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Singapore Company Focus

Macquarie International Infrastructure Fund (MIIF)


Bloomberg: MIIF SP

Reuters: MIIF.SI

DBS Group Research . Equity

25 Nov 2011

BUY S$0.525 STI : 2,677.15


(Re-instating Coverage) Price Target : 12-Month S$ 0.64 Reason for Report : Re-instating Coverage Potential Catalyst: Steady dividend payouts DBSV vs Consensus : Our DPS forecasts are in line with consensus Analyst Suvro SARKAR +65 6398 7973 suvro@dbsvickers.com

Revitalised, refocused
Completed transformation into pure Asia-focused infrastructure asset fund Organic growth from key assets and investment of surplus cash should support steady dividends Dividend yield of 10.5% and TP of S$0.64 implies total return potential of more than 30% at current prices; reinstate coverage with BUY
Now leaner, fitter and wholly Asia-focused. Over the years, MIIF has divested its non-Asian assets, and repaid corporate level loans with the sale proceeds, rendering a cleaner balance sheet with current net cash of about S$115m. The sale of stakes in other funds also eliminated the black box problem (assets with limited financial visibility) and the fund now focuses purely on key Asian infrastructure assets. Growth in dividend income expected. MIIFs three key investments include stakes in i) Taiwan Broadband Communications (TBC), the 3rd largest cable TV network in Taiwan, ii) Hua Nan Expressway (HNE), a 31km urban toll road in Guangzhou, China and iii) Changshu Xinghua Port (CXP), a multipurpose port in the Yangtze River Delta region of China. We visited these assets earlier this year and not only were we impressed by management and operations, but we are fairly confident of steady organic dividend growth from CXP and TBC, though traffic growth at HNE could face some near-term roadblocks. MIIF has also used its surplus cash (from sale of prior investments) to increase its stake in TBC from 20% to 47.5%, which will lead to higher dividend receipts from TBC. Yield of 10.5% at current prices. MIIF paid out 3Scts dividend in FY10. Post restructuring of its portfolio, MIIF is now guiding for 5.5Scts DPS in FY11, based on expected cash flow generation plus existing cash reserves (2.75Scts already declared for 1H11). We expect this is achievable and given the healthy implied yield of close to 10.5% at current prices, we are reinstating coverage with a BUY call and TP of S$0.64, based on DCF valuation of underlying assets. Share buyback programme in place provides further support to stock price.
At A Glance Issued Capital (m shrs) Mkt. Cap (S$m/US$m) Major Shareholders Macquarie Bank (%) Abu Dhabi Invest (%) Asset Value Investment (%) Free Float (%) Avg. Daily Vol.(000)

Price Relative
S$ 1 .1 1 .0 0 .9 0 .8 0 .7 0 .6 0 .5 0 .4 0 .3 0 .2 N o v -0 7 N o v -0 8 N o v -0 9 N o v -1 0 R e la t iv e In d e x 216 196 176 156 136 116 96 76 56 36 N o v -1 1

M IIF ( L H S )

R e la t iv e S T I IN D E X ( R H S )

Adjusted Income, Distribution and Valuation


FY Dec (S$ m) 2010A 2011F 2012F 2013F

Investment Income EBITDA Pre-tax Profit (Adj) Net Profit (Adj) Net Pft (Pre Ex.) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth (%) EPS Gth Pre Ex (%) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Consensus DPS (S cts): Other Broker Recs:

45 37 33 33 37 2.5 2.9 (41) (37) 2.5 3.0 80.2 21.0 18.3 35.9 8.2 5.7 0.7 CASH 3.1

59 49 46 46 49 3.6 3.9 45 35 3.6 5.5 75.2 14.4 13.6 nm 13.7 10.5 0.7 CASH 4.7 5.5 B: 2

73 62 62 62 62 5.2 5.2 44 35 5.2 5.5 70.4 10.0 10.0 nm 10.7 10.5 0.7 0.0 7.2 5.5 S: 0

75 64 64 64 64 5.6 5.6 7 7 5.6 5.5 64.2 9.3 9.3 nm 9.9 10.5 0.8 0.0 8.3 5.5 H: 1

1,267 665 / 508 10.5 10.2 7.3 61.9 2,024

ICB Industry : Financials ICB Sector: Equity Investment Instruments Principal Business: MIIF is an Asia-focused owner and operator of private infrastructure businesses

Source of all data: Company, DBS Vickers, Bloomberg

Note: The revenue and earnings shown above are on an adjusted basis and represent the earnings of MIIF from its key investments that underpin the dividend flow to shareholders, and are not in accordance with accounting standards.
www.dbsvickers.com Refer to important disclosures at the end of this report ed: MY / sa: JC

Company Focus MIIF

Table of Contents
SWOT Analysis Valuation Story of the transformation No immediate balance sheet issues Management and fees Fund strategy and operations Changshu Xinghua Port Taiwan Broadband Communications Hua Nan Expressway Miaoli Wind Financials 3 4 6 10 11 13 14 19 25 32 34

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Company Focus MIIF

SWOT Analysis
Strengths Ultimate manager Macquarie Bank is one of Australias top financial services groups, and has a proven track record in developing and acquiring infrastructure assets and packaging these assets into funds for investors Infrastructure assets will typically be recession-proof and provide stable and predictable cash flows supported by steady underlying demand No exposure to mature markets Fully Asia-focused investments; growth is also expected from certain assets in China, in line with GDP and trade growth expectations Weakness Assets operate in highly regulated environment and tariffs can be fully controlled by government and may not change over long periods Economic downturns could lead to lower utilisation of some assets like ports Distributions and valuations subject to exchange rate fluctuations (RMB and NTD vs. SGD) Minority stakes in certain assets could imply lack of control in deciding the course of distributions Since the underlying assets are not listed, financial visibility of these assets may be limited for investors Threats Rising interest rates could increase interest expenses as well as compress yield spreads and lead to de-rating Political and regulatory risks in China and Taiwan (risk of lower tariffs in toll road and other utility assets if the governments pursue populist measures during crises or inflationary periods) Competition from other assets entering in the vicinity of individual assets; e.g. a parallel road or a nearby port
Source: DBS Vickers

Opportunities Limited borrowings at corporate level, leaves significant headroom to fund acquisitions Leverage on the Macquarie Groups deal flow, expertise and contact network to source for new opportunities

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Company Focus MIIF

Valuation
We value MIIF at S$0.64 per share. This is based on the sum of DCF valuations of the underlying assets, which will be discussed in greater details in the report, as well as cash holdings of the fund. Owing to the investment fund structure, however, there is some leakage in the form of management fees, which are payable to the fund manager, MIMAL. Despite this, we believe the fund is undervalued at this moment, and current dividend yield of 10.5% looks very attractive, and is at a discount to peer valuations. Sum-of-the-parts valuation for MIIF
Attributable to MIIF CXP HNE TBC Miaoli Management Fees Holding company cash Total No of shares (m) end FY DCF Valuation (S$m) 81.1 174.5 502.7 0.0 (79.2) 100.8 779.8 1212.8 Per share (S$) 0.07 0.14 0.41 0.00 -0.07 0.08 0.64

Share buy back programme provides support. MIIF is currently trading at a discount to the directors valuation of MIIF, and at present management believes there are no other imminent acquisition opportunities. At the MIIF Annual General Meeting of April 2011, shareholders approved the renewal of a Share Purchase Mandate that authorises the buy-back of up to 10 per cent of the issued share capital of MIIF. Consequently, MIIF has commenced a partial buy-back of its own shares by way of on-market purchases funded from its cash reserves. The buy-back will be subject to the usual trading restrictions. The continuing programme should help support share price, while increasing trading liquidity and providing investors with an exit option. Since the last mandate in April 2011, MIIF has utilised S$40m of its cash buffer to buy back about 73m shares (6% of share cap). It is authorized to buy back up to 129m shares until the date of the next AGM in April 2012. Monthly trends in MIIF share buybacks in 2011
18 16 14 12 10 8 6 4 2 Apr May J un J ul Aug Sep Oct Nov Share Buy back (m) 0.70 0.60 0.50 0.40 0.30 0.20 0.10 Av g Purchase Price (S$)

Source: DBS Vickers estimates

DPUs should be sustainable in FY11/12, initiate with BUY. MIIF management has guided for 5.5Scts annual dividend in FY11, and we believe this level should be sustainable in FY12, given that dividends received from underlying investments should increase, driven by increased deployment of cash in the assets plus organic growth. MIIF also has enough surplus cash at the holding company level to support the dividend payouts to investors as well as buy back its shares which are trading much below book value to return capital to shareholders. Dividend inflow and outflow for FY11/12F
S$m TBC dividends HNE dividends CXP dividends Miaoli dividends Net expenses Net cash inflow Gross holding company cash Dividends paid DPU (Scts) DPU Yield (%) FY11F 29.5 22.9 5.5 0.0 (11.6) 46.2 100.8 69.0 5.5 10.5% FY12F 45.3 20.1 6.3 0.0 (9.6) 62.1 71.9 64.8 5.5 10.5%

Source: Company, DBS Vickers

Details of share buybacks since last mandate in Apr11


Date Since last mandate Maximum allowed % of maximum Shares Purchased Value (S$) Buybacks as Per share a % of mkt (S$) volume

72.9 128.9 56.6%

39.7

0.54

19%

Source: Company, DBS Vickers

Source: DBS Vickers estimates

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Company Focus MIIF

MIIF peer comparisons


Company Price (S$) Mkt Cap (US$m) 5312 2597 390 TP (S$) Rcmd DPU FY10 DPU FY11 DPU FY12 Yield FY10 Yield FY11 Yield FY12 DPU CAGR EV/EBI TDA FY11 11.7 10.4 13.5 11.9 13.3 EV/EBI TDA FY12 11.1 9.8 14.0 11.6 10.5

HPH Trust SP Ausnet* CitySpring* Average MIIF

0.61 1.195 0.335

0.95 NR NR

Buy NR NR

N/A 0.08 0.04

0.06 0.08 0.03

0.06 0.08 0.03

N/A N/A 12.1% 12.1%

9.2% 6.7% 9.6% 8.5% 10.5%

9.8% 6.8% 9.3% 8.6% 10.5%

6.4% 0.6% -12.6% -1.9% 35.4%

0.525

493

0.64

Buy

0.03

0.06

0.06

5.7%

* Based on consensus figures Source: Bloomberg, DBS Vickers

MIIF Dividend Yield Trading Band currently trading at close to 1 S.D. valuations
1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 5% 7% 9% 11% 13%

Source: Bloomberg, DBS Vickers

MIIF has outperformed the STI by about 6% YTD in 2011


110 100 90 80 70 Mar-11 Apr-11 Feb-11 May-11 Sep-11 Jan-11 Aug-11 Oct-11 Jun-11 Jul-11 Nov-11

