throughout the term of the New Sub-Lease Agreement, in providing its opinion regarding fairness on the stream of annual leasehold payment to be made by CPN to CID, the Independent Financial Advisor will provide the opinion in two aspects: 1.Fairness on the implied interest rate associated with the stream of annual leasehold payment. In providing the opinion, the Independent Financial Advisor will make the comparison between the financing cost associated with the stream of annual leasehold payment to be made for the Sub-Leased Assets and the cost of long-term debt financing of CPN; 2.Fairness on the leasehold value of the Sub-Leased Assets to be used as the basis for determining the stream of annual leasehold payment. In providing the opinion, the Independent Financial Advisor will make the comparison between the leasehold value of the Sub-Leased Assets that will be used as the basis for determining annual leasehold payment to be made by CPN to CID and the fair leasehold value of the Sub-Leased Assets as appraised by the Independent Asset Appraiser of CPN. 1) Fairness of the Financing Cost Associated with the Stream of Annual Leasehold Payment (Implied Interest Rate) The Independent Financial Advisor made a comparison between the financing cost associated with the stream of annual leasehold payment to be made by CPN throughout the term of the New Sub-Lease Payment and CPN's cost of long-term debt financing. This is because stream of annual leasehold payment to be made by CPN to CID is made in reference to that to be made by CID to the SRT, both of which are made on an installment basis throughout the term of the long-term lease agreement. Thus, making leasehold payment on an annual basis is similar to making leasehold payment on an installment basis throughout the lease term, with cost of financing associated with such stream of annual leasehold payment equal to the discount rate that when used to discount such stream of annual leasehold payment will make the sum of the discounted annual leasehold payment equal to the leasehold value of the Sub-Leased Assets of Baht 9,185 million that was appraised by the Independent Asset Appraiser of CPN. Thus, in providing its opinion regarding fairness of the stream of annual leasehold payment to be made by CPN throughout the term of the New Sub- Lease Agreement, the Independent Financial Advisor will compare between the discount rate associated with the stream of annual leasehold payment and CPN's cost of long-term debt financing. Should the comparison indicate that the discount rate (or implied interest rate of the stream of annual leasehold payment) be close to or fall in the range of CPN's cost of long-term debt financing, it could be concluded that the stream of annual leasehold payment to be made CPN to CID throughout the term of the New Sub-Lease Agreement is fair. Opinion and analysis of the Independent Financial Advisor regarding this are in Section 4.3.2.2.1, 4.3.2.2.2 and 4.3.2.2.3. 2) Reasonableness of the Leasehold Value to be Used as the Basis for Determining Annual Leasehold Payment As well, the Independent Financial Advisor will provide its opinion regarding fairness of the leasehold value to be used as the basis for determining the stream of annual leasehold payment to be made CPN to CID. The Independent Financial Advisor will do so based on the comparison between the leasehold value to be used as the basis for determining annual leasehold payment and the fair leasehold value of the Sub-Leased Assets as appraised by the Independent Asset Appraiser of CPN. Should the comparison indicate that the leasehold value to be used as the basis for determining annual leasehold payment to be made by CPN to CID is lower than the fair leasehold value of the Sub-Leased Assets, CPN will earn benefit from entering into the New Sub-Lease Agreement. Opinion and analysis of the Independent Financial Advisor regarding this are in Section 4.3.2.2.4. 4.3.2.2.1 The Appraised Leasehold Value of the Sub-Leased Assets The leasehold value of the Sub-Leased Assets as appraised by the Independent Asset Appraiser of CPN using the income approach stands at Baht 9,185 million. In obtaining the appraised leasehold value of the Sub-Leased Assets using the income approach, the Independent Asset Appraiser of CPN discounted the stream of Net Operating Income (NOI) generated by the Sub-Leased Assets throughout the term of the New Sub-Lease Agreement using an appropriate discount rate. The Independent Financial Advisor considers and evaluates set of financial assumptions employed by the Independent Asset Appraiser of CPN in appraising the leasehold value of the