HONG KONG AIRCRAFT ENGINEERING COMPANY LIMITED

Results for the six months ended 30th June 1997 - unaudited:


Exceptional Item

The exceptional item in 1996 relates to the formation, with a wholly-owned subsidiary of Rolls-Royce plc, of a 50/50 joint venture company, Hong Kong Aero Engine Services Limited. In recognition of the volume of business and relevant interests brought to the venture by the Company, Rolls-Royce plc paid the Company HK$155.0 million.

Interim Dividend

An interim dividend of HK$0.26 (1996: HK$0.26) per share has today been declared and will be paid on 29th September 1997 to shareholders registered at the close of business on 19th September 1997. The share register will be closed from 15th September 1997 to 19th September 1997, both dates inclusive.

Taxation

The taxation charge comprises Hong Kong profits tax calculated at 16.5% (1996: 16.5%) on estimated assessable profits.

Share Capital

During the period under review, no purchase, sale or redemption of the shares of the Company has been effected by the Company or any of its subsidiary companies.

Corporate Governance

None of the directors of the Company is aware of any information that would reasonably indicate that the Company is not, or was not for any part of the accounting period covered by the interim report, in compliance with the Code of Best Practice as set out in the Listing Rules of The Stock Exchange of Hong Kong Limited.

CHAIRMAN'S STATEMENT

Results

The Company's profit attributable to shareholders for the first half of 1997 was HK$179.6 million, in line with that for the same period in 1996. Revenues and operating profit were lower as a result of the transfer of the Company's engine overhaul business on 1st January 1997 to Hong Kong Aero Engine Services Limited (HAESL), on the commencement of that company's operations. Operating margins have remained stable in the first half of the year, with productivity improvements helping to offset the continuing adverse impact of Hong Kong inflation. Net finance income for the first six months of the year was at a similar level to that for the first half of 1996. Contributions from associated companies increased, with a positive contribution from HAESL and an improved performance from Taikoo (Xiamen) Aircraft Engineering Company Limited (TAECO).

Your directors have declared an interim dividend of HK$0.26 per share, unchanged from that declared in 1996.

Operations

The number of aircraft movements handled by the Company at Kai Tak increased by 6.2% as compared to the first half of 1996, which gave rise to an increase in line maintenance revenues.

The Company's airframe maintenance facilities were well utilised during the period, with scheduled maintenance checks on the Cathay Pacific Airways fleet accounting for a major portion of the work. There were no significant changes in the composition of that fleet during the first half of the year. A 'D' Check and Section 41 rectification work was completed on a Boeing 747 freighter with refurbishment on further Boeing 747 aircraft being performed in TAECO. Scheduled checks were also carried out on the aircraft operated by Dragonair and Air Hong Kong.

Heavy maintenance work packages were completed in the first half of the year on aircraft for Continental Airlines, Evergreen International Airlines and Virgin Atlantic, whilst extensive checks were also undertaken for American Trans Air, Air Macau, Sichuan Airlines, Philippine Airlines, Polar Air Cargo and TransAsia Airways.

TAECO, the Company's associate in Xiamen, China, has continued to make satisfactory progress and, in addition to work for Cathay Pacific Airways, completed major packages of work in the first half of 1997 for Japan Airlines, Singapore Airlines, Air Hong Kong, Northwest Airlines and South African Airways. TAECO made a small profit in the first half of the year.

TAECO has recently committed to the construction of a second two-bay hangar and backshops, adjacent to the current hangar, at an estimated cost of US$50 million. It is anticipated this facility will be operational in early 1999.

On 1st January 1997 HAESL commenced operations, initially at the Company's former engine overhaul base at Kai Tak. The company has, during the first half of the year, moved partially to Phase 1 of a three-hectare site at Tseung Kwan O on completion of construction of a large-fan engine test cell and module change facility. Phase 2 of this project, which will comprise module repair and general workshops, is now under construction, and is estimated to be complete in the second quarter of 1998. The company made a positive contribution in the first half of the year.

A five-storey building on a one-hectare area adjacent to the HAESL site at Tseung Kwan O is under construction by the Company to provide certain component and avionics overhaul services as well as administration offices. This is also scheduled for completion in the second quarter of 1998.

Construction of a single hangar at Chek Lap Kok, capable of fully enclosing three widebody aircraft, and associated backshops is well advanced, and on target to meet an anticipated airport opening date in April 1998.

Prospects

The Company continues to produce timely, high-quality work, and it is well-positioned to compete effectively at Chek Lap Kok. The balance of the year will remain challenging, but I expect that the profit attributable to shareholders before exceptional items for the full year will be broadly in line with that for 1996.


D M Turnbull
Chairman

Hong Kong, 5th August 1997

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