through acquisition in the past few years.  Kerry Siam Seaport 79.52% Net profit and core net profit  Our assumptions for domestic consumption and demand growth could be too high or low We forecast earnings growth of 8.3%, 8.4% and and will depend on global GDP and Chinese 8.1% for 2013-15, respectively. This compares to governmental policy decisions. a CAGR of 10.7% over 2010-12, which was driven by acquisitions and the full consolidation  We have not assumed a material impact from of Kerry TJ Logistics (Not rated). We calculate the introduction of VAT in China on services. underlying EBIT growth of 6% in 2012 excluding  Competition could intensify, pressuring acquisitions and c5% in 1H13. While we make no margins. Furthermore, cost base inflation assumption for acquisitions, and our growth rate could be higher than we forecast. is higher than has been the organic trend, we note that KLN has added a significant amount of  Working capital intensity could be higher square footage through 2013 and has 6% of its than we anticipate as KLN seeks to grow with existing portfolio under construction – which will big customers. come onstream largely in 2014. We also assume KLN will lease new facilities. Our central assumptions are that the capex has been largely front-end-loaded into 2013 and that the growth from the opening of these new facilities will materialize in 2014 and 2015. After this, we assume growth rates normalize to 5-6%.

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Income statement Year to Dec (HKDm) 2010 2011 2012 2013e 2014e 2015e Revenue 10,880 16,034 19,295 20,659 22,165 23,596 yoy growth % 47% 20% 7% 7% 6%

Total costs (excl D&A) 9,865 14,599 17,638 18,780 20,119 21,401 Adj EBITDA 1,015 1,435 1,657 1,879 2,046 2,195 D&A 210 296367 438 460 486

Adj EBIT 805 1,139 1,290 1,441 1,586 1,709 EBIT margin 7.4% 7.1% 6.7% 7.0% 7.2% 7.2%

Exceptionals 176 130265 500

EBIT 981 1,270 1,555 1,941 1,586 1,709

Interest income 11 13 25 29 32 35 Interest expense (23) (55) (63) (84) (84) (76) Net finance costs (12) (43) (38) (55) (52) (42)

Share of profit from associates 209 148 140 145 130 135

PBT 1,178 1,375 1,657 2,031 1,664 1,803 Adj PBT 1,002 1,245 1,392 1,531 1,664 1,803

Income tax expense (200) (254) (305) (337) (369) (404) Tax % of adjusted PBT 20.0% 20.4% 21.9% 22.0% 22.2% 22.4%

Net profit 978 1,121 1,352 1,694 1,294 1,399

Attributable to company's shareholders 833 871 1,069 1,384 958 1,035 Non-controlling interest 145 251 282 311 337 364 as % of net income 18% 25% 26% 26% 26% 26%

Adj net income attributable to 657 740 804 884 958 1,035 company's shareholders Core net profit^ 665 741 816 884 958 1,035 yoy growth % 11.4% 10.1% 8.3% 8.4% 8.1% Basic EPS 0.83 0.57 0.61 Adj EPS 0.53 0.57 0.61 ^ Core net profit is not a standard measure under HFRS. It represents the profit attributable to the company’s shareholders before the after-tax effect of change in fair value of investment properties

Source: KLN, HSBC estimates for 2013-15

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Balance sheet

Leverage Balance sheet ratios comparison 2013e 2014e 2015e There is a wide spectrum of leverage profiles Net debt/EBITDA (x) among the logistics players. The Swiss freight KLN -0.1 -0.5 -0.7 forwarders (Panalpina and K+N) tend to sit with Panalpina -2.1 -2.1 -2.0 KNIN -1.2 -1.3 -1.5 very conservative net cash balances and K+N is DSV 1.9 1.3 0.7 likely to pay a special dividend in 2014. DSV on DP-DHL 0.4 0.3 0.2 the other hand, tries to maintain an efficient Interest cover - EBIT capital structure with a target leverage ratio of 2x KLN 17.1 19.0 22.5 Panalpina 15.4 n/m n/m net debt/EBITDA. After having to raise equity in KNIN n/m n/m n/m DSV 8.3 9.6 12.8 2009, DSV reduced its gearing policy from 3-3.5x DP-DHL 9.8 8.8 10.2 net debt/EBITDA. Cash % of sales KLN 14% 14% 15% Post IPO, KLN sits with a small net cash balance. Panalpina 5% 6% 7% It could comfortably releverage or sale and KNIN 7% 8% 9% DSV 3% 5% 8% leaseback its freehold properties. However we are DP-DHL 5% 5% 6% not aware this is something management is Net debt/equity considering at present. KLN -1% -6% -8% Panalpina* -47% -49% -53% KNIN* -44% -49% -53% DSV 87% 51% 24% DP-DHL 17% 13% 8%

*net cash Source: HSBC estimates

Net debt/EBITDA 2.5

2.0

1.5

1.0

0.5

0.0 2010 2011 2012 2013e 2014e 2015e -0.5

-1.0

Source: KLN, HSBC estimates for 2013-15

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Debt breakdown and funding Working capital profile Forwarders tend to maintain a conservative capital Total borrowings (HKDm) structure as a result of the big swings in working 8,000 capital that can occur due to big changes in freight

6,000 rates, customers getting into difficulty or changes in customer mix (with bigger customers demanding 4,000 longer payment terms). The low growth environment 2,000 in Europe in particular has led to intense competition

- for volumes, the result being customers offered 2,010 2,011 2,012 2013e 2014e 2015e longer payment terms which has stretched cash Bank overdrafts Loan from non-cont rolling interest s flows for some forwarders. Loans from fellow subsidiaries Bank Loans KLN has seen its debtor days increase notably, Source: KLN, HSBC particularly in 1H13, due to an increase in

customer size with longer payment terms and a Maturity of bank loans Ov er 5 Within 1 change in the revenue contributions. years year 2% 22% Average trade receivables turnover days 80 70 60 Betw een 1 and 2 y ears 50 10% 40 Betw een 3 and 5 years 30 66% 20

10 Note: As of 30 June 2013 Source: KLN, HSBC 0 2010 2011 2012 1H13

Source: KLN, HSBC Breakdown of bank loans (HKDm) 3,500 The increase in the revenue contribution by the air 3,000 and ocean freight consolidation operations (which 2,500 have longer credit terms) has driven an increase in 2,000 payables days. 1,500 1,000 500 0 2010 2011 2012 1H13 Current unsecured Current secured Non-current unsecured Non-current secured Source: KLN, HSBC. Excludes KPL loan

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Average trade payables turnover days 50 45 40 35 30 25 20 15 10 5 0 2010 2011 2012 1H13 Source: KLN, HSBC

Covenants

Some covenants exist with regard to the company’s bank debt which preclude the company from changing the general nature of its business or disposing of a material part of its assets. There are also financial covenants, including consolidated tangible net worth, ratio of consolidated total financial indebtedness to aggregate consolidated tangible net worth and minority interests, and ratio of consolidated total liabilities to aggregate consolidated tangible net worth and minority interests.

