Hangzhou Airport future growth to benefit from robust YRD economy

(HONG KONG, 16 April 2005) -- The net profit of Hangzhou Xiaoshan International Airport (HXIA) is expected to increase at a compound average growth rate in excess of 20 per cent in the next five years, with robust economic growth in its home market at Yangtze River Delta.

The airport, which started operation in December 2000, was quick to attain positive cash flow in the second year of its operation and became profitable in 2004, the fourth year after the airport opened.

The high percentage of fixed costs in the airport business sees new airports reporting operating losses in the early years. The profit level will increase at an accelerated rate with passenger and cargo traffic reaching a critical mass.

In 2005, it is estimated that the net profit of HXIA, inclusive of Airport Construction Fee, will amount to RMB233 million, equivalent to a price earning multiple of about 24 times.

In 2004, the earning of HXIA amounted to RMB175 million, including an audited net profit of RMB85 million and a RMB90 million refund of the Airport Construction Fee from the government. The inclusion of Airport Construction Fee as part of an airport’s revenue is consistent with the accounting practice adopted by other mainland airports including Beijing, Guangzhou and Hainan Meilan.

“Airport Authority Hong Kong (AA) is satisfied with the financial performance of HXIA, its future earning potentials and considered the valuation reasonable. Besides financial return for Hong Kong International Airport, the investment in Hangzhou Airport by AA will enhance the passenger and cargo flow of both airports and generate significant economic benefit for both Hong Kong and Hangzhou.” said Mr Raymond Lai, AA’s Finance Director.

The HXIA was valued at approximately RMB3.7 Billion. On Friday (15 April) AA signed an agreement to invest approximately RMB1.9 Billion through a capital increase subscription for a 35 per cent stake in a new joint venture company to be formed with HXIA.

The 35 per cent investment in HXIA by AA followed the standard procedure for such transactions in China. The State Owned Assets Supervision and Administration Commission of the Zhejiang Provincial Government requested an independent professional appraiser to perform a valuation on HXIA, which is used as the basis of determining the cost of investment by AA. The comprehensive valuation included a review of all assets of HXIA, including the airport site, as well as its future earning potentials.

Independent of this, AA also retained PriceWaterhouse & Coopers to perform due diligence on the financials and valuation of HXIA.

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