Chairman's Statement

I am pleased to present my report to the shareholders:

Results

The Group's profit after taxation and minority interests for the year ended 30th June 2001 was HK$8,330 million, compared with last year's profit of HK$10,822 million. Earnings per share for the year was HK$3.47, compared with HK$4.51 for the corresponding period last year. A one-off gain of HK$2,688 million arising from the spin-off of SUNeVision Holdings Limited was included in last year's results. Excluding that gain, profit for the year under review shows a year-on-year growth of 2.4 per cent.

Dividends

The Directors have recommended the payment of a final dividend of HK$1.00 per share for the year ended 30th June 2001. Together with the interim dividend of HK$0.55 per share, the total dividend for the year is HK$1.55 per share, compared with HK$1.75 per share for the previous year.

Review

Sales

During the year ended 30th June 2001, total property sales generated by the Group, both as principal and agent, amounted to HK$19,641 million, an increase of 102 per cent over the previous year. Major projects sold during the period included The Leighton Hill in Happy Valley, Oscar by the Sea in Tseung Kwan O, The Parcville in Yuen Long, Royal Peninsula in Kowloon, The Belcher's Phase 2 in western Mid-Levels and Villa Esplanada Phase 3 in Tsing Yi.

During the year under review, the Group completed the following 11 projects, with an attributable gross floor area of about 4.1 million square feet:

More than 85 per cent of the residential units completed during the year have been sold. The shopping centres in Chelsea Heights, The Belcher's and Ocean Shores, as well as Shouson Place and MEGA-iAdvantage, are being retained as long-term investments.

Land Bank

During the year, the Group added a total of 5.3 million square feet of attributable gross floor area to its land bank through various means including public auction and tender:

The Group currently owns a land bank of 54.1 million square feet in Hong Kong, in terms of attributable gross floor area. It consists of 19.3 million square feet of completed investment properties and 34.8 million square feet of properties under development. The Group also owns 22 million square feet of agricultural land in the New Territories, primarily along existing or planned railway lines, the majority of which is in the process of land use conversion.

Property Development

Transaction volume in Hong Kong's residential market was affected by the recent terrorist attacks in the United States, after a modest improvement in the first eight months of 2001. Market sentiment has been weak, affected by the economic slowdown, rising unemployment rate and the significant decline in the Hong Kong stock market in the past two months. However, recent positive Government measures for the housing market and eight consecutive interest rate cuts totalling 3.5 per cent this year have helped to strengthen market fundamentals.

Affordability for home buyers is now the most favourable in the last 13 years, with residential prices currently at early 1992 levels. In addition, attractive financing packages offered by banks, the lowest mortgage rates on record and a significant increase in the number of Government-subsidized housing loans have underpinned market demand. Higher rental yields relative to mortgage interest rates have resulted in more people opting to buy flats instead of renting accommodation. It is expected that as confidence in the economy improves, the demand for housing will increase accordingly.

The Group's strategy is to increase the completion of residential units for sale over time in order to meet market demand, with a focus on developing large-scale, premium-quality projects with comprehensive facilities. It will continue to offer home buyers a wide range of flat sizes, with an emphasis on small-to-medium units. To meet the objective of raising production volume and enhancing value for shareholders, the Group will add to its land bank through various means when appropriate. Conversion of agricultural land into the Group's development land bank is continuing.

The Group's aim has always been to build ideal homes for its customers. As home buyers have become more selective, the Group is raising standards even higher in order to enhance its brand name for quality and strengthen its market-leading position. A variety of measures adopted during the year will allow the Group to surpass its achievements in areas such as project quality, customer care and management service. Reinforcement of the Group's brand name and stringent controls over construction costs should help to improve project returns.

In the coming financial year, the Group expects to complete 4.6 million square feet of gross floor area in attributable terms:

* less than 0.1 million sq ft

Property Investment

The Group's property investment portfolio generally performed well during the year, although leasing demand for commercial properties has softened since early 2001. Overall occupancy of investment properties owned by the Group remained high at 95 per cent. Gross rental income during the year under review, including the Group's share of jointly controlled entities, increased by 3.7 per cent over the previous year to HK$5,877 million.

To bolster recurrent income, the Group is actively developing a number of new, superior-quality investment property projects. At the same time, it will also review its rental portfolio constantly, with the intention of disposing of some non-core properties to maintain an optimal investment portfolio.