MIIF

STI Index

Source: Bloomberg, DBS Vickers

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Company Focus MIIF

Story of the transformation


Macquarie International Investment Fund (MIIF) was the first infrastructure fund to list on the SGX in May 2005, and started off with a global portfolio of infrastructure investments across toll roads, airports, renewable energy, communications infrastructure, broadcast infrastructure, transport infrastructure and aged care infrastructure assets, among others. The underlying assets spread across Canada, US, various European countries, Asia and Australia. Lack of visibility in underlying businesses and high gearing levels impacted past performance. Stakes in other Macquarie Group funds accounted for a significant part of MIIFs portfolio in the initial stages. These funds were invested in multiple assets across multiple geographies and visibility for each of these assets was limited, thus impacting investors ability to project cash flows. The fund also had significant holding company debts, and came under capital structurerelated stress during the financial crisis. Now leaner, fitter and wholly Asia-focused. Over the years, MIIF has sold off its investments in non-Asian assets, and repaid corporate level loans with the sale proceeds, rendering a cleaner balance sheet. The sale of stakes in other funds also eliminated the black box problem (assets with limited visibility) and the fund now focuses purely on 4 key Asian infrastructure assets located in China and Taiwan. Steady dividend income. MIIFs three key investments include stakes in i) Changshu Xinghua Port (CXP), a multi-purpose port in the Yangtze River Delta region of China, ii) Hua Nan Expressway (HNE), a 31km urban toll road in Guangzhou, China and iii) Taiwan Broadband Communications (TBC), the 3rd largest cable TV network in Taiwan. Annual dividends received from these assets are paid out to shareholders net of management fees and other fund expenses. As a result of time differences between dividend declaration by assets and receipts by MIIF, surplus cash or corporate debt facility can be used to finance the dividend on a temporary basis. Any debt drawn will be repaid once the distributions from assets are received. MIIF receives regular distributions from its investments
Asset CXP HNE TBC Frequency of distribution per annum 1 1 2 Distribution declaration period September September June, December

Residual cash being deployed to grow and sustain future dividend stream. After divesting its remaining legacy holdings in non-Asian assets in early-2010, MIIF ended FY10 with more than S$400m in net cash reserves. In 1Q11, it announced that it would deploy part of the cash reserves (S$174m) to increase its stake in TBC from 20% to 40% by buying out another shareholder. MIIF has also deployed another S$145m in 2Q11 to subscribe to TBC rights issue, which will bring its stake in TBC up to 47.5%. TBCs proceeds from rights issue will be used to repay borrowings and refinance debt at TBC level, and change the repayment profile from amortising loan to bullet repayments. With a better capital structure, more cash will be available for distribution from TBC and help ensure sustainability of dividends over the long term. MIIFs portfolio composition as of end-3Q11
Cash 12% Ports 10%

Communi cations 51%

Expresswa ys 27%

Source: Company, DBS Vickers

MIIFs dividend payment record


Sc t s 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 1H05 2H05 1H06 2H06 1H07 2H07 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11F

Source: Company, DBS Vickers Source: Company, DBS Vickers

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Company Focus MIIF

A list of MIIFs investments from IPO to current portfolio


Acquisition Value (S$m) $71.7 $176.6 $63.6 $87.4 $156.7 Sale Value (S$m) $107.9 $238.5 $90.8 $177.4 $152.9 Gain on sale (S$m) $36.2 ($198.1) $26.5 ($18.0) ($4.5)

Asset Brussels Airport Arqiva Novera Macquarie Renewable Energy (NMRE) Macquarie European Infrastructure Fund (MEIF) Macquarie Airports (MAp) Macquarie Communication Infrastructure Group (MCG) Diversified Utility and Energy Trusts (DUET) Macquarie Infrastructure Company (MIC) Changshu Xinghua Port (CXP) TanQuid (TSB) Canadian Aged Care (CAC) Hua Nan Expressway (HNE) Taiwan Broadband Communications (TBC) Miaoli Wind Co.

Initial Stake Acquired on 3.2% 8.7% 50.0% 6.3% 2.2% IPO IPO IPO IPO IPO

Sold on Aug-07 Mar-10 Jan-07 Jun-09 Mar-08

4.8% 4.1% 2.2% 38.0% 100.0% 55.0% 81.0% 20.0%* 100.0%

IPO IPO IPO Nov-05 Nov-05 Nov-05 Nov-07 Jul-07 Mar-08

$150.1 $55.2 $28.1 $112.3 $90.3 $164.9 $295.7 $265.9 $28.3

Jul-07 Jul-07 Jul-07

$147.2 $85.2 $37.4

($2.9) $30.0 $9.3

Nov-07 Mar-10

$187.3 $88.1

$72.9 ($87.0)

* now 47.5% stake with acquisition value of S$479.2m Source: Company, DBS Vickers

A sequence of MIIFs investments and divestments from IPO portfolio to current portfolio
Date Jan 2007 Apr 2007 July 2007 July 2007 July 2007 Nov 2007 Nov 2007 Nov 2007 Mar 2008 Mar 2008 May 2008 Jun 2009 Feb 2010 Mar 2010 Event Divested entire interest in Novera Macquarie Renewable Energy Arqiva acquired 100% of National Grid Wireless MIIF sells interest in Macquarie Infrastructure Company MIIF sells interest in DUET Group MIIF acquires 20% interest in Taiwan Broadband Communications Divestment of interest in Brussels Airport Divestment of interest in TanQuid Acquisition of 81% interest in Hua Nan Expressway MIIF divests stake in Macquarie Airports Acquisition of stake in Miaoli Wind (formerly known as infraVest Wind Power) HNE completes refinancing of debt facilities, with single long-term debt facility of RMB2.8bn Divested entire interest in MEIF to a number of investors Disposal of stake in CAC through proposed IPO Disposal of interest in Arqiva, last remaining non-Asian investment, to three existing shareholders of the business

Source: Company, DBS Vickers

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Company Focus MIIF

Evolution of MIIFs portfolio composition by individual assets simpler and more focused portfolio now
Port f olio Composit ion - Dec 2006 DUET 4% MIC 2% Arqiv a 17%
Port f olio Composit ion - Sep 2011

Brussels Airport 7%

Cash 12% TBC 51%

CAC 10%

CXP 10%

TSB 9%

MAp 11% CXP

HNE 27%

Source: Company, DBS Vickers

Evolution of MIIFs asset portfolio by geographical location transformation to a pure Asia-focused play now
Geographic al Spread - Dec 2006 China F rance 9% Italy 4% USA1% 3% Sweden 1% Denmark 3% Germany 9% UK 36%
Geographic al Spread - Sep 2011 12% Taiwan 51%

China 37%

Belgium 11% Australia 13% Canada 10%

Source: Company, DBS Vickers

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Company Focus MIIF

MIIFs portfolio valuation and net cash level trends


2,000 S$m

1,500

1,000

500

0 F Y06 (500) F Y07 F Y08 F Y09 F Y10 1Q11 2Q11 3Q11

Portfolio V aluation

Net Cash (debt)

Source: Company, DBS Vickers

MIIFs net book value trend


1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 F Y06 F Y07 F Y08 F Y09 F Y10 1Q11 2Q11 3Q11 Net Book V alue (S$m)

Source: Company, DBS Vickers

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Company Focus MIIF

No immediate balance sheet issues


Asset level borrowings are non-recourse to MIIF. MIIFs aggregate gearing level (debt/ asset) is about 50%, while the net debt/ equity ratio is about 101%. Compared to normal capital-intensive infrastructure businesses, this level of gearing is quite reasonable, and compares favourably with infrastructure business trusts listed on the SGX. At the individual asset level (excluding Miaoli Wind, where equity has been fully written down), Hua Nan Expressway is the most heavily geared asset, but the loan is amortising and the amortisation profile is set to match the cash flow growth profile of the asset, thus reducing risks to cash flows. MIIFs aggregate and asset level gearing (debt/ asset)
Equity TBC HNE CXP Miaoli Total 498.9 257.1 97 0.0 853 Net Debt 466.8 419.4 27.1 66.7 980 Net Gearing 0.48x 0.62x 0.22x 1.00x 0.53x

Few risks to debt covenants. The average Debt Service Coverage Ratio (DSCR) of MIIFs asset portfolio is safe at 1.7x ranging from 1.5x at HNE to 2.0x at TBC. Though aggregate net debt to EBITDA of 5.4x is likely at the higher end of the comfortable range, we believe the assets, apart from Miaoli Wind, are unlikely to run into any balance sheet stress anytime soon. The only near term refinancing risk is at Miaoli Wind, but unlikely to impact distributions. Since the asset was acquired by MIIF, wind speeds have been lower than expected and hence, operational performance has disappointed and been on a downtrend. The poor operational performance at Miaoli Wind has been fully reflected in its book valuation, which has been written down fully in FY09. We believe this puts debt refinancing at risk. Miaoli Wind has two debt facilities outstanding, a NT$1.3bn debt facility which is amortising up to 2020, and a NT$465m (~S$20m) facility, which comes up for renewal in December 2012. Given the lower than expected cash flows generated at Miaoli Wind and the subsequent write down of valuations, we believe rolling over debt will be difficult, and MIIF may be forced to either inject capital or divest the assets to pay back creditors. In March 2010, MIIF injected $1.7m into Miaoli Wind to avoid a breach of the debt service cover ratio. If this situation is repeated in future, MIIF may be required to put in further equity, funded by its cash reserves. Management is also looking for opportunities to sell the asset at reasonable valuations.

Corporate level cash

(114.7)

Total (incl. Cash)

853.0

865.3

0.50x

Source: Company, DBS Vickers

MIIFs aggregate and asset level gearing (debt/ asset)


Business Level Borrowings CXP A CXP B HNE Miaoli Wind A Miaoli Wind B TBC Senior TBC Junior MIIF Level Borrowings Corporate Facility A Debt Drawn RMB180m RMB200m RMB2.6bn NT$1.3bn NT$465m NT$20.4bn US$135m Facility Limit S$100m Maturity Date Jul 2014 Apr 2017 Feb 2022 Jun 2020 Dec 2012 Jun 2017 Dec 2017 Maturity Date Oct 2014 Repayment Profile Bullet Bullet; repayment over 2014-17 Amortising Amortising Bullet Bullet + Amrotising from Dec 2013 Bullet Debt drawn down NIL % Hedged N/A N/A N/A 100% 100% 85% 100% DSCR 1.7x 1.7x 1.5x 1.1x 1.1x 2.0x 2.0x

N/A

N/A

Source: Company, DBS Vickers

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Company Focus MIIF

Management and Fees


MIIF has appointed Macquarie Infrastructure Management (Asia) Pty Limited (MIMAL or the manager) as its sole and exclusive manager pursuant to a management agreement dated 19 May 2005. MIMAL is a member of the Macquarie Group, a diversified international provider of banking, finance, advisory and investment services headquartered in Sydney, Australia, with approximately 15,500 employees in 28 countries as at 30 September 2010. The Macquarie Group is one of the global leading advisors in acquisition, disposition and financing of infrastructure assets and the management of infrastructure investment vehicles on behalf of third-party investors. MIMAL is part of the Macquarie Groups Infrastructure and Real Assets business, which, through special purpose management companies, has approximately A$97bn of

assets under management as of 30 September 2010. MIMAL invests on behalf of retail and institutional investors in infrastructure assets and businesses, including toll roads, airports and airport-related infrastructure, communications infrastructure, electricity and gas transmission and distribution networks, water utilities and rail. Operating history of Macquarie Infrastructure and Real Assets dated back since 1996. The Singapore branch of MIMAL is also licensed by the Monetary Authority of Singapore as a holder of a Capital Markets Services Licence to conduct the regulated activity of fund management in Singapore. The Board of Directors of MIMAL is responsible for overseeing the management of MIMAL.

