Research Manual

Company Analysis

Introduction

To conduct the company analysis, you need to select one listed company and estimate its intrinsic value of shareholders’ equity. You also have to critically analyze the company and provide recommendations on the company’s future business strategy. Your report should demonstrate your mastering of the key knowledge and skills learnt from your undergraduate study in such areas as accounting, finance, economics, and management.

Selection of company

You should investigate one company which is currently listed on the Main Broad of the Stock Exchange of Hong Kong with a listing history of at least five years.

Coverage of the report

You report should cover the following major aspects:

1. Evaluate the accounting and financial performance of the company.

2. Assess the intrinsic value of equity through the process of business valuation with sensitivity analysis.

3. Consider the risk factor of the company.

4. Conduct a critical analysis (e.g., SWOT analysis) of the company.

5. Provide recommendations on the company’s future business strategy.

Guidelines of the report

The following suggests the guidelines that you can follow in preparing your research report. The list is not exhaustive and you are welcome to include additional analyses that will enrich the findings of your report.

Evaluation of accounting and financial performance

Your evaluation of the accounting and financial performance of the company can consist of the following steps:

(a) Evaluate accounting quality. For example, you can examine whether the firm has any accounting/auditing issues.

(b) Prepare comparative financial statements. Discuss any interesting patterns in the numbers. For example, has sales been growing or declining?

(i) Time-series analyses: the same firm over time (e.g., Hang Seng Bank from 2014 to 2016) (ii) Cross-sectional analyses: different firms at a single point in time (e.g., Hang Seng Bank versus BOC Hong Kong versus Bank of East Asia) (iii) Benchmark comparisons: using industry norms or pre-determined standards

Some possible financial ratios that can be used in your analyses:

(i) Profit margin (ii) Interest coverage (iii) Debt service cover (iv) Short-term liquidity (v) Leverage (vi) Operating efficiency (vii) Return on capital (e.g., ROA and ROE)

You might also want to do a DuPont decomposition of ROE to examine the drivers of ROE.

(d) Relying on your analyses of historical numbers, make some inferences about the future. Discuss about your expectations of the future earnings and/or future cash flows, as well as the risks, faced by the company.

Business valuation

There are two approaches to valuation which are discounted cash flow approach and relative valuation approach.

(a) Discounted cash flow (DCF) approach

DCF approach is the basic on which all other valuation approaches are built and is commonly used to estimate the attractiveness of an investment opportunity. This approach adopts free cash flow estimations and then discounts them to arrive at a present value, which will be taken into account to evaluate the potential for a specific investment. Therefore, by using this valuation approach, three parameters must be considered seriously, which are “asset life”, “cash flow per annum” and “discount rate”. The annual cash flows vary for different kinds of business and company, and the discount rate actually reflects the riskiness of the projected cash flows.

(b) Relative valuation approach

The value of an asset is estimated by the existing price of comparable assets, which is represented in term of a common variable such as price to cash flow, enterprise value, operating margin, sales, etc. The assumptions of this approach are that other firms in the same industry are comparable to the subject firm and the prices of those comparable firms are fair and correct under the prevailing market condition.

Price-to-earnings (P/E) ratio is one of the common multiples used in this approach, which is calculated by dividing the share price of the comparable company by its earnings per share (EPS). A company with a high P/E ratio is trading at a higher price per dollar of earnings than its peers and is considered overvalued.

Another multiple in wide use is the price-to-book value (P/B) ratio, with firms selling at a discount on book value relative to comparable firms being considered undervalued. Revenue multiple are also used to value firms, with the average price-sales (P/S) ratios of firms with similar characteristics being used for comparison.

Analysis of economic environment

You can examine both the microeconomic and macroeconomic environment surrounding the company and assess their implications to the business performance.

(a) Microeconomic environment

(i) Factors affecting the demand for the company’s products/services (ii) Factors affecting the production cost (iii) Prospect of the industry (iv) Level of competition in the industry and the application of Porter’s five forces model (v) Effects of government’s regulatory policy

(b) Macroeconomic environment

(i) Whether and how the company’s performance is affected by such domestic macroeconomic factors as GDP, interest rate, inflation, etc. (ii) Whether and how the company’s performance is affected by such global macroeconomic factors as exchange rate, foreign countries’ economic performance, etc.

