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 1998 was HK$7,260 million, a decrease of 48.7 per cent compared with last year's profit of HK$14,160 million. Earnings per share for the year was HK$3.04, compared with HK$5.93 for the previous year. The earnings are calculated after taking into account a provision for the diminution in value of property development projects and long term investments amounting to HK$4,700 million.

Dividends

The directors have recommended the payment of a final dividend for the year ended 30th June 1998, of HK$0.60 per share. Together with the interim dividend of HK$0.60 per share, the total dividend for the full year is HK$1.20 per share, representing a decrease of 48.9 per cent when compared with the previous year. To give shareholders the opportunity of increasing their investment in the Company's shares, they will be entitled to elect to receive a scrip dividend alternative. Particulars of the scrip dividend will be mailed to shareholders on or about 16th November 1998, and elections will be required to be made by 7th December 1998.

Sales

During the year ended 30th June 1998, total property sales generated by the Group, both as principal and as agent, amounted to HK$25,916 million, an increase of 14 per cent over the previous year. Major projects marketed during the period included Botania Villa in Tuen Mun, Grand Del Sol in Yuen Long, Chelsea Heights in Tuen Mun, Symphony Bay in Sai Kung, Mount Haven in Tsing Yi, and Hillview Court in Clear Water Bay. It is encouraging that property sales for the past two months amounted to over HK$4,000 million.

During the year under review, the Group completed the following ten projects, with an attributable gross floor area of 2.6 million square feet:

Over 90 per cent of the residential units completed during the year have been sold. Completions for the year are lower than scheduled, primarily due to poor weather conditions, which delayed the construction progress of Villa Concerto of Symphony Bay in Sai Kung and Chateau Royale in Tai Po. The Group will retain the shopping centre at International Finance Centre Phase 1 as a long term investment. A small portion of Peninsula Tower has been sold, and the remainder, which has been virtually fully leased, will be held for long term investment.

Land Bank

Since the last financial year, the Group has added four sites to its land bank, with a total of 2.5 million square feet of attributable gross floor area, through land use conversion and public tender.

* Land premiums for these sites are still under negotiation.

The Group currently owns a total land bank of 50.6 million square feet in terms of attributable gross floor area in Hong Kong, consisting of 17.6 million square feet of completed investment property and 33 million square feet of property under development. The majority of the property under development will be for residential use. Land premiums for a number of properties under development are still being negotiated. The Group also owns 19 million square feet of agricultural land in the New Territories, the majority of which is in the process of land use conversion.

Review

Sharp currency devaluations and the economic downturn in most Asian countries have significantly affected Hong Kong's service sectors. Tightened liquidity in the market amid the Asian financial turmoil has depressed both domestic demand and consumer and investor confidence, resulting in a rising jobless rate and a substantial fall in equity and property values. The impact on the Hong Kong economy has been pronounced. The Group supports the SAR Government's determination and its actions to maintain the Hong Kong dollar peg, and we have full confidence in the Government's ability to defend the linked rate. As the severity of the Asian financial turmoil has lessened and interest rates in external markets stabilised, Hong Kong dollar interest rates have gradually returned to more normal levels.

Property Development

Residential property prices have fallen by more than half since October last year, back to the same level as in 1992. With this significant price drop, homebuyers have seen the greatest affordability in seven years, and any further downside in prices is expected to be very limited. Recent negative economic growth, increased unemployment and volatile interest rates have weakened homebuyers' confidence, and monthly residential transactions have slowed accordingly in the past few months. However, this low level of market activity means that pent-up demand is building up. The Group welcomes recent Government measures to stabilise the property market. Relaxation of some of the regulations under the pre-sale consent scheme has improved market efficiency. The quota for families eligible under the Home Starter Loan Scheme and the Home Purchase Loan Scheme has increased to 22,000, enabling more families to purchase property. This, together with the expected decline in mortgage interest rates, has exerted a positive influence on the housing market.

The supply of new private residential units in the coming year is expected to be in line with the average over the past ten years. The supply after 1999 is expected to decline as a result of the difficult market and liquidity conditions in Hong Kong at present. This adjustment in future supply should provide good support for residential property prices. Despite the current tough market, fundamental long term demand remains positive. Rapid population growth is also expected, from the current 6.6 million people to 8.1 million by the year 2011, and there are increasing aspirations for better housing. The Group remains optimistic about the prospects for the residential property market.

In the coming financial year, the Group expects to complete properties with a total attributable gross floor area of 5.3 million square feet as follows:

The Group will continue with its business strategy of diversifying into different types of property, and will focus on large-scale developments with an emphasis on small and medium-sized units. It will provide premium-quality properties with comprehensive facilities, quality management and special attention to customer service. Given current market conditions, the Group will adopt a flexible approach and maintain a close watch on the market. With its highly experienced management team, I am confident that the Group will be able to take the necessary action based on market developments, and will selectively acquire additional land at the appropriate time.

