BUSINESS PRINCIPAL STRENGTHS. The Directors believe that the Group has the following principal strengths:

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1 OVERVIEW The Group is headquartered in the PRC and is one of the leading global providers of integrated container shipping services to international and domestic customers. The Group s businesses include the provision of a wide range of container shipping, container terminal, container leasing and freight forwarding and shipping agency services across the container shipping value chain. The Group carries on its container shipping business through COSCON. As at 1 January 2005, based on statistics of Containerisation International, in terms of vessel fleet capacity, the Group s container vessel fleet was the largest among all global container shipping companies based in the PRC and ranked seventh among the world s largest container shipping companies. The Group operated a fleet of 119 container vessels with a total capacity of approximately 303,197 TEU as at 31 March In addition to the PRC market, the Group s container liner shipping services cover the following four international markets: (i) the Trans-Pacific market; (ii) the Asia-Europe (including the Mediterranean) market; (iii) the Intra-Asia (including Australia) market; and (iv) other international (including Trans-Atlantic) markets. As at 31 December 2004, the Group s vessel fleet called at over 100 ports in over 30 countries and regions across the world, providing container shipping services to its customers along 60 international trade lanes, 14 international feeder service routes, eight PRC coastal service routes and 44 Pearl River Delta and Yangtze River feeder service routes. As at the same date, the Group, through COSCON s PRC and overseas subsidiaries, owned 280 sales and service points in major cities in the PRC and 65 sales and service points overseas; through COSCON on behalf of the COSCO Group, managed 25 sales and service points overseas; and through overseas appointed agents jointly operated by the COSCO Group and other third parties, used an additional 59 sales and service points overseas. The Directors believe that the coverage of the Group s global shipping network and sales and service networks are one of the most extensive in the global market. The Group carries on its container terminals business through COSCO Pacific, a non-wholly owned subsidiary of the Group, which is listed on the Stock Exchange and is a Hang Seng Index constituent stock with a market capitalisation of approximately HK$35.2 billion (equivalent to approximately RMB37.4 billion) based on the closing price of its shares as at 31 December The Group is one of the world s leading container terminal operators, measured by total throughput and total throughput capacity. In 2004, the container terminals in which the Group had an interest handled a total throughput of approximately 23.5 million TEU. The Group carries on its container leasing business through Florens, a wholly-owned subsidiary of COSCO Pacific and an indirect subsidiary of the Company. As at 31 December 2004, according to Containerisation International, excluding 5,380 TEU of containers under finance leases, Florens was the fifth largest container leasing company in the world in terms of operating container fleet capacity, owning and managing a container fleet of approximately 913,748 TEU. The Group believes that, by providing this range of services and combining its local experience in the world s regional markets with its global strengths, the Group will be able to offer its customers an integrated and high quality suite of value-added services across the container shipping value chain. The Group also believes its range of businesses also renders the Group less susceptible to cyclical fluctuations in the container shipping industry. 90

2 PRINCIPAL STRENGTHS The Directors believe that the Group has the following principal strengths: The Company is one of the leading global integrated container shipping companies with strong strategic alliances, and will be the overseas listed flagship of the COSCO Group for shipping business. As at 17 March 2005, the COSCO Group, comprising COSCO, the Company s controlling shareholder, together with its subsidiaries, was the second largest shipping group in the world in terms of total deadweight. The Company will be the overseas listed flagship of the COSCO Group for shipping businesses. The Group is a market leader in the integrated container shipping industry both internationally and in China. As at 1 January 2005, COSCON had the world s seventh largest container vessel fleet and, complementing its leading position, the Group is a member of the CKYH Consortium, the world s largest shipping alliance on the Trans-Pacific and the second largest on the Asia-Europe trade lanes in terms of annualised capacity as at 1 January As at 31 December 2004, COSCO Pacific was one of the world s leading container terminal operators and the world s fifth largest container leasing company. Within the PRC, the Group is the largest container shipping company, one of the leading container terminal operators and one of the leading providers of freight forwarding and shipping agency services. Ability to offer a comprehensive suite of container shipping services across the shipping value chain enables the Company to offer a door-to-door service and creates business synergies. The Group offers a comprehensive range of door-to-door integrated container shipping services that represents a core part of the global supply chains of its customers. The Directors believe that the Group s ability to offer these integrated services enables the Group to meet the needs of its customers more efficiently and enhance customer loyalty, and allows the Group to maximise its profitability. The Directors believe this integrated model consolidates and supports the well-balanced and strategically focused development of each of these individual businesses. With container shipping, container terminals, container leasing and freight forwarding and shipping agency businesses within the same Group, the Group believes it will be able to enhance and create synergies between the members of the Group, including in relation to the complementary nature of their businesses and sharing industry information. For example, the Group believes COSCON will benefit from COSCO Pacific s expertise in terminal management to execute its global hub strategy, while COSCO Pacific will enhance its ability to make new terminal investments around the world as a result of improved ability to evaluate container shipping traffic due to its closer association with COSCON. Furthermore, the Directors believe that the Group s range of businesses renders the Group less susceptible to cyclical fluctuations in the container shipping industry. 91