Following the success of One International Finance Centre (IFC), which is fully let, construction of Two IFC is under way. It consists of a 1.95 million square-foot, state-of-the-art office building, 500,000 square feet of prime shopping space, a 1.1 million square-foot six-star hotel complex and 140,000 square feet of landscaped garden. IFC is strategically located on the Central waterfront, right above the Airport Railway Hong Kong Station, with spectacular views of Victoria Harbour. The hotel complex will include one 400-room tower and another 600-room tower for long-staying guests, and it will be managed by Four Seasons Hotels and Resorts, a leading international luxury hotel operator. This will be the first Four Seasons-branded property in Hong Kong. With its ultra-modern office towers designed with interactive technology, IFC will serve as a truly international business and financial hub. The office tower in Two IFC will be completed by the end of 2003, and the shopping centre is expected to open in the first half of 2003. The entire IFC complex will be completed in phases by 2004. The Group has a 47.5 per cent interest in the project.

Kowloon Station Development Packages 5, 6 & 7 are situated right above Kowloon Station on the Airport Express Railway, at the heart of the future commercial and cultural hub of Hong Kong. With 4.7 million square feet attributable to the Group, the entire project comprises office, hotel, residential and serviced apartments, as well as retail space. Foundation work has already begun, and the whole project is scheduled for completion in phases between 2005 and 2007. Airport Railway Kowloon Station Development Packages 3, 5 & 6 will provide a total of two million square feet of residential property available for pre-sale in about two years' time.

Given its prime location in the centre of Kowloon East, Millennium City has become one of the major commercial developments in Hong Kong. With the success of Phases 1 and 2, which are both fully let, Phase 3 is under construction, with occupation scheduled for the second half of 2002.

With Hong Kong serving as an international hub for business, finance, trade and tourism, and China's entry to the WTO, the demand for top-quality office space is expected to remain solid. At the same time, the Group is taking various steps to enhance rental values in its shopping centres. In addition to regular renovations and refurbishment, promotional programmes are also staged in the shopping centres, particularly during weekends and public holidays, to boost pedestrian flows and consumer spending.

Information Technology and Telecommunications

SUNeVision

SUNeVision's business has been progressing well since the listing in March 2000. The company generated total revenue of approximately HK$198 million during the financial year ended June 2001, and achieved a positive gross margin in the second quarter of 2001. This performance primarily reflects a growth in revenue from the Internet infrastructure business and the company's success in carefully controlling costs in a tough operating environment. Leasing of iAdvantage's data centres in Hong Kong has been satisfactory, and other business units have made steady progress during the year.

The company is reviewing its business strategy and will focus on operations with growth potential. At the same time, it will prudently manage its balance sheet and tightly control operating costs and capital expenditure. SUNeVision has cash and marketable bonds totalling HK$1,870 million. With the full support of its parent company and commitment of its experienced management, SUNeVision will become more competitive by operating more efficiently and cost-effectively, and it is well positioned to pursue new investment opportunities when appropriate.

SmarTone

The telecommunications market remained highly competitive, and SmarTone reported a loss for the year, mainly due to the start-up investment required for its broadband business and other provisions. SmarTone expanded its customer base to 980,000 during the year, laying the foundation for future growth. Mr Douglas Li rejoined the company as CEO in July 2001, and he will lead SmarTone forward in its commitment to offering superior service to its customers. Through effective execution, the company will deliver a total service offering, achieving operational efficiencies and controlling costs. SmarTone Macau was launched in August 2001, offering a high-quality network and superior customer service.

SmarTone was provisionally awarded a 3G licence in Hong Kong in September 2001 at the reserve price of five per cent royalty rate. This will allow the company to provide its customers with wireless broadband and personalized services, with multi-media contents. SmarTone conducted the first successful 3G trial in the greater China region in 1999, giving it a head start in the industry.

With its leading market position, solid customer base and strong cash reserves of HK$3,478 million, the company will be able to leverage its strengths in any opportunities for consolidation that may arise. The Group is confident in SmarTone's future growth and prospects, and is committed to holding the company as a long-term strategic investment.

