INDUSTRY OVERVIEW. The F&S Report was compiled based on the following assumptions:

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1 The information set forth in this section has been derived from the F&S Report. We believe that the sources of the information are appropriate sources for such information, and we have taken reasonable care in extracting and reproducing such information. We have no reason to believe that such information is materially false or misleading, and no fact has been omitted that would render such information materially false or misleading. However, the information has not been independently verified by us, the Sole Sponsor, the [REDACTED], the [REDACTED], the [REDACTED], any of the respective directors, officers, employees, advisers, agents or representatives or any other party involved in the [REDACTED] and no representation is given as to its accuracy. Except as otherwise stated, all the data and forecast in this section are derived from the F&S Report. The information extracted from the F&S Report reflects estimates of market conditions based on sampling, and is prepared primarily as a market research tool. References to Frost & Sullivan should not be considered as the opinion of Frost & Sullivan as to the potential investment of the Shares or in our Group. Our Directors believe that the sources of information extracted from the F&S Report are appropriate sources for such information. We have no reason to believe that such information is false or misleading or that any material fact has been omitted that would render such information false or misleading. Our Directors confirm that after taking reasonable care, there is no adverse change in the market information since the date of the F&S Report. SOURCE OF INFORMATION We have engaged and commissioned Frost & Sullivan, an independent global consulting firm founded in 1961 in New York, to prepare the F&S Report including information on macroeconomy, logistics services market and air freight logistics services market in Hong Kong and other economic data for a fee of HK$450,000. Frost & Sullivan offers industry research and market strategies and provides growth consulting and corporate training. Its industry coverage includes automotive and transportation, chemicals, materials and food, commercial aviation, consumer products, energy and power systems, environment and building technologies, healthcare, industrial automation and electronics, industrial and machinery, and technology, media and telecom. Frost & Sullivan has conducted detailed primary research which involved discussing the status of the industry with certain leading industry participants. Frost & Sullivan has also conducted secondary research which involved reviewing company reports, independent research reports and data based on its own research database. Frost & Sullivan has obtained the figures for the estimated total market size from historical data analysis plotted against macroeconomic data as well as considered the above-mentioned market key drivers. The F&S Report was compiled based on the following assumptions: (a) (b) social, economic and political environment is likely to remain stable in Hong Kong in the forecast period; and related industry key drivers are likely to drive the market in the forecast period. 51

2 MACROECONOMIC ENVIRONMENT IN HONG KONG Over the last five years, the economy in Hong Kong has been heavily affected by the weak global economic performances and strong US dollars which affected Hong Kong s competitiveness. Hong Kong experienced an increase in nominal GDP from HKD2,037.1 billion in 2012 to HKD2,452.2 billion in 2016 at a CAGR of 4.7% underpinned by the resilient domestic demand and stable employment market. Amid the unstable global economic environment and the poor performance in tourism and retail sales in Hong Kong in 2015, the nominal GDP growth rate decreased to 2.3% in It is anticipated that the economy in Hong Kong is expected to recover steadily at a CAGR of 4.3% from 2016 to 2021, driven by the strong domestic consumption with low expected unemployment rate. Nominal GDP and Forecast (Hong Kong), E HKD billion 3,500 YOY Growth Nominal GDP % 10 3,000 2,500 2,000 1,500 1,000 2, , % 2, % 2, % 2, % 2, % 2, % 2, % 2, % 3, % E 2018E 2019E 2020E 2021E 0 International Monetary Fund, Frost & Sullivan LOGISTICS SERVICES MARKET IN HONG KONG Logistics refers to the management of the flow of goods between the point of origin and the point of destination in order to meet the requirements from customers or corporations. Logistics services involve the integration of information, transportation, inventory, warehousing, material handling, packaging, and often security. Logistics can be classified into three categories based on the different ways of transportation, which are air freight transport, water freight transport and land freight transport. Logistics services industry serves as a major contributor to the economy of Hong Kong. The market size of logistics services industry in Hong Kong increased from HKD344.1 billion in 2012 to HKD406.1 billion in The year 2015 witnessed a negative growth rate due to the inactive trading activities globally. Logistics services industry is estimated to remain stable in the future, demonstrating its strong support for economic development in Hong Kong. The market size of logistics services industry is expected to grow at a CAGR of 5.1% and reach HKD520.1 billion in 2021, benefiting from the improved transportation infrastructure and network and the resilient merchandise trade market in Asian countries. 52