You can consider to apply quantitative tools into your economic analysis. For example, if you are analyzing the company Link REIT (stock code: 823) whose major source of income is retail rental, you can run a time-series regression of the company’s retail rental on such economic factors as GDP growth, level of household income, retail sales value, unemployment rate, inflation rate, and tourist arrival, etc. to obtain the estimates of how the changes of these economic factors affect the retail rental income.

Risk factors

You have to discuss all the possible risk factors faced by the company. The following lists some of the possible risk factors:

(a) Operational risk: e.g., rising material cost, over-capacity, etc. (b) Economic risk: e.g., declines in economic conditions, etc. (c) Financial risk: e.g., exchange rate risk, interest rate risk, etc.

(d) Political and regulatory risk: e.g., change in government’s overall economic policy and/or regulatory policy on the industry

SWOT analysis

Discuss the strengths and weaknesses of the company, and identify the opportunities open to the company and the threats which it faces.

Recommendations to company management

Based on the above analysis, you should provide recommendations and suggestions to the company management with respect but not limited to the following dimensions wherever applicable:

(a) Accounting policy: e.g., inventory policy, etc. (b) Financial policy: e.g., leverage, payout policy, etc. (c) Production and marketing policy: e.g., consolidation of production plant, expansion or contraction of product line, market diversification, etc. (d) Corporate governance (e) Corporate social responsibility

Sample of Company Analysis

The following is a sample of the Company Analysis on Chu Kong Shipping Enterprise (Group) Company Limited. Please note that this sample shows only a reduced version of the evaluation of accounting and financial performance, approaches used in business valuation, and discussion of the risk factors and competitive advantage. The more in-depth analysis of the company and recommendations on the company’s future business strategy are not included.

Company Background

Chu Kong Shipping Enterprises (Group) Company Limited ("CKSG") is listed in Hong Kong on May 23rd, 1997 (0560.HK) and majorly held by Chu Kong Shipping Enterprises (Holdings) Company Limited (62% of shareholding), which is wholly owned by Guangdong Province Navigation Group Company Limited, a state-owned logistics enterprise in Guangdong Province.

CKSG’s principal business is investment holdings and engages in below four fields of business:

(A) Terminal navigation logistics business

It mainly comprises of cargo transportation, cargo handling and storage businesses by providing an one stop service of (i) cargo forwarding services for containerized or break-bulk cargoes from the PRC for direct shipment to Hong Kong or transshipment to other countries via Hong Kong; (ii) cargo handling services (including mid-stream operations), cargo consolidation and warehousing from its private wharf located in Tuen Mun, the Marine Cargo Terminal at the Hong Kong International Airport, and the Hong Kong Public Cargo Working Areas to serve river vessels from the PRC; (iii) container hauling and trucking in Hong Kong which provide services from its private wharf in Tuen Mun to the Kwai Chung Container Terminal or vice versa.

It also engages in air cargo transportation by obtaining the operating license for the only Marine Cargo Terminal at the Hong Kong International Airport, to provide river shipping for air cargoes between Hong Kong and the Pearl River Delta. For example, it transships air cargo to the Marine Cargo Terminal when it arrives at the Hong Kong International Airport, then forwards cargo to the Shenzhen Huangtian airport by river vessels, for shipment by air cargo to other cities in the PRC including Beijing, Shanghai, Xian, Chengdu, Chongqing, Nanjing, Zhengzhou, Wuhan, Shenyang, Hefei, and Kunming.

(B) Passenger transportation business

It provides high-speed ferry service business and related services, management and administration of the ferry service between the Pearl River Delta and Hong Kong China Ferry Terminal, Macau Ferry Terminal as well as the airport routes travel to and from SkyPier at the Hong Kong International Airport. It implements the ferry service into passenger agent, ticket sales, passenger transport, terminal and baggage handling, to complete the production chain of the travel between Hong Kong, Macau and Guangdong cities such as Guangzhou, Shenzhen, Shunde, Zhongshan, Zhuhai, Dongguan, Jiangmen.

It officially completed the acquisition of Sun Kong Petroleum Company Limited in June 2016 which its major business is to provide diesel and engine oil for vessels within the water territory of Hong Kong. Besides, Sun Kong Petroleum has waterborne fueling stations at the Hong Kong China Ferry Terminal, the Hong Kong International Airport Ferry Terminal and Yau Ma Tei.

