Guoco Group Limited
1997/98 Interim Announcement
The Board of Directors of Guoco Group Limited ("the Company") is pleased to announce the unaudited consolidated net profit of the Group, after exceptional items, taxation and minority interests, for the six months ended 31st December, 1997 together with comparative figures for the corresponding period last year as follows :
1. Group turnover for the period includes reinsurance, brokerage, underwriting and other commission, interest income, insurance premiums earned, dividend income, rental income and net investment income, property development income and the value of goods sold. It also includes net interest income, commissions, fees and other revenues earned from banking.
2. Exceptional items
Hong Kong profits tax is provided on the estimated assessable profits for the period at the rate of 16.5% (1996: 16.5%). Profits tax of foreign subsidiaries is provided in accordance with their respective local laws.
Deferred taxation is provided using the liability method in respect of the taxation effect arising from all material timing differences which are expected with reasonable probability to crystallize in the foreseeable future.
4. Earnings per share
The calculation of earnings per share is based on the profit attributable to shareholders for the period ended 31st December, 1997 of HK$362,750,000 (1996: HK$1,054,983,000) and on the 426,631,086 shares (1996: 426,631,086 shares) in issue during the period.
5. The accounts of the Company are maintained in United States dollars. The accounting figures shown above have been translated from United States dollars into Hong Kong dollar equivalents at the rates ruling at the respective financial period ends for presentation purposes only (1997: US$1=HK$7.7495; 1996: US$1=HK$7.7355).
6. Certain comparative figures have been reclassified to conform with the current period's presentation.
REVIEW OF ACTIVITIES
In its Annual Report for the year ended 30th June 1997, the Group cautioned that the immediate outlook for the region must be viewed with realistic objectivity. During the six month period ended 31st December 1997, well publicized macro-economic changes throughout the region occurred with a swiftness and a dimension that few could have foreseen. These events had an immediate effect on almost all businesses throughout the region including the core businesses of the Group. Against the backdrop of these macro-economic factors, the Group's profit for the six months ended 31st December, 1997 decreased by 65.6% to HK$362.8 million. Three significant reasons can be identified for this exceptional decline, namely:
Dao Heng Bank Group Limited ("DHBG")
DHBG, the Group's 71.1% owned Hong Kong listed subsidiary recorded a consolidated net profit attributable to shareholders of HK$821.5 million, representing a decrease of 25.2% from the previous corresponding period. After adjusting for a HK$281.6 million non-recurring profit on disposal of fixed assets in the previous year, consolidated net profit registered a 0.7% increase.
As at 31st December, 1997, total deposits were HK$99.5 billion and total loans HK$67.4 billion, representing growth rates of 1.7% and 14.2% respectively. Shareholders' Fund increased 9.6% to HK$11.2 billion and Dao Heng Bank Limited's consolidated Capital Adequacy Ratio was 20.6%.
The unsuccessful challenge to the Hong Kong Dollar to U.S. Dollar peg rate had a considerable short term impact on Hong Kong Dollar interest rates and Hong Kong Dollar liquidity, particularly in the fourth quarter of 1997. As DHBG has a high percentage of loan assets based upon the HK Prime lending rate, its net interest income was affected adversely by the dramatic narrowing of the HK Prime/HIBOR rate differential which was even negative for part of the period. Due to the prevailing uncertainty in the marketplace, DHBG continues to follow a policy of restrained growth and conservative balance sheet management, which has stood it in good stead during this difficult period. A high degree of liquidity and close attention to asset quality have been paramount in its strategy.
Credit quality of DHBG's loan portfolio continues to be at acceptable levels with non-accrual loans accounting for about 0.6% of total loans. However, as a measure of prudence in the present uncertain economic conditions, DHBG has set aside an additional HK$112 million in general loan loss provisions during the period, raising DHBG's general provision account to 1.1% of total loans as at 31st December 1997.
DHBG has carefully controlled its cross-border exposure to other Asian countries, in particular to those countries located in Southeast Asia. Approximately 95% of DHBG's consolidated total loans were extended to customers in Hong Kong. DHBG had negligible exposure to borrowers in the three countries which have applied to the IMF for assistance, namely Indonesia, Thailand and Korea. With the exception of DHBG's Philippine subsidiary, referred to below, DHBG's loans to customers in the other Asean countries amounted to less than 0.2% of its total assets.
Dao Heng Bank, Inc. ("DHBI"), a 60% owned Philippine subsidiary of DHBG, has completed its second year of operation and now has a total of 15 branches. DHBI is strongly capitalized with Pesos 1.75 billion in paid-up capital and a Capital Adequacy Ratio of 38%. Its total assets account for approximately 1% of DHBG's total assets and are self-funded by DHBI within the Philippines.
Positioning itself for future growth, DHBG continues its large scale investment in information technology infrastructure and delivery channel expansion, including its Direct Banking Services. DHBG will look increasingly to diversify its source of funds through the further securitization of assets. This will generate additional fee income, enhance its ability to satisfy future demand for mortgages and improve its asset mix and maturity profile. Concurrently, DHBG is streamlining operations to improve productivity and cost-effectiveness.
The Group's other financial services in Hong Kong generally performed satisfactorily during the period under review.
First Capital Corporation Ltd ("FCC")
The performance of FCC, the Group's 57.4% owned listed subsidiary in Singapore, continues to be affected by an already soft domestic residential property market. FCC reported a profit before tax and after tax (excluding extraordinary items) of S$40.5 million and S$8.2 million respectively. The tax charge is higher than the standard corporate income tax rate as there is no group tax relief in Singapore. As a result, tax losses of certain subsidiaries are not available for off-set against the profits of other subsidiaries.