Transportation and Infrastructure

Kowloon Motor Bus

Kowloon Motor Bus (KMB) had a good year in 2000, with net profit increasing 15.7 per cent. Operating efficiency continued to show improvement, and there were increases in new bus routes and passenger volume. The company aims to maintain its market-leading position by providing a high standard of user-friendly bus services, ensuring total customer satisfaction. The relocation of KMB's Lai Chi Kok bus depot to the West Kowloon reclamation will further enhance the efficiency and reliability of the fleet. The new depot will be purpose-built to provide advanced support service for KMB's modern fleet, and it is scheduled for completion by the end of 2001. KMB will continue to look for ways to diversify business in the bus transportation industry in Hong Kong and on the Mainland.

RoadShow Holdings Limited, a 73.3 per cent owned subsidiary of KMB, is a leading out-of-home media sales company in Hong Kong. The company provides multi-media on-board services to a captive transit vehicle audience base. It also engages in transit network media sales and merchandising. RoadShow was listed on the main board of the Hong Kong Stock Exchange on 28 June 2001, raising net proceeds of HK$534 million.

Other Infrastructure Business

Route 3 (Country Park Section) performed well this year. The toll for the Tai Lam Tunnel was increased in April 2001, and traffic volume remained satisfactory despite slower economic growth. It is expected that the development of new towns in the northwest New Territories and increasing trade between the Mainland and Hong Kong will result in growing traffic on the toll road.

The volume of cargo handled at the River Trade Terminal has been expanding since it commenced operation, and the Airport Freight Forwarding Centre continued to operate smoothly.

Through its 28.5 per cent interest in Asia Container Terminals Limited, the Group is participating in the development of two berths in Container Terminal 9. The project financing is already in place. Completion is scheduled in phases during 2003 and 2004.

All of the Group's infrastructure projects are in Hong Kong, and will provide quality cash flows and recurrent income over the long term.

Hotel Business

With increased incoming tourists, overall occupancy in Hong Kong's hotel sector remained at relatively high levels during the year. Performance of the Group's three hotels was encouraging. The average occupancy rate for the hotels not only registered a high of 85 per cent, room rates also increased during the year.

The Group is now developing six-star hotel facilities at both Hong Kong and Kowloon stations on the Airport Express Railway. With Hong Kong being a regional hub for tourists, the Government's initiatives to boost tourism, an anticipated increase in business travellers amid China's entry to the WTO and Beijing's successful bid to host Olympic Games in 2008, the Group's hotel portfolio is well positioned to take full advantage of forthcoming business opportunities.

Mainland China Business

With robust economic growth on the Mainland, performance of the Group's property investment portfolio in Beijing and Shanghai was satisfactory during the year. Sun Dong An Plaza in Beijing recorded 95 per cent overall occupancy, and Central Plaza in Shanghai was 93 per cent let.

China will continue to offer enormous business and investment opportunities to local and overseas investors, particularly after its entry to the WTO. With the success of ongoing housing reform in China, the Group will take advantage of the opportunities presented by investing selectively in the China property market in Beijing, Shanghai, Guangzhou and Shenzhen.

Corporate Finance

The Group's financial position remains strong, with low gearing and high interest coverage. Its net debt to shareholders' funds ratio as at 30 June 2001 was 15.8 per cent, and it has abundant undrawn banking facilities on a committed basis to finance future business expansion. All the Group's credit facilities are unsecured. Exposure to foreign currency risk is negligible, given that the vast majority of its borrowings are denominated in Hong Kong dollars.

In line with the Group's policy of lengthening its loan maturity profile, it successfully arranged two seven-year syndicated loans with a number of leading local and international banks in 2001. The market response was overwhelming, and an aggregate HK$15,300 million revolving credit and term loan facility was established to refinance short-term debt and for use as general working capital. The Group also broadened its funding base through issues of fixed and floating rate notes under its EMTN programme amounting to HK$2,150 million since July 2000, with tenors ranging from three to eight years.

During the year, the Group's credit rating outlook from Moody's was upgraded from stable to positive, in line with that of the Hong Kong Government's sovereign ceiling. The Group will adhere to its conservative financial management policies by maintaining low gearing and high liquidity.

Customer Service

Customer care is a top priority for the Group, and it is constantly looking for new ways to improve the quality of its products and services. The Group's Service Excellence Programme provides extensive and ongoing training to front-line staff in order to raise the quality of customer service.