(D) Corporate and other businesses

It completed the acquisition of Cotai Chu Kong Shipping Management Services (Macau) Company Limited in June 2016, which is engaged in provision of management of ferry terminals services and facilities maintenance services for properties in Macau. During the first half of 2016, Macau Cotai became one of the qualified service providers of the dockyards of Macau Government by establishing long-term cooperation with the dockyards of Macau Government, and proactively explored new vessel maintenance business.

Ratio Analysis

Actual Actual Actual Actual Actual Actual CAGR 2011 2012 2013 2014 2015 2016 1H (11-15) Liquidity Current ratio 0.9 1.1 1.1 1.0 1.3 1.4 9.7% AR turnover 4.4 4.6 4.1 3.8 3.2 -7.8% Average days receivable 83 80 90 96 115 8.4% AP turnover 2.4 2.3 2.1 2.2 1.9 -6.0% Average days payable 154 160 174 163 197 6.4%

Solvency Debt to assets ratio 32% 35% 36% 34% 35% 33% 2.1% Debt to equity ratio 47% 53% 55% 53% 54% 49% 3.2% Interest coverage ratio 21.3 12.7 15.4 21.3 19.0 28.8 -2.8%

Profitability Gross profit margin 22% 23% 25% 24% 23% 23% 1.8% Operating profit margin 11% 9% 11% 11% 10% 12% -2.0% Net profit margin 11% 10% 12% 13% 12% 13% 2.1% Assets turnover 49% 50% 48% 50% 48% -0.6%

Return on Investment Return on assets 5.6% 4.8% 6.0% 6.3% 6.0% 1.5% Return on equity 8.1% 7.3% 9.5% 10.2% 9.7% 4.7%

Return on capital employed 6.2% 5.3% 6.7% 7.1% 6.4% 0.8%

Liquidity • CKSG's current ratio has significantly improved in 2015 mainly due to the placement of new shares which brought $455 million net proceeds. The longer payable days has offset the longer receivable days for higher cash liquidity.

Solvency • Debt-to-equity ratio is improved to 49% in 2016 1st half. So far CKSG does not have financial distress risk concern.

Profitability • Gross profit margin and net profit margin both experienced positive average growth rate (CAGR: 1.8% and 2.1% respectively) between 2011 and 2015. However assets turnover is slightly decreased reflecting a lower efficiency in utilizing assets to generate revenue.

Return on • ROA and ROE are both increasing with CAGR 1.5% and 4.7% Investment respectively between 2011 and 2015.

Actual Actual Actual Actual Actual Actual CAGR 2011 2012 2013 2014 2015 2016 1H P/E, P/B and Growth rate Diluted EPS 0.1631 0.1509 0.2121 0.2459 0.2301 0.2170 5.9%

P/E ratio 6.07 9.08 9.76 7.81 9.86 12.9%

P/B ratio 0.50 0.64 0.89 0.77 0.90 16.1%

Dividend yield 4% 3% 4% 4% 4% 5.7%

Retention ratio 79% 70% 65% 67% 54% -9.1%

Growth rate 6.4% 5.1% 6.2% 6.9% 5.2% -4.9%

Earnings per share • 2016 is an estimated figure. CAGR is 5.9% between 2011 and 2016, which is approximately equal to the fundamental implied growth rate.

Growth rate • Based on ROE times Retention ratio. The average for 2011 to 2015 is about 5.9%.

Revenue Analysis

F-Score Analysis

Actual Actual Actual Actual Actual Estimate 2011 2012 2013 2014 2015 2016 Profitability 1. ROA 5.8% 5.0% 6.3% 6.5% 6.4% 5.7% 2. CFO 5.7% 11.1% 6.6% 8.3% 4.5% 5.3% 3. Change in ROA 0.2% -0.8% 1.3% 0.3% -0.2% -0.7% 4. CFO - ROA -0.1% 6.1% 0.4% 1.8% -1.9% -0.4%

Risk 5. Change in LT Debt to asset -0.5% 2.6% 4.5% -1.9% -4.3% -0.4% 6. Change in Current ratio -7.8% 19.2% 2.7% -9.1% 26.7% 14.2% 7. Equity offer No No No No Yes No

Efficiency 8. Change in Gross margin -2.1% 1.6% 1.9% -1.0% -1.0% 1.3% 9. Change in Asset turnover 5.5% 0.2% -1.4% 2.2% -2.3% -6.1%