During the corresponding period in the previous year, FCC reported an exceptional interim gain of S$13.3 million, while in the current period being reported, no exceptional gains were realized. FCC's current results have also incorporated:
(a) provisions for development properties which took into account the prevailing oversupply, subdued demand and cautious market sentiment for residential properties in Singapore;
(b) provisions for unrealised losses in respect of the FCC group's short term quoted equities.
The FCC group is restricted from borrowing entirely in Singapore Dollars and hence have exposure to foreign currencies. In respect of this exposure, the FCC group has actively managed its foreign exchange exposure. During the period under review, the realised gain on foreign exchange contracts amounted to S$19.9 million which was capitalised at the property development companies' level. The FCC group has to make a provision for an unrealised translation loss of S$28.8 million arising from the revaluation of foreign currency loans as at 31 December 1997.
As certain conditions precedent were not met, the proposed joint venture to develop the site at Jalan Gatot Subroto in Jakarta, was terminated. This has avoided large write-offs which would have otherwise resulted. Currently, the FCC group does not have any exposure in Indonesia and Thailand. The FCC group has no intention to proceed with investments in Indonesia and Thailand for the time being.
FCC's 34.7% held associated company, Benchmark Group PLC has announced pre-tax profits of £8.7 million in its half year results, having benefitted from the recent strength of the central London property market, where its investment properties are concentrated.
Other Property Interests
During the period under review, the Group's Hong Kong listed property subsidiary, Guoco Land Limited ("GLL"), which is 53% owned by the Group and 20% by FCC, has expanded existing operations and joined with other major developers in the development of Hong Kong property projects in Tai Hang Road, Tsim Sha Tsui and Tai Po and is deriving steady recurring rental income from its Hong Kong investment properties. The agreement to acquire 6 floors of a prime office property known as "The Center" at 99 Queen's Road Central is expected to be completed by mid-year. GLL will lease a portion of this property to the Group to be used for its headquarters and other Group operations. The remaining floors will be leased out to third party entities for rental income.
As a result of higher interest rates and the prospect of increasing Government land supply, the Hong Kong property market has recently experienced an abrupt correction. The sharp drop in residential property prices is expected to level off, supported by intrinsic demand for home ownership. Commercial property, however, is expected to remain subdued as current and projected supply exceeds demand which has been curbed by the economic slowdown.
The Group has not expanded its property interests in the People's Republic of China. Guoco Properties Limited ("GPL"), which is 55% owned by the Group and 45% by FCC, expects to complete a major office project, at Corporate Square, Jinrong Street, Beijing on time and sales have commenced. GPL's Shanghai land bank is being retained pending improvements in the residential property market. The long term phased development project in Suzhou will be rescheduled in line with market sentiment, once the first phase is completed.
Guoco Holdings (Philippines), Inc. ("GHPI")
GHPI, a 36.6% associated company of the Group, experienced higher interest costs arising from the steep devaluation of the Philippine Peso during the period under review. A total foreign exchange loss provision of approximately P349.6 million (HK$66.9 million) has been made, contributing to a net loss after tax and minority interest of P332 million (HK$63.5 million). The operating income of GHPI before financial charges, non-recurring gains and income taxes, showed an 87% improvement, largely due to the strong performance of Pepsi-Cola Products Philippines Inc. However, the significant increase in Peso interest rates during the period under review materially reduced the operating profit after interest charges.
Hong Leong Credit Berhad ("HLC")
HLC, the Group's 20.9% associate listed on the Kuala Lumpur Stock Exchange, will publish its results for the interim period ended 31st December, 1997 subsequent to the Group's own interim announcement. The Group has incorporated the consolidated results of HLC based on their unaudited management accounts.
Year 2000 Project
Since late 1996, a designated team has been addressing the Year 2000 issues. Actions have been undertaken to ensure that the computer hardware, operating systems and applications software throughout the Group are Year 2000 compliant, including:
It is expected that all major applications will be completed by the end of 1998. Progress to-date is satisfactory and is well within target.
It is expected that the Group will go through a period of consolidation in 1998. There are recent signs that regional markets have begun to stabilize. Under such circumstances, the Board feels that it is difficult to predict performance for the second half year with certainty. The Board nevertheless looks towards a better second half.
The Directors have declared an interim dividend of HK$0.2 per share amounting to HK$85,326,000 (1996/97 interim dividend: HK$0.25 per share amounting to HK$106,658,000) for the financial year ending 30th June, 1998 which will be payable on 16th April, 1998 to the shareholders whose names appear on the Register of Members on 15th April, 1998.
PURCHASE, SALE OR REDEMPTION OF THE COMPANY'S LISTED SHARES
During the period, neither the Company nor any of its subsidiaries had purchased, sold or redeemed any of the Company's listed shares.
COMPLIANCE WITH THE CODE OF BEST PRACTICE
No Director of the Company is aware of information which would reasonably indicate that the Company was not in compliance with the Code of Best Practice, as adopted by the Company, at any time during the six months ended 31st December, 1997.
CLOSURE OF REGISTER OF MEMBERS
The Register of Members will be closed from 7th April, 1998 to 15th April, 1998, both days inclusive, during which period no transfer of shares can be effected.
In order to qualify for the above dividend, all share transfers accompanied by the requisite share certificates must be lodged with the Company's Branch Share Registrars in Hong Kong, Central Registration Hong Kong Limited, at 17th Floor, Hopewell Centre, 183 Queen's Road East, Hong Kong, for registration not later than 4:00 p.m. on 3rd April, 1998.
By Order of the Board
Doris W. N. Wong
Hong Kong,20th March, 1998
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