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Announcement:

MOODY'S AFFIRMS HUTCHISON WHAMPOA'S A3 RATING AFTER RESULTS ANNOUNCEMENT; OUTLOOK STABLE

24 Mar 2006
MOODY'S AFFIRMS HUTCHISON WHAMPOA'S A3 RATING AFTER RESULTS ANNOUNCEMENT; OUTLOOK STABLE

Hong Kong, March 24, 2006 -- Moody's Investors Service has today affirmed the A3 debt ratings of Hutchison Whampoa Ltd (HWL) and its guaranteed subsidiaries following its announcement of its results for FY2005. The rating outlook remains stable.

"The rating affirmation reflects 1) the stability and continued strong operating and financial performance of HWL's diversified portfolio, which includes quality non-3G businesses; 2) improvements in its 3G performance; 3) the group's continued strong liquidity and financial flexibility; and 4) the expectation that gross debt and net debt had both peaked in June 2005," says lead analyst Elizabeth Allen.

"On the other hand, the rating is constrained by HWL's weak credit metrics, while cash funding is still required for the highly competitive 3G business. The latter has yet to turn cash flow positive and is not expected to do so until at least 2007," Allen adds.

At the same time, the company's non-3G businesses, in aggregate, continue to perform strongly and reported EBITDA of HKD31bn for FY2005. The port business, in particular, has shown strong revenue and cash flow generation. The non-3G businesses should remain free cash flow positive prior to any acquisition spending.

With HWL's 3G business, Moody's notes it has reached a point where its key execution risks and financial risks have fallen from the levels of the last few years. Therefore, its broad underlying performance and business trend are more positive and steady, although 3G remains a challenging investment.

As of March 2006, HWL reported global subscribers of 11.9 million and, in 2005, revenues of HKD37.5bn. While subscriber growth fell below expectations, Moody's acknowledges the company's has built the scale of its 3G business in a relatively short time and against the backdrop of intensely competitive UK and Italy markets. Its revenue growth of 138% in FY2005 outpaced the growth in subscribers of 66%, showing it can penetrate the market's high-end.

The company's trailing 12-month average revenue per user (ARPU) fell moderately to EUR42.2 as of December 2005 from EUR43.1 in the interim period. The trend at end-2005 and in early 2006 has been positive and HWL has, thus far, managed to achieve an above-industry average ARPU by offering products which are differentiated from those of its competitors.

HWL's overall 3G business managed to achieve in FY2005 positive EBITDA - before all customer acquisition costs (CAC). Both its businesses in the UK and Italy also achieved EBITDA breakeven (after all CACs) on a monthly basis in 2H2005. However, its on-going challenge will be to sustain subscriber growth, while maintaining strong ARPU and keeping its CAC under control. Furthermore, as HWL's competitors roll out their own 3G offerings more aggressively, the company will find it increasingly challenging to maintain such a competitive advantage.

The highly competitive operating environment of the 3G business constantly requires a high CAC, which -- in HWL's case - rose from EUR274/subscriber in 1H2005 to EUR293 in FY2005. As such, the company's consistently high CAC remains a key concern. While it is expected to fall - with the reduction in handset costs - the costs of distribution in the UK are set to remain very high.

Against such a backdrop, its 3G operation is accordingly still reporting negative free cash flow. But, encouragingly, the cash spent on 3G is falling since - with the major roll-out of its network near completion - capex has peaked, and fell over 30% to HKD14.1bn in FY2005. Moody's also expects strong discipline from HWL in terms of cost controls and savings.

The next milestones set by management are EBITDA breakeven (less all CAC) in 2006, and EBIT positive in 2007. At the same time, while developments are in the right direction, the uncertainties mentioned above may slightly delay the achievement of some of these outcomes.

Furthermore, Moody's notes the slower-than-expected improvement in the group's consolidated leverage is also attributable to HWL's expansion in non-3G businesses. In FY2005, it implemented non-3G investments worth a total HKD16-17bn in the retail and utility sectors. While broadly complementary to and within its core businesses, these activities resulted in a material rise in group funding requirements and were in addition to those required for 3G.

Moody's, nonetheless, says that HWL's excellent financial flexibility - afforded by its diversified portfolio of quality assets and sizable liquidity reserve - continues to underpin its rating. Moreover, the sales of its 20% stake in Hutchison International Terminals (HIT), 10% in COSCO-HIT, CKI's stake in the Australian electricity distribution businesses and disposal of 19.3% interest in Hutchison Telecommunications International Limited, generated cash proceeds of HKD29bn. From the perspective of the sales of the last few years, management does have the flexibility for and a track record of monetising selected assets, should it wish to do so.

HWL's gross and net debt of HKD264.9bn and HKD154.5bn as of end-2005, respectively, already represented improvements over the HKD316.7bn and HKD175.0bn reported as of June 2005. Accordingly, Moody's believes that leverage has peaked and expects HWL to continue reducing consolidated net debt and leverage in 2006 and 2007, such that its credit metrics will rebound to levels commensurate with its current A3 rating.

Moody's also continues to say that the performance of 3G and the group's overall appetite for acquisitions are likely to represent the key drivers of the rating going forward. As a result, and unless HWL can significantly de-leverage its balance sheet, the rating is unlikely to undergo an upgrade in the next 2 years.

On the other hand, downward ratings pressure could occur should HWL prove that 1) its consolidated credit metrics are unlikely to show meaningful improvement by end-2007; 2) a material delay occurs in the likelihood of achieving 3G free cash flow around FY2007; 3) the stability of income from its established businesses is disrupted with recurring annual EBITDA falling below HKD25bn to HKD30bn; and/or 4) large debt-funded acquisitions occur in the established businesses or 3G.

HWL is a Hong Kong-based conglomerate with strong presences in Asia, Europe and the Americas. Its 5 core businesses are: (1) ports and related services; (2) telecommunications; (3) property and hotels; (4) retail; (5) energy and infrastructure and finance, investments and others. HWL is 49.9%-owned by Cheung Kong (Holdings) Ltd. Cheung Kong (Holdings) is, in turn, about 37%-owned by Li Ka-Shing and his family.

Hong Kong
Elizabeth Allen
Vice President - Senior Analyst
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 2916-1121

Hong Kong
Clara Lau
Senior Vice President
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 2916-1121

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