Actual Actual Actual Actual Actual Estimate Fscore 2011 2012 2013 2014 2015 2016 Profitability 1. ROA > 0 1 1 1 1 1 1 1 2. CFO > 0 1 1 1 1 1 1 1 3. Change in ROA > 0 1 1 0 1 1 0 0 4. CFO > ROA 1 0 1 1 1 0 0

Risk 5. Change in LT Debt to asset < 0 1 1 0 0 1 1 1 6. Change in Current ratio > 0 1 0 1 1 0 1 1 7. No equity offer 1 1 1 1 1 0 1

Efficiency 8. Change in Gross margin > 0 1 0 1 1 0 0 1 9. Change in Asset turnover > 0 1 1 1 0 1 0 0

Total 9 6 7 7 7 4 6

Average of 2011 - 2016 6.2

CKSG achieves a high score of 7 during 2012 to 2014, but drops to 4 score in 2015 due to the decrease in return on total assets, more accrual, drop in gross profit margin and asset turnover; however, it is improved in 2016 but still under the high score.

Discounted Cash Flow

Based on the DCF model with 2016 as base year and 5 year forecast, the intrinsic value of CKSG is calculated as $2.51 per share, which is 26% higher than the market price of $2 per share (as at 1/3/2017).

Key Assumptions

Year 2016 Estimated based on trailing method by adding actual 2016 1st half and 2015 2nd half figures.

Year 2017 Forecasted as same as 2016, due to the first year after 2016 as the first dropping year since past 5 years and there may have some risks or uncertainties which may offset CKSG results (will be mentioned in “Risk Factors” section).

Year 2018 to 2021 Forecasted based on CAGR between 2013 to 2016 for each income statement line item, except for some items (Other income, Other gains/losses, Finance income, Finance cost) will be same as 2016.

Tax rate Use marginal tax rate 16.5% for 2018 to 2021.

Non-controlling interests Based on % of total net profit in actual 2016 1st half (2.9%).

Shares Issued The outstanding shares remain unchanged as 1,080 million in 2016.

Net CAPEX Grow at the implied growth rate 5.9% (2011-2016 average) as the minimum level to support the company business growth; according to an announcement dated on 18 February 2017, CKSG will agree to buy a 33-meter steel oil tanker at a consideration of RMB 9,860,000 to be delivered in November 2017; assume the depreciation will start in 2018 at the average useful life for vessels and barges (8-15 years).

Change in working As % of revenue; since the yearly change figures are negative, capital they are set to zero.

Net borrowing Total debt to cash ratio is decreased from 86% in 2011 to 25% in 2016 first half, showing that CKSG has the tendency to reduce borrowing as well as its new shares placement in 2015 for additional cash received, so assume that no change in future borrowing.

Risk Free Rate HKMA 10-year Government bond 7 year average rate 1.84%.

Beta Beta is calculated by means of weekly return variance of CKSG and Hang Seng Index from 2000/1/4 to 2017/2/20, which is 0.7307.

Terminal growth rate Terminal growth rate is estimated to be 2.6%. It is based on Hong Kong Census and Statistics Department monthly report on Consumer Price Index (CPI) and take average of past 2 years.

Market Risk Premium Reference to Bloomberg - Country Risk Premium for Hong (MRP) Kong as at 2017/2/27 (9.792%).

Cost of Equity Use the Capital Asset Pricing Model (CAPM), the cost of equity is calculated to be 8.99%.

Sensitivity Analysis

Cost of equity 2.51 7.99% 8.49% 8.99% 9.49% 9.99% 1.6% 2.60 2.41 2.24 2.10 1.97 Terminal 2.1% 2.77 2.56 2.37 2.21 2.07 growth 2.6% 2.98 2.73 2.51 2.33 2.17 rate 3.1% 3.23 2.93 2.68 2.47 2.29 3.6% 3.54 3.18 2.88 2.64 2.43

• The intrinsic value will be above $2 within +1 and -1 interval (0.5% per interval) for both cost of equity and terminal growth rate.

• When cost of equity is 1% higher and terminal growth rate is 1% lower, the intrinsic value will drop below $2.

Revenue growth in 2018-2021 2.51 1.2% 2.2% 3.2% 4.2% 5.2% -2% 0.72 1.39 2.08 2.79 3.52 Revenue -1% 0.92 1.60 2.30 3.01 3.75 growth 0% 1.13 1.81 2.51 3.24 3.98 in 2017 1% 1.33 2.02 2.73 3.46 4.21 2% 1.53 2.23 2.94 3.68 4.44

• The intrinsic value will be above $2 when revenue growth in 2017 is within +2% and -2%, given no change for revenue growth in 2018-2021.