Board of Directors of MIIF 4 out of 5 are Independent Directors


Name Heng Chiang Meng Designation Chairman & Independent Director Experience Has held several key positions across various companies and government bodies like Far East Organisation, First Capital Corporation, Overseas Union Bank, Monetary Authority of Singapore and Citibank. Has served as Member of Parliament in Singapore for 4 terms from 1984-2001. He received his BBA (Hons) degree from the University of Singapore, Singapore in 1970. President and CEO of Camford Atlantic Ltd., a Bermudan company providing risk management, investment and financial services. Has Michael Hamer received his Bachelor of Science (Hons) degree from the University of Melbourne Australia in 1972 and a Master of Science degree in Mathematics in 1974 and a D. Phil in Mathematics and Economics in 1980 from the University of Oxford England. Senior director at Stamford Law Corporation; her practice focuses on mergers and acquisitions, equity and debt capital markets and corporate finance. She graduated with a double first in law from Cambridge University in 1980 and qualified as a Barrister-at-Law at Grays Inn London in 1981. She was admitted to the Singapore Bar in 1982. Rob Mulderig is chairman of the board of financial services company Woodmont Trust Company Ltd, and is chairman of the Bermudian Bank of N.T. Butterfield and Son Ltd. He is the chairman of Intoll International Limited, the Bermuda entity that is part of Intoll Group, and a director of Macquarie Atlas Roads International Limited. He is a former member of the board of governors of the Bermuda Stock Exchange. He attended Colombia University and the Fordham University School of Law. Member of investment committees or boards of a number of Macquariemanaged funds. Previously the global COO of Macquarie Infrastructure and Real Assets division. Has also been the CFO of Macquarie Airports and Macquarie Airports Group. He holds Bachelor of Economics and Bachelor of Law degrees from the University of Sydney.

Michael David Hamer

Independent Director

Lee Suet Fern

Independent Director

Robert Andrew Mulderig

Independent Director

Frank Kwok

Executive Director

Source: Company

Page 11

Company Focus MIIF

Board of Directors of MIMAL


John Stuart High Roberts Executive Director John is Executive Chairman of the Macquarie Funds Group, which has US$300bn of capital under management and includes the activity of the Macquarie Infrastructure and Real Assets division (MIRA). John is on all investment committees or boards of directors in MIRA to provide oversight and strategic direction to individual fund management executive teams. He joined Macquarie in 1991 and is based in Sydney. John has a Bachelor of Laws degree from the University of Canterbury in New Zealand. John is a division director of Macquarie Group. He joined Macquaries fund business in London in 2004 and has been in Asia since 2008. He was previously asset director for a number of MIIFs direct investments and sits on the Board of all the assets. He has been instrumental in divesting non-Asian assets and furthering MIIFs focus on Asian investments. Prior to joining Macquarie, John spent 13 years with ExxonMobil, where he established the marine fuels and lubricants business in Europe. Member of investment committees or boards of a number of Macquariemanaged funds. Previously the global COO of Macquarie Infrastructure and Real Assets division. Has also been the CFO of Macquarie Airports and Macquarie Airports Group. He holds Bachelor of Economics and Bachelor of Law degrees from the University of Sydney.

John Lawson Stuart

CEO and Executive Director

Frank Kwok

Executive Director

Source: Company

Under the terms of the management agreement, MIIF compensates MIMAL for managing its investments through base fees and performance fees. These fees are calculated for each quarter ending on 31 March, 30 June, 30 September and 31 December of each year. Any change to the fee structure will be subject to shareholders approval at a general meeting, where the Manager and any Macaquarie Group member will abstain from voting. The base fee is calculated on the following basis: 1.5% per annum of MIIFs Net Investment Value Payable quarterly in arrears The Net Investment Value is the average market capitalisation over the last 15 SGX-ST trading days of the quarter; plus The total external borrowings at the end of the quarter; plus Firm commitments to invest in future investments at the end of the quarter; less The cash or cash equivalents at the end of the quarter

Performance Fees: Strong alignment with shareholders interests the manager will only get rewarded after shareholders are rewarded i.e. if the return on the shares for a quarter is greater than zero and exceeds a benchmark return The fee will be reduced by any deficit of MIIFs performance to the benchmark. And this carries on in perpetuity. The performance fee is calculated on the following basis: If the return on the shares for a quarter (including the reinvestment of all dividends) is greater than zero and exceeds the benchmark return, the performance fee is equal to; 20% of the excess above the benchmark return for the quarter. If the return is less than the benchmark return in any quarter, the amount of the deficit is carried forward i.e. Performance fee = 20% (return benchmark return deficit brought forward); Payable quarterly in arrears; and The performance fee is payable to the Manager in cash. MIMAL may apply to invest all or a portion of the performance fee in MIIF shares.

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Company Focus MIIF

Fund strategy and operations


Investment Policy. MIIFs investment policy is to invest in income-producing global assets with stable and predictable cashflows. Its objective is to provide shareholders with regular and stable dividends, whilst achieving long-term capital growth through active investment management, asset acquisitions and diversification with regard to currencies, infrastructure sectors and geography. Dividend Policy. MIIFs policy is to pay out the bulk of cash available for distribution. MIIF has guided for 5.5Scts annual dividend in FY11, up from the 3.0Scts dividend it declared in FY10. It has already declared 2.75Scts interim dividend at the end of 1H11. The distributions are based on expected forecast distributions from the underlying assets, as well as buffer cash from sale of investments. Capital Structure. Total borrowings at corporate level should not exceed 35% of total gross assets but this limit excludes gearing within MIIFs underlying assets. Debt in underlying assets is non-recourse to MIIF and will be repaid from the revenues generated from these assets. New acquisitions will be funded through raising new capital. Short-term, MIIF may use debt-bridging facilities to facilitate acquisition. These will then be replaced by new capital. Quarterly Valuations. The Manager intends to conduct quarterly valuations of its investment portfolio. Market value will be used for listed investments. Unlisted assets will be valued using established valuation techniques. Changes in investment values will not affect distributions. Any changes in the value of the investment portfolio will be reflected in the income statement in the next period. We would like to highlight that revaluations are not expected to have an impact on MIIFs ability to pay dividends since MIIF is not required to pay dividends out of distributable profits. Hedging Policy. The forecast dividends for 2011 are hedged. Currently, a part of forecast distributions for 2012 is hedged. There is no hedging policy in place, but the manager will monitor the forex movements and may enter into any hedging arrangements as distribution guidance provided by underlying investments becomes more certain. Income. This is made up of: (a) Distribution income, which is dependent upon the financial performance of MIIFs investments which then determines the respective investments dividend and distribution policy. (b) Forex gains/(losses), which arise on (i) differences between rates on settlement date and transaction date; and (ii) differences between end of period rates for assets and liabilities denominated in currencies other than Singapore dollars. Current investments have exposure to the Hong Kong Dollar, Chinese Renminbi and the New Taiwanese Dollar. (c) Net gain/(loss) on financial assets are changes in fair values of assets. Note that the net gain/(loss) on revaluations of investments is merely an accounting adjustment to restate investments to their current fair value and will not impact cashflows. Operating expenses. This is made up of: (a) Management Fees this is made up of base fees and performance fees, payable quarterly. (b) Directors fees - each independent director is paid an annual retainer fee of US$72,500 payable quarterly. (c) Transaction costs (d) Other operating expenses this item is expected to be fairly predictable and consist of recurring operating expenses such as accounting, audit and tax advisory fees, annual listing fees, costs associated with the preparation and distribution of reports to shareholders and other miscellaneous expenses. Higher costs are likely if (i) MIIF takes operational and management control of a future investment; and (ii) MIIF undertakes new acquisitions leading to additional funding costs, advisory and legal fees. Borrowing Costs. MIIF does not have any borrowings at the corporate level currently except for a S$100m debt facility, which has not been drawn down. The facility was renewed in October 2011 for 3 more years with a renewal fee of US$1m. Undrawn amounts are subject to a 0.4% commitment fee (calculated on the unutilised portion). The interest cost for the drawn down amounts are assumed to be LIBOR plus 2.5% margin. Taxation. MIIF is a resident for tax purposes in Bermuda. MIIF has applied for and expect to receive from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act 1966, an assurance that MIIF will not be liable for any tax until 28 Mar 2016 in the event that there is any new legislation imposing tax on income, capital gains or any other. There are withholding taxes expected though in respect of distributions from its assets in China and Taiwan. Distributions made to Singapore tax resident investors will be tax-free.

Page 13

Company Focus MIIF

Changshu Xinghua Port


Changshu Xinghua Port Co. Ltd (CXP) is a multi-berth river port; majority owned by Singapore based Pan-United Corporation Ltd in a consortium with Macquarie International Infrastructure Fund Limited, Petroships Investment Pte Ltd and Jiangsu Changshu Economic Development Group. The development is a multi-purpose port for general cargo and containers, and was established as a joint venture with the Changshu government (through its Changshu Riverbank Economic Development Corporation) in 1994. CXP has been granted a 50-year concession to operate the port until 2044. It has been ranked among the top ten river ports in China for bulk cargo tonnage. A view of the port

Asset shareholding structure

Source: Company

Located in high-growth industrial region. CXP was established in 1994 and opened in 1997. CXP is centrally located within a high growth industrial area along the Yangtze River, which includes the important cities of Suzhou, Wuxi and Changshu. Its hinterland, which covers the provinces of Shanghai, Jiangsu and Zheijang has close to 150 million people and is one of Chinas faster growing industrial regions. As a port, CXPs growth is driven by local GDP and trade volume growth. With a water depth of 13 meters, CXP is the furthest port upstream from Shanghai that is able to handle containerized traffic. With Class 1 port status, CXP is able to accept vessels directly from overseas thereby allowing it to participate in international trade flows.

Asset Location

Source: Company

Page 14

Company Focus MIIF

Asset Snapshot
Geography Concession Start date Concession End date Port Status Water Depth Vessel Capacity 80km upstream from Shanghai 50 year concession granted to Pan United Corp in 1994 2044 International Port Class 1 13.3m Up to 100,000 dead weight tonne (DWT) vessels under ideal conditions 8 berths Facilities 1,700m of berth 2 gantry cranes 10 multi-use portal cranes Storage Yard storage totaling 608,147 sq m 14 warehouses with total built up area of 107,300 sq m

Source: Company

Facilities in place. CXP has become one of the fastest growing ports along the Yangtze River. CXP has built 8 all-purpose berths with total of 1.5km berth length, and the waterfront depth is maximum 13.3 meters. The port is able to handle vessel sizes in excess of 50,000dwt and theoretically up to 100,000 dwt. The jetty is equipped with 2 units of quay cranes,10 portal cranes, rubber tire gantry cranes ,empty container cranes and multi-usage cranes. Currently, CXP has 14 warehouses with total built-up area of 107,300 sq m, a 249,000 sq m general cargo yard, a 50,000 sq m container yard to accommodate 6,000-TEUs containers, and a 370,000 sq m temporary stacking yard. General cargo contributes bulk of revenues. CXPs revenues are primarily based on fixed tariffs negotiated with customers. The main products handled on the general cargo side include steel and forestry products. The port also handles some container traffic. 2010 Revenue breakdown by cargo type
Other 5.5% Container 8.4%

Based on 2010 numbers, general cargo products (including steel, logs and non-ferrous metals) accounted for about 63% of revenue while paper & pulp products and container traffic accounted for 24% and 9% of total revenues, respectively. Steel volumes have been the major base loads. In the steel products segment, under general cargo, CXP benefits from the presence of captive steel mills and processing plants located in close proximity. The major factors for traders choosing CXP is the kind of facilities provided (including warehouses/ storage) and distance from the mill. Steel volumes at CXP are somewhat resilient to economic downturns. The steel trade for CXP is a direct export-import trade, and the proportion of steel being exported or imported depends on the arbitrage between domestic steel prices and international market prices. As seen from the figure below, the breakdown between imports and exports can vary widely between years. Domestic steel manufacturers export finished steel products when the international market prices are higher, and domestic steel processing firms import crude steel when domestic prices are higher. Thus, volumes are not as dependent on steel demand cycles as the difference between local and global prices. Steel volume breakdown depend on price arbitrage
3,500