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Balance sheet As at 31 Dec (HKDm) 2010 2011 2012 2013e 2014e 2015e Intangible assets 835 1,186 1,774 1,774 1,774 1,774 Investment properties 4,999 5,143 5,768 6,179 6,179 6,179 Leasehold land and land use rights 409 576 539 539 539 539 Property, plant and equipment 4,503 4,989 5,999 6,308 6,660 7,017 Associates 818 1,002 939 1,128 1,258 1,393 Available for sale investments 51 52 61 61 61 61 Non-current assets 11,614 12,949 15,079 15,988 16,471 16,963

Inventories 131 110110 124 133 142 Accounts receivable 2,029 2,405 3,389 3,719 3,990 4,247 Prepayments and deposits 481 954 936 936 936 936 Tax recoverable 5 11 9 9 9 9 Restricted and pledged bank dep. 16 5 5 5 5 5 Cash and bank balances 2,211 2,908 2,940 3,167 3,457 3,518 Current assets 4,871 6,392 7,389 7,960 8,529 8,857 Total assets 16,486 19,341 22,468 23,948 25,000 25,821

Accounts payable 788 1,287 1,663 1,758 1,870 1,983 Deposits received and acc. charges 1,525 2,066 2,260 2,260 2,260 2,260 Loans from fellow subsidiaries 3,491 3,891 4,182 Amount due to imm. holding co. 75 94 65 65 65 65 Amount due to a related company 5 7 4 4 4 4 Taxation 129 83 117 117 117 117 ST bank loans 417 694 601 601 601 601 Bank overdrafts 21 16 26 26 26 26 Current liabilities 6,451 8,137 8,917 4,830 4,942 5,055

Loans from non-controlling interests 83 131 222 222 222 222 Long term bank loans 237 405 1,365 2,300 1,800 1,300 Deferred taxation 466 443 490 490 490 490 Retirement benefit obligations 311 320 349 349 349 349 Non-current liabilities 1,097 1,300 2,425 3,360 2,860 2,360

Share capital 1 1 1 109 109 109 Retained profits 5,458 6,315 7,361 8,245 9,026 9,870 Other reserves 1,083 1,082 996 4,326 4,649 4,649 Shareholders’ equity 6,542 7,398 8,358 12,679 13,783 14,627 Non-controlling interests 2,395 2,506 2,768 3,078 3,415 3,778 Total Equity 8,937 9,904 11,126 15,757 17,198 18,405 Total liabilities and shareholders’ equity 16,486 19,341 22,468 23,948 25,000 25,821

Source: KLN, HSBC estimates for 2013-15

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Cash flow

Quality of earnings to build around 3-4 significant facilities pa in mainland China. Quality of earnings even adjusted for property revaluations has been volatile – mainly due to We estimate maintenance capex of c2% sales in swings in working capital. line with peers and then assume investment in 4 facilities pa at around HKD100m per facility and Quality of earnings 1.2 around 250,000 square feet per facility. Due to the time lag between capex for construction and 1.0 completion, revenue growth does not necessarily 0.8 follow the capex profile. 0.6 Capex/Sales 0.4 8% 0.2 7% - 6% 2010 2011 2012 2013e 2014e 2015e 5% 4% Calculated as operating cash flow less depreciation adjusted for property revaluations 3% Source: KLN, HSBC estimates for 2013-15 2% Working capital 1% 0% As the forwarding side of the business continues to 2010 2011 2012 2013e 2014e 2015e grow and KLN takes on large customers with longer Source: KLN, HSBC estimates for 2013-15 payment terms, we would expect the working capital intensity of the business to naturally increase. Capex/Depreciation 4.5 Capex 4.0 3.5 KLN spent on average HKD975m pa on property, 3.0 plant and equipment over 2010-12. The company 2.5 aims to make investments in new facilities when it 2.0 1.5 has identified a specific customer or has built 1.0 sufficient volumes in areas such that it can be 0.5 confident of achieving good utilisation of its new 0.0 sites upon opening. Capex can be lumpy depending 2010 2011 2012 2013e 2014e 2015e Source: KLN, HSBC estimates for 2013-15 on winning new contracts or identifying suitable sites or properties. We expect the company to look

44 Kerry Logistics Network (636 HK) Air Freight & Logistics abc 28 January 2014

Capital commitments

KLN has HKD461m in capital commitments in terms of property plant and equipment and acquisition of subsidiaries as at 30 June 2013. Free cash flow profile

Though the company intends to grow its IF division through acquisition, we do not forecast acquisitions due to the uncertainty in nature and timing.

Based on this, plus inherently lower capex and more muted working capital outflows, the cash flow profile of KLN improves significantly in 2014 and 2015.

Free cash flow (post investment capex and acquisitions) (HKDm) 1,000

800

600

400

200

- 2010 2011 2012 2013e 2014e 2015e (200)

(400)

Source: KLN, HSBC estimates for 2013-15

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Cash flow statement Year to Dec (HKDm) 2010 2011 2012 2013e 2014e 2015e Profit before taxation 1,178 1,375 1,657 2,031 1,664 1,801 Share of results of associates (209) (148)(136) (145) (130) (135) Interest income (11) (13) (28) (29) (32) (33) Dividend income from AFS investments (2) (2) (0) Finance costs 23 55 63 84 84 76 Others (152) (112) (187) (500) - - D&A 210 296367 438 460 486 Operating cash flow before WC changes 1,038 1,451 1,736 1,879 2,046 2,195

Increase in inventories and accounts (425) (269) (703) (344) (280) (266) receivable, prepayments and deposits Increase/(decrease) in current liabilities, 163 204 179 95 112 113 Change in net pension liabilities (10) (20)(25) Dec in contingent payment for acq. of sub. (8) Net cash generated from operations 765 1,367 1,179 1,630 1,878 2,042

Interest paid (18) (49) (58) (84) (84) (76) Income tax paid (140) (298) (250) (337) (369) (404) Net cash generated from op. activities 607 1,019 871 1,209 1,425 1,562

