RMB(Million) 2006 2005 2004(restated) 2003

% of % of % of % of
Balance sheet Amount Amount Amount Amount
total assets total assets total assets total assets

Current Assets
Inventories 76,038 9% 62,733 8% 37,278 6% 24,186 5%
Account receivable (Debtors ) 6,241 1% 2,485 0% 1,902 0% 1,761 0%
Provisions 3,257 0% 3,998 1% 7,046 1% 6,283 1%
Cash at bank & in hand 48,559 6% 80,905 10% 8,391 1% 8,022 2%
Total current assets 162,222 19% 175,895 23% 116,741 19% 86,174 16%

Fixed Assets
Intangible assets 6,627 1% 5,011 1% 2,153 0% 1,803 0%
Tangible assets 703,314 81% 597,161 77% 481,549 80% 438,787 83%
Investment 32,956 12,378 5,774 4,520
Total fixed assets 709,941 81% 602,172 77% 483,702 81% 440,590 84%

Total Assets 872,163 100% 778,067 100% 600,443 100% 526,764 100%

Current Liabilities (creditors)

Borrowings 35,763 4% 28,689 4% 27,276 5% 28,890 5%
Other creditors 60,149 7% 37,867 5% 35,865 6% 30,771 6%
Total Current liabilities 179,879 21% 153,838 20% 120,089 20% 114,029 22%

Non-current liabilities (creditors)

Borrowings 35634 4% 44570 6% 38458 6% 41959 8%
Other creditors 19476 2% 15233 2% 2438 0% 2000 0%
Total Non-current liabilities 74693 9% 80562 10% 55236 9% 55485 11%

Total liabilities 254,572 29% 234,400 30% 175,325 29% 169,514 32%

Owners' equity
Capital 179021 21% 179021 23% 175824 29% 175824 33%
Reserve 143564 16% 132556 17% 105764 18% 91212 17%
Minority interest 30914 28278 9391 5608 1%
Total owner's equity 353499 41% 339855 44% 290979 48% 272644 52%

Total liabilities and owner's equity 608,071 70% 574,255 74% 466,304 78% 442,158 84%

% of % of % of % of
Profit and loss account Amount Amount Amount Amount
total sales total sales total sales total sales

Turnover (sales) 688,978 100% 552,229 100% 397,354 100% 303,779 100%
Sales to related co 185,061 27% 184,447 33% - 0% - 0%
Turnover from 3rd party 503,917 367,782 - -
Cost of sales 341,456 50% 257,957 47% 165,025 42% 134,935 44%
Gross profit 347,522 50% 294,272 53% 232,329 58% 168,844 56%

Depreciation expense 58,675 9% 49,211 9% 46,411 12% 40,531 13%

Other income - 0% - 0% 31 0% (538) 0%
Exceptional items - 0% - 0% - 0% - 0%
EBIT 256,651 37% 241,382 44% 197,580 50% 139,179 46%
Interest expense (3,220) 0% (2,762) -1% (2,303) -1% (2,346) -1%
Earning before tax 253,431 37% 238,620 43% 195,277 49% 136,833 45%
Taxation (49,776) -7% (54,180) -10% (42,563) -11% (28,072) -9%
Tax rate 20% 23% 22% 21%
Net income 203,655 30% 184,440 33% 152,714 38% 108,761 36%
Minority interest 7,173 1% 6,280 1% 1,651 0% 636 0%
Extraordinary items - 0% - 0% - 0% - 0%
Dividends payable 64,001 9% 60,013 11% 46,317 12% 31,326 10%
Retained earning 274,829 40% 250,733 45% 200,682 51% 140,723 46%
Profitability analysis 2006 2005 2004 2003 Remarks

