1. Vidya Vishal Jerry Wang Grace Zhao Gaobo Zhou February 27th, 2006
Hutchison Whampoa Limited: Invest in the Phase II Shanghai Deep-water Port?
Vidya Vishal
Jerry Wang
Grace Zhao
Gaobo Zhou
February 27th, 2006

2. Agenda Case overview Hutchison Whampoa Limited
China’s economy, port industry, and Shanghai ports
The Yangshan Deep-water Port Project
The Yangshan Deep-water Port phase II (expansion)
Other potential investors
The question
Our analysis

3. Case Overview - Geography
Yangshan Islands

4. Case Overview Case timeline: September 2004
Constraints at existing Shanghai Ports
Deep-water Port on Yangshan Island
Phase I
Under Construction – Est. Completion: EOY 2005
Phase II
Under Planning
Open to Private Investors
HWL’s Question – Invest in Phase II or not?

5. Hutchison Whampoa Limited (HWL)
HK-based international corporation
Highly diversified company
Consolidated turnover ~$2.3 bn
Operations in 54 countries; 200,000 employees
World’s leading port operator
Operates 242 berths in 41 ports spread over 20 countries
First foreign firm to invest in and operate container terminals in Shanghai
HWL owned by Hong Kong tycoon Li-Ka Shing, Asia’s richest and most influential businessman
Five core businesses
– ports & related services,
- telecommunications
- property & hotels
- retail & mfg
- energy & infrastructure

6. China Economy
Tremendous economic prosperity since the reform started from late 1970s
GDP doubled every 7 years since 1987
Strong economic performance attracts the foreign investment
China surpassed U.S. and became the most attractive destination for FDI.
FDI totaled $60.6 billion with growth rate 13.3%
Low operating cost and huge existing/potential market
Fast growing foreign trade
Foreign trade has increased by 30 times in 24 years
Opening up to private investment?
Exports rose 35.4% to $593.4 billion, while imports surged 36.0% to $561.4 billion.
, reached $1.65 trillion in 2004, with growth rate of 9.5%

7. Port Industry in China Bohai Bay Zhujiang Delta Changjiang Delta
Under the drive of the fast-growing national economy, cargo handling capacity of ports in China keeps a rapid growth and breaks the record again in The handling capacity of major coastal ports reached 1.8 billion tons with a growth rate of 13.5% year on year, while major inland ports handled million tons, a 17.8% increase compared with the year 2003.
Dalian Port
Tianjin Port
Qingdao Port
Shanghai Port
Ningbo Port
Xiamen Port
Shenzhen Port
Guangzhou Port
Changjiang Delta

8. Port Industry in China (cont’d)
Nationwide cargo throughput will increase at declining growth rate
Increase of cargo throughput is much higher than growth of foreign trade and growth of GDP
Estimated annual increase of cargo throughput 10% - 20% for the next ten years
Competition among ports will intensify
Various new ports and port expansion projects
Low utilization rate and excess capacity
Some ports may have to lower their service charge
, growth rate of cargo throughput is 30%, while 18% for foreign trade and 9.7% for GDP

9. Shanghai Ports Shanghai port is the largest port in China 3 ports
Shanghai is China’s business center
99% of Shanghai's foreign-trade goods are handled by its ports
Cargo handling capacity of 400 million tons
Container handling capacity of 18 million TEUs
3 ports
Waigaoqiao port (not deep-water port)
Huangpujiang port (not deep-water port)
Yangshan deep-water port (under construction)
Located at the mouth of the Yangtze River, currently boasts a cargo handling capacity of 4.21 million TEUs (Twenty Foot Equivalent Unit). The importance of the port is increasing at a rapid pace, particularly as a gateway for container transport. As a result of accelerated export demand, the growth rate at the port averaged 29% per year in the past three years, and is expected to continue once China is accepted into the World Trade Organization (WTO).