Additions of PP&E (604) (853) (1,468) (1,182) (813) (843) Additions of investment properties (4) (0) Purchase of AFS investments (3) Purchase of leasehold land and land use rights (4) (102) (22) Proceeds from sale of PP&E 42 101 84 35 Proceeds from sale of investment in associates 2 6 1 Proceeds from sale of an AFS investment 1 Dividend income from AFS investments 2 2 0 Dividends received from associates 159 31 296 Increase in balance with associates (0) (39)(71) Decrease in balance with associates 9 8 32 63 Interest received 11 13 28 29 32 33 Acquisition of subsidiaries 65 (194)(492) (411) Increase in investments in associates (55) (53) (107) Change in restricted and pledged bank dep (15) 11 0 Net cash used in investing activities (388) (1,024) (1,665) (1,573) (782) (809)

Increase in loans from fellow subsidiaries 299 394 285 Decrease in loans from fellow subsidiaries (2,400) Repayment of bank loans (123) (351) (927) (1,600) (500) (500) Drawdown of bank loans 302 770 1,771 2,535 Dividends of subsidiaries paid to non- (6) (66) (80) controlling interests Capital injection from non-controlling interests 33 13 Drawdown of loans from non-cont interests 2 60 90 Repayment of loans from non-cont interests (1) (13) Settlement of recharge of share based (104) payment with immediate holding company Acquisition of additional interest in subsidiaries (42) (151) (256) Disposal of partial interest in subsidiaries 0 Dividends paid to shareholders (177) (192) (207) IPO net proceeds 2,056 323 Net cash generated from financing activities 431 676 793 591 (354) (692) Change in cash and cash equivalents 650 671 (2) 227 290 62 Effect of exchange rate changes 63 26 33 Cash and cash eq at the beg of the year 1,498 2,211 2,908 2,940 3,167 3,457 Cash and cash eq at the end of the year 2,211 2,908 2,940 3,167 3,457 3,518

Source:: KLN, HSBC estimates for 2013-15

46 Kerry Logistics Network (636 HK) Air Freight & Logistics abc 28 January 2014

Valuation

 KLN is more asset heavy than peers, making multiple comparison tricky  We cross-check our multiple-based valuation with listed peers  We arrive at a target price of HKD11.75 and initiate with an UW(V) rating

Valuation methodology (V) rating. Potential return equals the percentage difference between the current share price and the KLN is a predominantly Asian contract logistics target price, including the forecast dividend yield led freight forwarding business with some when indicated. express/road activities and a Thai port as well as a holding in a container and airfreight terminal. We then cross-check this valuation range with There is no pure play listed peer which is why we EV/IC vs. ROIC and historic peer multiples. use a broad peer group of US and European Core valuation (based on 2014 forecasts) freight forwarders, global integrators, European Multiple Valuation (HKDm) contract logistics operators as well as Chinese P/E 21.0x 20,116 state owned logistics hybrids to derive our EV/EBIT 14.0x 19,990 valuation. EV/EBITDA 10.5x 19,453 Average 19,853 Target price -HKD 11.75 KLN’s peer group is trading over a broad range of **EBIT/EBITDA adjusted for minority interests (25% of the earnings stream). To derive the multiples reflecting divergent returns profiles and equity value we add a net cash of HKD1.14bn (2014e) and add in the market value of the associates HKD2.2bn. growth expectations. We take the average 2014e Source: HSBC estimates PE, EV/EBIT and EV/EBITDA multiples across the sector and apply these to KLN’s 2014 Implied KLN valuation based on our target price estimates, adjusting for the value of associates 2013e 2014e 2015e (CCT and AAT HKD2.2bn) and minority interests P/E 19.5 20.7 19.2 EV/EBITDA 10.6 10.6 9.7 (KLN fully consolidates Kerry TJ Logistics EV/EBIT 13.8 13.7 12.4 although it only owns 36% ). This gets us to our Note: these are headline multiples that include the book value of associates/JV and minority interests rather than the market value target price of HKD11.75. Source: HSBC estimates

Under our research model, the Neutral rating band for volatile Hong Kong stocks equals the local hurdle rate of 8.5% plus or minus 10ppt. Our target price of HKD11.75 implies a potential negative return of 8.6%, including the forecast dividend yield of 0.9%. This is below the Neutral band; therefore, we initiate with an Underweight

47 Kerry Logistics Network (636 HK) Air Freight & Logistics abc 28 January 2014

Challenging peer analysis  Listed logistic peers have gravitated towards a more asset-light model and shy away from Peer comparison is imperfect and KLN’s peers are property ownership, unlike KLN. trading at a range of multiples which we reflect in our valuation range presented above.  KLN has higher margins than peers benefitting from low ownership costs Comparative analysis is challenging as: (investment properties are not depreciated).  There is a shortage of listed logistics The flip side of having high margins due to companies within Asia and those that exist high asset intensity is lower returns on (Sinotrans) are state owned hybrids. invested capital. KLN’s 2014e ROIC is 7.1% versus KNIN on 22.5% and DSV on 13.8%.  Some of the listed logistics companies are undergoing significant restructuring and/or  KLN has a high degree of minority interests – earnings are distressed. representing c26% of net income.

 Listed logistics companies in Europe and the US We present below a multiples comparison table are forwarding rather than contract logistics led. for what we believe to be the most relevant peers. Within this, we have a mixture of:  Most of the significant stand-alone contract logistics-led players within Europe that could have been relevant have been acquired.

Pee

Peer multiples Ticker CP^ Rating ______PB (x) ______Dividend yield ______13e 14e 15e 13e 14e 15e DPW DPW GR 26.5 N 3.2 3.0 2.7 3.2% 3.4% 3.6% TNTE TNTE NA 6.7 UW (V) 1.7 1.6 1.5 1.1% 1.9% 2.5% KNIN KNIN VX 123.7 UW 5.8 5.4 5.0 3.1% 3.2% 3.4% PWTN PWTN SW 150.0 UW 4.5 4.2 3.9 1.4% 1.7% 1.8% DSV DSV DC 181.0 N 5.0 4.0 3.4 0.7% 0.8% 0.8% KLN 636 HK 13.0 UW (V) 1.4 1.6 1.5 1.0% 0.9% 0.9% FDX FDX US 140.2 NR* 2.5 2.2 2.0 0.4% 0.5% 0.6% UPS UPS US 97.9 NR* 31.2 32.8 28.5 2.5% 2.7% 2.9% UTI WW UTIW US 17.2 NR* 2.3 2.1 1.8 0.3% 0.4% 0.3% CH Robinson CHRW US 59.1 NR* 8.0 7.6 7.9 2.3% 2.5% 2.7% Expeditors EXPD US 43.6 NR* 4.2 4.0 3.5 1.4% 1.7% 1.9% Wincanton WIN LN 1.5 NR* n/m n/m n/m 0.0% 0.0% 0.0% Sinotrans 598 HK 3.3 NR* 1.2 1.2 1.1 1.2% 1.4% 1.6% Average** 3.9 3.6 3.3 1.4% 1.6% 1.8%