Gross Profit / Sales (%) 50.4% 53.3% 58.5% 55.6%

EBITDA/ sales (%) 28.7% 34.8% 38.0% 32.5%
Operating Profit / Sales (%) 37.3% 43.7% 49.7% 45.8%
Profit before Tax / Sales (%) 36.8% 43.2% 49.1% 45.0%
Net income/ Sales (%) 29.6% 33.4% 38.4% 35.8%
Return on Assets (ROA) 23.4% 23.7% 25.4% 20.6%
RONA 29.8% 29.9% 32.2% 26.8% return = earning before interest and after tax:
RONA (Net asset with the deduction of Investment) 31.3% 46.9% 30.5% 54.5% operating income after tax): EBIT(1-t)
Reurn on Equity (ROE)
55.6% 70.4% 52.4% 73.9%
(Net income -minority interest /Equity (%))

Operating Efficiency analysis 2006 2005 2004 2003

Asset turnover (Sales / Total Assets) 0.79 0.71 0.66 0.58

Equity turnover (Sales/ Equity) 1.95 1.62 1.37 1.11
Account receivable turnover
110.40 222.22 208.91 172.50
(Credit sales /Account receivable (times/annum))
Inventory turnover (COGS/Inventory (times/annum)) 4.49 4.11 4.43 5.58
Payable turnover (COGS/creditors (times/annum))) (4.29) (4.86) (4.31) (4.12)
AR period (days) 3 2 2 2
Inventory period (days) 81 89 82 65
AP period (days) (85) (75) (85) (89)
Cash conversion cycle
170 166 169 156
(AR days + inventory days - AP days)

Liquidity analysis 2006 2005 2004 2003

Current ratio (Current Asset/Current liabilities) 0.90 1.14 0.97 0.76

Working Capital
-17657 22057 -3348 -27855
(Current Asset - Current liabilities (million))

Gross Gearing 20% 22% 23% 26%

(ST borrowing + LT borrowing / owner's equity(%))
Net Gearing
(ST borrowing + LT borrowing - cash / owner's 6% -2% 20% 23%
equity(%))
Interest coverage (Operating income/interest expense) 79.71 87.39 85.79 59.33

Financial Leverage analysis 2006 2005 2004 2003

Asset to Debt ratio 3.43 3.32 3.42 3.11

Debt ratio (total debt/total asse) 0.29 0.30 0.29 0.32
Equity multiple (Asset/equity) 2.47 2.29 2.06 1.93
Debt to equity (LT debt/total equity) 0.21 0.24 0.19 0.20
Debt to capital (LT debt/total asset) 0.09 0.10 0.09 0.11

4year
Growth analysis 2006 2005 2004 2003 CAGR
(2003-2006)

Sales growth 24.76% 38.98% 30.80% #REF! 31%

Gross profit growth 18% 27% 38% #REF! 27%
EBIT growth 6% 22% 42% #REF! 23%
Pretax profit growth 6% 22% 43% #REF! 23%
Net income growth 10% 21% 40% #REF! 23%
ROE (Dupont) 57.61% 54.27% 52.48% 39.89% 55%
Dividend payout ratio -31.43% -32.54% -30.33% -28.80% -31%
Dividend retention ratio 32% 136% 175% 136% 105%
Sustainable growth rate 19% 74% 92% 54% 58%
 0.76 -182.54

DDM Assume the growth rate of dividend is constant infinity

1992 Dividend (1991 dividend * growth rate) ### Given expected growth rate of dividend in exhibit 8
Growth Rate 12.00% Given expected growth rate of Sales exhibit 8
Current share price Unknown
Expected Return of common stock 14.47%
Shares Outstanding (exhibit 5) ###
Current stock price per shares (Intrinsic Value) -2,880.39

current stock price (exhibit 5) 9.48 -1.0033 undervalue

DDM Calculate growth rate from ROE*(1-payout ratio)

1992 Dividend (1991 dividend * growth rate) ###
Growth Rate 75.72%
Current share price Unknown
Expected Return of common stock 14.47%
Shares Outstanding (exhibit 5) ###
Current stock price per shares (Intrinsic Value) 116.35

current stock price (exhibit 5) 9.48 -0.9185 undervalue

t and after tax: NOPAT (net
BIT(1-t)
 (Million) 2003A 2004A 2005A 2006A 2007E

Balance sheet Amount Amount Amount Amount Amount

Current Assets
Stocks 24,186 37,278 62,733 76,038
Account receivable (Debtors ) 1,761 1,902 2,485 6,241
Provisions 6,283 7,046 3,998 3,257
Cash at bank & in hand 8,022 8,391 80,905 48,559
Total current assets 86,174 116,741 175,895 134,095 160,914

