Sun Hung Kai Properties Limited
Chairman's Statement 1998-1999

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 1999 was HK$9,278 million, an increase of 28 per cent compared with last year's profit of HK$7,260 million. Earnings per share for the year was HK$3.87, representing an increase of 27 per cent compared with HK$3.04 for the previous year.

Dividends

The Directors have recommended the payment of a final dividend for the year ended 30th June 1999 of HK$1.05 per share. Together with the interim dividend of HK$0.50 per share, the total dividend for the full year is HK$1.55 per share, representing an increase of 29 per cent when compared with the previous year.

Review

Sales

During the year ended 30th June 1999, total property sales generated by the Group, both as principal and as agent, amounted to HK$21,904 million, compared with last year's sales of HK$25,916 million. Major projects marketed during the period included Scenic View in Ngau Chi Wan, Grand Horizon in Tsing Yi, Castello in Shatin, Le Sommet in North Point, Chelsea Heights Phase 2 in Tuen Mun and The Belcher's Phase 1 in Mid-Levels West.

During the year under review, the Group completed the following twelve projects, with an attributable gross floor area of about 5 million square feet:

* Retained for investment, except 300,000 square feet of Millennium City Phase 1, which was sold to an end-user.

Approximately 95 per cent of the residential units completed and marketed during the year have been sold.

Land Bank

During the year, the Group added a total of 3.8 million square feet of attributable gross floor area to its land bank through land use conversion and other means:

In addition, the Group recently acquired two other sites, 418A Kwun Tong Road and AIL 129 in Ap Lei Chau. The Group owns 100 per cent of the Kwun Tong site, which has a developable gross floor area of 133,000 square feet for office use. The Group has a 35 per cent interest in the Ap Lei Chau site, which has an attributable gross floor area of 316,000 square feet that it plans to change to residential use.

At the end of the year under review, the Group owned a land bank of 50.6 million square feet in Hong Kong, in terms of attributable gross floor area. This consisted of 18.5 million square feet of completed investment properties and 32.1 million square feet of properties under development. The Group also owns 21 million square feet of agricultural land in the New Territories, the majority of which is in the process of land use conversion.

Property Development

Following the economic downturn in 1998, Hong Kong's economy started to register positive growth in the second quarter of 1999. Total exports started to rebound and the number of visitors grew continually. At the same time, consumer sentiment began to strengthen, the unemployment rate moderated and liquidity improved with stable interest rates.

After the significant drop in 1998, property prices have stabilized and are now within reach for the majority of families. This, coupled with the pronounced reduction in mortgage rates, means that affordability is at its highest in eight years. The residential property market is now healthier, driven by end-user demand, with virtually no speculative activity. Banks are enthusiastic about residential mortgage financing, offering competitive, attractive terms to homebuyers. The Government also continued to encourage home ownership by providing subsidized loans to first-time buyers. All this, together with improved economic prospects and stabilized interest rates, has had a positive influence on the housing market.

The Group will continue to focus its property business in Hong Kong, with an emphasis on large-scale projects containing small and medium sized residential units to meet market demand. The Group will also incorporate new technologies in its developments, while constantly improving its quality and comprehensive facilities for residents. The Group will continue to increase the volume of its residential completions in the next few years, while stringently controlling costs to enhance development returns. In the next financial year, the Group expects to complete properties with an attributable gross floor area of 4.4 million square feet as follows:

The Group will continue to increase its land bank through various means. Some industrial sites will be converted into other uses, such as residential, service apartments and offices. Conversion of agricultural land to residential use will continue to be the major source of land for new developments, and the Group is now actively negotiating with the Government on land conversion and land premiums. Most of these properties are located near future railway stations, and with the construction of various large-scale infrastructure projects, the New Territories has great development potential.

Property Investment

As the Group adheres to its flexible approach to leasing, its investment property portfolio is 95 per cent let. Despite the rental market adjustments over the past one and a half years, gross rental income for the year, including the Group's share in jointly controlled entities, saw only a one per cent decline from the previous year to HK$5,801 million. The minimal decline was due to an additional 1.3 million square feet of newly-completed investment properties, along with the relative resilience of the Group's shopping centres, as the majority are in the new towns, primarily offering daily necessities to nearby residents.