Note: UTI WW is a January ending company, FedEx is a May ending company and Wincanton is a March ending company. Hence the values have been calendarized. ^Current price in local currency *NR = Not rated **PB average excludes Sinotrans and UPS. Dividend yield averages includes all the values Source: HSBC estimates for DPW, TNTE, PWTN, KNIN, DSV, KLN. Bloomberg estimates for FDX, UPS, UTI WW, CH Robinson, Expeditors, Wincanton and Sinotrans Prices as of 23 January 2014 for DPW, TNTE, KNIN, PWTN, DSV, FDX, UPS, UTI WW, CH Robinson, Expeditors and Wincanton as of 24 January for KLN and Sinotrans

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Peer multiples Ticker CP^ Rating ______EV/EBIT (x) ______EV/EBITDA (x) ______PE (x) ______13e 14e 15e 13e 14e 15e 13e 14e 15e DPW DPW GR 26.5 N 11.9 13.3 11.7 8.1 9.2 8.3 17.1 17.4 15.3 TNTE TNTE NA 6.7 UW (V) 15.1 11.6 9.5 9.0 7.8 6.7 36.6 21.3 15.8 KNIN KNIN VX 123.7 UW 16.6 17.2 15.9 13.2 14.0 13.0 25.1 23.6 22.0 PWTN PWTN SW 150.0 UW 19.4 23.3 18.7 14.1 16.5 13.5 39.3 33.3 27.2 DSV DSV DC 181.0 N 13.5 14.5 13.4 11.2 12.0 11.2 19.6 18.4 17.3 KLN 636 HK 13.0 UW (V) 13.8 15.1 13.8 10.6 11.7 10.8 19.5 22.9 21.2 FDX FDX US 140.2 NR* 13.3 11.9 9.9 7.4 7.2 6.3 22.7 17.2 14.1 UPS UPS US 97.9 NR* 14.4 14.1 12.8 11.4 11.4 10.3 21.3 18.4 16.2 UTI WW UTIW US 17.2 NR* 36.1 17.9 10.6 15.8 10.0 7.1 85.3 31.5 19.3 CH Robinson CHRW US 59.1 NR* 13.3 12.6 11.9 12.3 11.6 10.9 21.8 19.8 18.0 Expeditors EXPD US 43.6 NR* 13.4 11.8 10.5 12.4 11.0 9.7 25.0 22.2 20.2 Wincanton WIN LN 1.5 NR* 11.6 10.9 10.8 7.6 7.4 7.1 9.3 9.7 8.8 Sinotrans 598 HK 3.3 NR* 9.1 7.7 6.5 6.0 5.2 4.5 16.8 13.7 11.5 Average** 15.6 13.9 11.9 10.7 10.3 9.0 28.3 20.5 17.2 Avg excl. 13.9 13.4 11.9 10.6 10.5 9.6 23.6 19.8 17.4 high/low(1) Avg excl. 13.2 12.6 11.3 9.9 9.7 8.8 21.5 18.2 15.9 restructuring (2) Avg just FF 14.2 14.0 12.9 12.3 12.2 11.2 22.9 21.0 19.4

Note: UTI WW is a January ending company, FedEx is May ending company and Wincanton is a March ending company. Hence the values have been calendarized. (1) We exclude the two highest and lowest multiple peers (2) Excluding companies undergoing significant restructuring or where earnings are distressed ^Current price in local currency *NR = Not rated Source: HSBC estimates for DPW, TNTE, PWTN, KNIN, DSV and KLN.. Bloomberg estimates for FDX, UPS, UTI WW, CH Robinson, Expeditors, Wincanton and Sinotrans; Prices as of 23 January 2014 for DPW, TNTE, KNIN, PWTN, DSV, FDX, UPS, UTI WW, CH Robinson, Expeditors and Wincanton as of 24 January for KLN and Sinotrans

 Freight forwarding led contract logistics Earnings 2012-13e 2013-14e 2014-15e 2012-15e players: Kuehne + Nagel, DSV, Panalpina growth CAGR (European), Expeditors, UTI Worldwide, CH KLN 8.3% 8.4% 8.1% 8.2% Wincanton -22.8% -4.3% 10.0% -6.7% Robinson (US) Sinotrans 28.7% 22.8% 19.4% 23.6% UTI -53.6% 173.2% 65.1% 27.9% CH Robinson -1.7% 10.0% 9.6% 5.9%  Global integrators: Deutsche Post-DHL, TNT, DSV 4.8% 6.4% 6.1% 5.8% FedEx, UPS KNIN 10.1% 6.3% 6.9% 7.8% PWTN 67.7% 18.1% 22.3% 34.3% DP-DHL 27.5% -2.1% 13.8% 12.4%  Local contract logistics led players: TNTE -36.8% 71.5% 34.9% 13.5% Wincanton (Europe) FedEx 4.9% 21.4% 23.4% 16.3% UPS 4.9% 15.5% 12.8% 11.0%  Asian integrator: Sinotrans (though this also Source: HSBC estimates for KLN, DSV, KNIN, PWN, DP-DHL and TNTE. Bloomberg consensus for Wincanton, Sinotrans, UTI, CH Robinson, FedEx and UPS. Numbers have provides marine transportation services) been calendarized

We present below the earnings growth profile for the peer group. KLN’s forecast earnings growth is in the middle of the pack; slightly higher than some of its European peers but lower in general than its US peers and the asset heavy integrators.