Fixed Assets
Intangible assets 1,803 2,153 5,011 6,627
Tangible assets 438,787 481,549 597,161 703,314
Total fixed assets 440,590 483,702 602,172 709,941 851,929

Total Assets 526,764 600,443 778,067 844,036 1,012,843

Current Liabilities (creditors)

Borrowings 28,890 27,276 28,689 28,689 28,689
Other creditors 30,771 35,865 37,867 37,867 45,440
Total Current liabilities 114,029 120,089 153,838 66,556 74,129

Non-current liabilities (creditors)

Borrowings 41959 38458 44570 44570 44570
Other creditors 2000 2438 15233 15233 15233
Total Non-current liabilities 55485 55236 80562 80562 59803

Total liabilities 169,514 175,325 234,400 147,118 133,932

Owners' equity
Capital 175824 175824 179021 179021
Reserve 91212 105764 132556 143564
Minority interest 5608 9391 28278 30914
Total owner's equity 272644 290979 339855 353499 -

Total liabilities and owner's equity 442,158 466,304 574,255 500,617 133,932
Discretionary financing needed 878,911

2003A 2004A 2005A 2006A 2007E

Profit and loss account Amount Amount Amount Amount Amount

Turnover (sales) 303,779 397,354 552,229 688,978 826,774

Cost of sales 134,935 165,025 257,957 341,456
Gross profit 168,844 232,329 294,272 347,522
Depreciation expense 40,531 46,411 49,211 58,675
Other income - - - -
Exceptional items (538) 31 - -
EBIT 139,179 197,580 241,382 256,651
Interest expense (2,346) (2,303) (2,762) (3,220)
Earning before tax 136,833 195,277 238,620 253,431
Taxation (28,072) (42,563) (54,180) (49,776)
Tax rate 21% 22% 23% 20%
Net income 108,761 152,714 184,440 203,655 244,386
Minority interest 636 1,651 6,280 7,173
Extraordinary items - - - -
Dividends payable 31,326 46,317 60,013 64,001
Retained earning 140,723 200,682 250,733 274,829
2008E 2009E 2010E % of sales

Amount Amount Amount %

177,005 194,706 214,177 19%

937,122 1,030,834 1,133,918 103%

1,114,128 1,225,540 1,348,094

28,689 28,689 28,689 N/A

49,984 54,983 60,481 5%
78,673 83,672 89,170

44570 44570 44570

15233 15233 15233
59803 59803 59803

138,476 143,475 148,973

179021 179021 179021

228,501 479,852 756,338 Assuming dividend payout ratio = 15%
30914 30914 30914
438,436 689,787 966,273

576,912 833,262 1,115,246

537,215 392,278 232,848

2008E 2009E 2010E % of sales Scenario applied

B
Amount Amount Amount %

909,451 1,000,396 1,100,436

268,825 295,707 325,278 29.56%
Growth Scenario

Probability
Scenario 2007E 2008E 2009E 2010E CAGR =cum avg growth rate
of occurrence
A 20% 10% 10% 10% 10% 7.9%
B 30% 5% 5% 5% 5% 4.0%
C 30% 5% 10% 10% 10% 6.9%
D 20% 8% 10% 12% 12% 8.3%
Expected 100% 6.60% 8.50% 8.90% 8.90% N/A

* Please adjust the color cells

g growth rate
Grand Metropolitan PLC

UK marginal tax rate: 35%

Risk free rate

20yr 10 yr 5 yr
UK 9.60% 9.80% 10%

Cost of equity:

Retail industry:

Location risk free rate(a) Beta (b) market risk preium© cost of equity (a +b*c)
UK 9.80% 1.42 4.1% 15.63%

Food industry:

Location risk free rate(a) Beta (b) market risk preium© cost of equity (a +b*c)
UK 9.80% 1.18 4.1% 14.65%

Drinks industry:

Location risk free rate(a) Beta (b) market risk preium© cost of equity (a +b*c)
UK 9.80% 1.09 4.1% 14.25%

Overall company:
Location risk free rate(a) Beta (b) market risk preium© cost of equity (a +b*c)
UK 9.80% 1.14 4.1% 14.47%

Outstandings Weights cost of financing cost of financing

Types
(pounds) (a) (pretax) (after tax) (b)
Specific debts 1,794.8 15.6% 8.63% 5.61%
Unspecific debts 87.0 0.8% 8.63% 5.61%
Convertible debts 63.0 0.5% N/A 9.75%
Preferred stock 6.3 0.1% N/A 10.27%
Common stock 9,535.9 83.0% N/A 14.47%
Total 11,487.0 100.0% WACC
(a) * (b) Remark
0.88%
0.04%
0.05% Exhibit 6 note3
0.01%
12.02%
12.99%
Comparable companies

Average Beta Average Creidt rating Cost of Average Average

Industry
(pound) rating score range debt(pre-tax) D/E (MV) D/A (MV)
Retail 1.42 4.00 A 11.08% 22.50% 18.37%
Food 1.18 2.88 AA- to A+ 10.89% 19.30% 16.18%
Drinks 1.09 2.50 AA- to A+ 10.82% 30.45% 23.34%

adjustment factor
1.4

Adjusted Debt to
Retail Location Beta beta Rating Rating scoreCost of debt equity
(pound) ratio(MV)
1 UK 1.18 1.18 NR 0 42%
2 US 0.95 1.33 AA 1 2%
3 US 0.9 1.26 NR 0 0%
4 US 1 1.4 NR 0 58%
5 US 1.25 1.75 NR 0 3%
6 US 1.15 1.61 BBB 7 30%

1.42 4.00 11.08% 22.50%

Adjusted Debt to
Food Location Beta beta Rating Rating scoreCost of debt equity
(pound) ratio(MV)
1 UK 0.72 0.72 NR 0 16%
2 UK 0.47 0.47 NR 0 23%
3 US 1.15 1.61 A+ 3 25%
4 UK 0.83 0.83 NR 0 21%
5 US 1 1.4 AA 1 9%
6 US 1.1 1.54 A 4 14%
7 US 0.9 1.26 NR 0 12%
8 US 1.05 1.47 NR 0 28%
9 US 0.85 1.19 NR 0 16%
10 US 1 1.4 A+ 3 6%
11 US 1 1.4 AA- 2 2%
12 US 1.15 1.61 NR 0 36%
13 US 0.9 1.26 A+ 3 15%
14 US 0.9 1.26 A- 5 23%
15 US 1 1.4 AA- 2 7%
16 UK 1.1 1.1 NR 0 47%
17 UK 0.73 0.73 NR 0 11%
18 UK 0.86 0.86 NR 0 44%
19 UK 0.88 0.88 NR 0 16%
20 US 0.9 1.26 NR 0 15%

1.18 2.88 10.89% 19.30%

Adjusted Debt to
Drinks Location Beta beta Rating Rating scoreCost of debt equity
(pound) ratio(MV)
1 UK 0.97 0.97 NR 0 44%
 2 US 1 1.4 AA- 2 18%
3 UK 0.77 0.77 NR 0 62%
4 US 1.2 1.68 A+ 3 4%
5 US 0.85 1.19 NR 0 11%
6 UK 1.01 1.01 NR 0 22%
7 CN 0.75 1.05 NR 0 38%
8 CN 0.75 1.05 NR 0 59%
9 UK 0.59 0.59 NR 0 25%
10 CN 1.1 1.54 NR 0 35%
11 UK 0.7 0.7 NR 0 17%

1.09 2.5 10.82% 30.45%

Remark:
Standard and Poor's credit rating definition
https://secure1.insweb.com/carriers/stdpoor/claim2.htm

Rating Score Pound yield

AAA 10.38%
AA+ 10.47%
AA 1 10.56%
AA- 2 10.73%
A+ 3 10.91%
A 4 11.08%
A- 5 11.11%
BBB+ 6 11.13%
BBB 7 11.16%
BBB-
Capital structure - by industry

UK marginal tax rate: 35%

* The debt is arranged centrally so that the proportion of different types of financing in various industry assumed to be the same.