Construction will soon begin on a number of large-scale infrastructure projects in Hong Kong including the West Rail, MTR Tseung Kwan O Extension and Ma On Shan Railway. The Government is also actively planning new road links between major new towns to further improve the transport network. This will benefit the long term development of the New Territories.

Property Investment

The Group's investment portfolio is 95 per cent let, with gross rental income for the year amounting to HK$5,650 million, an increase of 14.6 per cent over the previous year. Rental income is expected to be stable in the coming year. During the year, both Grand Century Place in Mongkok and East Point City Shopping Centre in Tseung Kwan O opened for business and were fully leased.

The Group has a 47.5 per cent interest in International Finance Centre Phase 1. The development comprises a 38-storey office building of 784,000 square feet and a shopping centre of 131,000 square feet. It is prominently located near the waterfront in the core business district in Central, and is fully integrated with the new Hong Kong Station on the Airport Express line. The first floor of retail space opened in September and is fully let, and the second and third floors are due to open in November. The office building, which is scheduled for completion by the end of 1998, features a unique interactive design and intelligent infrastructure to cater to the needs of financial institutions and other discerning multi-national companies. Construction of another 88-storey office tower is planned to commence in the second half of 2000.

The Millennium City Phase 1 office development in Kwun Tong was completed in September this year. Of the total 1.23 million square feet, 300,000 has been sold. The remaining 930,000 square feet is being retained for investment, and leasing is progressing very satisfactorily. This project and the International Finance Centre Phase 1, to be completed by the end of the year, will further strengthen the Group's recurrent income base.

The Group initiated a variety of promotional activities to further increase business in its malls. Its SHKP Club issued a co-branded credit card in order to stimulate consumer spending at its shopping centres. As the Group's retail portfolio is located primarily in the new towns, the rents are more resilient to the effects of the current economic downturn.

The Group regularly renovates its shopping centres in order to enhance their quality and raise rental value. About 90,000 square feet in New Town Plaza in Shatin, previously occupied by a Japanese department store, was renovated and is now fully let. This shows that despite current market conditions, prime shopping centres are still in high demand. The Group will continue to develop new investment properties, in order to strengthen its recurrent income, and will consider selling some of its non-core investment properties.

Hotel Business

The currency devaluations and economic downturn in Southeast Asian countries over the past year have resulted in a decline in tourist arrivals. The Group's Royal Garden and Royal Park Hotels achieved average occupancy rates of 82 and 76 per cent respectively during the year, while average room rates have declined. The Royal Plaza Hotel, which opened for business in October 1997, has achieved steadily increasing occupancy rates, and recorded an average occupancy of 67 per cent in recent months. Measures are being taken to reduce operating costs in these hotels. Although the tourism and hotel industries are facing a difficult environment, tourist arrivals in recent months have increased over last year.

Infrastructure and Transportation

SmarTone reported encouraging results for the 1998 financial year. The subscriber base was 523,000 as of 30th June 1998, a 37 per cent increase over the previous year. The acquisition of a PCS network in the year has enabled the company to increase its capacity and further broaden its customer base by targeting different market segments. SmarTone will continue to provide a good quality network and premium customer service. The Group is optimistic about SmarTone's business outlook, and it will maintain its stake in SmarTone as a strategic long term investment.

Kowloon Motor Bus Holdings Limited continued to show earnings growth during the year. The company opened new routes to the new town Tung Chung and the new airport, and is expected to continue to provide steady recurrent income to the Group.

The Route 3 (Country Park Section) opened ahead of schedule, in May this year. The new road forms a vital part of the territory's transport network, linking the northwestern New Territories to the city, and the flow of traffic has been steadily increasing since the opening.

The Airport Freight Forwarding Centre, in which the Group has a 65 per cent interest, started smooth operations in July 1998, before the opening of the two air cargo terminals. Approximately 70 per cent of the Centre's 1.3 million square feet of cargo handling space and 175,000 square feet of office space has been leased.

Construction of the River Trade Terminal in Tuen Mun is progressing smoothly. The first phase operating area is expected to commence service this month, meeting the demand from increasing river trade business. The entire project is scheduled for completion by the end of 1999.

All of the Group's infrastructure projects are in Hong Kong. These are low-risk investments, and will continue to provide steadily growing recurrent income to the Group. Long term financing for these projects is already in place.