3 High quality customer base and extensive global networks. The Group has a broad base of container shipping customers operating in different regions of the world and across different industries, including many world-renowned international and domestic companies. The Group s container terminals and container leasing customers comprise major international shipping companies. The Group has entered into strategic cooperation and partnership agreements with many of its major customers in order to secure long-term and stable sources of operating revenues. The Directors believe the Group s networks, including its trade lanes, container terminals, container depots and sales and service networks, are among one of the most extensive in the world. As at 31 December 2004, the Group s vessel fleet called at over 100 ports in over 30 countries and regions across the five continents of the world along 60 international trade lanes, 14 international feeder services, eight PRC coastal service routes and 44 Pearl River Delta and Yangtze River feeder services; the Group had interests in 15 container terminals and one automobile terminal in the PRC (including in Hong Kong), one container terminal in Singapore and one container terminal in Belgium; the Group s container leasing business had 12 offices and used more than 190 appointed container depots around the world. As of such date, the Group owned 280 sales and service points in the PRC; and 65 sales and service points overseas; through COSCON on behalf of the COSCO Group, managed 25 sales and service points overseas; and through overseas appointed agents jointly owned by the COSCO Group and other third parties used an additional 59 sales and service points overseas, with this global sales and service network extending across the PRC and 65 countries and regions outside the PRC. The Group s vessel fleet structure enables the Company to maximise the reliability of its services and optimise its ability to control its costs. The Group owns or leases under long-term charters the vast majority of its vessel fleet, giving the Group security in relation to, and control over, the quality, punctuality, availability and cost of its vessels, which are the Group s most important operating assets for its container shipping business. The Directors believe that, over the long-term, owning vessels and leasing vessels under long-term charters costs significantly less than leasing vessels under short-term charters. The Group s management have extensive shipping and management experience. The COSCO Group has had over 40 years of shipping experience since commencing business in 1961, while COSCON has had over 30 years of experience in the container shipping business. COSCO Pacific has had over 17 years and nearly ten years of experience in the container leasing and container terminals businesses, respectively, and a number of the most senior management members of its container leasing business have over 20 years of experience in that business. Most of the executive Directors and senior management of the Group have over 25 years of experience in the international shipping industry, experienced many cycles in the shipping market, and have an in-depth understanding and knowledge of the demands of international and domestic customers. 92

4 Well-developed information technology systems and e-commerce capabilities. The Group, through COSCON, has set up an advanced integrated information system, IRIS-2, to manage its shipping service network, which enables real-time information sharing across the Group. The Group, through an inter-connected global e-commerce platform and a global EDI centre, allows its customers and suppliers to exchange data and share information resources to increase the Group s sales capability and enhance brand recognition. The Group, through Florens, has developed its own proprietary container leasing operating system, Fleet Manager, which enables customers to interact with Florens by computer on a real-time basis. The Directors believe these information technology systems are one of the key competitive advantages of the Group. The Group has the right to use COSCO, one of the most recognised brands in the global shipping industry, giving it a significant marketing advantage. STRATEGIES As at 17 March 2005, the COSCO Group was the world s second largest shipping group in terms of deadweight and one of the leading business groups in the PRC. Since the commencement of the Group s container shipping business in 1973, the Group has, with the permission of COSCO, been using the trademarks COSCO, and, in conducting its business. COSCON enjoys a strong reputation for high quality services and has received numerous awards for its punctuality and quality of service. COSCO Pacific, listed on the Stock Exchange, has built up a good corporate reputation and received numerous awards for its corporate governance, and has been a Hang Seng Index constituent stock since June COSCO Pacific uses the well-established Florens trademark in its container leasing business. As such, the Directors believe that the above brands are some of the most recognised and well-respected brands in the global shipping industry, giving the Group a significant marketing advantage. The goal of the Group is to continuously improve its competitive strengths to become one of the leading global integrated shipping companies in the world in terms of size, range of services, profitability and customer satisfaction. The Group intends to adopt the following strategies to realise this goal: Continue to expand and optimise container vessel fleet capacity and structure to enhance competitiveness, efficiency and profitability. To take advantage of the robust growth in global container shipping demand driven by the global and domestic PRC economic growth, expansion of international trade and the continuing trend of containerisation and outsourcing, the Group intends to continue to expand its container vessel fleet capacity through new ship building, purchasing used vessels and long-term vessel charters. The Group aims to expand its total operating capacity to over 800,000 TEU by the end of At the same time, the Group intends to, as appropriate, continue to improve the structure and composition of its fleet, such as through the replacement of older and smaller vessels and deployment of larger modern vessels, in accordance with the development of the container shipping industry and the demands of the market and customers in order to further strengthen its overall competitiveness, improve efficiency, lower operating costs and enhance profitability and shareholder returns. 93