3 Market Size of Logistics Services Industry by Revenue (Hong Kong), E HKD billion E 2018E 2019E 2020E 2021E Hong Kong Census and Statistics Department, Frost & Sullivan AIR FREIGHT LOGISTICS SERVICES MARKET IN HONG KONG Air freight logistics refers to the physical process of transporting commodities, goods, cargo, etc. by mode of air. Air freight logistics services consist of air freight forwarding ground handling services, air cargo terminal operating services, warehousing and distribution and other logistics supporting services. As the core of air transport, Hong Kong International Airport plays a dominant role in international air cargo. Currently, there are three air cargo terminals in Hong Kong International Airport. The three cargo terminals altogether contribute a total capacity of approximately 7.4 million tonnes annually on average. The air cargo throughput in Hong Kong increased from 4.0 million tonnes in 2012 to 4.5 million tonnes in 2016 at a CAGR of 3.0%. Both inward and outward air cargoes have increased, which has driven the growth of overall air cargo throughput. It is forecast that with the rapid development of e-commerce due to its convenience, demand for air cargo will keep growing. Market Size of Air Freight Logistics Services by Air Cargo Throughput (Hong Kong), E Million tonnes E 2018E 2019E 2020E 2021E Hong Kong Census and Statistics Department, Frost & Sullivan 53

4 The total revenue generated from the air freight logistics services market increased from HKD138.5 billion in 2012 to HKD159.1 billion in 2016, representing a CAGR of 3.5%. Along with the trend of the air cargo throughput in Hong Kong, the market size of air freight logistics services in terms of revenue will demonstrate stable growth in the near future with a CAGR of 2.4%. The revenue generated by air freight logistics services is projected to reach HKD178.7 billion in 2021, driven by the growing demand of cross-border commerce. Market Size of Air Freight Logistics Services by Revenue (Hong Kong), E HKD billion E 2018E 2019E 2020E 2021E Hong Kong Census and Statistics Department, Frost & Sullivan Air freight forwarding ground handling services Air freight forwarding is a kind of service that a company organises shipments for individuals or corporations to get goods from the manufacturers or producers to a market, customer or final point of distribution with the airline as the transportation means. Large air freight forwarders in Hong Kong have a wide network of overseas branches. Ground handling services are an inextricable part of the air freight forwarding services. Air freight forwarding ground handling services usually include activities such as cargo pick-up and delivery, cargo packing and crating services, weighing services, warehouse management and other supporting services. Revenue generated by the provision of air freight forwarding ground handling services increased from HKD12.9 billion in 2012 to HKD13.6 billion in 2016 with a CAGR of 1.3%. Over the period from 2016 to 2021, the market size of air freight forwarding ground handling services is estimated to grow more steadily at a CAGR of 0.9%, which will be in accordance with the growth trend of air freight forwarding services market. It is an industry norm that large international air freight forwarders prefer to continuously engage the same service providers in order to reduce the fluctuation of labour demand, which varies with the cargo throughput of the air freight forwarders. 54

5 Market Size of Air Freight Forwarding Ground Handling Services by Revenue (Hong Kong), E HKD billion E 2018E 2019E 2020E 2021E Frost & Sullivan Air cargo terminal operating services Currently, there are three air cargo terminals in Hong Kong International Airport. The services provided by air cargo terminal operators include the preparation for cross border documents, palletisation (ULD build-up), cargo security screening, etc. It is a common practice that air cargo terminal operators outsource part of the terminal operating services, including collecting and processing cargoes or ULDs arriving from aircraft, preparing and palletising ULDs for departures, and handling transshipment cargoes to certain specialised services providers. Moreover, it is an industry norm that air cargo terminal operators prefer to continuously engage the same subcontractors over a long period of time in order to save operation cost while at the same time to guarantee the consistency and stability of service quality. The total revenue generated from the air cargo terminal operating services market increased steadily at a CAGR of 2.4%, from HKD1.0 billion in 2012 to HKD1.1 billion in With the aim to maximise the operation efficiency, air cargo terminal operators tend to continue to outsource part of the air cargo terminal operating services to specialised services providers in the future and thus the market size of air cargo terminal operating services market is likely to keep registering stable growth in the future, demonstrating a CAGR of 1.8% from 2016 to

6 Market Size of Air Cargo Terminal Operating Services by Revenue (Hong Kong), E HK$ Billion E 2018E 2019E 2020E 2021E Frost & Sullivan Major cost components Labour As physical labour plays a significant role in air freight logistics services, the cost on labour accounts for the largest component in the whole cost structure. The average annual compensation (incl. salary and allowance) of employees in logistics services industry in Hong Kong recorded stable growth over the period from 2012 to 2016, increasing from HKD294,001.7 in 2012 to HKD402,502.4 in 2016 at a CAGR of 8.2%. It is an industry norm that logistics companies adopt the use of dispatched labour services to fulfill labour intensive tasks because of the shortage in the number of employees in the logistics services industry in order to save cost. Nevertheless, the labour cost is estimated to continuously grow in the future. The average yearly compensation of employees in the logistics services industry is projected to keep growing at a CAGR of 6.9% over the period from 2016 to Average Yearly Compensation of Employees in Logistics Services Market (Hong Kong), E HKD 600, , , , , , , , , , ,000 50, , , , , , , , , , , E 2018E 2019E 2020E 2021E Hong Kong Census and Statistics Department, Frost & Sullivan 56

