Interim Results

The Group's unaudited profit after tax and minority interests for the six months ended 31st December 1998 was HK$4,723 million, equivalent to an earnings per share of HK$1.97. Profit for the corresponding period in the previous year was HK$5,936 million, equivalent to an earnings per share of HK$2.48.

Dividend

The Directors have declared an interim dividend of HK$0.50 per share, compared with last year's interim dividend of HK$0.60 per share. The dividend will be payable in cash on 15th April 1999, to shareholders whose names appear on the Register of Members of the Company on 15th April 1999.

Review of Operations

Property Sales

During the six months ended 31st December 1998, total property sales generated by the Group, both as principal and agent, were HK$11,908 million, an increase of 21 per cent compared to the same period last year. Major projects sold during the period include Scenic View on Clear Water Bay Road, Chateau Royale in Tai Po, Waterfront South in Aberdeen, Castello in Shatin and Grand Horizon in Tsing Yi. Property sales since the beginning of 1999 have been satisfactory and exceeded HK$4,500 million, excluding HK$1,825 million from sales of Villa Esplanada Phase 2, in which the Group holds a 22.5 per cent interest.

During the first half of 1998/99, eight projects were completed:

90 per cent of the residential properties completed in the first half of the year have already been sold. Both One International Finance Centre and Millennium City (Phase 1) have been retained for investment purposes.

Land Bank

Since the last financial year, the Group added the following two sites, with an aggregate gross floor area of 1.9 million square feet, through land use conversion and joint venture:

The Group currently owns a land bank in Hong Kong of 50.5 million square feet in terms of attributable gross floor area, consisting of 18.7 million square feet of completed investment property and 31.8 million square feet of property under development. The Group also owns 20 million square feet of agricultural land in the New Territories, the majority of which is in the process of land use conversion.

Property Development

In 1998, tight domestic credit and interest rate volatility in Hong Kong and the economic downturn in South East Asia significantly affected the Hong Kong economy, resulting in a substantial fall in the price of various types of property, weakened consumer spending and increased unemployment in the territory. Significant downward adjustments in the economy and asset prices over the past 18 months have made Hong Kong more competitive. Property prices and rents have become more affordable, wages and salaries have also been adjusted gradually and overall business operating costs in Hong Kong have been reduced. All of these should be beneficial to Hong Kong as an international centre for business, finance and trade.

The Group believes that residential property prices have already stabilized, with the residential sector being healthy and without signs of speculative activity, as buyers are mainly end-users. As property prices have come down significantly and the trend in mortgage interest rates is downward, affordability for homebuyers is at its strongest level in eight years. The more positive attitude to mortgage lending recently taken by banks and the Government's initiatives to encourage home ownership through subsidized loan schemes have exerted a positive influence on the housing market. The effective raising of the mortgage ceiling to 85 per cent through the Hong Kong Mortgage Corporation's mortgage insurance plan will boost the secondary market, which in turn will stimulate the upgraders' market.

Population is expected to grow continuously in Hong Kong, and there are increasing aspirations for better housing, enhanced by various government schemes to encourage home ownership. The Group has a positive outlook on the property market over the long term. The Group will continue with its business strategy of diversifying into different locations, types of properties and various unit sizes, in order to minimize risk. It will continue to focus on developing large-scale projects, concentrating on small to medium sized units. The Group will maintain the premium quality of its developments, in terms of construction and materials, and adopt effective controls over construction costs without compromising on quality.

Completion of the Group's properties in Hong Kong in the first half, and expected completions in the second half of the current financial year are analysed as follows:
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* less than 100,000 square feet

Property Investment

The Group's investment property portfolio is approximately 95 per cent let. Leasing demand for retail properties has slowed down amid the recent economic downturn and soft consumer spending. Retail rental performance varied depending upon location and tenants' trade. The adverse influence on rentals of the Group's shopping centres was moderate, as the majority of them are regional malls, located in prime sites in new towns, mainly providing daily necessities for nearby residents.

Office rentals in the short term are likely to continue to come under pressure due to an increased supply, but new office developments, at prime locations providing advanced technical facilities, are expected to perform better than others.

The Group's total rental income shows a modest increase in the first half of the financial year. This is mainly due to East Point City Shopping Centre in Tseung Kwan O and Grand Century Place in Mongkok, which both opened in the previous financial year, having made full six-month contributions.

One International Finance Centre, acclaimed as Hong Kong's highest-quality commercial building, comprises a 784,000 square-foot office building and a 131,000 square-foot shopping centre. It is strategically located on the waterfront in the core Central business district, and is fully integrated with Hong Kong Station on the new Airport Express Line. The shopping centre, which opened in late 1998, is 80 per cent let. Leasing of the office tower is underway, and the principal tenants are international financial institutions and multinational companies. The Group has a 47.5 per cent interest in the project.

The Millennium City Phase 1 office development at 388 Kwun Tong Road, the premiere commercial property in Kowloon East, was completed in September 1998. The office space is 95 per cent let or sold. The Group will launch Millennium City Phase 2 at 378 Kwun Tong Road for lease in the second quarter of 1999. This project totals 267,000 square feet, and the Group has a 50 per cent interest.

The Group regularly reviews its existing rental portfolio and considers the disposal of some of its non-core investment properties at appropriate times.

The Group places an emphasis on offering high quality service to its tenants. It will continue to boost tenant satisfaction through ongoing two-way communication, and actively organize promotional programmes at its shopping centres, to raise consumer spending and increase pedestrian flows.

Hotel Business

The Asian financial crisis of the past year has seriously affected Hong Kong's tourist industry. With regional markets gradually stabilizing, and increased competitiveness in hotel tariff rates, tourist arrivals have recently shown some early signs of improvement. In the longer term, Hong Kong will continue to be an international business hub and a gateway to mainland China. Prospects for the hotel industry are still promising.