5 Continue to expand and optimise its global networks and range of services to improve door-to-door services and meet the constantly changing demands of customers global supply chains. Increasingly, customers are seeking a one-stop-shop carrier to provide door-to-door container shipping services on a global basis. To match its customers increasingly global supply chains, the Group intends to expand and adjust its global networks, including its trade lanes, container terminals, container depots and sales and service networks, and leverage those of its strategic partners, to improve its door-to-door services. The Group has plans to further acquire overseas network companies from COSCO in strategically important locations such as South-East Asia, Europe and, in particular, emerging markets. Furthermore, the Group intends to further strengthen the freight forwarding and shipping agency capabilities of COSCON s PRC and overseas subsidiaries to support the operations of COSCON s container vessel fleet. The Directors believe that these measures will strengthen the Group s ability to provide integrated services across the entire container shipping value chain. Continue to implement advanced information technology and other management systems to improve revenue performance, asset utilisation, operating efficiency and profitability. The Group intends to continue to implement advanced information technology and other management systems throughout its operations and expand its e-commerce capabilities. In 2004, a leading information technology consultant was engaged to develop a commercial intelligence system for COSCON to improve its data retrieval capabilities. The Directors believe that these strategies will enhance the Group s revenue performance, asset utilisation, operating efficiency and profitability. Continue to implement strict cost control measures to maintain the Group s costs competitiveness and improve its return on assets. The Group intends to continue to implement strict cost control measures in order to achieve the lowest cost base and enhance the overall competitiveness of the Group. These cost control measures include: (1) strengthening yield management and client management throughout the Group s operations, and achieving cost reductions through e-commerce; (2) maximising the benefits of economies of scale through joint investments, joint services and cooperative alliances; (3) deployment of larger container vessels to increase the average vessel carrying capacity and lower the average cost per TEU; (4) enhancing operational management, to improve efficiency and lower administrative expenses; and (5) improving profit management and analysis, focusing on expansion in target high margin markets and regions identified through constant customer and project evaluation. The Directors believe that these cost control measures will, as well as improving the Group s overall costs competitiveness, enable the Group to be less susceptible to cyclical fluctuations in its container shipping business as a result of a reduced fixed costs base. 94

6 Expand its investment in overseas and domestic container terminals, and expand and improve its container fleet capacity and structure. AWARDS The Group, through COSCO Pacific, intends to expand its investment in container terminals to take advantage of the Group s increasing shipping capacity and the increasing demand for, and shortage of, handling capacity at container terminals in the PRC, Europe and the United States. The Group will direct its investment to three major regions in the PRC, the Bohai Rim region, Yangtze River region and Pearl River region, hub ports in Europe and the United States, and other hub ports around the world. The Group plans to achieve this through a combination of COSCO Pacific increasing its investments in, and participating in the expansion of, terminals in which it has investments, making new investments in other terminals and participating in the construction and operation of greenfield container terminals. These future investments, as well as strengthening the Group s container terminals business, are expected to also benefit the Group s container shipping business by facilitating easier access to berthing capacity at terminals in which it has investments. The Group, through Florens, intends to continue to expand its container fleet and to seek to increase the proportion of long-term leases to lock in customers and secure stable cash flows. Through these strategies, and the continuing improvement of its service standards, the Group intends to further enhance its reputation as a reliable lessor to its customers and nurture partnerships with strategically important clients. Continue to seek expansion opportunities. The Group intends to continue to evaluate opportunities to expand its capacity and scope of services, through potential earnings accretive mergers, acquisitions and strategic alliances, in order to enhance the Group s industry position. The Group is constantly evaluating opportunities to expand its businesses, but currently has no firm commitment or timetable regarding any target companies. The Group is committed to providing the best global integrated container shipping services to its customers. The Directors believe that as a result of this commitment, members of the Group have consistently received awards and commendations. COSCON has received from Lloyd s List the Sailing Schedule Reliability Award for nine consecutive years and has received from the China Shipping Gazette the Best Shipping Line Award for various trade lanes in the past years. In 2004, 11 of COSCON s vessels were recognised as The QUALSHIP 21 Vessel by US Coast Guard. For excellence in information technology implementation, COSCON was ranked 24th among all Chinese companies in the PRC by the National Informatization Evaluation Centre in In recognition of high standards of corporate governance, COSCO Pacific has received awards from diverse bodies such as the Institutional Investor Research Group and the Hong Kong Management Association for the last three years. COSCO Pacific was awarded Conglomerate with the Best Investor Relations in Asia by Institutional Investor Research Group in 2004, and was ranked the seventh for the Most Commitment to Shareholder Value by Finance Asia in