'000 tons

Paper & Pulp 23.5%

3,000

General Cargo (steel/ logs) 62.6%

525 259 497 619 2,370 1,858 1,435 341 05 06 Import 134 07 Export 94 08 Domestic 09 1,549 138 10 650 275 605 1,873 1,484 530

2,500 2,000 1,500 1,000 500

Source: Company

Source: Company

Page 15

Company Focus MIIF

Leading player in the paper and pulp trades . This position is due to CXPs relationship with Westerlund, a global leader in the handling and logistics of paper, pulp and other forest products. Westerlund and CXP have jointly set up Changsu Westerlund Warehousing (CWW), in which CXP has a 25% stake, to operate a dedicated forestry product terminal at CXP. According to management, CWW handles almost 15% of Chinas pulp imports. Chinas pulp import volumes are expected to continue to grow strongly, driven by increasing per capita consumption levels and constraints in domestic supply from the closure of polluting units. Steady growth in pulp & paper volumes at CXP
'000 tons 2,500 2,000 1,500 1,000 500 07 08 09 10 1,835 1,894 2,139

Growing presence in the logs segment. CXP marked its entry into the logs logistics space with the import of New Zealand logs, as management actively sourced wholesalers in the Chinese market to promote the use of NZ logs. From a relative small base prior to 2009, CXPs log business took off and volume grew 56% in 2010. Import growth of logs is likely to be supported by increasing furniture consumption as well as strict domestic controls on deforestation. Currently, NZ wood (Pacific Forest Products) contributes close to 74% of total log volumes in CXP and CXP can drive further growth in the logs business as it has spare storage space and facilities are not as congested as other major log ports like SIPG (Longwu). Container handling business still small. In the container segment, renewed growth is projected as CXP develops as an inland hub for container shipping along the Yangtze River. Rising costs for road transport, especially to and from the new Yangshan Port, are expected to make transport of containers via the Yangtze River more competitive. CXP is thus likely to handle more international and domestic containerized cargo as river traffic increases.

2,094

Source: Company

CXP historical cargo throughput details


Cargo Volumes Steel (tons) Logs (tons) Other non-steel (tons) Paper & Pulp (tons) Total general cargo (tons) Growth Container (TEU) Growth 87,763 07 3,028,095 692,291 1,834,540 5,554,926 08 2,600,770 788,161 1,893,519 5,282,450 -4.9% 95,522 8.8% 09 2,315,743 831,219 378,155 2,094,048 5,619,165 6.4% 81,893 -14.3% 10 2,217,018 1,297,735 647,302 2,138,717 6,300,772 12.1% 90,163 10.1%

Source: Company

Most of the river ports in China are concentrated in Yangtze River Delta region. River ports in China are much smaller than the seaports and serve as centers of domestic trade and transhipment of import/ export cargoes. They largely serve as connections between seaports and inland regions (manufacturing hubs). Most of the bigger river ports in China are concentrated in the Yangtze River Delta (YRD) region, and CXP competes with at least 7 other major ports either upstream or downstream on the Yangtze River. These include SIPG (Longwu) SIPG (Luojing) Taicang Nantong

Zhangjiagang Jinagyin, and Nanjing All YRD river ports may not be direct competitors. Among the ports listed above, only the first three are downstream from CXP and enjoy potentially greater drafts. Upstream ports cannot accommodate larger ships. Moreover, ports like Nantong, Zhangjiagang and Jiangyin are mainly involved in iron ore, coal and chemical trades and do not deal with similar cargo as CXP. The main competitiors for CXP are thus limited to SIPG (Luojing) and Taicang as these ports also deal with steel, paper & pulp and log trades.

Page 16

Company Focus MIIF

Revenue and EBITDA trends. Historically, CXP has delivered steady growth in revenues and EBITDA. Revenue has grown at a CAGR of 7% and EBITDA at a CAGR of 2% over 200710. EBITDA growth has been slower than revenue growth owing to declining margins, as a result of higher wages, overheads and an appreciating RMB. CXP had to provide for a one-off litigation payment amounting to RMB30m, which affected its EBITDA and net profit in 2008, and consequently impacted distributions to MIIF in FY09. Since the hiccup in 2008, EBITDA is back on the growth track. CXP revenue, gross profit and EBITDA trends
300 250 200 150 100 50 07 Rev enue (RMB m) 08 Gross Profit (RMB m) 09 10 EBITDA (RMB m) 215 157 121 89 210 153 217 158 119 182 128 264

Very strong growth trend YTD in FY11. In the 9 months to September 2011, CXP generated revenues of RMB223m, up 15.5% y-o-y. This was driven by higher cargo volume across the board, led by log volumes with 48% y-o-y growth off a lower base in FY10. Despite higher costs, EBITDA margins were maintained around 51% and EBITDA came in 19% higher y-o-y. This bodes well for growth in distributions to MIIF in FY12. Gearing on the lower side. CXP has a strong balance sheet, with gross gearing of around 0.3x, comprising two bullet loans drawn down to the extent of RMB380m, which will mature in 2014 and 2017 respectively. With a current Debt/ EBITDA ratio of only 3.1x, we do not envisage any difficulty in rolling over the debt, given that CXPs concession extends till 2044. CXP revenue, gross profit and EBITDA trends
Debt Facility CCB (Bullet) ICBC (Bullet) Draw down (RMB m) 180 200 > 5 yr PBOC rate > 5 yr PBOC rate Base rate Maturity date July 2014 April 2017

Source: Company

Note: FY08 EBITDA affected by one-time litigation charges Source: Company

Distributions once a year, in September. CXP pays out substantially almost all of its net profits after scheduled loan repayments. Distributions pertaining to the current financial years performance are paid out in September the next year. Thus, distributions received by MIIF in FY11 will pertain to HNEs performance in FY10, which is already known. Given stronger financial performance and net profit growth in FY10, FY11 distributions to MIIF should be higher than FY10. CXP distributions to MIIF
6 5 4 3 2 1 07 08 09 10 1.5 5.7 Distributions to MIIF (S$ m) 5.1 4.6

Growth initiatives. Management is looking to further diversify cargo types. These include initiatives in the spheres of: Developing the North American log markets and increasing market share in this market Increase the trade volumes of chemicals like sodium sulphate with Brazilian volumes as a key target Develop further inroads into the export of project equipment by renting out assembly space in the port area to improve business proposition to customers Increase volumes in white minerals, which are used in LCD manufacturing, for example Key risks. Apart from the competition from neighbouring river ports on the Yangtze River, which could limit growth in volumes and tariffs, CXP faces the following concerns: Higher export steel duty in 2H-2011, which could cap the growth momentum in steel volumes Mounting cost pressures from higher minimum wage levels in 2011 and tight labour markets

Source: Company

Page 17

Company Focus MIIF

CXP Revenue and EBITDA forecasts


FY Dec (m) Revenue (RMB m) Revenue growth EBITDA (RMB m) EBITDA Margin Distributions to MIIF (S$) 07 214.7 10% 120.8 56% 5.7 08 209.6 -2% 84.0 40% 5.1 09 217.2 4% 119.1 55% 1.5 10 263.6 21% 127.4 48% 4.6 11F 295.6 12% 153.7 52% 5.5 12F 317.8 8% 165.2 52% 6.3 13F 333.7 5% 173.5 52% 6.8

Source: Company, DBS Vickers estimates

CXP DCF Valuation Key Assumptions


Risk Free Rate Cost of Debt (b/tax) Tax rate % Expected market return Target Debt/Equity Ratio Beta at Target Gearing Cost of Equity WACC 5.5% 6.0% 25.0% 15.0% 45.0% 1.0 15.0% 11.7%

CXP DCF Valuation Methodology


Multi-stage revenue growth model 2013-15 2016-18 2019-21 Terminal growth Sum of NPV (RMB m) Net cash (debt) (RMB m) Fair value of equity (RMB m) Fair value (SGD m) Fair value of MIIF's stake (SGD m) Implied FY12 EV/EBITDA (x) 5% 3% 2% 1% 1446.8 -380.0 1066.8 213.4 81.1 8.8

Source: DBS Vickers

CXP Peers Valuation Summary


Company CMHI CP DLP XIP TPD HPHT Average Price (Local $) 21.40 8.74 1.85 1.04 1.09 0.61 Market Cap (US$m) 6,781 3,039 1,816 363 861 5,269 FY11 PE 10.0 7.5 7.8 6.8 9.4 19.0 10.1 FY12 PE 11.1 7.4 6.9 6.3 8.4 18.6 9.8 P/B 1.2 0.8 0.5 0.6 0.6 0.6 0.7 FY11 EV/EBITDA FY12 EV/EBITDA 15.5 12.8 11.3 4.0 7.0 12.4 10.5 16.3 11.3 9.7 3.6 6.1 11.6 9.8

Source: Bloomberg, DBS Vickers

Page 18

Company Focus MIIF

Taiwan Broadband Communications


Taiwan Broadband Communications (TBC) was established in 1999 and is the third largest cable TV (CATV) infrastructure owner and operator in Taiwan. It is the sole licensee and provider of CATV in its five franchised areas passing over one million homes. As of 30 Sep 2011, TBC has 747,126 Basic cable subscribers, 79,864 Premium digital subscribers and provides broadband services to 162,421 subscribers. Snapshot of the leading Cable TV operators in Taiwan
Cable Operator Kbro CNS TBC TFN Media # System Operators 19 10 5 Subscribers (approx.) 1,200,000 1,000,000 750,000 550000

Investment highlights
Date of acquisition Cost of acquisition Latest valuation Distributions paid since acquisition MIIFs ownership % of MIIF portfolio as of end-3Q11 16 July 2007 S$479.2m S$498.9m S$77.8m 47.5% 51.5%

Source: Company

Cable TV Cable TV Cable TV Cable TV

Areas of operation Broadband Cable Phone Broadband Cable Phone Broadband Broadband

Owner Carlysle Group MBK Partners Macquarie Group Taiwan Mobile

Source: Companies, DBS Vickers

TBC is one of the leading multi-system cable operators in Taiwan. Established in 1999, TBCs franchised areas include Taoyuan, HsinChu, Miaoli and Taichung. Today, TBC serves over 740,000 cable TV households with more than 150 channels of exciting local and international content on its analogue and digital TV platforms. TBC also provides a full range of quality broadband access packages with speeds ranging from 2M to 30M, as well as a VOIP service. Franchise Map

Cable television is widely prevalent in Taiwan, as a result of cheap subscription rates (typically around NT$550-600, or less than USD$20 a month) and the paucity of free-to-air television, which comprises of a few channels only. Community Antenna Television (CATV) is the dominant broadcast medium accessed by 80% to 85% of the population. Programming is mostly in Mandarin, Taiwanese and Japanese, with some English, Korean and other foreign language channels. Miniseries, called Taiwanese drama, are popular. There are around 100 channels with most stations being dedicated to a particular genre; such as game shows, news, anime, movies, sports and documentaries. Almost all programs are in the original language with traditional Chinese subtitles. The Taiwan government has been pushing for a switch to digital television services in the near future provided through set-top box, which will increase the number of channels available to subscribers. TBC is the sole licensee and provider of CATV, or cable television, in its franchised areas. Contracts are one to three months long and generally pre-paid. Contracts are also renewed automatically. TBCs 3 key product segments are: Basic Cable TV more than 100 channels of diverse content, delivered via TBCs 10,570km Hybrid Coaxial Fibre (HFC) network spread over the five franchised areas Premium Digital TV recently re-launched digital product offering state-of-the-art interactive digital TV services, including Digital Video Recording (DVR) Broadband various high-speed options, using cable modem technology

Source: Company

Page 19

Company Focus MIIF

TBCs broadband offering provides high-speed Internet access to subscribers in its franchised areas using cable modem technology. TBC completed a technology upgrade in early 2007 to significantly increase its broadband Internet speeds, currently providing subscribers with up to a 16Mbps offering. TBC Broadband subscribers are also able to obtain cable telephony or Voice Over Internet Protocol services over the network enabling local, national and international calls. TBC has an arrangement with Eastern Broadband Communications under which TBC earns commission per cable phone subscriber. Subscriber Numbers and Growth
Subscribers Basic Cable TV Basic Digital Penetration rate Broadband Penetration rate Subscriber Growth Basic Cable TV Basic Digital Broadband FY06 664,785 16,009 2.4% 92,723 13.9% FY07 688,860 19,373 2.8% 111,177 16.1%

TBCs Premium Digital TV has seen strong demand since relaunch. After upgrading hardware and software systems, TBC introduced its revamped digital cable TV product in March 2009, following which subscriber base has increased almost four-fold. The digital service is provided via a set-top box (STB) and offers premium and HD content an additional 33 video and 30 music channels, which are not subject to regulatory price caps; and Interactive video services. The STB also comes with an external hard disk, which provides an advanced Digital Video Recording (DVR) platform to users.