The Group has a 47.5 per cent interest in One International Finance Centre, strategically located above Hong Kong Station on the Airport Railway, on the waterfront in the core of Central. The three-storey, 131,000 square-foot shopping centre is open and over 90 per cent let, and the intelligent 38-storey office tower, with 784,000 square feet of high-quality space, is 80 per cent let.

Millennium City Phase 1 in Kowloon East was completed late last year, and its 930,000 square feet of office space is now fully let. In view of the encouraging response, the Group recently began leasing Phase 2, which is scheduled for completion in the fourth quarter of 1999. The Group has a 50 per cent interest in Phase 2, which will provide 267,000 square feet of offices. The Group's annual rental income from Millennium City Phases 1 and 2 is estimated to exceed HK$170 million.

The downside of retail rents should be limited because of improving retail sales and higher tourist arrivals. Rents in the luxury residential market have also shown signs of stability, while in the office market, prime space offering advanced technological features and state-of-the-art facilities is expected to continue to be in demand.

The Group aims to maintain an optimal rental portfolio by developing quality projects for rent and disposing of some non-core investment properties.

Hotel Business

Hotel occupancy improved during the year on the back of a continual increase in tourist arrivals, and average room rates stabilized after a significant decline last year. In the long run, with Hong Kong as an international business and tourist hub, hotel prospects should be promising.

Despite the difficult operating environment over the year, the performance of the Group's three hotels was encouraging, with improved occupancy rates. The Royal Garden Hotel in Tsim Sha Tsui, Royal Park Hotel in Shatin and Royal Plaza Hotel in Mongkok achieved average occupancy rates of 85, 86 and 80 per cent respectively.

Infrastructure and Transportation

SmarTone reported a decline in net profit for the 1998-99 financial year. Despite keen competition, SmarTone secured its market position through continuous efforts to provide premium customer service, quality network coverage and comprehensive value added service. With British Telecommunications plc becoming a strategic shareholder in May 1999, SmarTone is in an even better position to get access to advanced technology, with broader opportunities to expand in Asia. In addition to mobile voice services, SmarTone will continue to focus on business expansion, including IDD, the Internet and wireless data applications. The company will also look for investment opportunities in the region. The Group is confident of SmarTone's future prospects, and it will continue to hold its interest in the company as a strategic long-term investment.

The Kowloon Motor Bus Holdings Limited recorded satisfactory results for the year. The company expanded its business through the operation of new routes linking the urban areas to the new airport and Tung Chung, and it has increased its non-franchised bus operations to cope with growing market demand. The company aims to stay competitive with the continued provision of high-quality service and improvements in efficiency, and is expected to provide steady recurrent income to the Group.

The Route 3 (Country Park Section) provides a quick and direct link between the northwest New Territories and major urban areas, as well as the new airport. There has been a continuous improvement in traffic volume since its opening in May 1998.

The Airport Freight Forwarding Centre comprises 1.3 million square feet of cargo handling space and 175,000 square feet of office space. It commenced operations in July 1998. The Hong Kong Business Aviation Centre officially opened in September 1999, providing premium ground services for corporate and private aircraft.

Construction of the River Trade Terminal in Tuen Mun is progressing smoothly. The first phase operating area began business in October 1998, and completion of the entire project is scheduled for the end of 1999.

The Group has a 28.5 per cent interest in Asia Container Terminals Limited, which is engaged in the development of two berths in Container Terminal 9. The terminal is now being designed and construction is expected to begin in early 2000. Upon completion, the berths will be exchanged for two existing berths in Container Terminal 8.

All of the Group's infrastructure projects are in Hong Kong. They are low risk in nature and provide the Group with growing recurrent income over the long term.

Mainland China Business

The Group will continue with its prudent and selective policy towards investing in mainland China. It will focus on property projects in Beijing, Shanghai and Guangzhou, adopting a long-term view and retaining most developments for rental purposes.

Sun Dong An Plaza in Beijing contains 1.3 million square feet of retail space and 430,000 square feet of office space. Since renovations to Wangfujing Street have finished, there has been a significant increase in the flow of pedestrians to the shopping mall, bringing more business to the tenants. Leasing of the office tower has been satisfactory, with occupancy at 80 per cent.

Shanghai Central Plaza, with 455,000 square feet of office space and 133,000 square feet of retail space, was finished in early 1999. It has become a showcase for quality development in Shanghai. The shopping centre is already 90 per cent let and leasing of the offices is progressing well. Phase 1 of Arcadia Shanghai, with 369 luxury residential units, was finished in the second quarter of 1999, and leasing is now under way.