• When revenue growth in 2018-2021 is 1% lower, the revenue growth in 2017 has to be 1% for the intrinsic value above $2; otherwise will drop below $2.

2.51 Share Price Net 5.9% 2.51 CAPEX 7.9% 2.42 growth 9.9% 2.32 11.9% 2.22 13.9% 2.11 15.9% 1.99

• When net CAPEX growth is doubled from original 5.9% implied growth rate to 11.9%, the intrinsic value will also be above $2.

Relative Valuation

Mkt Cap Share Price Dividend Implied 5 yr CAGR EV/ Code Company ($'B) ($) EPS (ttm) ROE (ttm) P/E Payout Growth EPS P/B (mrq) EBITDA 560 Chu Kong Ship 2.16 2.00 0.23 8.36% 8.69 N/A N/A 0.83 5.19 144 China Merchant Port 56.85 21.65 1.55 5.69% 13.96 64.71% 2.0% 1.91 0.85 19.74 316 Orient Overseas (Intl) Ltd 28.47 45.50 3.35 -0.24% 13.58 0% 3.56 6.07 96.61 368 Sinotrans Ship 7.39 1.85 -0.13 -4.93% -14.38 0% -2.09 3.71 145.37 935 Dragon Crown 1.79 1.47 0.07 9.16% 20.16 N/A N/A 1.79 10.72 1138 Cosco Ship Energy 25.88 4.75 0.12 5.06% 9.69 31.97% 3.4% 0.09 4.82 40.95 1145 Courage Marine 0.97 7.05 -2.67 -66.88% -2.64 N/A N/A 31.47 -158.83 1308 SITC 13.00 4.97 0.43 17.19% 11.66 N/A 0.81 15.68 80.8 1549 Ever Harvest Group 0.41 0.29 N/A N/A N/A N/A N/A 11.15 18.07 1919 Cosco Ship Hold 55.71 3.73 0.03 -20.33% 114.49 N/A -0.29 14.63 -193.38 2343 Pacific Basin 7.35 1.83 -0.05 -7.19% -33.47 0% -0.77 6.68 189.99 2866 Cosco Ship Dev 45.20 1.82 -0.3 -17.59% -6.12 N/A N/A 10.46 -6820.85 2880 Dalian Port 29.74 1.46 0.06 3.14% 25.96 46.70% 1.7% 1.95 7.26 86.47 3369 QHD Port 9.71 1.93 0.32 4.44% 6.08 N/A N/A 5.94 36.52 3378 Xiamen Port 4.44 1.63 0.12 6.64% 13.74 N/A N/A 6.22 34.75 3382 Tianjin Port Dev 3.81 1.33 0.1 6.67% 12.79 50.00% 3.3% N/A 0.71 3.85 6198 QingDao Port 22.89 4.79 0.47 15.65% 10.18 N/A N/A 11.97 71.07 8233 CIG Ports 1.83 1.06 0.02 N/A 50.72 N/A N/A 3.03 46.8 8310 Dafeng Port 1.55 1.20 -0.02 N/A -55.81 N/A N/A 8.22 -47.87

Average 7.34% 13.78 2.6% 1.66 6.13 48.15 Average (Mkt Cap < $10 B) 6.73% 13.19 3.3% N/A 3.67 21.46

(Source: Yahoo Finance as at 1/3/2017)

• Companies with similar business as CKSG (cargo transportation, cargo handling or passenger transportation) are selected; some with negative ROE or especially high P/E ratio are defined as outliners (rows not highlighted); among the selected peers, whose market capitalization is lower than $10 billion are selected as comparable to the size of CKSG and used as industry average for relative valuation for CKSG (rows highlighted in red).

• P/E ratio of CKSG is 8.69x, which is lower than most of its peers. However, the growth rate of CKSG is much higher than its peers. The implied growth rate of CKSG is 5.9%, which is higher than industry average of 3.3%. When consider the 5-year CARG growth rate of EPS, CKSG also has a higher figure than average of its peers (5.9% vs 1.7%).

• P/B ratio for CKSG is 0.83x, which is lower than industry average of 3.67x. On the other hand, the ROE of CKSG (8.36%) is relatively higher than industry average of 6.73%.

