I am pleased to report profits attributable to shareholders for 1995 of HK$6,454 million representing growth of 16.1% over 1994. This result reflects the strength and resilience of the Swire Pacific Group.
Aviation Division
Whilst competition in the airline industry remains keen, Cathay Pacific saw good profit growth in 1995 following a modest improvement in the operating environment for airlines and as a consequence of the cost control measures introduced in recent years. The company is fully aware of the need to maintain competitiveness through improved service and better cost control. As part of an established plan to replace the Lockheed L1011 TriStar fleet with more cost effective aircraft, the company took delivery of seven Airbus Industrie A330s and two A340s during the year. Announcement was also made during the year of plans to invest HK$3,500 million in new corporate headquarters and a staff hotel at Hong Kong's new airport at Chek Lap Kok and HK$2,000 million on in-flight services equipment and new information technology. This reflects the company's commitment to Hong Kong as its base of operations and to a strategy which focuses on delivering the highest level of service both on the ground and in the air.
Considerable progress has been made during the year on the negotiation of Air Services Agreements, in particular with the USA, where the company has secured rights to fly to a number of new destinations. Chicago and New York joined the cargo network at the beginning of March 1996. Passenger services to New York will commence in July 1996.
Chinese aviation interests in the form of CNAC(HK) are seeking to establish an operation in Hong Kong. It is too early to say what the outcome might be or to quantify any impact this might have on the market and airlines currently operating from Hong Kong.
Hong Kong Aircraft Engineering Company (HAECO) operates in what continues to be a depressed sector of the aviation industry and as a consequence profits were lower than in the prior year. Rates for third party work remain low due to intense competition, whilst the profit on work carried out for its major customer Cathay Pacific continues to decline with that company's fleet replacement programme resulting in the phasing out of older and more expensive-to-maintain aircraft. Significant progress has been made on a number of strategic initiatives. These include the recent opening of a new twin-bay hangar facility in Xiamen, China and the establishment of joint ventures in component and avionics overhaul with Lucas Aerospace and Allied Signal Aerospace. Additionally, the company signed a Heads of Agreement with Rolls-Royce to form a 50:50 joint venture for commercial aero engine overhaul in Hong Kong. Agreement in principle has also been reached with the Airport Authority for the award of a licence to operate line and base maintenance facilities at Chek Lap Kok airport.
Dragonair enjoyed good growth in both revenue and profits and also made progress in reducing unit costs, in part through the introduction of three cost-effective A330 aircraft and the phasing out of two leased L1011 aircraft.
Air Hong Kong, which is beginning to reap the benefits of stringent cost control and generally more buoyant markets for airfreight, reported a modest profit for the year. During 1996 the company will replace its existing Boeing 747F freighters with newer, more cost-effective B747F freighters to be leased from Cathay Pacific.
Catering operations at Kai Tak performed well in a demanding and increasingly competitive market whilst those overseas continue to experience mixed fortunes. In November, Cathay Pacific Catering Services (HK) Limited agreed terms for a 15-year franchise to operate a flight kitchen at Chek Lap Kok.
Other companies in the division enjoyed satisfactory growth overall with Hong Kong Air Cargo Terminals (HACTL) producing another year of record throughput and profits. HACTL was awarded a franchise to operate a cargo handling facility at Chek Lap Kok and has announced plans to invest HK$7,800 million to develop a facility, to be named SuperTerminal 1, with a capacity of 2.6 million tonnes per annum.
Property Division
Despite a further decline in property prices and rental levels in Hong Kong during the year, the division enjoyed good growth in profits from both the investment property portfolio and the sale of development properties. This reflects a first contribution from the Dorset House office tower which opened in February and generally higher rentals achieved from those properties which were subject to rent reviews during the year. The contribution from sales of development properties also grew following further sales of units in Tower One of Robinson Place.
Interest rates have now eased somewhat and banks have relaxed their lending policies to a limited extent, which has helped sentiment. The market is now more stable and there are signs of increasing confidence on the part of genuine home buyers to commit at current price levels. Swire Properties' portfolio of residential trading properties is concentrated on Hong Kong Island, where there is little prospect of any significant increase in the supply of new residential schemes and hence is well positioned to ride out any continuation of unsettled conditions in the general market, and to benefit from any further improvement in demand.
Swire Properties remains committed to the expansion of its high quality recurring rental stream from long-term interests in commercial properties in Hong Kong. The focus of this expansion will be in Quarry Bay where the construction of office towers on two recently vacated sites in TaiKoo Place will enable a physical link to be established between the company office properties in TaiKoo Place and retail and office premises in Citiplaza, and in Yau Yat Tsuen where the company in joint venture with CITIC Pacific is constructing a combined office and retail complex to be known as Festival Walk. Swire Properties has a 20% interest in a consortium of five major Hong Kong developers which in March signed an agreement with the MTRC for the construction of a new town centre at Tung Chung on Lantau Island. Opportunities to develop additional properties for sale will also be actively pursued.
In Miami, Florida it is encouraging to see an improvement in the market for quality residential accommodation in downtown areas. Following the success of One Tequesta Point, Swire Properties is presently constructing a further residential tower on Brickell Key, with development plans for adjacent land holdings under active review.