Nearly all of the units marketed in Glorious City Garden Phase 2 in Guangzhou have been sold, and the project is scheduled for completion in the first half of 2000.

Corporate Finance

The Group will adhere to its conservative policy of maintaining a low gearing and high liquidity. It further strengthened its financial position over the year, and as of 30th June 1999, its ratio of net debt to shareholders' funds was 12 per cent. The Group's solid recurrent income base, together with proceeds from pre-sales of new residential properties, will continue to sustain a strong cash flow.

The Group has substantial undrawn facilities on a committed basis on standby for future business expansion, and as virtually all of its borrowings are denominated in Hong Kong dollars, its foreign exchange exposure is negligible. All the Group's bank facilities are unsecured. The Group has been able to maintain its foreign currency credit ratings on a par with Hong Kong's sovereign ceiling, with "A3" from Moody's and "A" from Standard & Poor's. The Group will continue to diversify its funding base and lengthen its debt maturity profile with the objective of spreading debt maturity in future years.

Since launching its Euro Medium Term Note programme in early 1999, the Group has raised the equivalent of approximately US$400 million through several Hong Kong dollar bonds and a floating rate US dollar note. The proceeds were used mainly to repay short-term loans. In light of the good market response, the Group decided to triple the authorized programme size to US$1.5 billion in September. The programme offers the Group flexibility in tapping funds from the international capital markets and enables it to issue notes efficiently.

Customer Service

The Group is committed to raising the overall quality of its property developments in terms of design, materials and construction, and it will continue to set new standards in these areas. The Group will also capitalize on the opportunities presented by new technology to meet the increasing demand for a more active digital lifestyle by making broadband access available in its property developments.

Providing the highest levels of service is one of the Group's top priorities, and its property management subsidiaries, Hong Yip and Kai Shing, are committed to providing residents with the finest care to enhance their lives for the modern age. With continual training they will embody the spirit of "customer first". As evidence of this dedication, both companies received various territory-wide management awards during the year.

The SHKP Club has seen a significant increase in members during the year, to about 95,000. The Club will continue to enhance the quality of its service to members and promote two-way communication, and the up-grading of the co-branded Citibank SHKP Club VISA Card to a multifunctional smart card with the latest technology will offer more convenience and added value to members.

Prospects

With the People's Republic of China's 50th anniversary this year, its society is stable and prosperous. China's open door policy and economic reforms will continue, and it is expected to gain access to the WTO in the near future. Prospects for the mainland economy remain positive. In this advantageous environment, the Group has full confidence in the long-term prospects for Hong Kong. Japan and the rest of Asia have seen continued economic improvement. A significant drop in rents and downward adjustments to labour costs have made Hong Kong more competitive. These, together with low interest rates and the construction of new infrastructure, should underpin Hong Kong's current economic recovery. The Government's efforts to lead the territory in technology development and other areas should add new strength and variety to economic prospects.

The Group will continue to focus on Hong Kong property development and investment, with the objective of sustaining long-term profit growth by increasing its land bank and residential completions, as well as adopting effective cost control measures. The Group also puts great emphasis on its people, providing staff training to achieve higher productivity, greater efficiency and more competitiveness. As we move forward into the new millennium, the Group will take full advantage of new technology, both in its properties and operations. It will further enhance its brand name with added commitments to incorporating the latest technology in its premium products and providing high-quality services. The Group will also consider investing in selective technology projects to capitalize on the benefits of the information age.

The Group is optimistic about the long-term prospects for the Hong Kong property market. With its solid financial position and low gearing ratio, the Group is well positioned to take advantage of opportunities for expanding its business in Hong Kong, to maximize the benefits to shareholders. Forthcoming pre-sales in the next several months will include Royal Peninsula in Hung Hom, Phases 1 of both Ocean Shores and Clearwater Bay Peninsula in Tseung Kwan O and the Leighton Hill development in Causeway Bay. These pre-sales are expected to further strengthen the Group's cash flows. Over 90 per cent of the residential units to be completed in the coming financial year have been pre-sold. Barring unforeseen circumstances, the Group's results for the next year will show satisfactory growth.

Dr Victor Fung and Mr William Kwan were appointed as Independent Non-Executive Directors of the Company in May and July of this year respectively. Their wealth of experience in the commercial sector will benefit the Group's further business development.

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, 7th October 1999

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