FY08 712,895 18,958 2.7% 128,605 18.0%

FY09 724,628 25,012 3.5% 140,227 19.4%

FY10 738,072 55,619 7.5% 152,369 20.6%

3.6% 21.0% 19.9%

3.5% -2.1% 15.7%

1.6% 31.9% 9.0%

1.9% 122.4% 8.7%

Source: Company

TBC Growth in subscriber base across business lines


'000 Subsc ribers 800 700 600 500 400 300 200 100 F Y06 F Y07 F Y08 F Y09 Basic Digital F Y10 1Q11 Broadband 2Q11 Basic Cable TV 16 93 111 19 129 19 140 25 152 56 65 157 160 72 665 689 713 725 738 741 744

Source: Company

Breakdown of TBCs subscriber base by franchise areas and type of service (as of end-1Q11)
Subscribers Basic Cable TV Basic Digital South Taoyuan 233,548 21,548 Hsinchu County 111,697 9,466 North Miaoli 45,002 4,061 South Miaoli 57,977 2,715 Taichung City 293,037 26,999 Total 741,261 64,789

Penetration rate
Broadband

9.2%
53,806

8.5%
24,976

9.0%
9,512

4.7%
5,292

9.2%
63,428

8.7%
157,014

Penetration rate Source: Company

23.0%

22.4%

21.1%

9.1%

21.6%

21.2%

Page 20

Company Focus MIIF

Basic CATV growth will be driven by population increase. TBCs franchised areas are located in growth corridors of Taiwan and have historically enjoyed population growth above national average. TBCs largest franchised area is in Tai Chung City, the 3rd largest city in Taiwan, where it has exclusive franchise rights. Population & households CAGR (2000-2010)
3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Population growth Taiwan (national av erage) Houseold growth TBC F ranchise Areas 0.4% 1.2% 1.7% 2.6%

This also helps diversify revenue away from regulated basic CATV services. With higher revenues from digital TV and broadband services, TBC will be able to reduce regulatory risks as the regulated basic CATV business now accounts for a lower proportion of revenues. From 2006 to 2010, revenue from basic cable TV services has been reduced from 88% to 83%, and the trend should continue in future. TBC Revenue breakdown by service (FY10)
Broadband 16% Basic Digital 1%

Source: Ministry of the Interior, Taiwan

Cable TV penetration in Taiwan is among the highest in Asia. This is primarily driven by the high affordability of the cable TV services in Taiwan monthly cable TV ARPU amounts to only 1.1% of monthly nominal GDP per capita, according to a recent report by Media Partners Asia as programming and content costs are among the lowest in the region. Content providers derive more than 60% of revenue from advertisements and hence, content subscription costs are lower. Moreover, the regulator caps basic CATV services tariff at NT$600 (around S$26 or US$20) per month, further subject to local governments regulations, and hence cable TV services remain very affordable. Local Free-to-Air (FTA) content is deemed inadequate and hence, Cable TV has grown in popularity over the years, resulting in a penetration rate of close to 83% of all TV households, one of the highest on Asia, matched only by South Korea. Organic growth will be boosted by up/cross-selling digital TV and broadband services. Digital TV subscribers only account for just over 10% of TBCs CATV subscriber base as of end3Q11. Hence, there is substantial headroom for expansion in the non-regulated space of the Cable TV industry in Taiwan. While basic CATV ARPUs range from NT$540-580 per month, digital TV subscriptions can add another NT$200 per month. Cable broadband is the other product where TBC has the chance to take market share away from traditional providers like telecom providers. With its DOCSIS-3.0 infrastructure already in place, TBC is able to provide high speed broadband (up to 120 Mbps) at slightly lower price than existing players owing to bandwidth advantages. Higher speeds also allow for higher ARPUs.

Basic Cable TV 83%

Source: Company, DBS Vickers

Capital expenditure for network upgrades mostly in place. TBCs network currently consists of 13,493km coaxial cable and 1,956km of fibre, which forms the backbone of its Digital TV and Broadband services. Over 95% of TBCs network has been upgraded to 750Mhz to provide more spectrum for Digital TV, with two-way capability upgrade for broadband access through cable modem. In 2009, TBC made significant investments to launch its premium digital TV service, to deliver latest MPEG-4 technology digital signal, which allows for higher number of channels while reserving sufficient capacity for DOCSIS-3.0 Broadband product. Strong and experienced management in place. Current CEO Thomas Ee is former Head of Cable, Broadband and Fixed Line at StarHub, Singapores leading quad-play operator and was the key driver for the rollout of Singapores nationwide 100Mbps residential broadband service. Other senior management includes Ms. Loke Kheng Tham, former Head of Content and Marketing at StarHub, Singapore. EBITDA has grown at a faster pace than revenues. Given that broadband EBITDA margins are higher than CATV services, the higher growth rate of non-basic CATV services, as described above, has led to improving EBITDA margins and a faster EBITDA CAGR of 5.3% compared to revenue CAGR of 3.9% over FY07-10.

Page 21

Company Focus MIIF

TBC Revenue, EBITDA and margin trends


8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 07 Rev enue (NTD m) 08 09 EBITDA(NTD m) 60% 61% 61% 62% 63% 62% 62% 61% 61% 60% 60% 59% 59% 58% 10 EBITDA Margin

TBC Distributions to MIIF


20 18 16 14 12 10 8 6 4 2 07 Distributions to MIIF (S$ m)

08 Rev enue (NTD m)

09

Source: Company, DBS Vickers

Source: Company, DBS Vickers

Broadband EBITDA margins are better than CATV margins


80% 75% 70% 65% 60% 55% 50% F Y07 CATV F Y08 F Y09 F Y10 Broadband 59% 73% 69% 59% 60% 60% 73% 75%

New capital injection by MIIF geared towards capital structure optimization and higher distributable cash flows. TBC was initially acquired from Carlyle Group in 2006 by a Macquarie Group-led consortium. Now MIIF has a 47.5% stake in TBC over 3 transactions: i) July 2007 MIIF acquired 20% interest for S$161.8m ii) March 2011 MIIF acquired a further 20% interest for S$174.4m iii) June 2011 MIIF subscribed to shares and other instruments representing 12.5% interest for S$143m iv) The remaining stake is held by another Macquarie Group company, Macquarie Korea Opportunities Fund. The last tranche of S$143m (NT$3.3bn) investment from MIIF has been used to pay down about NT$3.2bn of TBCs outstanding Senior Secured Facility, as outlined below. Following this, the amortisation profile has been amended to begin from December 2013, freeing up cash flow for distribution in the near to medium term.

Source: Company, DBS Vickers

Distributions to MIIF affected by loan amortisation payments. Distributions to MIIF from TBC have declined over the past 2 years, despite higher EBITDA. This was due to higher loan amortisation payment for TBCs outstanding borrowings, which lowered cash available for distributions. TBC details of borrowings
Facility Senior Secured Debt Facility (Onshore) Subordinated Debt Facility (Offshore) Facility Size NT$24.5bn US$135m Drawn down NT$20.4bn US$135m

Maturity Jun 2017 Dec 2017

Repayment profile Amortising from Dec 2013 Bullet

% Hedged 84% 100%

Source: Company

TBC revised repayment profile of Senior Secured Debt Facility


2011 Repayment (NT$bn) 0.2 2012 0.0 2013 0.2 2014 2.3 2015 2.9 2016 3.2 2017 15.8

Source: Company

Page 22

Company Focus MIIF

Key risk is regulatory in nature. Until recently, cable operators in Taiwan were principally regulated by the Government Information Office (GIO) and the Ministry of Transportation and Telecommunications (MOTC). The National Communications Commission (NCC) was established in March 2006 as the central independent regulator, consolidating the functions of the GIO and MOTC with respect to cable television regulation. Notwithstanding this regulatory consolidation, the CATV Review Committee (CTRC) remains independent as the body responsible for setting national price caps for cable operators as well as the approval, issuance, and renewal of CATV operating licenses. In addition, local governments impose local tariff limits within the national cap set by the CTRC. Licenses have to be renewed every 9 years. Each initial Systems Operation (SO) license was expressed to be effective for nine years to facilitate the regulation of the industry initially. Each license is renewable provided that a renewal application is filed during the six months following the eighth anniversary of the date on which the original license was issued. All existing SOs licenses (including TBC) expired in 2008 or 2009, and have since been renewed for another nine years stretching up to 2017-18. While we do not think renewal of licenses at the end of these periods will be an issue, this limits the tenure of borrowings and hence, debt has to be rolled over in conjunction with the roll-over of the license periods. Regulatory Environment Highlights
Licensing

Industry is fairly consolidated already but M&A opportunities exist. The market currently consists of 51 franchised areas and 64 cable television operators with 40 franchises having a sole operator. Market consolidation has already occurred in the past with the top four operators servicing approximately 3.4 million subscribers (60%). Cable market subscriber growth over the next five years is expected to grow in-line with organic household growth in Taiwan. Total market revenue of US$1.9 billion (S$2.9 billion) with total industry growth forecast at 4.5% per annum over the next 10 years, largely driven by increased penetration of digital programming. Management remains open to the possibility of acquiring smaller Systems Operators, especially in contagious franchised areas to increase the scale of TBCs business. Direct competition should remain scarce, given the barriers to entry. While growth opportunities from the bundling of digital TV, broadband and other value-added services exist; we believe new players are unlikely to enter the Taiwanese Cable TV market. Regulatory ownership restrictions, operator licensing requirements, the ability to source content, as well as the cost and practicality of building a new cable network and establishing a significant customer base to justify that investment create significant barriers to entry for potential new entrants within TBCs operating regions, in our opinion.