7 COSFRE has been named as one of the top two freight forwarders in 2004 by the China International Forwarders Association and International Business Daily in overall performance as well as specific subsectors such as maritime transport. COSFRE also received awards for the provision of services in import, export, warehousing and information technology in HISTORY AND DEVELOPMENT History of the Company The Company was established as a joint stock limited company in the PRC on 3 March The Company was formed to be the overseas listed flagship of the COSCO Group for its shipping business, to provide integrated container shipping, container terminal, container leasing and freight forwarding and shipping agency services to international and domestic customers. The Company is a wholly-owned subsidiary of COSCO, and owns 100% of COSCON and approximately 52.18% of COSCO Pacific. COSCO s predecessor, China Ocean Shipping Company, was established in April 1961 and was reorganised and renamed as COSCO in COSCO is one of the largest State-owned enterprises and is considered by the PRC government as critical to the national economy; COSCO is directly supervised and administered by SASAC. COSCO has become a multi-national business group engaging in a wide variety of businesses including container shipping, dry bulk shipping, tanker shipping, general cargo and special cargo shipping, logistics, freight forwarding and shipping agency, ship building and repair, terminal operation, trade, financing and information technology. China Ocean Shipping Company and its subsidiaries commenced international container shipping services in 1973 and international container liner services in In 1993, COSCO started to reform its shipping management system, and at the end of that year, a new business division named COSCO Container Lines was established in COSCO s Beijing headquarters, with the aim of integrating the operations of all container vessels owned separately by its major shipping subsidiaries. In late 1997, COSCO Container Lines was relocated from Beijing to Shanghai and restructured with COSCO Shanghai, and COSCON was established on 11 November COSCO Pacific was incorporated in Bermuda on 26 July 1994 and listed on the Stock Exchange in December 1994 as the holding company of Florens Shipping Corporation S.A. and Fairbreeze Shipping Company Limited, both of which had been formed in the 1980s and engage in the leasing of containers to the COSCO Group. At the time of its listing on the Stock Exchange, COSCO Pacific was known as Florens Group Limited. Immediately prior to the Reorganisation, COSCO Pacific was held as to approximately 52.39% by COSCO HK and its wholly-owned subsidiary, COSCO Investments, and as to 47.61% by independent shareholders. COSCO HK is a direct wholly-owned subsidiary of COSCO. Following the Reorganisation, COSCON is now a direct wholly-owned subsidiary of the Company and COSCO Pacific is now an approximately 52.18% indirect subsidiary of the Company. 96

8 Reorganisation In preparation for the Listing, the Group underwent the Reorganisation which involved, among other things, the transfer of the entire equity interest in COSFRE, COSA and the Overseas Companies from COSCO to COSCON, the transfer of the entire equity interest in COSCO Investments and COSCO Pacific from COSCO HK to COSCO Pacific Investment, and, subsequently, the transfer of the entire equity interest in COSCON and COSCO Pacific Investment from COSCO to the Company. Upon the approval of the SASAC, the Company was formed on 3 March 2005 as a joint stock limited company by way of capital contribution by COSCO, the Company s sole promoter and shareholder. Pursuant and subject to PRC law and the Reorganisation Agreement, the Company has enjoyed the rights and benefits and assumed the obligations and liabilities arising from the assets injected into the Company as capital contribution for the establishment of the Company with effect from 1 January For details of the Reorganisation, please refer to the sub-paragraph headed 1.1 Reorganisation under the section headed Relationship with COSCO Connected Transactions and the section headed Reorganisation in Appendix IX to this prospectus. The following charts illustrate the major operational subsidiaries of the Company (i) immediately prior to the Reorganisation and (ii) after the completion of the Global Offering. Immediately prior to the Reorganisation: COSCO 0.75% 100% 90% 100% 100% COSCON COSFRE COSCO HK Overseas Companies Mercury Other businesses (note 1) 99.25% 29% 20% 51% 100% 100% Pan Asia COSA COSCO Investments COSCO Pacific Investment 43.23% 9.16% COSCO Pacific 51% 49% 60% COSCO Logistics 40% COSCO Information & Technology (Shanghai) Limited 97