Sub-Leased Assets and finds that by overall such financial assumptions are reasonable. In preparing such set of financial assumptions the Independent Asset Appraiser of CPN evaluated and took into account many relevant factors such as appropriateness of the methodology used to appraise the leasehold value of the Sub-Leased Assets, CPN's current and future operating plans for the Central Plaza Ladprao Shopping Complex as well as impact from changes in factors such as economic growth rate, current and future level of competition in the retail property business and etc. Opinion of the Independent Financial Advisor regarding such asset of financial assumptions is as follows: Table 5 Opinion of the Independent Financial Advisor regarding Set of Financial Assumptions Used by the Independent Asset Appraiser of CPN in Appraising the Leasehold Value of the Sub-Leased Assets Financial Assumption Opinion of the Independent Financial Advisor 1.Use of the income approach in It is of the opinion of the Independent appraising the leasehold value Financial Advisor use of the income of the Sub-Leased Assets approach in appraising the leasehold value of the Sub-Leased Assets is appropriate for appraising leasehold value of income-generating real property like the Shopping Complex and Plaza and the Office Building. This is because the income approach aims to appraise leasehold value of income-generating real assets, taking into account their abilities to generate income in the form of NOI over the term of the lease contract. 2.Net leasable area of each asset It is of the opinion of the Independent -The Shopping Complex and Financial Advisor that the assumption Plaza: 55,531 SQ.M. regarding net leasable area of each -The Office Building: 17,719 asset makes sense because the assumption SQ.M. employed takes into account existing net leasable area of each asset. Future expansion of net leasable of each asset requires an approval by the SRT and needs feasibility study. 3.Occupancy rate of each asset The projected occupancy rate of each asset -The Shopping Complex and over the term of the New Sub-Lease Plaza: Agreement is obtained by taking into Year 1-3: Average occupancy account each asset's current occupancy rate rate of 82 % as well as their projected occupancy rate Year 4-20: Average occupancy in the long-run that may be affected by rate of 95 % factors such as economic growth, level of -The Office Building: competition in the industry as well as Year 1-3: Average occupancy change in customers lifestyle. rate of 98 % Note that for Years 1-3, the average Year 4-6: Average occupancy occupancy rate of the rate of 95 % Shopping Complex and Plaza is approximately Year 7-20: Average occupancy 82 % that is lower than that for Years 4-20. rate of 90 % This is because during such period some areas of the Shopping Complex and Plaza will be under renovation. After completion of renovation, from Year 4 on the average occupancy rate will be 95 % that is close average occupancy rate of the Shopping Complex and Plaza in recent years (See Appendix 1). For the average occupancy rate of the Office Building, it could be seen that when time passes average occupancy rate will decline as the Office Building will age while the competition from new office buildings in the nearby area will intensify. 4.Growth in average rental rate per For Year 1-3 in which some areas of the SQ.M.of the Shopping Complex and Shopping Complex and Plaza are under Plaza is as follows: renovation, CPN will give a Year 1-3: A rental discount of 40 %- rental discount in the range of 40 %-50 % 50 % to the current rental rate to the current rental rate. However, Year 4: An increase by 15 % from after completion of renovation, the the current rental rate rental rate in Year 4 will increase by Year 5-10: An increase by 15 % 15% from the current rental rate. every three years The projected growth in average rental Year 11-20:An annual increase of 4% rate per SQ.M. of the Shopping Complex and Plaza is obtained by taking into account conditions in the rental/lease agreements that allow for increase in rental rate and data regarding increase in rental rate in the past. Factors that may affect ability to raise rental rate such as economic condition and future trend of the retail property business are taken into account as well. 5.Growth in average rental rate per The projected growth in average rental SQ.M. of the Office Building that rate per SQ.M. of the Office Building is a growth of 10 % every three is obtained by taking into account years over the first 10 years of conditions in the rental/lease agreements the New Sub-Lease Agreement and an that allow for