The performance of the Group's three hotels was encouraging. The Royal Plaza Hotel in Mongkok, which opened last year, recorded 84 per cent occupancy, while the Royal Garden Hotel in Tsim Sha Tsui and the Royal Park Hotel in Shatin achieved occupancy rates of 87 and 89 per cent, respectively.

Infrastructure and Transportation

SmarTone's interim results for the period ended 31st December 1998 were satisfactory in light of the competitive market environment. The company benefited from the successful integration of its GSM and PCS networks with substantial cost savings and enhanced efficiency. SmarTone is well positioned to capitalize on opportunities that arise in the fast growing telecommunications industry in Hong Kong. The company will continue to provide a quality network, as well as premium customer service. The long term prospects for SmarTone are good, and the Group will continue to maintain its stake in SmarTone as a long term strategic investment.

The Kowloon Motor Bus Holdings Limited (KMB) recorded satisfactory results during the first half of 1998. The company will continue to maintain its high quality service. It expanded its businesses through new routes linking the new airport and Tung Chung district as well as its non-franchised bus services. KMB is expected to provide a steady stream of income to the Group.

The Route 3 (Country Park Section) and the Airport Freight Forwarding Centre opened for business in mid 1998 as scheduled. Business is growing gradually. The first phase operating area of the River Trade Terminal in Tuen Mun opened late last year, and the entire project will be completed on schedule by the end of 1999.

Asia Container Terminals Limited, in which the Group has a 28.5 per cent interest, is engaged in the development of two berths in Container Terminal 9. The consortium signed the Land Grant with the Government in December 1998. 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. These projects are low risk in nature and should provide steadily growing recurrent income to the Group in the long run.

Mainland China Business

The Group will continue to adopt a prudent and selective policy towards investments in China. The current total commitment is 2 to 3 per cent of the Group's assets. The focus is on projects in three major cities, Beijing, Shanghai and Guangzhou, and most developments will be retained for rental purposes. Sun Dong An Plaza in Beijing opened in early 1998. The 1.3 million square-foot shopping centre is fully let. The leasing response to the 430,000 square feet of office space has been satisfactory, with high occupancy expected later this year.

Shanghai Central Plaza, comprising 455,000 square feet of office and 133,000 square feet of retail space, was completed in early 1999. It is Shanghai's foremost commercial building in terms of location, design and quality. Arcadia Shanghai, a luxury residential project, is expected to be completed in the second quarter of 1999. Both developments will be retained for investment purposes. Glorious City Garden Phase 2 in Guangzhou will be completed in the first half of 2000. All units marketed have been sold.

Corporate Finance

The Group will continue its prudent financial policy of maintaining a low level of debt and high liquidity. Its gearing (net debt to shareholders' funds ratio) has been reduced to below 15 per cent. Further improvement of this position is expected through continuous cash flow from property sales, disposal of selected investment properties and recurrent income. Residential properties expected to be pre-sold in the coming months include Chelsea Heights Phase 2 in Tuen Mun, Villa Premiere in Yuen Long, Belcher Gardens in Western Mid-levels and Royal Peninsula in Hunghom. The sale of these properties will further strengthen the Group's liquidity.

The Group has substantial undrawn facilities on a committed basis, ready to be used as new investment opportunities arise. At present, its available financial resources exceed the level they stood at before the financial crisis. Virtually all of its borrowings are denominated in Hong Kong dollars, and thus the Group's foreign exchange exposure is negligible. Since the financial crisis began in October 1997, the Group has been able to continuously renew all matured bank loans and obtain new credit facilities. The Group will continue to diversify its funding base and lengthen the maturity profile of its debt while minimizing the refinancing risk in any particular year.

In early 1999, the Group successfully raised HK$1.3 billion through the issue of fixed rate Hong Kong dollar notes. A Euro Medium Term Note programme was also launched in February 1999, which provides flexibility to the Group in tapping funds from international capital markets. The programme has the same credit rating as Hong Kong's sovereign ceiling from Moody's and Standard & Poor's.

Customer Service

Kai Shing and Hong Yip, the Group's property management subsidiaries, continue to provide residents with premium service. To enrich the lives of their residents, the companies recently introduced Privilege Home Services, and they regularly organize recreational activities for residents. SHKP Club, which has just celebrated its third anniversary, will continue to enhance its two-way communication with our customers. The number of members already exceeds 63,000. The Group will continue to strengthen after-sales service and enable homebuyers to enjoy a range of special offers and privileges.

Prospects

As China continues to implement its open door policy and economic reforms, its economy will keep growing. In the wake of the Asian financial crisis of the past one and a half years, interest rates have come down and volatility has been reduced. The Hong Kong equity market has become more active and residential property prices have become more stable. Inbound tourist arrivals also continue to show signs of recovery. All these factors, together with the stabilization of other Asian economies, will be beneficial to Hong Kong's economic recovery.

The Group will maintain its focus on Hong Kong property development and investment. It will continue to pre-sell residential projects according to schedule. Given the right opportunities, the Group will use different means to increase its land bank in order to expand its business, and it will continue to actively negotiate with the government on land premiums. The Group plans progressively to complete more residential units in the coming years, in order to increase profitability and enhance shareholders' value in the long run.

The Group's long term objective is to achieve an equal balance between profits from property sales and recurrent earnings. The Group has a strong financial position, with a low gearing and solid recurrent income from investment properties and infrastructure projects. It is well positioned to participate in large-scale developments, fully capitalizing on the current economic down cycle.

Since the peak in 1997, the property market has fallen significantly, and property prices have now stabilized. It is expected that the property market will gradually recover. Barring unforeseen circumstances, the Group's results for this financial year will show satisfactory performance.

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, 18th March 1999