Mainland China Business

With the open door policy and economic reforms expected to continue, long term prospects for the Chinese economy remain positive. The Group will continue with its prudent policy towards investing in China. Current investments in China amount to two or three per cent of the Group's total assets, and are focused on property projects in three major cities: Beijing, Shanghai and Guangzhou. Most developments will be retained for rental.

The shopping centre in Sun Dong An Plaza, Beijing, opened in January 1998. The 1.3 million square feet of retail space is fully let, and leasing of the 430,000 square feet of office space is underway. The second phase of Glorious City Garden in Guangzhou was recently launched for sale. About 500 units were offered for sale, and 95 per cent of these were sold.

Corporate Finance

The Group will continue to adhere to its prudent financial policy of maintaining strong working capital and a low level of debt. The Group improved its financial position during the year under review. As of 30th June 1998, net debt had been reduced to about HK$20,300 million and the gearing ratio (net debt to shareholders' funds ratio) fell to below 18 per cent.

The Group has substantial net recurrent income in excess of HK$ 6,000 million annually, and pre-sales of residential properties will further increase its cash flow. The Group has no major firm financial commitments for land acquisitions or premium payments, and planned capital expenditure in the coming year is expected to be low. Forthcoming property pre-sales, including Waterfront South in Aberdeen, Villa Esplanada Phase 2 in Tsing Yi and the residential projects in Chung On Terrace in North Point and Ha Yau Tin in Yuen Long, will further enhance the Group's strong liquidity position.

Despite tightened liquidity in the market, all the Group's matured bank lines have been renewed since the beginning of the financial crisis last October. The Group has also been able to secure fresh loan facilities. It has substantial committed and undrawn facilities for standby purposes. With virtually all of its borrowings denominated in Hong Kong dollars, the Group's foreign exchange exposure is negligible. In terms of the Group's debt maturity profile, over half of its borrowings exceed three years. The Group's foreign currency credit rating is A3 (Moody's) and A (Standard & Poor's), the same as Hong Kong's sovereign debt rating.

Customer Service

The Group places a great deal of emphasis on customer service. The SHKP Club, established to improve two-way communication with its customers, presently has over 50,000 members. The Club recently issued the Citibank SHKP Club co-branded card with special privileges for members. In their efforts to provide a better environment and standard of living, our property management subsidiaries, Kai Shing and Hong Yip have further strengthened the quality and variety of their services. Both companies received various territory-wide management awards during the year.

At the same time, the Group introduced the "New Home Expo" in one of its shopping centres, allowing customers to view a variety of show flats and access a comprehensive range of property-related information under the same roof. Response has been very encouraging.

Prospects

On 1st July 1997, Hong Kong was smoothly reunified with China, and since then we have seen the "One Country, Two Systems" principle successfully implemented, and a high degree of autonomy for the territory. The Group has full confidence in the long term development prospects for the mainland and Hong Kong.

Past experience shows how resilient Hong Kong is, and how it became stronger from earlier setbacks. Notwithstanding the current downturn, Hong Kong's economic fundamentals remain solid, particularly in the banking sector, which is strong and healthy. These factors, coupled with the current downward adjustments in prices and wages, should place the territory in a better position to recover once the overall worldwide situation improves. In the long term, Hong Kong should improve its competitiveness as an international centre for trade, finance and business. With increased infrastructure development and stable consumer spending, mainland China is expected to grow steadily, and this positive environment should provide Hong Kong with the strength to overcome the economic difficulties that we are now facing.

The Group will continue to focus on property development and investment in Hong Kong, reducing risk through diversification of property usage and location. The Group's land bank for property development consists largely of sites located along existing or future rail lines. The majority of the planned residential developments will be large-scale to reduce construction costs, with small and medium-sized units. The Group will continue to improve the quality of its properties and its customer service. With a net recurrent income base in excess of HK$6,000 million annually, the Group's recurrent revenue will be further strengthened through additional income from newly completed investment properties and infrastructure projects in Hong Kong. The adoption of effective cost control measures and prudent financial management will continue.

The Group's solid financial position, with high liquidity and low gearing, will enable it to weather the current unfavourable economic climate. Over the past few decades Hong Kong has seen economic downturns. But with its substantial resources and the faith it has in Hong Kong, the Group has always braved the storm to capitalise on the new opportunities that arise in its wake, becoming stronger after the turbulence. The Group is well prepared for the coming recovery and is in an excellent position to pursue new investment opportunities at the appropriate time. I am fully confident in the Group's long term development.

Mr Ho Wing-sun, one of the Company's non-executive directors, retired in June 1998. He has served the Group for over 25 years and has made a substantial contribution to its growth. On behalf of the board, I would like to thank Mr Ho for his valuable contributions.

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, 15th October 1998

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