increase in rental rate and average annual growth of 3 % per data regarding increase in rental rate in year for the Years 11-20 of the the past. Factors that may affect ability New Sub-Lease Agreement to raise rental rate such as economic condition and future trend of the office building business are taken into account as well. 6.Operating Expense The Independent Asset Appraiser of CPN The Shopping Complex and Plaza derived this assumption by taking into Year 1-3: Approximately 33 %* account past actual operating records Year 4-20:Approximately 19 %* of the Central Plaza Ladprao Shopping The Office Building Complex for the ratio of operating Year 1-20:Approximately 29 %* expenses excluding utility expenses to Note: The ratio does not include operating revenues excluding utility utility revenue and expense. revenue. Note that the ratio for the Shopping Complex and Plaza for Years 1-3 is higher than the ratio for the remaining life of the New Sub-Lease Agreement as some areas in the Shopping Complex over the period of Year 1-3 are under renovation. Over the period of renovation, some expenses still exist and are high while rental revenues are not obtained. 7.Renovation and Maintenance Expenses The Independent Asset Appraiser of CPN (for the Shopping Complex and Plaza derived this assumption by taking into and the Office Building)totaling Baht account CPN's renovation and maintenance 1,986 million during the first 3 budget for the Central Plaza Ladprao years of the New Sub-Lease Agreement Shopping Complex. 8.Discount rate of 12 % The assumption regarding discount rate is derived by the Independent Asset Appraiser of CPN by taking into account some potential risks associated with real properties similar to the Sub-Leased Assets.Such discount rate of 12 % when used to discount the NOI of the Sub-Leased Assets in each year will make the appraised leasehold value of the Sub-Leased Assets equal to Baht 9,185 million Note: Revenue from the Central Plaza Ladprao Shopping Complex (including rental & services revenues and others with the major portion of more than 50 % being rental revenue) accounts for approximately 21 % on average of CPN's consolidated revenues excluding share of profits from investments accounted for using the equity method for the Years 2006, 2007 and 2008. 4.3.2.2.2 Cost of Financing Associated with Stream of Annual Leasehold Payment The cost of financing associated with the stream of annual leasehold payment to be made by CPN throughout the term of the New Sub-Lease Agreement (Implied Interest Rate) is the discount rate that when used todiscount such stream of annual leasehold payment will equate the sum of the discounted annual leasehold payment to the appraised leasehold value of the Sub-Leased Assets of Baht 9,185 million In other words, the relationship among the cost of financing associated with the stream of annual leasehold payment (Implied Interest Rate), the fair appraised leasehold value of the Sub-Leased Assets of approximately Baht 9,185 million and the stream of annual leasehold payment that CPN is obligated to made to CID could be illustrated using the following financial equation; -- Please see in PDF file -- The Independent Financial Advisor determines that the discount rate that equates the sum of the discounted annual leasehold payment to be made by CPN to CID throughout the term to the appraised leasehold value of the Sub-Leased Assets of Baht 9,185 million is 5.62 %. Thus, the cost of financing (implied interest rate) associated with the stream of annual leasehold payment to be made by CPN throughout the sub-lease term is 5.62 % Such implied interest rate of 5.62 % is regarded as the cost of financing CPN has to bear in exchange for the leasehold right in the Sub-Leased Assets while CPN is allowed to make annual leasehold payment to CID on an installment basis. Duration of the stream of annual leasehold payment to be made by CPN to CID is 9.42 years. 4.3.2.2.3 CPN's Cost of Long-Term Debt Financing In determining CPN's cost of long-term debt financing, the Independent Financial Advisor will consider: 1.Weighted Average Cost of Interest of CPN: It falls in the range between 5.0 % and 5.6 % in the Years 2007 and 2008 and during the first 9 months of 2009 (Source: http://www.sse.set). Such weighted average cost of interest is the financing cost associated with CPN's loans with term of less than 10 years; 2.Average Yield of Corporate Bonds Issued by Firms with the Same Credit Rating as that of CPN: The latest company rating as well as issue rating of unsecured bond issued by CPN as assigned by TRIS Rating Co.,Ltd. on May 23, 2007 is A+. By considering