Retail industry:
Weights cost of financing cost of financing
Types (a) * (b) Remark
(a) (pretax) (after tax) (b)
Debt 18.37% 11.08% 7.20% 1.32%
Common stock 81.63% N/A 15.63% 12.76%
Total 100% WACC 14.08%

Food industry:
Weights cost of financing cost of financing
Types (a) * (b) Remark
(a) (pretax) (after tax) (b)
Debt 16.18% 10.89% 7.08% 1.14%
Common stock 83.82% N/A 14.65% 12.28%
Total 100% WACC 13.42%

Drinks industry:
Weights cost of financing cost of financing
Types (a) * (b) Remark
(a) (pretax) (after tax) (b)
Debt 23.34% 10.82% 7.03% 1.64%
Common stock 76.66% N/A 14.25% 10.93%
Total 100% WACC 12.57%

Overall: Expected Existing Decision

Net asset 1991
Industries Weights(a) WACC(b) (a) * (b) RONA© (a) * © Accept/rejected?
(million)
Retails 2,332 40% 14.08% 5.60% 6.60% 2.62% Rejected
Food 1,997 34% 13.42% 4.57% 9.80% 3.34% Rejected
Drinks 1,536 26% 12.57% 3.29% 19.20% 5.03% Accepted
Total 5,865 100% 13.46% 10.99%
From Exhibit 7 From Exhibit 6
£ Outstandings £ Weights
Average Cost of Debt and Preferred Stock £ Cost of CapitalBook Market Book Market
Debt (pre-tax) 8.63% 1864.4 1881.8 34.60% 16.40%
Convertible bond 2002 (after-tax) 9.75% 52 63 1.00% 0.50%
Preferred stock 10.27% 12.2 6.3 0.20% 0.10%
Common stock 3454 9535.9 64.20% 83.00%
Total Capital 5382.6 11487 100.00% 100.00%
Capital structure - by industry

UK marginal tax35%
rate:
* The debt is arranged centrally so that the proportion of different types of financing in various industry assumed to be the same.

Retail industry:
cost of
cost of
Weights financing
Types financing (a) * (b) Remark
(a) (after tax)
(pretax)
(b)
Debt 16.40% 8.63% 5.61% 0.92%
Convertible Debt 0.50% N/A 9.75% 0.05%
Preferred stock 0.10% N/A 10.27% 0.01%
Common stock 83.00% N/A 15.63% 12.97%
Total 100% WACC 13.95%

Food industry:
cost of
cost of
Weights financing
Types financing (a) * (b) Remark
(a) (after tax)
(pretax)
(b)
Debt 16.40% 8.63% 5.61% 0.92%
Convertible Debt 0.50% N/A 9.75% 0.05%
Preferred stock 0.10% N/A 10.27% 0.01%
Common stock 83.00% N/A 14.65% 12.16%
Total 100% WACC 13.14%

Drinks industry:
cost of
cost of
Weights financing
Types financing (a) * (b) Remark
(a) (after tax)
(pretax)
(b)
Debt 16.40% 8.63% 5.61% 0.92%
Convertible Debt 0.50% N/A 9.75% 0.05%
Preferred stock 0.10% N/A 10.27% 0.01%
Common stock 83.00% N/A 14.25% 11.83%
Total 100% WACC 12.81%

Overall:
Net asset
Industries 1991 Weights(a) WACC(b) (a) * (b) RONA Accept/rejected?
(million)
Retails 2,332 40% 13.95% 5.55% 6.60% Rejected
Food 1,997 34% 13.14% 4.47% 9.80% Rejected
Drinks 1,536 26% 12.81% 3.35% 19.20% Accepted
Total 5,865 100% 13.37%
to be the same.