The Group's property management subsidiaries Hong Yip and Kai Shing consistently receive accolades for their management service, and the companies won over 30 awards from a variety of organizations during the year. Both companies continue to extend the use of information technology in property management and building services, monitoring facilities via the Internet. They are also environmentally conscious, encouraging recycling and conservation to reduce the amount of waste produced by the properties they manage.

Membership in the SHKP Club continues to grow, and it now exceeds 140,000. The Club offers members complete service and a wide range of leisure and property-related activities. Building on the success of initiatives such as the Show Flat Preview Loyalty Scheme, the Club introduced various new benefits and services for members during the year, including a Buyer Reward Programme. The Club will continue to attract new members and promote two-way communication with the public through various means.

Prospects

China continues to show impressive growth, with ongoing economic reforms. Its anticipated accession to the WTO will add further momentum to its economic progress. Beijing's successful bid to host the Olympic Games will not only translate into greater economic expansion during the run-up to 2008, it will also strengthen both domestic and international confidence in China. All these favourable developments on the Mainland should benefit Hong Kong's economy and property market over time, as the territory serves as a gateway to China.

The September attack in the United States has undoubtedly shocked global financial markets and the world economy, but the negative impact is likely to be short term. Given persistently low interest rates and continuing growth on the Mainland, Hong Kong is well equipped to deal with the current challenges.

Despite challenging economic conditions, home buyers' confidence should improve following the suspension of HOS sales until June of next year and the current review of the institutional framework for public housing. These factors, along with the desire to own property, very favourable affordability for home buyers and relaxed mortgage financing, are expected to bolster the demand for residential property. New supply in the pre-sale market is likely to remain steady next year, and there is a high likelihood that it will fall in the medium term. In light of all these, the residential market should become active once the shock of recent events in America subsides.

The Group has witnessed various major economic ups and downs over the past few decades, and each of these downturns invariably brought the Group considerable investment opportunities. With its experienced management team and strong financial position, the Group believes that the current residential market will provide opportunities for business expansion and long-term growth. We are confident that the Group will be an even stronger property company with the advent of a recovery in the market.

The Group will continue efforts to strengthen its property business in Hong Kong. It will build more residential developments for sale in the next few years to meet expected demand. It will also develop a number of landmark investment properties to increase recurrent income. Concurrently, the Group will dispose of some non-core investment properties in order to maintain an optimal mix in its rental portfolio and improve the return on assets.

With a focus on maintaining its leading position in the present challenging business environment, the Group will continue to develop premium products and provide quality service, making its properties customers' first choice. To further enhance competitiveness, the Group will take steps to strengthen its brand name and control costs, but without compromising on quality. The aim is to increase returns and enhance shareholder value.

Given the promising outlook for China's economy, the Group is actively seeking business opportunities in the Mainland property market to take advantage of growing prospects in that sector over the long term. The Group will bring its strong brand name and successful Hong Kong experience to Mainland China, and it is confident that it will further develop the market there.

Proceeds from upcoming pre-sales and substantial recurrent rental income will further enhance the Group's cash flow. The Group will continue to launch new projects for pre-sale according to schedule, and major projects to be marketed in the next nine months include Park Central in Tseung Kwan O, Villa by the Park in Yuen Long, 71 Mount Kellett Road on the Peak and Park Island on Ma Wan.

Approximately 75 per cent of the residential properties to be completed in the coming financial year have been pre-sold, and barring unforeseen circumstances, the Group's results for the coming year will show satisfactory growth.

Appreciation

Sir Sze-yuen Chung was appointed as an Independent Non-Executive Director of the Company in March this year. His broad experience and knowledge of business and public affairs will benefit the Group's future business development.

Independent Non-Executive Director Dr Ho Tim retired from the board in March this year after more than 28 years of service. Throughout this time, he has made a considerable contribution to the Group's growth, and on behalf of the board, I would like to thank Dr Ho for his valuable efforts and dedication.

Executive Director Mr Law King-wan will soon retire after over 30 years of service, staying on as a Non-Executive Director. I wish to thank Mr Law for his substantial contribution to the Group's development, and for his commitment and loyalty.

I would also like to take this opportunity to express my gratitude to my fellow directors for their guidance, and to all the staff for their dedication and hard work.

Kwok Ping-sheung, Walter
Chairman & Chief Executive

Hong Kong, 27th September 2001

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