relevant bond market data, the Independent Financial Advisor found that average bond yield of corporate bonds with term of more than 5 years and rating of A+ for the 3-month period between November 2008 and January 2009 is 5.70 %. Such average yield is obtained by considering: 1) Average credit spread of corporate bonds with term of more than 5 years and rating of A+ for the 3-month period between November 2008 and January 2009 that is at 157 bps (Source: http://www.sse.set); and 2) Average yield on 20-year Thai government bond for the 3-month period between November 2008 and January 2009 that is at 4.11 % (Source: http://www.thaibma.or.th) Taking into account both 1. and 2.,the Independent Financial Advisor finds that CPN's cost of long-term debt financing falls in the range between 5.0 % and 5.7 %. When comparing the cost of financing associated with the stream of annual leasehold payment (5.62 %) and CPN's cost of long-term debt financing (5.0 %-5.7 %), the Independent Financial Advisor finds that CPN's cost of financing associated with the stream of annual leasehold payment to be made by CPN to CID (Implied Interest Rate) for the Sub-Leased Assets falls within the range of CPN's cost of long-term debt financing. Thus, it is the opinion of the Independent Financial Advisor that CPN's cost of financing (implied interest rate) associated with the stream of annual leasehold payment to be made throughout the sub-lease term for the Sub-Leased Assets as well as the stream of annual leasehold payment is reasonable. 4.3.2.2.4 Comparison between the Leasehold Value to be used as the Basis for Determining Annual Leasehold Payment and Appraised Leasehold Value of the Sub-Leased Assets As mentioned earlier in this Section 4, the basis used to determine the stream of annual leasehold payment to be made by CPN to CID is the cost plus basis based on the sum of the cost of acquiring leasehold right of the Central Plaza Project as actually incurred by CID plus an appropriate profit margin of 5 %. Thus, in making a comparison between the leasehold value to be used as the basis for determining annual leasehold payment and the appraised leasehold value of the Sub-Leased Assets,the Independent Financial Advisor will also determine the leasehold value to be used as the basis for determining annual leasehold payment using the cost plus basis. It is the sum of the following financial components: -The leasehold value of the Central Plaza Ladprao Project of Baht 11,580 million as appraised by the independent asset appraisers employed by the SRT; -Leasehold right registration fee equivalent to 1 % of the sum of the annual leasehold payment to be made by CID to the SRT throughout the 20-year term of the New Main Lease Agreement; and -A profit margin of approximately 5 % From the sum of the three figures above, CID will allocate approximately 72 % of the sum (that is the proportion of the appraised value of the Sub-Leased Assets to the total appraised value of the Central Plaza Ladprao Project) as the annual leasehold payment to be made by CPN to it throughout the term of the New Sub-Lease Agreement. In other words, determination of the leasehold value to be used as the basis for determining annual leasehold payment to be made by CPN to CID could be illustrated using the following equation: Leasehold Value to Be Used as the Basis for Determining Annual Leasehold Payment = 0.72 x [The Appraised Leasehold Value of the Central Plaza Ladprao Project (Baht 11,580 million) + Leasehold Right Registration Fee + A Profit Margin of 5 %] Such determination indicates that the leasehold value of the Sub-Leased Assets that will be used as the basis for determining annual leasehold payment to CID is Baht 8,900 million. On the other hand, the fair leasehold value of the Sub-Leased Assets as appraised by the Independent Asset Appraiser of CPN is Baht 9,185 million.For purpose of illustration, showed below is the illustration of the basis of determining the leasehold value of the Sub-Leased Assets that will be used as the basis for determining annual leasehold payment: Figure 2 The Basis of Determining the Leasehold Value of the Sub-Leased Assets to Be Used as the Basis for Determining Annual Leasehold Payment -- Please see in PDF file -- Making comparison between the leasehold value of the Sub-Leased Assets that will be used as the basis for determining annual leasehold payment (Baht 8,900 million) with the fair leasehold value of the Sub-Leased Assets(9,185 million) indicates that CPN will earn benefits from entering into this transaction. 4.3.3 Summary of the Opinion of the Independent Financial Advisor regarding (more)