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Historical EV/EBIT (x) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Exel 16.1 20.4 14.6 16.7 17.8 18.0 Wincanton 16.2 14.4 10.4 12.5 16.4 12.2 12.2 14.3 14.0 12.5 10.7 11.3 13.8 9.2 Tibbett 7.7 10.2 10.3 10.1 10.5 Sinotrans 0.6 0.7 2.2 3.9 5.1 3.1 3.7 3.4 DSV 7.7 9.8 12.5 16.5 15.0 14.7 13.5 13.1 12.8 12.4 KNIN 7.8 9.8 8.4 8.0 12.4 12.9 16.3 17.0 13.4 14.8 16.4 18.0 18.0 PWTN 15.0 16.0 16.3 13.8 11.0 15.9 8.9 13.3 12.4 11.6 25.8 DP-DHL 11.9 8.9 9.0 9.0 8.7 10.9 16.9 16.4 13.9 10.4 8.7 9.0 TNTE 14.6 10.6 6.2 15.9 FedEx 13.1 13.0 13.0 12.6 11.1 10.6 11.0 11.2 12.1 12.0 9.7 9.1 UPS 18.2 18.0 14.6 13.7 12.9 13.4 17.9 13.6 12.3 12.6 Average 13.3 13.2 11.7 12.1 12.9 12.1 12.2 11.7 13.1 11.8 12.9 11.4 10.8 12.8

Source: Respective company reports, HSBC

Historical multiples

There were more contract logistics driven businesses listed in the past than there are in the present. We therefore look back to sense-check our multiples and valuation. If we look back to 1999-2004, which was a period of significant growth of contract logistics within Europe and the US when Exel, Tibett and Britten and Wincanton were listed (Wincanton still is), we get an average multiple of EV/EBIT of 12.6x and PE of 17.1x.

Historical PE (x) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Exel 26.5 34.3 23.9 17.2 21.4 20.0 Wincanton 18.6 13.3 7.3 15.1 11.3 20.7 15.2 15.2 16.2 19.6 19.7 12.4 4.5 Tibbett + Britten 10.7 14.7 15.9 15.8 17.2 Sinotrans 15.5 16.9 15.7 27.8 22.7 16.1 18.6 13.4 12.1 8.5 DSV 8.7 13.0 16.4 22.0 20.7 16.3 17.8 17.9 15.8 14.3 KNIN 13.2 11.8 11.0 11.4 15.2 18.5 21.4 22.5 17.8 19.5 22.2 23.4 24.5 PWTN 20.8 24.2 23.2 20.5 16.8 23.2 15.3 27.9 20.2 18.9 40.3 DP-DHL 13.8 7.8 10.1 6.6 5.4 8.4 19.3 11.1 16.4 13.8 10.7 11.9 TNTE 25.3 20.0 10.7 29.0 FedEx 20.4 20.4 19.1 18.6 17.2 16.3 16.7 17.1 19.0 19.0 15.1 14.2 UPS 26.3 25.6 21.1 19.8 17.3 18.0 24.4 18.6 16.3 16.7 Average 18.6 18.9 15.5 15.4 16.5 17.8 16.2 18.5 19.8 16.4 21.0 18.1 15.0 18.2

Source: Respective company reports, HSBC

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EV/IC vs. ROIC Acquisition multiples

We plot EV/IC versus ROIC for the sector in order Acquisition multiples are illustrative of the to sense-check our valuation, bearing in mind the significant deviation in valuation across the sector difference in capital intensity of KLN’s model but are not useful for analysis. Acquisition versus its peers and given that this should be multiples have ranged from 8-21x EBIT. In 2005 reflected in its multiples. KLN has a ROIC of 7.1% Deutsche Post-DHL acquired Exel Logistics for (on our 2014 estimates) versus KNIN of 22.5%. 27x EBIT (or 13x post the cost synergies it at the From our line of best fit, on the basis of a 7.1% time expected to extract). 2013e ROIC and an invested capital base of

HKD17.4bn this would imply a valuation of HKD11.5 per share.

EV/IC vs. ROIC (2013e) 6 y = 22.258x - 0.0733 5 PWTN CH Robn 4 KNIN

3 DSV EV/IC UTI 2 DP-DHL KLN 1 Wincanton TNTE 0 0% 5% 10% 15% 20% 25% 30% ROIC Source: Respective company reports, HSBC estimates

Third-party logistics acquisitions Target company Acquirer Acquisition date Target company EBIT multiplier EBITDA multiplier yearly revenue (USDm) American Backhaulers C.H.Robinson Dec-99 280 10.5 Tibbett & Britten Exel Dec-04 2600 6.8 Ozburn-Hessey Logistics Welsch, Carlson, Anderson & Stone Jun-05 302 9.2 Exel Plc Deutsche Post Dec-05 13* BAX Global Deutsche Bahn Jan-06 2734 10.7 Barthco International Ozburn-Hessey Jul-06 120 9 Jacobson Companies Oak Hill Capital Jun-07 375 11 EGL Apollo Management/CEVA Jul-07 3200 14.5 Geodis SNCF Jul-08 7043 9.6 Express Logistics Group Toll Holdings Oct-09 113 8 Summit Logistics Intl Toll Holdings Feb-10 261 9.3 ATC Technology Corp GENCO Distribution System Jul-10 476 6.6 Total Logistic Control Ryder Dec-10 250 7 TDG Norbert Dentressangle Mar-11 1100 5.8 Exel Transportation Services Hub Group Apr-11 717 20.8 Caterpillar Logistics Platinum Equity May-12 660 11 Turbo Logistics XPO Logistics Oct-12 124 8 Phoenix International C.H.Robinson Nov-12 807 12.5

*Post the cost-synergies expected to extract Source: KLN, HSBC

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Investment property the appropriate pre-tax capitalisation rate, given that rental income is taxable, would be 4.6% Below we show JLL’s estimate of the capital divided by 0.835 (i.e. 1 - 16.5%) = 5.4%. value of warehouse space in Hong Kong. Finally, if we apply this capitalisation rate to Industrial property valuation (HKD psf) and capitalisation yields in Hong Kong revenue, then the cap rate used should be 5.4% 2,500 8% divided by the warehouse division’s EBIT margin 7% of 57% which gives a capitalisation rate of 9.5%. 2,000 6% This compares to the current cap rate of 5.8% 5% 1,500 (source: Jones Lang Lasalle). 4% 1,000 3% We argue given the relatively strong rental 2% 500 performance in recent years, the upside risks to 1% 0 0% HKD 10-year interest rates, plus the relatively 1Q04 3Q05 1Q07 3Q08 1Q10 3Q11 1Q13 weak outlook for demand, that the capitalization HKD psf (LHS) Yield % (RHS) rate for Hong Kong industrial space should be Source: Jones Lang Lasalle, HSBC relatively high. Indeed, KLN’s relatively old warehouse properties – some of which rely on Capital values are a function of rents and lorry loading bays on some or all of the floors – capitalisation rate applied to these rents. Based on suggests its capitalization yield should be higher a perpetuity formula, the capitalisation rate is than the levels suggested by JLL’s basket of driven by a combination of the risk-free rate, the industrial space assets. perceived risk premium for holding property investment assets, and perceptions of the likely HSBC appraised valuation by country/territory future annual growth in rent in perpetuity. Vietnam S'pore 3% 3% China (ex- What’s in the capitalisation rate? HK) If property rent (pre-tax) which is rent (pre-tax) 6% value = Yield equivalent to WACC – g