Licenses for each of 51 franchised areas Each initial license effective 9 years Renewal subject to an administrative process and self-assessment tests every three years

Price Caps

Basic television prices capped at rates which vary from one franchise to another but must not exceed the maximum tariff set centrally by NCC, which is currently NT$600 per month Digital services not subject to tariff caps

Market concentration

No license holder allowed to control more than 33.3% of total subscribers in Taiwan A multiple licenses holder can only own half of licenses in any given administration area Vertical integration not prohibited

Foreign ownership

TBC ownership structure is in full compliance with Taiwan laws and regulations TBC ownership structure was last reviewed and approved by the Taiwan Investment Commission in June 2007

Content

Programs produced in-house by license holders and affiliates must not exceed 25% of content

Source: Company

Page 23

Company Focus MIIF

TBC Revenue and EBITDA forecasts


FY Dec (m) Revenue (NT$ m) Revenue growth EBITDA (NT$ m) EBITDA Margin Distributions to MIIF (S$)* 07 6,157.3 08 6,408.4 4.1% 3902.0 60.9% 18.2 09 6,646.1 3.7% 4078.1 61.4% 16.6 10 6,909.6 4.0% 4287.2 62.0% 13.1 11F 7,112.8 2.9% 4444.9 62.5% 29.5 12F 7,305.8 2.7% 4627.2 63.3% 45.3 13F 7,524.9 3.0% 4766.0 63.3% 46.6

3672.6 59.6%

Source: Company, DBS Vickers estimates * Note: Ownership change for MIIF in 2011-12 from 20% stake previously to current 47.5% stake

DCF Valuation Key Assumptions


Risk Free Rate Cost of Debt (b/tax) Tax rate % Expected market return Target Debt/Equity Ratio Beta at Target Gearing Cost of Equity WACC 1.5% 6.0% 17.0% 13.5% 50.0% 0.8 11.1% 9.1%

TBC DCF Valuation Methodology


Multi-stage revenue growth model 2013-15 2016-18 2019-21 Terminal growth Sum of NPV (NT$ m) Net cash (debt) (NT$ m) Fair value of equity (NT$ m) Fair value (SGD m) Fair value of MIIF's stake (SGD m) Implied EV/EBITDA (x) 3.0% 2.5% 2.0% 1.0% 48465.9 -24125.0 24340.9 1058.3 502.7 10.5

Source: DBS Vickers estimates

Page 24

Company Focus MIIF

Hua Nan Expressway


HNE is a 31km, dual way six-to-eight-lane brown-field urbantolled expressway, located in the city of Guangzhou in South China. The road comprises a tunnel, various bridges and interchanges. The asset has been constructed in two separate phases Phase I totaling 15.6km long with eight lanes commenced operations in October 1999 and Phase II totaling 15.4km in length with six to eight lanes (four lanes in the tunnel) commenced operations in January 2004. The rights to operate and collect tolls for Phase I & II expire in April 2026. Phase I & II make up one of the main arteries for north-south traffic in Guangzhou, giving easy access to cities in the Pearl River Delta such as Foshan, Zhongshan, Zhuhai, Shenzhen and the whole of Southern China. It is the only tolled expressway running through the central areas of Guangzhou and hence, provides one of the high-speed options for car travel through the city.

MIIF holds 81% effective stake in the asset. On 19 November 2007, MIIF acquired a 90% interest in South China Highway Development (SCHK) from Preciseway Management Ltd and Topwise Consultants Ltd (Vendors). SCHK holds a 90% interest in Gunagzhou South China Highway and Bridge Industry Ltd. (GZSC), resulting in MIIF holding an effective 81% stake in HNE Phase I and II and the vendors retaining a 9% effective interest. Guangzhou Centre for Administration of Municipal & Gardening Works (Guangzhou government body) holds the remaining 10% in GZSC. The following is a simplified diagram of HNEs holding structure. Investment highlights
Date of acquisition Cost of acquisition Latest valuation Distributions paid since acquisition MIIFs ownership % of MIIF portfolio as of end-3Q11 19 November 2007 S$295.7m S$257.1m S$85.6m 81.0% 26.6%

Source: Company

Asset shareholding structure

Source: Company

Under the CJV between SCHK and a Guangzhou government entity, GZSC has the exclusive rights to operate and collect tolls and ancillary revenues along HNE until 2026. At the end of the toll collection period, all the assets of GZSC (excluding cash) and the rights to operate the road will be transferred to the Guangzhou government without compensation.

Asset location

Source: Company

Page 25

Company Focus MIIF

Asset snapshot
Phase I Construction Period Construction Cost Concession Expiry Date Length Interchanges Number of lanes Immediate Destinations Dec 1996 Sep 1999 RMB2.15bn 2026 15.6km 7 6-8 (4 in tunnel) Panyu and Nansha Guangzhou International Exhibition Centre Local universities Residential developments in southern Guangzhou Distant Destinations Zhong Shan Zhu Hai Macau Baiyun and Tianhe districts Baiyun International Airport Mt Maofeng scenic region Shaoguan Hunan Province Beijing Phase II Sep 2000 Dec 2003 RMB1.38bn 2026 15.4km 4 6-8 (4 in tunnel)

Source: Company

Road configuration. HNE has three to four lanes in each direction and converges into two lanes each way in the tunnel at Shimentang Hill. HNE lies to the east of Guangzhou City and has good connectivity with other roads in the province including other expressways, the national highway and urban primary roads as marked out in the map below. Phase I of HNE originates in the Tianhe district, the financial center of Guangdong and connects to the Panyu Bridge in the south. It intersects with eight expressways and urban arteries, namely Guangshen Highway, Northern Ring Road, Guangyuan East Expressway, Zhongshan Avenue, Huangpu Avenue, Xinguang Expressway, Xinjiaonan Road and Southeast West Ring Road. Phase I is the only external highway backbone which runs near the city centre in Guangzhou and connects to the Pazhou International Exhibition Centre and Guangzhou University Town. According to management, Phase I provides the fastest and most convenient route between Guangzhou and Panyu. Phase II of HNE connects to Phase I from Cencun Bridge and converges with Jingzhu Highway and the second Northern Ring Road at Taihe Town next to the Helong Reservoir in Baiyun District. The second Northern Ring Road is the key road in the Guangzhou-Foshan area and is the primary linkage between Baiyun Airport and Guangzhou New Railway Station. By taking the Jingzhu national highway from Beijing and continuing down Phase II to Guangzhou, cities in the Pearl River Delta such as Foshan, Zhongshan, Zhuhai, Shenzhen are easily accessible.

HNE Phase I and II Interchanges

Source: Company

Ample capacity for traffic growth. The road handled about 50m vehicles traffic in 2010 and management believes there is ample room to grow traffic up to 80m vehicles without adding significant congestion to the network. If growth is skewed towards heavier vehicles, the number could be closer to 70m vehicles. This is assuming average speeds of about 80kmph. The actual capacity could go beyond this if speeds are sacrificed but the key bottleneck will be at the tunnels where the 6 lanes converge into 4 lanes. We estimate there is unlikely to be a capacity issue before the end of the concession in 2026, and thus, there will be no need for any significant capital expenditure during the life on concession.

Page 26

Company Focus MIIF

HNE road network map with competing roads and potential feeder roads

HNE Phase III Guanghe Eway (under construction)

Keyun Road

Source: Company

Competitive landscape and industry dynamics. The key competing roads for HNE Phase I and II are the parallel roads on either side of the expressway in southern Guangzhou Xinguang Expressway and Keyun Road (refer to map above). Both of these roads are not tolled currently and though they do not provide the same level of connectivity as HNE, they do have a significant impact on traffic flows. As seen in the table below, traffic numbers in 2007 were approximately 11.7% lower than for 2006 predominantly due to the opening of Xinguang Expressway in January 2007. The negative impact of Xinguang Expressway on Phase I was limited over the next 3 years as the traffic on Xinguang Expressway mainly consists of local passenger cars whereas Phase I has a wider traffic mix consisting of long distance freight trucks, buses and also local passenger cars. Moreover, Xinguang Expressway has limited connectivity within the Traffic trends historical
Traffic ('000) Passenger Vehicles Minibus/ Light Truck Medium Bus/ Truck Large Bus/ Large Truck Heavy Duty Truck/ Trailer Total Vehicles Growth 06 29,406 4,671 9,630 576 1,476 45,759

region (limited to the southern part of the city), which indicates that fewer cars are likely to use the road given the lack of destinations served by the road. For instance, the residential area just south of Panyu Bridge is a main source of traffic for Phase I, and given the immediate proximity of this region to Phase I the traffic is unlikely to detour and use the cheaper but less convenient Xinguang Expressway. However, with the recent de-tolling of Xinguang Expressway from 1 Dec 2010, there has been some migration of local passenger cars from HNE to Xinguang Expressway and has resulted in 3.6% decline in HNE revenue YTD in FY11. However, after the initial one-time hit in 1Q11, we expect traffic growth for HNE to resume slowly as greater congestion on Xinguang Expressway will cause some migration back to HNE.

07 27,827 2,973 7,359 628 1,613 40,400 -11.7%

08 30,110 2,490 6,370 599 1,304 40,873 1.2%

09 34,936 2,427 6,864 618 1,485 46,330 13.4%

10 38,550 2,414 7,086 654 1,828 50,532 9.1%

Source: Company

Page 27

Company Focus MIIF

Further competition is unlikely. According to the Guangzhou Urban Master Plan which provides detailed plans for the construction of roads and toll expressways till 2020 there are no plans to construct any roads or toll expressways which would be in direct competition to HNE Phase I and II. Moreover, we believe there are significant barriers to the development of new competing roads i) It is a timeconsuming process which requires a number of approvals from the regulatory authorities, ii) it is capital intensive and returns may not be attractive in an inflationary and high interest cost environment and iii) the corridor where HNE is located (especially the southern corridor) is well developed and heavily built-up, making land acquisition complicated and expensive. Feeder roads could provide growth. Again, with reference to the road network map in the preceding page, we notice that HNE Phase III has been completed and the Guanghe Expressway which is a 70-km 6 lane expressway is also due for completion by end-FY11. These two east-west expressways are expected to provide feeder traffic to HNE Phase I and II and boost growth prospects in future. Toll rates are regulated. Toll rates in Guangzhou are regulated and have to be approved by the Guangdong Pricing Bureau, the Guangdong Bureau of Communications and the Guangdong Provincial Government. Toll rates for HNE Phase I were set based on the construction cost of the road plus a perceived fair return on investment. For HNE Phase II, toll rates were set at the standardized provincial rate, in line with all roads completed after 2003. The average toll rate for HNE Phase I is about RMB0.60/ km, though it charges slightly more at some elevated sections of the road. HNE Phase II charges a flat rate of RMB0.60/ km. No increases in rates. Toll rates have not increased since the opening of Phase I in 1999 and are set initially on a per-km basis by the provincial government (i.e. Guangdong Province Government). Toll rates in the Guangdong province have remained unchanged at RMB0.60/ km (for 6 lane roadways) and RMB0.45/ km (4-lane roadways) since 2003. There is no defined contractual mechanism for revision of HNEs toll rates. In the event that the HNE Phase I & II Board decides to increase toll rates, they are required to submit an application to the various regulators as mentioned above. Any such approval by the government authorities will have an effect on all toll roads in the province, and thus any upside is unlikely at this point. To date, the Guangzhou City and Guangzhou Provincial Governments have not initiated any action to either increase or decrease HNEs toll rates.