10. Yangshan Deep Water Port Project

11. Phase I Construction started in 2002 Operational In EOY 2005
Total Investment: 1.25 Billion with 50% debt financing
Four major components:
Port zone
Five berths
2.2 MM TEUs capacity
Allow 6th Generation Ships
Donghai Bridge
32 Kilometers
Connecting Shanghai And Yangshan
5 MM TEUs capacity
Lu-Hu Freeway
43 Kilometers
Connecting Luchaogang and Shanghai
Luchaogang city
Yangshan Deep Water Port Zone: the Phase I port area with the first five container berths from Xiao Yangshan islands to Huogaitang. The total handling capacity of the five berths would be million TEUs. The channels would be 15.5 meters deep, allowing fifth and sixth generation ships. It is projected to be completed by According to the plan, container throughput will be 2.2 million TEUs in 2005, 5.5 million TEUs in 2010 and 13.4 million TEUs in The planned ship types focus on the 5th and 6th generations of container ships and 8000TEU ultra large ships may be accepted. By final completion of the project in 2020, Yangshan port will have 50 berths and a total capacity of 15 million TEUs.
Donghai Bridge: A bridge connecting Big Yangshan, Little Yangshan to Luchaogang, the closest on-shore point in Shanghai. The bridge is 32 kilometers in length, with 6 lanes and annual throughput capacity of 400 million TEUs.
Lu-Hu Freeway: A freeway connecting Luchao and Shanghai. It is designed with 43 kilometers in length and 100 kilometer per hour in speed.
Luchao District: the district provides a land area of 1.5 sq. km, with storage area of 720,000 sq. m. and 15 container cranes. It is also designed to become a new port city in Luchaogang, to provide comprehensive logistics support, storage, processing, and other auxiliary services.

12. Deal Structure for Phase I

13. Yangshan Deep-water Port Phase II
Specs
Additional 4 berths
Waterway depth: 15m, accommodate 8,000 TEU ships
Designed throughput: 2.1 MM TEU/year
Estimated cost: $800 MM
Completion date: EOY 2006
Construction
Acquire 0.64 km2 land via sea-fill
Thick mud foundation complicates construction
Phase II
Phase I
Five techniques to prepare foundation

14. Yangshan Deep-water Port Phase II
Operation
Expand SH container throughput
Attract international transit shipments
Competition
Pusan port: under expansion (2006)
Ningbo Beilun port
Better port condition
Cross-harbor bridge to shorten distance to Shanghai (2009)
Silt blockage: Dredging needed
Environment hazard: stir-up sea floor
Inclement weather could close the port as many as 50 days per year

15. Other Potential Investors
Port of Singapore Authority
World’s largest container terminal operator
AP Moeller-Maersk
Focus On Shipping, Oil-drilling, Shipbuiliding, retail
Orient Overseas Container Line Limited
Largest Container Transportation Company
COSCO Group
Focus On Shipping And Logistics
China Shipping Group
State-owned Shipping Conglomerate
Orient Overseas Container Line Limited
Public company listed on HKSE
Largest int’l container transportation cos
AP Moeller-Maersk
Int’l enterprise headquartered in Copenhagen
Shipping, Oil-drilling, Shipbuiliding, retail
Port of Singapore Authority
World’s largest container terminal operator
Synergy among investors
Government investor will be unlikely to take controlling interest in the future.
COSCO Group
The China Ocean Shipping (Group) Company (COSCO) is a diversified service company focusing mainly on shipping and logistic business.
China Shipping (Group) Company
China Shipping Group (China Shipping) is a shipping conglomerate that operates across different regions and sectors. It is a state-owned enterprise under the direct administration of China’s Central Government and has assets to totaling $5 billion.
OOCL
The Orient Overseas Container Line Limited (OOCL) is a wholly owned subsidiary of the Orient Overseas (International) Limited (OOIL), a public company listed on the Hong Kong Stock Exchange. OOCL is one of the world's largest integrated international container transportation, logistics and terminal companies
The A.P. Moller - Maersk Group is an international enterprise with activities covering diverse areas such as shipping, oil drilling, shipbuilding, industry and retail. It is headquartered in Esplanaden, Copenhagen and has total assets exceeding $32 billion.
The Port of Singapore Authority (PSA) is the world's largest container terminal operator. It operates 19 ports in 11 countries around the world, the largest of which is the world’s number 1 container shipping port, the Singapore port, which has a designed capacity of 22.6 million TEU a year.

16. The Question
Should HWL invest in the Phase II Shanghai Deep-water Port?

17. Our Analysis
Pros
China economy booming and Shanghai maturing as an economic and trade center
Investors have international port management experience
Shipping investors guarantee part of demand
Real option:
“Foot in the door” for investment in future expansion projects
Cons
Demand risk
Nationwide cargo throughput increase slowing down
Competition from other ports
Disadvantages of private investors
Speed of construction, permits, etc
Higher expropriation risk
Bridge capacity constraints
Weather-related risks
Environmental issues

18. Our Analysis NPV of project: $29 million Cost of capital:
14.19% in 2005, decrease annually with improvement of China’s country rating
Our conclusion:
Marginally successful with IRR of 17.7%
Real options – convenient access to future investment opportunities in expansion projects

19. What Happened Phase I began operation on 12/10/2005
Reached designed operation level in Jan 2006
Phase II investment agreement signed on 12/19/2005
Hutchison Whampoa Limited %
AP Moeller-Maersk 32%
Shanghai International Port Group 16%
COSCO Group 10%
China Shipping Group 10%