Then: yield = WACC-g Where WACC = pre-tax real risk free rate (Rf pre-tax) + inflation + risk premium and: g = annual growth in rents

Source: HSBC HK 88% We assume an average beta for Hong Kong- Source: HSBC estimates warehouse property investors of 1.0. The current HKD 10-year swap rate is 2.6%, though this may Given the relatively low EBIT margin generated be subject to upside risk. If we assume an equity by KLN’s portfolio of assets, we estimate a risk premium of 5% and that, from relatively high capitalization rate of 9.5% should be applied to levels, warehouse rents grow at a 3% CAGR, this KLN’s 2013 revenues to value the property assets. implies a capitalisation rate of 4.6% for Therefore, based on our forecast of gross revenue warehouse property should be applied to the post- from this division of HKD730m, we value KLN’s tax profit from these properties. If we apply a property assets at HKD7.7bn. capitalisation rate to pre-tax income (i.e. EBIT),

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HSBC’s Real Estate team argues that property investors should trade at approximately a 30% discount to appraised valuation (the investors are trading at 40-45% discounts currently) (HK Real Estate: Seeking shelter from stronger headwinds, 27 January 2014). If we applied a 30% discount to our appraised valuation of KLN’s property portfolio, then it implies a value of HKD5.4bn, which equates to 15x 2013e post-tax profit from the Hong Kong warehouse division.

Below we show our valuation of KLN’s investment properties under three scenarios.

 Base case – as we discuss above

 Low – we assume HKD 10-year interest rates of 3.6% versus 2.6% now

 High – we assume warehouse rents grow in perpetuity by 4% rather than the 3% we assume in the base case

The risks to this valuation include a sharp decline in demand for space by logistics companies in Hong Kong, a significant strengthening of the HK/US dollar and a rise in the HKD 10-year interest rate.

HSBC appraised valuation scenarios Low Base High HKD 10-yr 3.6% 2.6% 2.6% ERP 5.0% 5.0% 5.0% l-t growth 3.0% 3.0% 4.0% Post-tax cap rate 5.6% 4.6% 3.6% Pre-tax 6.6% 5.4% 4.3% Yield on revenue 11.6% 9.5% 7.4% Appraised value (HKDm) 6,292 7,683 9,864 Fair value to KLN (HKDm) 4,405 5,378 6,905 Implied PE (x) 13 15 20

Source: HSBC estimates

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Appendices

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Appendix 1

Kerry / Kuok Group About: Private, diversified conglomerate with interests in shipping and transportation, food industries, real estate, media, financial activities, hotels, etc. Owned by Kuok family (started as Kuok Brothers Limited in 1949). Robert Kuok is the chairman of the group Key Group members  Perlis Plantations Berhad (PPB)  Federal Flour Mills Berhad (FFB)  Jerneh Insurance Corporation Sdn. Berhad  Hexagon Holdings Berhad  Wilmar International Limited  Transmile Group  Pacific Carriers Limited (PCL)  Allgreen Properties Limited  Shangri-La International Hotel Management Limited  Kerry Properties Limited  South China Morning Post (SCMP)  Kerry Logistics Limited

Source: Various news reports

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Appendix 2

China’s 3PL market structure China's market structure 1. An estimation of over 10,000 3 PL service providers 2. Usually small/medium sized operating in only one province 3. Expectation of market consolidation led by large 3PLs Current deficiencies 1. Vast disparity in quality of urban against rural transportation infrastructure makes managing logistics more complicated and costly 2. Without good transportation infrastructure, costs are higher 3. High warehousing and inventory carrying costs due to higher levels of inventory owing to longer delivery cycle times Objectives of China's 12th 5 year plan 1. Aggressively develop 3PL, integrate existing logistics resources, reduce costs 2. Promote agricultural products, bulk mineral products, key industrial areas 3. Develop regional distribution systems and logistics parks 4. Promote development of modern logistics management and improve standardization

Source: Company presentation

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Appendix 3

Board of Directors Name Position Profile

Yeo George Yong-boon Chairman/Executive Mr. Yeo, age 59, is an Executive Director of the Company. He has been a Chairman since Aug 2012 and also Director deputy chairman and a director of KGL. From 1988 to 2011, Mr. Yeo served in the Singapore government as Minister of State for Finance, Minister of Information and the Arts, Health, Trade and Industry and Foreign Affairs. Prior to 1988 he has also served in various capacities in the Singapore Armed Forces. Mr. Yeo is a member of the Foundation Board of the World Economic Forum, the Berggruen Institute on Governance, the Asia-Pacific Advisory Board of Harvard Business School, the International Advisory Board of IESE Business School and Economic Development Commission, Hong Kong. Mr. Yeo was awarded the Philippines’ Order of Sikatuna, India’s Padma Bushan and Australia’s Honorary Officer of the Order of Australia. Mr. Yeo graduated from Cambridge University with a double first in engineering in 1976 and also obtained a master of business administration degree (Baker Scholar) from Harvard Business School in 1985. Ma Wing Kai William Group Managing Mr. Ma, age 52, is an Executive Director. He has been a director since June 1999 and designated as Deputy Director/Executive Director Chairman and Managing Director since April 2004. He joined the KHL Group in September 1990 and served as an executive director of KPL since March 2004. He has also been a director of Kerry TJ Logistics since November 2008. Mr. Ma currently serves in the Logistics Development Council, the Aviation Development Advisory Committee and the Advisory Committee on Admission of Quality Migrants and Professionals of the Hong Kong Government. He is also a member of the Advisory Board of the Asian Institute of Supply Chain and Logistics of the Chinese University of Hong Kong and the Logistics Services Advisory Committee of the Hong Kong Trade Development Council. Mr. Ma obtained a bachelor of science (management sciences) degree from the University of Lancaster, the United Kingdom in 1985, and completed an executive supply chain programme at Harvard Business School in 2000. Erni Edwardo Executive Director Mr. Erni, age 52, is an Executive Director. He has been a director since 2011 and also President of the China region. He joined the company in January 1994 and has c20 years of experience in the logistics industry of China. Mr. Erni currently serves as vice-chairman of several industry associations including the China Federation of Logistics & Purchasing, the Integrated Transport Federation of China Communications and Transportation Association, and China Association of Warehouses and Storage. Mr. Erni obtained a master of business degree in logistics management from the Royal Melbourne Institute of Technology, Australia in 2005 and has completed various management and professional study programmes - a training course held by the Harvard Business School in association with the School of Management at Fudan University in 2013, and management courses held by Tianjin University in 2011, Beijing University in 2009 and Tsinghua University in 2008. Kuok Khoon Hua Executive Director Mr. Kuok, age 34, is an Executive Director. He has also served as a director of KHL since January 2010, as a director of Kerry Wines Limited, a subsidiary of KGL, since March 2011, as deputy managing director of KHL since January 2012, and director of KGL since August 2012. He is currently involved in the management of KHL, including KHL’s investment, legal, human resources and wine divisions. Mr. Kuok obtained a bachelor’s degree in economics from Harvard University in 2003.