• It seems that CKSG has unreasonable low P/E and P/B ratios when compared with its peers, when consider the driven factors of growth rate and ROE behind.

Risk Factors

There are several risk factors that may impose negative effect to the company expected earnings in the forecast periods, which are summarized as below:

Global economic • The global economic recovery in 2016 is weakened and the PRC environment economy continue to slow down, which affects China’s imports and exports volume with dropping bulk commodity prices and continuous decrease in throughput in Hong Kong. • Catalyst: CKSG has integrated the terminal network at the Pearl River Delta to exert synergy effect, such as resource sharing, centralized procurement, environmental protection and energy saving etc. to maintain internal business growth and attract surrounding cargo sources.

Passenger • Number of tourists visiting Hong Kong is decreased due to the transportation impact of the “anti-individual mainland visitors” and “anti- parallel traders” activities in Hong Kong.

Fuel price • One of the CKSG business is fuel supply, which the fuel selling prices will be affected by the falling trend of international prices.

Government • Local government preferential policies has affected the terminal policies business in Zhuhai region • By relying on the advantages of its geographical location, clearance inspection and terminals services, Civet Port (西域港) in Zhuhai successfully undertook the cargo sources from Jiuzhou Port (九州港) and Xiangzhou Port (香洲港). • Civet Port is CKSG’s key location for the future deployment of terminal logistics industry in Zhuhai. It will accelerate the construction project on the newly acquired warehousing land, and will develop Civet Port to become the integrated logistics center in the Zhuhai region and the bridgehead of Hong Kong-Zhuhai- Macau Bridge. • 2016 is the first year to commence the "Thirteenth-Five-Year Plan" in China. Under the effects of favorable conditions such as the benefits released from the deepening reform and the huge potentials brought about by upgrade transformation, the Chinese economy is expected to maintain its steady and relatively fast growth pace. Being the market leader of terminal logistics and water-way high-speed passenger transportation in Guangdong, Hong Kong and Macau, CKSG will strive to maintain a stable and sustainable development and strengthen its integrated logistics businesses as well as cross-border logistics for e-commerce.

Competitive Advantages

The company’s strategic orientation is “Based in Hong Kong, Backed by the Mainland and Facing the World” due to its special business location in connecting Hong Kong, Guangdong, other China cities and even other countries.

In terms of the number of vessels under agency management, it is the largest shipping agent for river vessels plying the Hong Kong – Pearl River Delta routes. It services over 100 ship owners with more than 400 vessels under its agency. Besides, it owns and operates a fleet of 50 tractors and over 70 trailers to provide container hauling and trucking services in Hong Kong. To optimize its cargo transportation network systems, it owns a private wharf in Tuen Mun of Hong Kong, and also owns interests in more than ten cargo terminals in the Pearl River Delta region through wholly owned subsidiaries. In addition, it owns several bulk cargo berths in the Hong Kong Public Cargo Working Areas, providing services such as port loading and unloading, storage and cargo transportation.

CKSG is also one of the largest operators of inland terminal and logistics service in the PRD. Based in Hong Kong, it builds up a network covering more than 20 cities in the PRD, including Zhaoqing, Qingyuan, Foshan, Guangzhou and Jiangmen, providing the operation of inland cargo terminals, integrated logistics, international forwarding and solutions to logistic supply chain.

Moreover, it manages 54 high speed vessels, over 16,000 seats, as the world’s largest passenger capacity with high technique advanced commercial speed passenger fleet, and currently has more than 20 routes with 200 or more flights travel between the Pearl River Delta, Hong Kong and Macau daily, carrying more than 10 million passengers. The brand “CKS” has become a trademark of the ferry service between the Pearl River Delta, Hong Kong and Macau and the preferred passenger transport according to its “safe, fast, convenient and comfortable” of the cross boundary ferry service.

The industry of CKSG is having high barriers to entry due to its nature of high economies of scale in operation and high capital requirements, which can give CKSG advantages in competing in the market. Besides, CKSG’s major competitors in passenger transportation business only include TurboJet (majorly owned by Shun Tak Holdings Ltd, 0242.HK) and Cotai Water Jet (indirectly owned by Las Vegas Sands Corp., NYSE: LVS), which results in less substitutes and gaining more market share power.