9 After the completion of the Global Offering (assuming the Over-allotment Option is not exercised): Public Shareholders COSCO 51% 36.5% 63.5% The Company 100% COSCO HK COSCON 100% 100% COSCO Pacific Investment 90% 90% 99.25% COSFRE (note 2) 10% 10% COSA (note 3) 0.75% Pan Asia (note 4) 100% COSCO Investments 9.13% 43.05% COSCO Pacific (note 8) 49% COSCO Logistics (note 9) 60% COSCO Information & Technology (Shanghai) Limited (note 5) Overseas Companies (note 6) 100% Mercury (note 7) Note 1: Note 2: Note 3: Note 4: Note 5: Note 6: Other than the businesses conducted by COSCON, COSCO HK and the Overseas Companies, COSCO is also involved in a wide range of transportation related businesses and investments. For details of the other principal businesses conducted by the COSCO Group, please refer to the section headed Relationship with COSCO Overview in this prospectus. COSFRE is mainly engaged in freight forwarding, the provision of ground transportation, railway transportation, warehousing and other value-added services primarily to support the container shipping operations of COSCON. After the Global Offering, the Company and COSCON will still be regarded as PRC entities with COSCON entitled to hold 90% equity interest of COSFRE directly and the other 10% through its interest in COSA. COSA is mainly engaged in shipping agency and related services solely in connection with COSCON s container shipping operations. After the Global Offering, the Company and COSCON will still be regarded as PRC entities, with COSCON entitled to hold 90% equity interest of COSA directly and the other 10% through its interest in COSFRE. Pan Asia is mainly engaged in international container transportation, domestic coastal and inland river, domestic trading container transportation business. COSCO Information & Technology (Shanghai) Limited is mainly engaged in the design and manufacture of computer software, production of network system spare parts and provision of related technical services and technical supporting business. The Group does not hold the remaining 40% interest in COSCO Information & Technology (Shanghai) Limited because the Group already has effective control over the company and COSCO Information & Technology (Shanghai) Limited only performs a supporting role to COSCON, and is not engaged in any of the principal businesses carried on by the Group. Please refer to the section headed Definitions in this prospectus for the definition of Overseas Companies. 98

10 Note 7: Note 8: Note 9: Mercury and its 47 wholly-owned subsidiaries, mainly being single vessel companies. The interests of COSCO Pacific Investment and COSCO Investments in COSCO Pacific stated in this chart assume no change in their percentage interests subsequent to the Latest Practicable Date. COSCO Logistics is mainly engaged in logistics, third party freight forwarding and shipping agency services. The interest in COSCO Logistics is held through COSCO Pacific which, according to the prevailing PRC laws and regulations, is regarded as an overseas investor and, therefore, is not permitted to hold more than an interest of more than 49% in any shipping agency business (one of the business operations of COSCO Logistics) in the PRC. The remaining 51% shareholding in COSCO Logistics held by COSCO has not been transferred to the Company because the Company is currently intended to be a holding company for COSCON and COSCO Pacific, its two primary operating subsidiaries. BUSINESS OF THE GROUP Introduction The Group is principally engaged in providing integrated container shipping, container terminals, container leasing and freight forwarding and shipping agency services to international and domestic customers. The Company has two principal subsidiaries, namely, COSCON and COSCO Pacific. The Group s principal businesses can be diagrammatically represented as follows: Notes: (1) The Group s container shipping business is carried on by COSCON and also by certain of its subsidiaries. (2) The Group s container terminals and related business is carried on through COSCO Pacific s subsidiaries, jointly controlled entities and associated companies. (3) The Group s container leasing business is carried on by COSCO Pacific s wholly-owned subsidiary, Florens. (4) The Group s freight forwarding and shipping agency business is carried on by COSCON s subsidiaries in the PRC and overseas, primarily to support the container shipping operations of COSCON. The Group also has an ownership interest in COSCO Logistics (through COSCO Pacific s 49% interest in COSCO Logistics), which is mainly engaged in logistics, third party freight forwarding and shipping agency businesses. (5) The Group s other operations primarily comprise COSCO Pacific s ownership interests of: (i) 16.23% in CIMC, 20.0% in Shanghai CIMC Reefer Containers Co. Ltd, 20.0% in Shanghai CIMC Far East Container Co., Ltd. and 22.5% in Tianjin CIMC North Ocean Container Co., Ltd, which are mainly engaged in container manufacturing; and (ii) 20.0% in Liu Chong Hing Bank, which is mainly engaged in retail and wholesale financial banking. COSCON, which is wholly-owned by the Company and is headquartered in Shanghai, is mainly engaged in the container shipping business. To support COSCON s container shipping business, COSFRE and COSA, both of which are subsidiaries of COSCON and indirect subsidiaries of the Company, together with certain of COSCON s overseas subsidiaries, provide freight forwarding and shipping agency services primarily to COSCON. 99