Source: Company

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Board of Directors (cont’d) Name Position Profile

Qian Shaohua Non- executive Director Mr. Qian, age 56, is a Non-executive Director. He has been a director of KPL since September 2007, re- designated as an executive director of KPL in July 2009 and was subsequently re-designated as a co-managing director of KPL in August 2013. He served as vice president of development at Shangri-La Asia Limited from February 2004 to September 2007 and as general manager of Zhongshan Province Tourism Group Company, a state owned enterprise primarily engaged in the business of tourism development, from January 1996 to May 2002. Mr. Qian is also a member of the executive committee of KPL and is responsible for KPL’s property development business in China. Mr. Qian graduated from South China Normal University in 1986 and completed an advanced management programme at Harvard Business School in 2002. Wong Yu Pok Marina Independent Ms. Wong, age 65, is an Independent non-executive Director. Ms. Wong has served as an independent non- Non-executive executive director of KPL since May 2008. She had worked with PricewaterhouseCoopers for over 30 years, Director specialising in PRC tax and business advisory services, and has extensive experience in advising both Hong Kong and foreign investors on the structuring of their businesses and investments in China Ms. Wong is a Fellow Member of the Hong Kong Institute of Certified Public Accountants and the Association of Chartered Certified Accountants. Ms. Wong obtained a higher diploma in Accountancy from Hong Kong Technical College (now known as Hong Kong Polytechnic University) in 1968 after completing a three-year full-time course in accountancy from 1965 to 1968. Wan Kam To Independent Mr. Wan, age 60, is an Independent non-executive Director. He was a former partner Non-executive of PricewaterhouseCoopers Hong Kong & China, and has been a practicing accountant in Hong Kong for over 30 Director years with extensive experience in auditing, finance, advisory and management. He has also served as independent non-executive director in companies such as China Resources Ltd, Dalian Port, KFM Kingdom Holdings etc.

Mr. Wan is a Fellow Member of Hong Kong Institute of Certified Public Accountants and the Association of Chartered Certified Accountants. Mr. Wan graduated from the accounting department of Hong Kong Polytechnic (now known as Hong Kong Polytechnic University) with a higher diploma in 1975. Yeo Philip Liat Kok Independent Mr. Yeo, age 67, is an Independent non-executive Director. He is the chairman and independent director of Non-executive Ascendas India Trust since June 2007 and an independent non-executive director of City Developments Limited Director since May 2009. Mr. Yeo has been a member of the United Nations Committee of Experts on Public Administration, special adviser for economic development in the Prime Minister’s office of the Singapore Government and senior adviser for the Ministry of Trade and Industry, Singapore Government, senior adviser for Science and Technology, chairman of the Agency for Science, Technology and Research, in Singapore, chairman and co- chairman for the Economic Development Board. Mr. Yeo also served as the Permanent Secretary in the Ministry of Defence for Defence Research, Logistics and Industry from September 1979 to December 1985. Mr. Yeo obtained a bachelor’s degree in applied science in industrial engineering in 1970 and an honorary doctorate degree in engineering from the University of Toronto, Canada in 1997. He obtained a master of science degree in systems engineering from the University of Singapore in 1974 and a master of business administration degree from Harvard University in 1976.He received a doctor of medicine degree from Karolinska Institutet, Sweden in May 2006, an honorary doctor of science degree from Imperial College London, United Kingdom in November 2007, the Order of the Rising Sun, Gold and Silver Star from the Japanese Government in December 2007, the Distinguished Service (Star) award from the Singapore’s Labour Movement, National Trade Unions Congress in May 2008, an honorary doctor of letters degree from the National University of Singapore in July 2011 and an honorary doctor of law degree from Monash University of Australia in November 2011.

Source: Company

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Senior Management Name Position Profile

