Set out below is further information which will assist in the formation of a balanced assessment of the financial position and results for the year of the Swire Pacific Group.
Review of Operating Results
The principal activities of the Swire Pacific Group together with the contribution of each activity to Group results are as follows:
The Company and its subsidiaries:
Associated companies:
The activities of the Swire Pacific Group are mainly based in Hong Kong and, in particular, Cathay Pacific's airline operations, which were consolidated up to 9th June 1996, are carried out between rather than within geographic segments and all principal services are to and from Hong Kong. An analysis of Group turnover by principal markets is outlined below:
There are no businesses carried on outside Hong Kong which, in aggregate, contribute to 10% or more of the Group's consolidated operating profits.
An analysis of Group attributable profit by division is as follows:
Comments on major variances in the Consolidated Profit & Loss Account and Balance Sheet
Upon the share placement by Cathay Pacific to CITIC Pacific on 10th June 1996, the Group's interest in Cathay Pacific was diluted and from that date Cathay Pacific and HAECO were no longer consolidated by Swire Pacific. This has important implications for the presentation of the Swire Pacific Group's financial statements. To assist in the assessment of the Swire Pacific Group's results, proforma 1996 figures, prepared on the basis that Cathay Pacific and HAECO are accounted for as associated companies throughout, using the actual shareholdings held by Swire Pacific for 1996, have been provided in the analysis of significant variances in the consolidated profit and loss items.
The comments made below relate to the variances in the Group's 1997 and proforma 1996 consolidated profit and loss account figures.
The comments made below relate to the variances in the Group's consolidated balance sheets at the end of 1997 and 1996.
Financial Risk Management Policy
Financing for Swire Pacific subsidiaries in Hong Kong is provided primarily by Swire Pacific, which raises funds both directly and through wholly-owned finance subsidiaries. Small working capital lines and overdraft facilities are arranged by individual subsidiaries. All areas of financial risk management activity are subject to policies, guidelines, exposure limits, and systematic authorisation and reporting. The Group's listed associated companies, Cathay Pacific and HAECO, arrange their financial affairs on a stand-alone basis. Their financing activities are undertaken in a manner consistent with the overall financial policies of the Group.
Use of Derivatives
In the normal course of business, each of Swire Pacific and Cathay Pacific use interest rate and currency swaps in connection with their borrowings. Such derivative transactions are entered into in order to manage exposure to fluctuations in foreign currency exchange rates and interest rates. In addition, Cathay Pacific is a party to forward contracts and options for the purchase of aviation fuel. It is the policy of the Swire Pacific Group not to enter into derivative transactions for speculative purposes. The implementation of hedging policy is only undertaken following approval from the Board.
Derivatives involve, to varying degrees, credit and market risk. With regard to credit risk, the Group would be exposed to loss in the event of non-performance by a counter-party. The Group controls credit risk through approved counter-party limits and monitoring procedures.
Market risk is the possibility that a movement in interest rates or currency rates will cause the value of a derivative to fluctuate or change the cost of settling the underlying obligations. Derivatives are used solely for management of an underlying risk and the Group is not exposed to market risk since gains and losses on the derivatives offset losses and gains on the assets, liabilities or transactions being hedged. The Group is not required by its counter-parties to provide collateral or any other form of security against any change in the market value of a derivative.
Management of Currency Exposure
Exposure to movements in exchange rates on individual transactions in the Swire Pacific Group is minimised using forward foreign exchange contracts where active markets for the relevant currencies exist. With the exception of the Perpetual Capital Securities, which have no scheduled maturity, all significant foreign currency borrowings are covered by appropriate currency hedges.
Translation exposure arising on consolidation of the Group's overseas net assets is reduced where practical by broadly matching assets with borrowings in the same currency. Any remaining translation exposure is not actively managed. A substantial proportion of the revenues, costs, assets and liabilities of Swire Pacific and its subsidiary companies are denominated in Hong Kong dollars.
The long-term financial obligations of Cathay Pacific have been arranged primarily in currencies in which it has substantial positive operational cash flows, thus establishing a natural currency hedge. The policy adopted requires that anticipated surplus foreign currency earnings should be at least sufficient to meet the foreign currency interest and principal repayment commitments in any year.
Capital Resources & Liquidity
Swire Pacific's total shareholders' funds amounted to HK$91,480 million at the end of 1997, compared with HK$100,788 million at the end of 1996.
As at 31st December 1997, the Swire Pacific Group's net liquid funds totalled HK$2,961 million. These comprised cash deposits of HK$4,521 million less bank and other short-term borrowings of HK$1,560 million.
An analysis of the Group's net borrowings by currency at 31st December 1997, including the US$600 million Perpetual Capital Securities issued, is shown below:
Sources of Finance
At 31st December 1997, committed loan facilities and other financing in place amounted to HK$21,716 million of which 22% remained undrawn. In addition, there were uncommitted facilities undrawn at year-end amounting to HK$2,810 million. Sources of funds at the end of 1997 comprised:
Maturity Profile
It is Group policy to secure adequate funding so as to match cash flows associated with both current and planned investments. The maturity profile of the Group's gross borrowings at the end of each of the last five years is set out below:
In addition to raising funds on a fixed rate basis, the Group uses interest rate swaps and other instruments where appropriate in the management of its interest rate profile. At 31st December 1997, 46% of the Group's gross borrowings were on a floating rate basis and 54% were on a fixed rate basis.
Interest Cover and Gearing
The following graphs illustrate cash interest cover and gearing ratios for each of the last five years. Cash interest cover for the year ended 31st December 1997, calculated by reference to total interest charges including those capitalised, was 7.74 times and the gearing ratio was 0.14/1 at the end of 1997.
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Capital Expenditure
Capital expenditure incurred by the Group in 1997 was HK$5,373 million. The following graphs illustrate capital expenditure by division and by type over the last five years:
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The major outgoings during 1997 in the property division related to expenditure on Festival Walk, Lincoln House, Oxford House and the Citiplaza One redevelopment. Expenditure in the industries division was mainly on property, plant and equipment in Swire Beverages. Within the marine services division, capital expenditure related principally to expenditure on newbuildings.
Year 2000
The Group has initiated a compliance programme to tackle the year 2000 issue whereby the two-digit year representation in computer systems can potentially cause exposure due to '00' being treated as '1900' instead of '2000', thus causing systems to malfunction. A review of the Group's computer systems is being conducted to identify those areas that could be affected by the year 2000 issue and appropriate measures will be undertaken to ensure that the computer systems in use within the Group are "year 2000 compliant". Cathay Pacific aims to achieve year 2000 compliance for all key computer systems by the end of 1998 and the Group overall is aiming to achieve such compliance for all systems within 1999. A detailed project plan has been developed to support conversion and implementation of relevant systems. It is anticipated that the year 2000 issue will not pose significant operational problems and that expenditures associated with year 2000 compliance will not be material.
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