Average toll rates declining at HNE as passenger car growth increases. Toll rates for larger vehicles are higher than that for the passenger car segment. However, since growth in traffic for larger vehicles especially in the Minibus/ Light Truck segment has been slow, passenger vehicle traffic now accounts for 76% of total traffic, compared to 69% in FY07. As a result, average toll rates have been declining, though absolute rates remained steady. Average toll rate trend - historical
07 Rate (RMB) Growth 11.4 08 10.9 -4% 09 10.5 -4% 10 10.4 -1%

Source: Company

Traffic mix 2010


Large Bus/ Large Truck Medium 1% Bus/ Truck 14% Minibus/ Light Truck 5% Heav y Duty Truck/ Trailer 4%

Passenger V ehicles 76%

Source: Company

Revenue mix 2010


Heav y Duty Truck/ Trailer Large Bus/ 13% Large Truck 3%

Medium Bus/ Truck 20% Minibus/ Light Truck 5%

Passenger V ehicles 59%

Source: Company

Page 28

Company Focus MIIF

Revenue and EBITDA trends. Historically, HNE has delivered revenue CAGR of 4.5% and EBITDA CAGR of 3.6% over 2007-10, despite a hiccup in 2008. In 2008, revenue declined 2.3% owing to various one-off factors like weather disruptions, impact of the Beijing Olympics and reduced industrial activity in the region because of the global economic slowdown towards end-year. Likewise, EBITDA declined 7.3% in 2008 but has since recovered. Revenue and EBITDA trend historical
600 500 400 300 200 100 07 08 Rev enue (RMB m) 09 EBITDA(RMB m) 10 459 382 447 354 484 393 523 425

Loan amortisation profile


400 300 200 100 0 11 12 13 14 15 16 17 18 19 20 21 22

Source: Company, DBS Vickers estimates

Source: Company

Distributions once a year, in September. HNE pays out substantially almost all of its net profits after scheduled loan repayments. Distributions pertaining to the current financial years performance are paid out in September the next year. Thus, distributions received by MIIF in FY11 will pertain to HNEs performance in FY10, which is already known. We thus, estimate FY11 distribution receipts to be higher than FY10, but FY12 distribution receipts will be lower owing to weaker traffic numbers at HNE in FY11. Distributions to MIIF
25 20 15 10 5 08 09 10 13 14 Distributions to MIIF (S$ m) 21

Debt amortisation profile matches cash inflows. After MIIF bought into the asset in 2007, HNE was able to refinance its existing mix of multi-currency, multi-term debt facilities with a single RMB-denominated facility in 2008 from China Construction Bank. Currently HNE has about RMB2.5bn debt outstanding. The facility has a 14-year tenor and an amortisation profile, which matches the operating cash flow growth profile of the asset and allows HNE to repay a larger proportion of the debt towards the end of the tenor. The interest rate applicable to the loan is the 5-year PBOC rate, and MIIF is currently reviewing potential interest rate hedging options. MIIF has also changed the depreciation policy of HNE from straight-line depreciation to units-of-production method to better match depreciation profile to traffic growth at the expressway. Revenue and EBITDA forecasts
FY Dec (m) Revenue (RMB m) Revenue growth EBITDA (RMB m) EBITDA Margin Distributions to MIIF (S$) 07 459.2 08 446.7 -2.7% 353.8 79% 13.2

Source: Company

09 484.4 8.4% 393.4 81% 14.2

10 523.4 8.1% 424.8 81% 21.3

11F 496.8 -5.1% 397.4 80% 22.9

12F 515.1 3.7% 412.1 80% 20.1

13F 540.8 5.0% 438.1 81% 20.9

381.6 83%

Source: Company, DBS Vickers estimates

Page 29

Company Focus MIIF

DCF Valuation Key Assumptions


Risk Free Rate Cost of Debt (b/tax) Tax rate % Expected market return Target Debt/Equity Ratio Beta at Target Gearing Cost of Equity WACC 5.5% 6.0% 25.0% 15.0% 50.0% 0.8 12.7% 10.0%

DCF Valuation Methodology


Multi-stage revenue growth model 2013-16 2017-19 2020-2026 EBITDA Margin Sum of NPV (RMB m) Net cash (debt) (RMB m) Fair value of equity (RMB m) Fair value (SGD m) Fair value of MIIF's stake (SGD m) Implied FY12 EV/EBITDA (x)

5% 3% 1% 80% 3577.0 (2,500) 1077.0 215.4 174.5 8.6

Source: DBS Vickers estimates

China Toll Road Peers Valuation Summary


Company Jiangsu E'way Zhejiang E'way Sichuan E'way Hopewell H'way Shenzhen E'way Anhui E'way Average Price (Local $) 7.12 4.86 3.04 4.06 3.16 4.48 Market Cap (US$m) 4,609 2,706 1,816 1,542 1,208 1,107 FY11 PE 11.2 9.3 6.3 12.6 7.3 6.8 8.9 FY12 PE 10.3 8.9 5.7 13.4 6.4 6.1 8.5 P/B 1.7 1.1 0.8 1.4 0.6 0.9 1.1 FY11 EV/EBITDA FY12 EV/EBITDA 7.7 4.3 7.3 8.8 8.7 4.6 6.9 7.2 4.2 6.4 8.9 8.0 4.2 6.5

Source: Bloomberg, DBS Vickers

Page 30

Company Focus MIIF

Policy risks for HNE. The Notice issued by the Chinese central government (five ministries) earlier this year aims to enforce already existing regulations that target illegal toll roads, unauthorized toll stations or unreasonably high toll charges. Possible actions include lowering of concession lengths, toll rates or removal of collection stations. However, provincial governments (as they provide the bulk of funding) would have the final say. A summary of major targets of the Notice is shown below: 1) Illegal toll roads a. b. Public loan toll road act as commercial toll road Class II highways approved after Nov 2004 for eastern regions and Jan 2009 for midland regions Commercial expressway exceeds stipulated concession (25 years for eastern region and 30 years for mid/western region) Toll road fails to meet certain criteria e.g. Expressway less than 30km in length or Class I highway less than 50km Toll gates not approved by the government Toll gates with unreasonable interval (<50km on main routes) No specific standard provided

Truck toll rates linked to inflation. Prior to the Notice, the State Council asked toll road companies to lower toll charges for trucks in an effort to help logistic companies and to tame inflation. The Central government in fact adopted the nationwide Green Passage (no tolls for trucks carrying fresh produce) in Dec 2010 for the same reason. We believe the Notice further echoes this view and we may see truck toll rates being lowered. Passenger vehicle toll rates are on the higher side in Guangzhou; potential risk of reduction. As seen in the table below, coastal regions Zhejiang, Jiangsu and Anhui have the same passenger vehicle toll rate, while Guangdong charges 33% higher despite having similar GDP per capita. Listed toll road company Hopewell Highway's key asset GS Super Highway has been one of the toll roads highlighted in the media to be overcharging (though other complaints include poor service and traffic congestion). Toll rate comparisons (RMB/km)
Province Jiangsu Zhejiang Guangzhou Sichuan Anhui GDP per capita (US$) 6,884 6,868 6,333 2,668 2,524 Passenger vehicle rate 0.45 0.45 0.60 0.35 0.45 Commercial vehicle rate 0.90 0.90 N/A 0.85 0.90

c.

d.

2)

Unauthorized toll stations a. b.

3)

Unreasonable toll rates a.


Source: CEIC, DBS Vickers estimates

Retrospective clause is the wild card. The Notice mentioned that the current campaign would also rectify non-compliant toll roads approved before 2004 when the Regulations on the Administration of Toll Road (the Regulations) was adopted. The Regulations exempted pre-2004 cases that deviated from the concession cap. The Notices retrospective clause will mainly impact toll roads granted more than 25 years (30 years for mid/west regions) concession. Nonetheless, not all pre-2004 cases will be rectified as the Notice also states that special situations could be spared. Uncertainty over what constitutes unreasonable toll rates. The Notice has also instructed local governments to lower unreasonably high toll rates. However, it is not clear on what constitutes unreasonable toll rates. Toll rates vary across the provinces owing to differences in economic development and toll road requirements. Hence it would be difficult to implement a uniform standard for all provinces. Ultimately, the provincial government will have to make the final decision on toll rates.

Can HNEs concession period/ toll rates be altered? HNEs Phase I and II are both less than 30km in length and HNE Phase I has a concession period of 27 years, and it was approved pre-2004. Moreover, as shown above, Guangzhou toll rates are above other provinces average and media reports have already highlighted one of the expressways in the province. Thus, we believe there is a possibility that HNE could come under the regulatory review. However, downside may be limited. Toll road projects would need to sustain a reasonable and good-enough rate of return to attract private investments in this sector, if China and the local governments are to continue developing the expressway network. From a contractual perspective as well, we dont think that toll road concessions (especially those under listed companies) that have already been handed out would see their concession periods reduced (or stopped entirely) without fair compensation. In fact, most of the buy-backs (by the local governments) we have seen involving assets of listed companies are at least at book value. Therefore, even if HNE has its concession period reduced or removed, we think that it is very likely that shareholders will receive fair and adequate compensation.

Page 31

Company Focus MIIF

Miaoli Wind
MIIF's acquired 100% interest in Miaoli Wind (formerly known as infraVest Wind Power) from Asia Wind Co. Limited and Meihui Windpark GmbH & Co KG in March 2008. The total consideration (including transaction costs) was S$27.9m. Miaoli Wind holds an Electricity Industry Licence issued by the Taiwanese Bureau of Energy for a period of 30 years, expiring in 2036. Miaoli Wind owns and operates 25 wind energy converters (WEC), with a cumulative installed capacity of 49.8MW, at two sites (Dapong and Chunan) in Miaoli County, Taiwan. The terrain in the area is flat and all the WEC sites are found directly on the coastline facing the Taiwan Strait or inland at elevated and exposed points. Location of Miaoli Winds wind farms

installed by Miaoli is based on well-proven technology and has been installed at more than 150 sites worldwide. A view of Miaoli Winds turbines

Source: Company

Stable revenue from fixed long-term tariffs. The entire energy production is sold to Taipower under 15-year fixed tariff PPA and there is an option to extend each PPA for an additional 5 years. The fixed tariff is NT$2.00 per KWh. Long-term O&M contracts to control costs. Operation and maintenance (O&M) of the WECs is contracted to Solvent, a wholly owned subsidiary of the turbine manufacturer, Enercon. The fixed fee contract is valid for 12 years, with the option to extend for three more years. With the contract, costs are fixed and there is no need for separate maintenance capital expenditure.
Source: Company

These WECs provide power generation capacity under license from the Energy Commission of the Ministry of Economic Affairs of Taiwan. All output from the WECs is sold to Taiwan Power Company (Taipower), the government-owned electricity company, under long-term power purchase agreements (PPA). Taipower is obliged by regulation to purchase power from renewable energy sources. There is strong government and legislative support for renewable energy in Taiwan. In 2009, the Taiwanese government passed a renewable energy act aimed at promoting the use of renewable energy. The goal is to increase Taiwans renewable energy generation capacity by 6.5 GW to 10 GW within 20 years. Miaoli Wind uses turbines manufactured by Enercon, one of the worlds leading manufacturers of WECs. The E-70 WEC

The O&M contract with Solvent guarantees 97% WEC availability. If this level of availability is not achieved, Solvent is required to compensate Miaoli Wind. The O&M contract payments are denominated in and have been hedged to NT$ for five years. Highly vulnerable to wind speeds. Energy production by each WEC fluctuates based on the natural wind speed at the location of the WEC. Energy production is subject to seasonality, with the autumn and winter months forecast to have higher wind speed than the spring and summer months. Wind speeds have disappointed. At the time of acquisition, energy yields of the infraVest sites were assessed by Deutsche WindGuard, using the European Wind Atlas Procedure. Wind measurements were based on a data series covering 36 years of historical data gathered from a meteorological station at Hsinchu Airport, which is located close to the two wind farm sites. A long-term average mean energy production or

Page 32

Company Focus MIIF

probability of exceedance (P50) was assumed in MIIFs investment case. However, since acquisition, wind speeds have been significantly lower than expected. Hence, the operational performance has been disappointing and management has now revised its forecast to the average actual historic generation. This puts at risk Miaoli Winds ability to refinance to current debt levels in 2012. Steady decline in energy production. Owing to lower wind speeds, energy production has declined at CAGR of 6% over 2007-10 at Miaoli Wind. This has had an adverse effect on revenues and EBITDA as well, which have declined at 8% and 11% CAGR over the same period. Energy production on a decline at Miaoli Wind
180 160 140 120 100 80 60 40 20 07 08 09 10 Energy Production (GWh) 154

This puts debt refinancing at risk. Miaoli Wind has two debt facilities outstanding, a NT$1.3bn debt facility which is amortising to 2020, and a NT$465m facility due for renewal in December 2012. Given the lower than expected level of cash flows being generated at Miaoli Wind and the subsequent write down of valuations, we believe rolling over debt will be difficult, and MIIF may be forced to either inject capital or divest the assets to pay back creditors. Further equity infusion maybe needed. In March 2010, MIIF injected S$1.7m into Miaoli Wind to avoid a breach of the debt service cover ratio. The low debt service cover ratio was caused by the poor wind conditions for the 12 months to 31 December 2009. By proactively addressing this potential breach, the Company continues the validation process in its application for Voluntary Gold Standard carbon credits. Miaoli Wind has lodged an application for Voluntary Gold Standard carbon credits. The Gold Standard Foundation has accepted Miaolis pre-feasibility assessment and the project is now undergoing the validation process. If successful, Miaoli Wind will be able to generate incremental revenue through the sale of these credits. However, we do not think the additional cash flow will be significant enough to impact valuations.