Ang Keng Lam Senior Advisor Mr. Ang, age 66, has been a Senior Advisor since August 2012, prior to which he was the Chairman from July 2000. He has also been a Director from December 1991 to August 2012. He has been a director of KHL since September 1999 and the chairman of China World Trade Center Co, Ltd. Mr. Ang was a member of the National Committee of the Chinese People’s Political Consultative Conference from January 1998 to March 2013. Mr. Ang obtained a bachelor’s degree in engineering from the University of Western Australia and a master’s degree in business administration from the University of Toronto. He also attended and completed the International Advanced Management Programme at Harvard Business School in 1998. Benjaathonsirikul Kledchai Executive Director of Mr. Benjaathonsirikul, age 58, joined the Group in 2000 as an executive Director of Thailand. He is also a Director Thailand of Kerry Logistics (Thailand) Limited, a subsidiary of the Company, and other subsidiaries in Thailand. Mr. Benjaathonsirikul is also an independent director and an audit committee member of Shangri-La Hotel Public Company Limited in Thailand. He has over 20 years of experience in port logistics and transport-related businesses. Prior to joining the company, he has worked at Kerry (Thailand), Siam Seaport Terminal and at KSSP. He obtained a bachelor of laws degree from the University of Birmingham, United Kingdom in 1978. Cheng Chi Wai Chief Financial Officer Mr. Cheng, age 49, joined the group in August 2009 as Chief Financial Officer. Mr. Cheng has more than 25 years of experience in auditing, financial control and corporate finance and previously worked in an international accounting firm and held key finance positions in several companies whose shares are listed on the Main Board of the Hong Kong Stock Exchange. Prior to joining KLN, Mr. Cheng was the Chief Financial Officer of Miramar Hotel and Investment Company, Limited from March 2007 to July 2009 and the Chief Financial Officer of Water Oasis Group Limited from September 1999 to February 2007. Mr. Cheng is a Fellow of the Association of Chartered Certified Accountants, the Hong Kong Institute of Certified Public Accountants, as well as a chartered accountant and a chartered secretary. He obtained a bachelor of arts degree in accountancy from The Hong Kong Polytechnic University in 1996 and an executive master’s degree in business administration from The Chinese University of Hong Kong in 2008. Hung Wai Shing Group Financial Controller Mr. Hung, age 48, joined the Group in September 1999, and is currently the group financial controller since January 2010. Mr. Hung joined the warehouse division of KPL in May 1991. He was transferred to the Hong Kong properties division of KPL in August 1993 before joining KLN. Mr. Hung is a Fellow of the Hong Kong Institute of Certified Public Accountants. He obtained a bachelor of arts degree from City Polytechnic of Hong Kong (now known as City University of Hong Kong) in 1992. Ko Fuk Yuen Kenneth Executive Director of Mr. Ko, age 42, joined the Group in April 2010 as the executive director of international freight forwarding. Mr. Ko International Freight is also a director of Kerry Freight (Hong Kong) Limited, a wholly-owned subsidiary of the Company, and Forwarding responsible for the development of the global freight forwarding business of our Group. He has over 20 years of experience in the logistics industry. Prior to joining KLN, Mr. Ko was the managing director, Hong Kong and South China, of Agility Logistics Limited and has worked with Expeditors Hong Kong Limited. He has also worked at Cathay Pacific Airways Limited for 14 years from 1989 to 2003. He serves as a vice-chairman of the executive committee of Hong Kong Association of Freight Forwarding and Logistics Limited since 2011. Mr. Ko obtained a bachelor of management studies degree from the University of Hong Kong in 2003. Lee Wai Shun Wilson Director of Information Mr. Lee, age 46, joined the Group in April 2004 as Director of Information Technology. He is the Director of Technology Information Technology and is responsible for overseeing the global information technology development of the Group. He has over 20 years of experience in information system development and technology management. Prior to joining KLN, Mr. Lee worked with Li & Fung (Trading) Limited from 1991 to 1998 and his last position was a department manager. He was a system development and support manager of Gap Inc. from 1998 to 2000 and was an information systems and services director of Limited Brands, Inc. from 2000 to 2004. Mr. Lee obtained a bachelor of science degree from The Chinese University of Hong Kong in 1989 and a master of science degree in corporate governance and directorship from Hong Kong Baptist University in 2010. Shen Chung-Kui Chairman of Kerry TJ Mr. Shen, age 70, has been the chairman of Kerry TJ Logistics since November 2008 (when he joined the Logistics Company Group). He has over 30 years of experience in the logistics industry, ranging from trucking, container terminal, port and warehousing businesses. He is responsible for overseeing the Taiwan logistics operations of the Group. Prior to joining Kerry TJ Logistics, Mr. Shen worked as a senior operation manager (Taiwan region) of United States Lines from 1977 to 1987. He subsequently worked at United Terminals Ltd, from 1987 to 2004. Mr. Shen is currently the chairman of Taiwan Route-Permitted Truck Transportation United Association. Mr. Shen graduated from the Shipping and Transportation Management Faculty of the National Taiwan Ocean University in 1972. He also completed various training courses, including Dale Carnegie Course Training in San Francisco, United States in 1983, General Management Program at Ashridge College in London, United Kingdom in 1993 and Shipping Management research study at China Maritime Institute, Taiwan in 1988.

Source: Company

. 60 Kerry Logistics Network (636 HK) Air Freight & Logistics abc 28 January 2014

Senior Management (cont’d) Name Position Profile

Tan Kai Whatt Robert Managing Director of Mr. Tan, age 56, joined the Group in January 2004 as a director of a subsidiary of the Company. Mr. Tan is the South and South East Asia managing director in charge of the South East Asia logistics operation of the Group (since January 2008) and is responsible for the development and expansion of our network in South and South East Asia. Mr. Tan has 18 years of experience in the logistics industry. Prior to joining the Group, Mr. Tan had worked with Newship Agencies Pte. Ltd since 1994 and was seconded to its Indonesia office as marketing manager from 1996 to 1999, and as general manager for its Singapore office from 1999 to 2001. He was then transferred to PACC Container Line Pte Ltd as a manager (marketing) in charge of feeder businesses in Malaysia from 2002 to 2003. Mr. Tan obtained his master’s degree from the Asian Institute of Management in the Philippines in 2003. Wilcock Gary Managing Director of Mr. Wilcock, age 52, joined the Group in April 2002 following the Company’s acquisition of Trident International Europe Limited (now known as Kerry Logistics (UK) Limited, where he started his career in May 1982. He is the managing director in charge of the European logistics operations of our Group since December 2007. He is also a director of Kerry Logistics Holding (Europe) Limited, a wholly-owned subsidiary of the Company headquartered in Europe, and the managing director of Kerry Logistics (UK) Limited. He has more than 30 years’ experience in the logistics industry and in particular trading between the United Kingdom and Asia

Source: Company

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Notes

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Notes

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Disclosure appendix

Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Julia Winarso and Mark Webb Important disclosures Equities: Stock ratings and basis for financial analysis HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website.

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice. Rating definitions for long-term investment opportunities Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change.

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*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change. Rating distribution for long-term investment opportunities As of 28 January 2014, the distribution of all ratings published is as follows: Overweight (Buy) 44% (34% of these provided with Investment Banking Services) Neutral (Hold) 37% (32% of these provided with Investment Banking Services) Underweight (Sell) 19% (30% of these provided with Investment Banking Services)

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HSBC & Analyst disclosures Disclosure checklist Company Ticker Recent price Price Date Disclosure KERRY LOGISTICS NETWORK 0636.HK 12.84 27-Jan-2014 1, 2, 5, 6, 7 Source: HSBC

1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. 4 As of 31 December 2013 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 30 November 2013, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of investment banking services. 6 As of 30 November 2013, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking securities-related services. 7 As of 30 November 2013, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in securities in respect of this company

HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research. Additional disclosures 1 This report is dated as at 28 January 2014. 2 All market data included in this report are dated as at close 24 January 2014, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

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Disclaimer

* Legal entities as at 8 August 2012 Issuer of report ‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, HSBC Bank plc Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 8 Canada Square HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ London, E14 5HQ, United Kingdom HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Telephone: +44 20 7991 8888 Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Fax: +44 20 7992 4880 Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Website: www.research.hsbc.com Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR In the UK this document has been issued and approved by HSBC Bank plc (“HSBC”) for the information of its Clients (as defined in the Rules of FCA) and those of its affiliates only. 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abc Global Industrials Research Team

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