11 COSCO Pacific, which is indirectly owned as to approximately 52.18% by the Company and is headquartered in Hong Kong, is mainly engaged in the container terminals and container leasing businesses. COSCO Pacific is listed on the Stock Exchange and is a constituent stock of the Hang Seng Index, with a market capitalisation of approximately HK$35.2 billion (equivalent to approximately RMB37.4 billion) based on the closing price of its shares as at 31 December COSCO Pacific has interests in and operates a number of container terminals at major hub ports in Asia and Europe, including mainland China, Hong Kong, Singapore and Belgium. As well as serving independent third party container shipping companies, COSCO Pacific s investments in container terminals enhance COSCON s ability to secure terminal capacity for its container shipping business. COSCO Pacific jointly manages the majority of the container terminals in which it has an interest. COSCO Pacific carries on its container leasing business through its wholly-owned subsidiary, Florens. Florens leases containers to independent third party customers and also provides COSCON with a significant proportion of the containers used by COSCON in its container shipping business. COSCO Pacific owns a 49.0% interest in COSCO Logistics, with the remaining 51.0% interest being held by COSCO, the Company s controlling shareholder. COSCO Logistics provides logistics, third party freight forwarding and shipping agency services to its customers, together with a range of ancillary supporting services. COSCO Pacific also has interests in a number of container manufacturing companies, including a 20.0% interest in Shanghai CIMC Reefer Containers Co. Ltd., a 20.0% interest in Shanghai CIMC Far East Container Co., Ltd., a 22.5% interest in Tianjin CIMC North Ocean Container Co., Ltd. and a 16.23% interest in CIMC. The CIMC group of companies is principally engaged in the manufacturing and sale of modern traffic and transport equipment such as containers, modern road transport vehicles and airport ground equipment. The core business of CIMC is container manufacturing. In addition, COSCO Pacific has a 20.0% interest in Liu Chong Hing Bank, a company the shares of which are listed on the Stock Exchange. The Company believes that COSCON s businesses and COSCO Pacific s businesses are complementary and that, by including both these companies within the Group, the Group will be able to provide integrated services across the container shipping value chain, and create synergies, thereby enhancing the competitiveness of the Group. For further details, please refer to the section headed Business Container Shipping Value Chain and Synergies in this prospectus. Container Shipping Value Chain and Synergies Container shipping value chain The container shipping value chain refers to services across the entire chain of container shipping transportation services, including not only port-to-port services but also planning, implementation and control of transportation, warehousing management, packaging, delivery and freight agency of cargoes from the place of supply to the place of demand. For further details, please see the section headed Industry Overview Container Transportation Overview Container Shipping Value Chain in this prospectus. 100

12 As fellow subsidiaries of the Company, COSCON and COSCO Pacific and their respective subsidiaries enable the Group to provide a full range of integrated container shipping, container leasing, container terminals and freight forwarding and shipping agency services to its customers across the container shipping value chain. The Directors believe that the ability of the Group to provide this range of integrated container shipping services across the shipping value chain enables the Group to maximise revenues, enhance efficiency and reduce operating costs, resulting in increased profitability. For further details, please refer to the section headed Principal Strengths above. The Group s businesses and investments encompass the following components of the shipping value chain: Container manufacturing COSCO Pacific holds interests in a number of container manufacturing companies, including a 16.23% interest in CIMC, the world s largest container manufacturer. Container leasing COSCO Pacific s wholly-owned subsidiary, Florens, provides container leasing services to customers around the world. Container depots to provide its customers with pick up and drop off points for leased containers, Florens has access to a network of over 190 appointed container depots around the world, and to support the container shipping services it offers to its customers, COSCON has access to a network of over 400 appointed container depots around the world. Outbound and inbound shipping agency the Group s shipping agencies in China and overseas provide shipping agency services for both outbound and inbound voyages. COSA provides shipping agency services solely in connection with COSCON s container shipping operations, while COSCO Logistics provides shipping agency services to third party customers and COSCON. Inland transportation the Group provides inland transportation services to transport freight from factories to ports and from ports to warehouses. COSFRE and certain of COSCON s overseas subsidiaries provide inland transportation services primarily for COSCON and its customers, while COSCO Logistics provides inland transportation services to third party customers and COSCON. Ports COSCO Pacific holds interests in and operates a network of container terminals at major hub ports in Asia and Europe, including mainland China, Hong Kong, Singapore and Belgium. Ships COSCON operates a large container vessel fleet, which transports containers from port to port. Warehouses to facilitate the storage and forwarding of freight to the retailer, COSFRE provides warehousing services primarily for COSCON and its customers, while COSCO Logistics provides warehousing services to third party customers and COSCON. 101

13 The Group s capabilities in providing services across the container shipping value chain may be diagrammatically represented as follows: Container manufacturing Container leasing Related activities Container depots Outbound shipping agency Inbound shipping agency Supply chain Factory Inland transportation Inland Port Ship Port Warehouse transportation Retailer Door-to-door Port-to-port Services offered by: COSCON COSFRE (1) COSA (2) COSCO Pacific (3) Florens COSCO Logistics (4) Notes: (1) COSFRE provides freight forwarding services primarily to COSCON and its customers. (2) COSA provides shipping agency services solely in connection with COSCON s container shipping operations. (3) COSCO Pacific manages, or jointly manages, the majority of the container terminals in which it has an interest. COSCO Pacific also holds interests in a number of container manufacturing companies. (4) COSCO Pacific holds a 49% interest in COSCO Logistics, which provides logistics, third party freight forwarding and shipping agency services. One-stop service The Group provides one-stop services to its customers and enters into long-term strategic agreements with its important customers, to develop long-term relationships and mutual benefits. For example, the Group may set up its order systems to end directly in its customers factories and warehouses, in order to provide on-site slot booking, packing, sealing, customs clearance and order/bill printing services. 102

