CHAIRMAN'S STATEMENT
Consolidated Results
The profit attributable to shareholders for
the first half of 1996 was HK$3,055 million representing an increase
of 5.6% over the equivalent period in 1995. This includes an
exceptional profit of HK$468 million on the disposal of part of
the Group's shareholding in Hong Kong Dragon Airlines (Dragonair).
In April a major restructuring of the Group's
aviation interests was announced involving the placement of new
shares in Cathay Pacific Airways with CITIC Pacific and concurrently
the sale of shares representing a 17.5% interest in Dragonair
by the Swire Pacific Group to the China National Aviation Corporation
Group. We very much welcome these transactions, which have recently
been completed, and believe they represent very positive developments
for the local aviation industry and will facilitate continued
profit growth for both Cathay Pacific Airways and Dragonair.
Operating profits at Cathay Pacific Airways
showed satisfactory growth on the first half of 1995 particularly
in view of the relative strength of the HK dollar, which has depressed
yields. Hong Kong Aircraft Engineering Company's operating profits
were marginally below the first half of 1995 but the downward
pressure on margins has moderated. The property division enjoyed
further growth in rental income and in profits from its hotel
interests, although the overall results of the division were well
down on the corresponding period due to the absence of significant
profits from developments for sale. With only a minimal contribution
from Swire Technologies, which was sold in March, the modest growth
in operating profits in the industries division can be considered
satisfactory. The trading division's results were well down on
the corresponding period in 1995 as a result of the difficult
trading conditions faced by its vehicle trading operations in
Taiwan. Profits from the marine services and insurance divisions
enjoyed reasonable growth on those in the first half of 1995.
Your Directors have today declared interim
dividends for 1996 of HK¢43.0 per 'A' share and HK¢8.6
per 'B' share representing an increase of 10.3% over the interim
dividends paid in 1995.
Aviation Division
The Cathay
Pacific Airways Group's profit from operations was HK$1,106 million,
an increase of 12.5% over the same period last year. In addition,
there was an exceptional profit of HK$541 million from the disposal
of part of its shareholding in Dragonair.
Cathay Pacific Airways carried 5.4 million
passengers in the first half of 1996, an increase of 8.9% as compared
to the same period last year. Revenue passenger kilometres increased
by 14.2% whilst passenger capacity, measured in available seat
kilometres, increased by 9.4%. Consequently, the passenger load
factor increased by 3.0 percentage points to 72.2%. The passenger
yield decreased by 4.3%.
Cathay Pacific Airways' flown cargo tonne
kilometres increased by 10.8% against an increase of 16.0% in
cargo capacity, measured in available cargo tonne kilometres.
As a result, the cargo and mail load factor fell by 3.0 percentage
points to 63.5%. The cargo yield fell by 5.3%.
Freighter services to New York were introduced
in March. Passenger services to New York began in July and will
be daily from September. The service to Stockholm was terminated
in July due to the poor economic performance and outlook for the
route.
The first six months of the year saw the arrival
of two Airbus Industrie A330-300s (one on an operating lease),
two A340-300s and two Boeing B777-200s. Three B747-200F freighters
for use by AHK Air Hong Kong were delivered during the period;
the first of these went into service in June. Four Lockheed L1011s
left the fleet during the period. In March, the airline's A330
fleet was granted approval for 120 minutes extended range twin-engined
operations (ETOPS). The approval provides flexibility, where
cost-effective, to operate A330s on longer-haul routes which will
release four-engined aircraft for more appropriate routes. The
airline is currently seeking 120 minutes ETOPS approval for the
B777s.
We welcome the recent decision to build the
second runway at the new airport at Chek Lap Kok, which will have
a positive effect on Hong Kong overall, and look forward to the
opening of the airport in 1998. The land lease for Cathay Pacific
Airways' new headquarters at Chek Lap Kok was signed with the
Airport Authority in May. In the same month, Cathay Pacific Catering
Services (HK) signed a 15-year franchise agreement with the Airport
Authority to operate a flight kitchen at the new airport.
A new five-year agreement covering air services
between Hong Kong and Taiwan was signed in June. Under the agreement,
Dragonair will take over Cathay Pacific Airways' services to Kaohsiung.
Hong Kong Aircraft Engineering Company reported
a decrease in operating profit although downward pressure on margins
has moderated somewhat, reflecting both greater stability in world-wide
rates for aircraft maintenance and productivity improvements.
In July the formation, with Rolls-Royce, of a 50:50 joint venture
company which will undertake aero engine overhaul business for
the Asia-Pacific region from January 1997 was completed.
Intense competition in the air cargo market
has depressed results at AHK Air Hong Kong. Continued improvements
in productivity are expected in the second half with the delivery,
on operating lease, of two further refurbished B747 freighter
aircraft.
The results of other companies within the
division were satisfactory.
Property Division
Net rental income for the half-year to 30th
June 1996 showed satisfactory growth over the corresponding period
in 1995, mainly because of further reversionary growth in rents
and a full contribution from Dorset House.
In TaiKoo Place, the foundation contracts
for Lincoln House and Oxford House are now in progress and the
main building contracts will be awarded this year, with the completion
of both office towers scheduled for 1998. The Cityplaza 1 office
tower is expected to be topped out in the fourth quarter, with
completion in the first quarter of 1997. The reinstatement of
the Cityplaza retail areas beneath the new office tower should
be accomplished before the end of 1996. The main building contractor
is making steady progress with Festival Walk, the combined retail
and office scheme adjacent to the Kowloon Tong MTRC/KCRC interchange
station. Agreement has been reached with several retail anchor
tenants, including the operator of the eleven-screen cinema complex.