140

134

127

Source: Company

Revenue and EBITDA on a decline at Miaoli Wind


350 300 250 200 150 100 50 07 08 Rev enue (NTD m) 09 EBITDA(NTD m) 10 313 264 288 215

260 204

246 189

Source: Company

Equity has been written off. The poor operational performance at Miaoli Wind has been fully reflected in its book valuation, which has been written down fully in FY09.

Page 33

Company Focus MIIF

Financials & Forecasts


MIIF Consolidated Revenue and EBITDA trends for key assets FY Dec (m) TBC Revenue (NT$ m) Revenue growth EBITDA (NT$ m) EBITDA Margin Distributions to MIIF (S$)* HNE Revenue (RMB m) Revenue growth EBITDA (RMB m) EBITDA Margin Distributions to MIIF (S$) CXP Revenue (RMB m) Revenue growth EBITDA (RMB m) EBITDA Margin Distributions to MIIF (S$) 07 08 09 10 11F 12F 13F

6,157.3

6,408.4 4.1% 3902.0 60.9% 18.2

6,646.1 3.7% 4078.1 61.4% 16.6

6,909.6 4.0% 4287.2 62.0% 13.1

7,112.8 2.9% 4444.9 62.5% 29.5

7,305.8 2.7% 4627.2 63.3% 45.3

7,524.9 3.0% 4766.0 63.3% 46.6

3672.6 59.6%

459.2

446.7 -2.7% 353.8 79% 13.2

484.4 8.4% 393.4 81% 14.2

523.4 8.1% 424.8 81% 21.3

496.8 -5.1% 397.4 80% 22.9

515.1 3.7% 412.1 80% 20.1

540.8 5.0% 438.1 81% 20.9

381.6 83%

214.7 10% 120.8 56% 5.7

209.6 -2% 84.0 40% 5.1

217.2 4% 119.1 55% 1.5

263.6 21% 127.4 48% 4.6

295.6 12% 153.7 52% 5.5

317.8 8% 165.2 52% 6.3

333.7 5% 173.5 52% 6.8

Source: Company, DBS Vickers estimates

Page 34

Company Focus MIIF


Segmental Breakdown of Investment Income
FY Dec 2008A 2009A 2010A 2011F 2012F 2013F

Income (S$ m) CXP HNE TBC Miaoli Others Total 5 13 18 0 98 135 2 14 17 0 31 64 5 21 13 0 6 45 5 23 29 0 1 59 6 20 45 0 1 73 7 21 47 0 1 75 Higher stake in TBC HNE growth impacted

Source: Company, DBS Vickers


Adjusted Income Statement (S$ m)
FY Dec 2008A 2009A 2010A 2011F 2012F 2013F

Margins Trend

Investment Income Expenses Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Transaction Costs Pre-tax Profit (Adj) Tax Minority Interest Preference Dividend Net Profit (Adj) Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins & Ratio Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%)

135 (19) 116 0 0 0 (2) 113 0 0 0 113 116 116 2.7 20.3 20.3 (57.8) 85.7 83.9 7.9 6.9 7.1 83.0

64 (7) 56 0 0 0 (3) 53 0 0 0 53 56 56 (52.8) (51.4) (51.4) (53.0) 88.3 83.6 4.6 4.1 4.4 70.2

45 (7) 37 0 0 0 (5) 33 0 0 0 33 37 37 (30.1) (33.9) (33.9) (39.0) 83.4 72.9 3.1 2.7 3.2 119.7

59 (10) 49 0 0 0 (3) 46 0 0 0 46 49 49 32.4 30.8 30.8 40.3 82.4 77.3 4.7 4.1 4.4 151.3

73 (11) 62 0 0 0 0 62 0 0 0 62 62 62 23.4 26.6 26.6 34.9 84.5 84.5 7.2 6.2 6.3 105.2

75 (11) 64 0 0 0 0 64 0 0 0 64 64 64 3.5 4.3 4.3 4.3 85.1 85.1 8.3 7.1 7.2 97.9

89.0% 84.0% 79.0% 74.0% 69.0% 2009A 2010A 2011F 2012F 2013F
Operating Margin % Net Income Margin %

FY10 net adjusted income was lower as a result of divestment of assets

Source: Company, DBS Vickers Note: The revenue and earnings shown above are on an adjusted basis and represent the earnings of MIIF from its key investments that underpin the dividend flow to shareholders, and are not in accordance with accounting standards.

Page 35

Company Focus MIIF


Balance Sheet (S$ m)
FY Dec 2008A 2009A 2010A 2011F 2012F 2013F

Asset Breakdown 1,260 0 105 42 0 11 0 1,418 26 28 86 8 1,239 30 1,418 (17) (70) 39.7 N/A N/A 0.1 1.0 1.0 0.1 0.1 (121.0) 930 0 94 176 0 3 0 1,202 6 17 80 5 1,066 29 1,202 (15) 90 37.7 N/A N/A 0.0 7.7 7.7 CASH (0.1) (195.0) 581 0 89 486 0 13 0 1,170 6 12 74 6 1,041 31 1,170 1 406 65.6 N/A N/A 0.0 27.3 27.3 CASH (0.4) (417.5) 842 0 83 102 0 13 0 1,041 6 12 74 6 912 31 1,041 1 22 83.2 N/A N/A 0.1 6.3 6.3 CASH 0.0 398.4 769 0 77 73 0 13 0 933 6 12 74 6 804 31 933 1 (7) 67.4 N/A N/A 0.1 4.7 4.7 0.0 0.0 0.0 694 0 77 78 0 13 0 863 6 12 74 6 734 31 863 1 (2) 65.1 N/A N/A 0.1 5.0 5.0 0.0 0.0 0.0 About S$320m used in increasing stake in TBC from 20% to 47.5%
Bank, Cash and Liquid Assets 10.5%

Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholders Equity Minority Interests Total Cap. & Liab. Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%)

Associates'/J Vs 0.0%

Inventory 0.0% Debtors 1.4%

Net Fixed Assets 88.1%

Source: Company, DBS Vickers

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Company Focus MIIF


Cash Flow Statement (S$ m)
FY Dec 2008A 2009A 2010A 2011F 2012F 2013F
400

Capital Expenditure

Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (S cts) Free CFPS (S cts)

(314) 5 (3) 0 (2) 411 97 135 0 0 0 23 159 (98) (155) 0 (23) (276) 1 (20) 7.6 17.9

(117) 6 (1) 0 (1) 170 57 167 0 0 0 0 167 (58) (25) 0 0 (84) 0 140 4.6 18.0

33 6 (1) 0 (16) (3) 19 335 0 0 0 0 335 (39) (6) 0 0 (45) 0 310 2.7 27.3

(10) 6 0 0 0 0 (5) (320) 0 0 59 0 (261) (69) 0 (50) 0 (119) 0 (385) (0.4) (25.9)

(8) 6 0 0 0 0 (2) 0 0 0 73 0 73 (65) 0 (35) 0 (100) 0 (29) (0.2) (0.2)

(8) 0 0 0 0 0 (8) 0 0 0 75 0 75 (63) 0 0 0 (63) 0 5 (0.7) (0.7)

350 300 250 200 150 100 50 0 2009A 2010A 2011F 2012F 2013F

Capital Expenditure (-)

Share buyback programme in place

Source: Company, DBS Vickers

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Company Focus MIIF


Quarterly / Interim Adjusted Income Statement (S$ m)
FY Dec 2Q2010 3Q2010 4Q2010 1Q2011 2Q2011 3Q2011

Margins Trend
200% 100% 0% -100% -200% -300% -400% -500% -600% -700%
2Q2009 3Q2009 4Q2009 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011 2Q2011 3Q2011

Investment Income Fund Expenses Operating Profit (Adj) Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit (Adj) Tax Minority Interest Net Profit (Adj) Net profit bef Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins Opg Profit Margins (%) Net Profit Margins (%)

1 (1) (1) 0 0 0 0 (1) 0 0 (1) (1) (1)

35 (2) 33 0 0 0 0 33 0 0 33 33 33

1 (1) (1) 0 0 0 0 (1) 0 0 (1) (1) (1)

10 (2) 8 0 0 0 0 7 0 0 7 8 8

1 (4) (3) 0 0 0 0 (3) 0 0 (3) (3) (3)

48 (2) 46 0 0 0 0 46 0 0 46 46 46

Operating Margin %

Net Income Margin %

Higher dividend income y-o-y owing to higher stake in TBC

(93.7)

6,620.0

(97.7)

1,139.3

(94.2)

8,213.4

(113.7) (4,556.0) (113.7) (4,556.0) (199.3) (5,916.3) (142.8) (109.4) 94.7 94.7

(101.9) (1,278.5) (101.9) (1,278.5) (101.9) (1,261.2) (80.4) (80.4) 76.4 75.3

(141.0) (1,566.9) (141.0) (1,566.9) (143.9) (1,491.1) (538.7) (568.1) 95.1 95.1

Source: Company, DBS Vickers Note: The revenue and earnings shown above are on an adjusted basis and represent the earnings of MIIF from its key investments that underpin the dividend flow to shareholders, and are not in accordance with accounting standards.

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Company Focus MIIF

DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends


DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers Securities (Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVR. It is being distributed in the United States by DBSV US, which accepts responsibility for its contents. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBS Vickers Securities (USA) Inc (DBSVUSA) directly and not its affiliate. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBSVR, DBSVS, and/or DBSVH) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. DBSVR accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by DBSVR, DBSVS and/or DBSVH (and/or any persons associated with the aforesaid entities), that: (a) (b) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.

Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 25 Nov 2011, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (interest includes direct or indirect ownership of securities, directorships and trustee positions).

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Company Focus MIIF

COMPANY-SPECIFIC / REGULATORY DISCLOSURES DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the company mentioned as 1. of 23 Nov 2011 2. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered brokerdealer, may beneficially own a total of 1% or more of any class of common equity securities of the company mentioned as of 25 Nov 2011. Compensation for investment banking services: i. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA have received compensation, within the past 12 months, and within the next 3 months receive or intends to seek compensation for investment banking services from the HPHT Trust. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

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