14 Through the provision of this type of one-stop service, the Group is able to help its customers to improve efficiency and reduce costs in transportation and supply chain management. Synergies The Directors believe that the Group s service capabilities across the container shipping value chain create a number of synergies which enhance the Group s competitiveness in the container shipping, container terminals, container leasing and freight forwarding and shipping agency markets. In connection with the Listing, the interests of COSCO Pacific and of its shareholders as a whole have been taken into account, in particular, by taking measures to safeguard the interests of minority shareholders of both the Company and COSCO Pacific and to ensure that there are sufficient independent Directors on the Board to address any potential conflict situations such as connected transactions between the Company and COSCO Pacific. These measures include appointing four independent non-executive Directors to the Board of the Company and increasing the number of independent non-executive directors on the board of COSCO Pacific from three to four, none of whom will assume any management role in any COSCO Group company other than the Company or COSCO Pacific, as the case may be. For further details, please refer to the section headed Relationship with COSCO Common Directors of COSCO and the Company in this prospectus. It is not only commercially beneficial for the Company, as the holding company, to have both COSCO Pacific and COSCON included within the Group so as to achieve synergies across the shipping value chain, but it is also commercially sensible for each of COSCON and COSCO Pacific to be included as part of the Group so that each will be able to benefit directly from reliable and efficient service support from each other given the complementary nature of the businesses of the two companies. The Company believes that COSCO Pacific and its shareholders (including minority shareholders) will benefit from being included as part of the Group. Container leasing and manufacturing business The expansion of Florens container leasing business is expected to enable Florens to benefit from economies of scale and increased bargaining power, and obtain more favourable terms from its suppliers and banks, thereby increasing the profitability of Florens. As a result, Florens may be able to offer its customers, including COSCON, more competitive leasing terms. COSCO Pacific s container manufacturing business is expected to provide sufficient support to Florens container leasing business in order to ensure adequate container fleet growth to match the demand of COSCON and its other customers. Container terminals In recent years, one of the trends in the container terminals industry has been to attract strategic investors or partners, such as leading container terminal operators and leading shipping companies, to invest or cooperate in existing and new container terminal projects. Container terminal operators bring experience and expertise, while shipping companies are able to bring increased and stable container traffic. Therefore, with COSCON as a fellow subsidiary alongside COSCO Pacific, COSCON is expected to be able to provide the COSCO Pacific invested and/or operated terminals with steady, and potentially increased, container traffic flow, so as to reduce the related investment and operation risks. In addition, the 103

15 ability of COSCO Pacific to secure future investments in attractive container terminals is expected to be enhanced by its closer association with a leading shipping company, COSCON, as its fellow subsidiary. Further, COSCON s ability to secure berthing capacity may be enhanced at terminals in which COSCO Pacific has an interest. Freight forwarding and shipping agency The Group also provides freight forwarding and shipping agency services. The Group s extensive freight forwarding network provides support to the Group s container shipping businesses by working to source cargoes to fill the Group s vessels, and the Group s shipping agency services enable it to improve the smooth operation of port callings and the punctuality of shipping schedules. Sharing of industry information The subsidiaries of the Group is expected to be able to, as appropriate, share industry information, which will allow, on the one hand, the Company to make strategic decisions at a Group level in a more effective and timely manner and, on the other hand, the subsidiaries of the Company to make more effective decisions relating to the day-to-day management and strategies of their individual and complementary businesses. Value-added services The Group provides a range of value-added services relating to freight forwarding, primarily to COSCON and its customers, through COSFRE. In addition, COSCO Logistics offers a wide range of logistics services to its customers, including COSCON. These value-added services enhance the integration of the container shipping services provided to customers and enable COSCO Logistics to capture additional components of the container shipping value chain. Information technology systems COSCON and COSCO Pacific both use advanced information technology systems in their container shipping and container leasing businesses, respectively. The Group is expected to be able to, where appropriate, better leverage these systems to mutually enhance the operating efficiency of both COSCON s container shipping business and COSCO Pacific s container leasing business in order to maximise the integration and synergies of these companies operations across different business sectors. Container Shipping The Group s container shipping business is carried on by COSCON. With the support of the freight forwarding and shipping agency services provided by its PRC subsidiaries, COSFRE and COSA, and certain of its overseas subsidiaries, COSCON provides its customers with high quality door-to-door container shipping services for a wide range of medium to high-end industrial products and consumer products (including raw materials, semi-finished products and finished products). 104