7 Warehouse rental The average rental index of warehouses for logistics services companies experienced rapid growth rate during the past five years, increasing from in 2012 to in 2016 at a CAGR of 8.1%, driven mainly by the shortage of land in Hong Kong. Since the land shortage problem cannot be addressed in a short time, it is anticipated that the average rental index of warehouses for the logistics services companies in Hong Kong will continue to grow at a CAGR of 6.5% over the period from 2016 to Average Rental Index of Warehouses for Logistics Services Companies (Hong Kong), E 2012= E 2018E 2019E 2020E 2021E Frost & Sullivan Market Drivers Increasing demand for air freight logistics services The development of the PRC and Southeast Asia has led to the increase in demand for imported raw materials and consumer goods by consumers there, which in turn stimulated the increase of Hong Kong s re-exports to the PRC and Southeast Asia. As air freight logistics can save significant time for both buyers and sellers, it has greatly driven the development of air freight logistics services market. Hong Kong s geographic advantage as an air transport hub Located at the centre of Asia Pacific region, Hong Kong has a geographic advantage and has always been used as a transfer station for airlines and air transportation companies. As an ideal gateway to access the PRC, particularly the PRD (Pearl River Delta) manufacturing base, Hong Kong has benefited from being a free port with an international legal regime, a well-renowned business and financial environment, and a mature trading and logistics system. Policy support for air freight logistics services industry The competitiveness of logistics industry in Hong Kong also relies largely on the policy commitment of the Government. Facing strong competitors and business bottlenecks, the logistics players in Hong Kong are now at a critical stage of further development. The 57

8 Government has taken initiatives to further stimulate the development of air freight logistics services industry, such as to complete the construction of the third runway in Hong Kong International Airport with the target to improve the operation efficiency by increasing and reallocating the available traffic volume of the air freight logistics services. According to the government, the Hong Kong International Airport could handle a maximum of 8.9 million tonnes of cargo by 2030 with the establishment of the third runway, which therefore, further creates new development opportunities for the air freight logistics services industry in Hong Kong. COMPETITIVE LANDSCAPE OF AIR FREIGHT LOGISTICS SERVICES MARKET IN HONG KONG Air Freight Forwarding Ground Handling Services Market Air freight forwarding ground handling services compose an integral part of the value chain of the air freight forwarding industry. As ground handling services are labour-intensive operations, large international air freight forwarding companies such as DHL and UPS often outsource the ground handling section to specialised services providers so as to reduce the fluctuation of labour demand and the related risk, which varies with the cargo throughput of the air freight forwarders. The air freight forwarding ground handling services market is considered to be fragmented in nature with more than 500 business establishments engaged in ground handling services, with the largest service provider owning not more than 5.0% of market share in terms of turnover. A number of mid-sized air freight forwarders offer integrated air freight forwarding services including flight booking arrangements, cartage, crating, warehouse management, overseas shipment handling, etc. Some of the market players in the air freight forwarding industry specialise in a particular function such as ground handling services within the value chain. The air freight forwarding ground handling services market players offer specialised ground handling service solutions to large air freight forwarding companies. Based on Frost & Sullivan s estimates, our Group s revenue from air freight forwarding ground handling services accounts for approximately 1.4% of Hong Kong s air freight forwarding ground handling services market for the year ended 31 December We are one of the very few relatively large players, which could offer sizable labour force and extensive logistics services in this market. It is common for large international air freight forwarding companies, such as DHL, UPS, FedEX, DB Schenker and Kuehne + Nagel, to subcontract their ground handling works to the same large and reputable service providers with solid experience in serving large international air freight forwarding companies as their major subcontractor. As an industry norm, many of these large international air freight forwarding companies continuously engage the same providers for services to save operation cost and at the same time to guarantee the consistency and stability of service quality. It is also normal that these large service providers would focus their resources on serving large air freight forwarding companies to develop long term business relationship and take advantage of the stable stream of income. DHL has subcontracted more than 90% of its global forwarding s ground handling services to our Group for over 10 years continuously which gives our Group a competitive advantage against competitors as we have become very 58