Company Management

Overall, all executive directors in the board are experienced in the shipping logistics industry with over 20 years working experience. None of the management team members is identified on the ICAC Wanted Person list, SFC Enforcement News, and Webb-site. They are all working in one company currently from Webb-site. There are no negative news to the management team that can be found on the WiseNews search engine. The external auditor is the well-known PricewaterhouseCoopers. Altogether, these facts suggest that the management team are capable of doing their jobs well and have high integrity.

In addition, the management honors their promises according to the Chairman’s Statement in the annual report. There are no material deviations and the company is aligning with its future development plans.

Appendix Data used for Business Valuation

Actual Actual Actual Actual Actual Actual Estimate Forecast Forecast Forecast Forecast Forecast 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 Revenue 1,172,862 1,384,423 1,514,647 1,619,279 1,828,912 1,922,280 1,778,561 1,778,561 1,835,064 1,893,361 1,953,511 2,015,571

Cost of services rendered (895,988) (1,086,176) (1,164,235) (1,213,115) (1,388,794) (1,478,244) (1,345,019) (1,345,019) (1,392,100) (1,440,830) (1,491,265) (1,543,466)

Gross profit 276,874 298,247 350,412 406,164 440,118 444,036 433,542 433,542 442,963 452,531 462,246 472,106

Other income 17,996 22,181 42,078 48,296 61,309 68,472 68,645 68,645 68,645 68,645 68,645 68,645 Other gains/losses, net 26,741 57,508 1,952 12,299 (4,482) (8,254) (11,751) (11,751) (11,751) (11,751) (11,751) (11,751) General and administrative exp (191,459) (222,376) (250,831) (282,195) (288,053) (304,917) (296,088) (296,088) (300,869) (305,728) (310,665) (315,682)

Operating profit 130,152 155,560 143,611 184,564 208,892 199,337 194,348 194,348 198,988 203,697 208,475 213,318

Finance income 4,982 4,163 4,463 4,428 4,667 8,438 12,100 12,100 12,100 12,100 12,100 12,100 Finance cost (5,031) (7,301) (11,317) (11,975) (9,793) (10,484) (8,628) (8,628) (8,628) (8,628) (8,628) (8,628) Share of profits less losses of jo 56,726 43,988 50,868 79,024 84,546 95,410 94,481 94,481 100,278 106,431 112,961 119,892

Profit before income tax 186,829 196,410 187,625 256,041 288,312 292,701 292,301 292,301 302,738 313,600 324,908 336,682 Income tax expense (35,789) (38,724) (42,374) (55,458) (58,377) (54,860) (50,981) (50,981) (49,952) (51,744) (53,610) (55,553) Profit for the year 151,040 157,686 145,251 200,583 229,935 237,841 241,320 241,320 252,786 261,856 271,298 281,130 Tax rate 19.2% 19.7% 22.6% 21.7% 20.2% 18.7% 17.4% 17.4% 16.5% 16.5% 16.5% 16.5% Attributable to: Equity holders of the Company 160,086 146,819 135,825 190,918 221,268 232,362 234,332 234,332 245,466 254,274 263,442 272,989 Non-controlling interests (9,046) 10,867 9,426 9,665 8,667 5,479 6,988 6,988 7,320 7,583 7,856 8,141 151,040 157,686 145,251 200,583 229,935 237,841 241,320 241,320 252,786 261,856 271,298 281,130 MI as % of PAT -6.0% 6.9% 6.5% 4.8% 3.8% 2.3% 2.9% 2.9% 2.9% 2.9% 2.9% 2.9%

2017 2018 2019 2020 2021 Assumptions for DCF model HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 Net income 234,332 245,466 254,274 263,442 272,989 Cost of equity 8.99% - Net CAPEX (74,971) (66,900) (70,935) (75,210) (79,739) Tax rate 16.50% - Change in working capital - - - - - Terminal growth rate 2.6% + New borrowing - - - - - Share price (1/3/2017) 2.00 FCFE 159,361 178,566 183,339 188,232 193,250 P/E ratio (1/3/2017) 8.69 Terminal value 3,102,282 P/B ratio (1/3/2017) 0.83 FCFE 159,361 178,566 183,339 188,232 3,295,532

Discount factor 0.918 0.842 0.772 0.709 0.650

PV of FCFE 146,214 150,320 141,605 133,391 2,142,730

Total PV of FCFE 2,714,261 Outstanding shares ('000) 1,080,000 Market price per share ($) 2.51 26%

P/E ratio 11.58 2.89