16 In terms of geographic segments, COSCON s container shipping business can be categorised into: (i) international container shipping business and (ii) PRC container shipping business. The Group will not only focus on the international market, but also expects to focus on developing the PRC market. For the year ended 31 December 2004, the Group s international container liners around the world provided a weekly average of approximately 120 voyages. For the same year, the Group s PRC coastal services travelling between different major ports provided a weekly average of approximately 16 voyages. In developing new trade lanes or adjusting its existing trade lane network, one of the Group s key considerations is to operate trade lanes that meet the development and requirements of global trade and, in particular, PRC foreign trade. The Group will also seek to generally increase the geographic coverage of its trade lane network, thereby enhancing the Group s ability to provide high quality door-to-door services around the world and also increasing the Group s efficiency as a result of a larger network of routes along which it will have the opportunity to maximise space utilisation, in particular, on return voyages. In addition, where appropriate, the Group will seek to develop specific trade lanes to address imbalances in space utilisation on outward and return voyages. The following tables illustrate the volumes (in terms of loaded containers) and turnover of the Group in the major international container shipping markets of the world and in the PRC container shipping market, together with the corresponding percentages relative to the Group s total container shipping volumes and turnover, for the three years ended 31 December 2004: Shipping Volume of Individual Markets For the year ended 31 December Shipping volume (in terms of loaded containers) Percentage of the total container shipping volume of the Group Shipping volume (in terms of loaded containers) Percentage of the total container shipping volume of the Group Shipping volume (in terms of loaded containers) Percentage of the total container shipping volume of the Group Market (TEU) (%) (TEU) (%) (TEU) (%) Trans-Pacific , , ,000, Asia-Europe (including Mediterranean) , , , Intra-Asia (including Australia) , , , Other international (including Trans-Atlantic) , , , PRC , , , Total... 2,934, ,018, ,501,

17 Turnover of Individual Markets (1) For the year ended 31 December Turnover Percentage of the total container shipping turnover of the Group Turnover Percentage of the total container shipping turnover of the Group Turnover Percentage of the total container shipping turnover of the Group Market (RMB 000) (%) (RMB 000) (%) (RMB 000) (%) Trans-Pacific... 7,566, ,536, ,680, Asia-Europe (including Mediterranean)... 3,836, ,141, ,354, Intra-Asia (including Australia)... 3,790, ,264, ,352, Other international (including Trans-Atlantic)... 1,698, ,927, ,270, PRC , , ,146, Total... 17,492, ,615, ,805, Note: (1) Excluding turnover from the chartered-out market. International markets and trade lanes The global container shipping market can be categorised into four major international markets: (i) the Trans-Pacific market; (ii) the Asia-Europe (including the Mediterranean) market; (iii) the Intra-Asia (including Australia) market; and (iv) other international (including Trans-Atlantic) markets. Based on statistics of Containerisation International, as at 1 January 2005, COSCON ranked first among container shipping companies based in the PRC in terms of the number of trade lanes operated. As at 31 December 2004, the Group provided international container shipping services to its customers via 60 international trade lanes, of which 23 trade lanes were independently operated by the Group, 16 trade lanes were joint service trade lanes operated with partners and the remaining 21 trade lanes were operated by other shipping companies with container slots being made available to the Group under slot exchange and purchase arrangements. For details of these joint services and slot exchange and purchase arrangements, please see the section headed Alliances below. In addition to the international trade lanes mentioned above, as at 31 December 2004, the Group also provided 14 international feeder services, of which two international feeder services were independently operated by the Group and 12 international feeder services were operated by other shipping companies in respect of which the Group provided services to its customers through slot exchange and purchase arrangements. As at 31 December 2004, through the trade lanes and feeder routes in the global container market described in this prospectus, the Group provided shipping services between more than 100 international ports in the Far East, North America, South America, Europe, the Mediterranean Sea, the Middle East, the Red Sea, South-East Asia, Australia, Korea, Japan, West Africa and South Africa. 106

18 As at 31 December 2004, the major ports and locations covered by the Group s international trades lanes (including trades lanes operated by the Group independently, joint service trade lanes and trade lanes operated by other shipping service providers with container slots being made available to the Group under slot exchange and purchase arrangements) were as follows: Southampton Felixstowe Antwerp Le Havre Bremerhaven Thamesport Valencia Fos Hamburg Barcelona Port Said Jeddah Rotterdam Genoa Napoli Dammam Dubai PEOPLE'S REPUBLIC OF CHINA Yingkou Qingdao Thessaloniki Istanbul Izmir Haifa Lianyungang Shanghai Guangzhou Xiamen Chiwan Huangpu Karachi Bangkok Port Kelang Singapore Jakarta Semarang Surabaya Ningbo Dalian Busan Iwakuni Kobe Fuzhou Keelung Ishigaki-jima Taichung Kaohsiung Yantian Nansha Hong Kong Tokyo Nagoya Yokohama Osaka Moji Vancouver Seattle Oakland Los Angeles Long Beach Houston Boston New York Norfolk Wilmington Charleston Savannah Miami New Orleans Sydney Santos Durban Melbourne Montevideo Cape Town Auckland 107