9 familiar with the system and operations of DHL and substituting us, would be extremely burdensome and time-consuming for DHL. In addition, UPS and FedEX have subcontracted some of their ground handling works to our Group since 2016 and 2017, respectively. Air Cargo Terminal Operating Services Market Currently, there are three air cargo terminals in Hong Kong International Airport, and all three air cargo terminals sub-contract their operating services to certain specialised service providers. Moreover, it is an industry norm that air cargo terminal operators prefer to continuously engage the same subcontractors over a long period of time in order to save operation cost while at the same time to guarantee the consistency and stability of service quality. In 2016, the total revenue generated from air cargo terminal operating services in Hong Kong reached HKD1.1 billion. The air cargo terminal operating services market was concentrated with less than 20 companies in the industry, and is dominated by a few larger players for the last couple of years with the top five service providers, in aggregate, account for over 90% of market shares in terms of revenue in According to the F&S Report, CPCT is the largest employer, with a market share of approximately 40% in terms of subcontracting expenses, in the air cargo terminal operating services market. There are a total of three subcontractors in CPCT and our Group individually and in aggregate with Company C have contributed more than 45% and 85%, respectively, of the total throughput of CPCT. F&S Report has compiled the following table of the top five air cargo terminal operating services providers in Hong Kong in 2016: Rank Company Market name Company description Revenue share (HK$ million) (%) 1 Company A The subsidiary of Hong Kong s largest independent air cargo terminal operator specialising in air cargo terminal operating services. It is the sole operator for Hong Kong Air Cargo Terminals Limited 2 Company B A logistics company offering integrated logistics services including but not limited to air freight forwarding, warehousing and air cargo terminal operating services. The company is one of the service providers for Asia Airfreight Terminal 3 Our Group Principally engaged in the provision of (i) air freight forwarding ground handling services; and (ii) air cargo terminal operating services in Hong Kong. Our Group is one of the service providers for CPCT

10 Rank Company Market name Company description Revenue share (HK$ million) (%) 4 Company C A logistics company offering diversified logistics services including but not limited to air freight and sea freight forwarding, road transportation, warehousing and air cargo terminal operating services. The company is one of the service providers for CPCT 5 Company D A logistics company offering import, export, logistics and transportation services including but not limited to air freight forwarding, warehousing, local and cross boundary transportation services and air cargo terminal operating services. The company is one of the service providers for Asia Airfreight Terminal Others Total 1, It is common for air cargo terminals to cooperate with the same subcontractors over a long period in the industry. Company A is estimated to have started the provision of air cargo terminal operating services in Hong Kong Air Cargo Terminals Limited since the operation of the airport began in 1998 and is still serving as the mere service provider in this terminal as of today. Company C and our Group have become the subcontractors for CPCT since its commencement of operations in 2012 and its full operation in 2013, respectively. Company B has been cooperating with Asia Airfreight Terminal for more than ten years and the relationship is expected to continue in the future. Given that none of the air cargo terminal operating services providers serve more than one of the air cargo terminal operators at the same time and since all of them have become very familiar with the operations of the terminals respectively over time, it is unlikely that these service providers will abandon their current operations at the respective terminals. Opportunities Rapid development of manufacturing industry in Southeast Asia The global manufacturing center has been gradually shifted to Southeast Asian countries during recent years because of the comparatively lower labour cost in those countries, which further suggests the increasing trading business from Southeast Asia. In light of this, Hong Kong s logistics and air freight logistics services market is expected to embrace a variety of opportunities serving as a logistics hub benefiting from its location advantage. 60

11 Expanding cross-border commerce market With the development of cross-border commerce, distribution channels are moving from dealership models to multi-channel and direct sales models, requiring higher-density networks with quicker response which offers great opportunity for logistics companies that could offer comprehensive services, demonstrating the potential growth in the logistics industry. Threats Insufficient land and labour forces The limited land resources in Hong Kong lead to the high cost for land use or rental. The short-term contract conditions further make it difficult for the warehouse operators to plan for long-term development. Meanwhile, labour shortage of both workers and professional talents exists in the industry, thus resulting in the shortage of workforces to match the positions and result in higher labour costs. Slowdown of global economy Hong Kong has always been playing a significant role in global trade and logistics due to its advantageous location on the East-West trade route and its trading partnership with many countries in the world. Thus, the prospect of logistics market in Hong Kong is inextricably related to the dynamics of global economy. Time remains being needed for most developed countries in the world to recover from the slumping economy, which is another threat to the logistics industry in Hong Kong. Entry Barriers Skilled labour In Hong Kong, the basic salary of the labour in logistics and air freight logistics services industry is usually higher than that in other industries, but there is limited young labour force willing to enter this industry. Moreover, skilled labour with extensive knowledge and expertise is one of the most important factors that help logistics and air freight logistics services companies to compete in the market. As a result, it is not easy for new entrants to hire these skilled labour where supply is limited. Strong business network and track records Strong business network has great impact on air freight logistics services providers operations, cost control and pricing strategy. For instance, players who have established strong cooperative relationship with airline companies, shipping companies and agents are able to negotiate for preferential prices and cooperative conditions, which converts to cost saving advantages for logistics and air freight logistics service providers in the long run. 61