Industries Division
Profits in 1995 for the division as a whole were satisfactory. Coca-Cola operations in Hong Kong suffered from the combined effect of poor retail demand and competition from imported products. Our Coca-Cola USA operation based in Salt Lake City had a good year whilst other beverage interests enjoyed satisfactory growth overall.
The associates performed well although much of the growth stems from a first full year's contribution from the 39.2% interest in Carlsberg Brewery (HK) Limited. Considerable progress has been made during the year on expanding and developing the division's beverage and non-beverage interests in China. In particular, new joint venture agreements were signed covering Coca-Cola operations in Hefei, Guangzhou, Dongguan and Xiamen, and Carlsberg and ICI operations in Shanghai. The sale of Swire Technologies shortly after the year-end will allow the division to focus its resources on the continued expansion of its beverage and other interests.
Trading Division
The contribution from motor vehicle operations in Taiwan was adversely affected by poor consumer confidence following heightened political tension in the second half of the year. However, the long term prospects for motor vehicle trading in Taiwan remain attractive and the Group has committed significant capital to a programme of expanding the number of vehicle workshops and upgrading the spare parts supply capability to provide a more comprehensive service to customers. Hong Kong apparel operations performed well in a relatively weak market.
Marine Services Division
Swire Pacific Offshore had a good year in 1995 following renewed interest in oil exploration and hence demand for the company's services. Advantage was taken of an opportunity to start realigning the fleet through the sale of two vessels at a profit and the purchase of one second hand vessel.
Construction of new terminals in Hong Kong has been delayed whilst discussions take place between the Hong Kong and Chinese Governments, but Modern Terminals continues to study investment opportunities in container ports in China.
The contribution from associates was adversely affected by a fall in profits at Hongkong United Dockyards as a result of the continued decline in ship repair activity.
Insurance Division
In view of the difficult trading conditions faced by all operations in the division, the modest overall growth in attributable profits is satisfactory.
Finance
At 31st December 1995, consolidated net borrowings were HK$19,653 million which when related to shareholders' funds and minority interests totalling HK$82,858 million resulted in a gearing ratio of 0.24/1. The increase in the gearing ratio over the prior year is attributable primarily to expenditure associated with Cathay Pacific fleet replacement programme, and with continued expansion of the Group's investment property portfolio.
Community Relations and the Environment
Our financial commitment to Hong Kong is clear from our continued investment in our key local businesses but equally strong is our commitment to support projects which meet the needs of the local community.
During 1995, Swire Pacific has continued to support the Community Chest. In addition it has chosen to fund charities which focus on those least able to help themselves, including the Befrienders International, Youth Outreach, the flying eye hospital Project Orbis and the Bayanihan Trust, which supports overseas workers based in Hong Kong.
Through the Swire Group Environmental Policy, we are endeavouring to minimise the impact of Group companies on the environment and we have continued to support those seeking ways to preserve and improve the environment for the generations to come.
The Swire Group's support in recent years for the Swire Institute of Marine Science and Hong Kong's new Centre for Environmental Technology are prominent examples of the Group's commitment to funding research into environmental issues. 1995 saw Cathay Pacific Airways undergo its first full environmental audit, whilst Swire Properties continued to implement Hong Kong's most progressive programme to eliminate CFCs from its air-conditioning equipment.
As one of Hong Kong's biggest employers, it remains a high priority to encourage employees as to the importance of the environmental policy.
Staff
The Swire Pacific Group employs over 37,000 staff in Hong Kong and the encouraging results we have achieved in 1995 are a tribute to their dedication and hard work. Staff throughout the Group are under constant pressure to work efficiently and deliver productivity improvements to help offset the high level of inflation in Hong Kong. On behalf of the shareholders, I would like to thank them for their efforts during the year.
Dividends
Interim dividends of HK¢39.0 per 'A' share and HK¢7.8 per 'B' share were declared on 10th August 1995; directors have recommended final dividends for 1995 of HK¢120.0 per 'A' share and HK¢24.0 per 'B' share. Thus the total distribution per share paid and proposed for 1995 is 14.4% higher than that for 1994. Subject to approval by shareholders, dividend payments will be made on 3rd June 1996.
Prospects
I expect net rental income from Swire Properties' investment property portfolio to continue to grow in 1996. However, it will not be possible to match the high level of profits earned in each of the last two years from property developments for sale, notwithstanding a more positive outlook for the residential property market on Hong Kong Island where the majority of the Group's development properties are situated.
Cathay Pacific should continue to benefit both from an improving outlook for the aviation industry and from recent investments in new aircraft and its in-flight product. With few signs of improvement in conditions in the aircraft maintenance business, HAECO faces another difficult year.
The industries division will build on the foundations laid over the past few years for the significant long-term expansion of its business, in particular its beverage interests. The trading, marine services and insurance divisions are expected to show steady growth.
The Swire Pacific Group will continue to invest significant sums in its businesses in Hong Kong, China and Taiwan so as to facilitate long-term growth. This is a reflection of the Group's commitment to Hong Kong and the region and confidence in its continued prosperity.
P D A Sutch
Chairman
Hong Kong, 15th March 1996
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