The pre-sale of residential units in Island
Place, North Point will start once Government's consent to pre-sell
has been obtained. The residential and retail content will be
completed in 1996, followed by the adjacent office tower in 1997.
Pre-sale of units in The Floridian may start before the end of
the year but Government's consent has still to be obtained. Construction
of the 625 King's Road office scheme is making progress, with
completion expected around the end of 1997. The land exchange
relating to 9 Star Street has been accomplished and the foundation
contract on the residential scheme will start shortly.
Sales of a total of 227 residential units
in One Tequesta Point on Brickell Key, Miami have been closed,
and a further 21 are subject to sales contract. The neighbouring
Courvoisier Courts rental apartment tower is now substantially
completed.
Industries Division
The industries division's results for the
first half of 1996 showed satisfactory improvement over those
for the corresponding period of the previous year.
Swire Beverages' profits improved largely
due to favourable results from Swire Coca-Cola Taiwan, which benefited
from a new production facility and better market conditions.
Notwithstanding the tragic loss of four key managers in an aviation
accident in January, Swire Coca-Cola, USA also reported increased
profits. Swire Coca-Cola HK reported reasonable profits with
strong non-carbonated soft drink sales offsetting lower margins
on carbonated soft drinks. In China progress was made on the
construction of new and replacement bottling plants in Dongguan,
Guangzhou, Xiamen, Hefei, Hangzhou and Zhengzhou, with the latter
two scheduled to commence production in the second half of 1996.
Carlsberg Brewery Hong Kong experienced difficult market conditions
in Hong Kong, but saw an increase in profits from its subsidiary
in Huizhou, and began the construction of a new brewery in Shanghai.
Profit from the division's non-beverage subsidiaries
and associates was reduced following the sale of Swire Technologies
in March for a consideration of US$70.8 million. Crown Can Hong
Kong and its subsidiaries reported a fall in profits as a result
of deteriorating market conditions. New plants in Beijing and
Hanoi are expected to be completed in the second half of the year.
Swire BFI Waste Services continued to perform
in line with expectations. ICI Swire Paints (China) continues
to expand its business in southern China and a new ICI Swire joint
venture commenced construction of a paint facility in Shanghai.
A new joint venture, Schneider Swire, was formed to invest in
electrical distribution equipment manufacture in Guangzhou, China.
Trading Division
The difficult trading environment in Taiwan
in the first six months of 1996 has depressed the division's results
compared to the same period last year. The decline in new vehicle
registrations has resulted in reduced profits for both the Volvo
and Chrysler distributorships. The division remains confident
of a recovery in the Taiwan market although the timing is uncertain.
In Hong Kong, the division has experienced
encouraging growth in the consumer product distribution, sports
shoe and apparel businesses. New product offerings, supported
by a strong marketing effort, will ensure the momentum is maintained
throughout the year. The exclusive distributorships for Ellesse
sportswear and footwear, Speedo swimwear and Lacoste footwear
for the Hong Kong, China and Vietnam markets were acquired. In
Hong Kong two new retail concept shops were introduced, M Street
shops selling casual footwear and Gigasports, the first of a chain
of larger sporting shops. Investments are being made in China
to develop the cross-border potential of these businesses.
The U.S. apparel retail industry continues
to suffer from over-capacity and price discounting. The Eagle's
Eye has performed in line with last year's result and is striving
to improve the position of the brand.
Marine Services Division
Offshore oil exploration and production is
showing a steady increase in activity. As a consequence, the
utilisation of the Swire Pacific Offshore fleet is expected to
improve. Three vessels were sold early in the year to an Egyptian
joint venture company, in which the Group has a one-third share.
Subsequently an order was placed with Ulstein Verft of Norway
for two 12,200 BHP anchor handling tug supply vessels for delivery
in April and June 1997.
Amongst the associated companies within the
division, Modern Terminals experienced only modest growth in throughput.
Shekou Container Terminals saw lower throughput than expected,
although there are now signs of growth resulting from main line
calls at the terminal. Continued weak demand for shiprepair services
again depressed the results of Hongkong United Dockyards. A sustained
increase in ship movements in the port of Hong Kong enabled The
Hongkong Salvage & Towage Company to perform well.
Insurance Division
Attributable profits from the insurance division
showed satisfactory growth over the corresponding period in 1995
reflecting a much improved performance at Swire Fraser and, despite
intense competition, continued good performances by the underwriting
businesses based in Hong Kong.
Finance
Following the placement of new shares in Cathay
Pacific Airways on 10th June 1996, Swire Pacific's shareholding
in that company was diluted from 52.6% to 43.9%. As a consequence,
both Cathay Pacific Airways and Hong Kong Aircraft Engineering
Company then ceased to be subsidiaries, being accounted for thereafter
as associated companies. This will have a significant impact
on the future presentation of the Group's results and financial
position, although for the period to 30th June 1996, the Group's
profit and loss account is largely unaffected since those companies
have been accounted for as subsidiaries until 9th June 1996.
However, the consolidated balance sheet at 30th June 1996 reflects
only the Group's attributable interest in those companies, under
the heading of associated companies, as compared with the previous
presentation of total assets and liabilities, and minority interests.
Shareholders' funds at 30th June 1996 totalled
HK$74,851 million (31st December 1995: HK$71,320 million), with
the increase mainly representing earnings retained during the
period and the unrealised gain of HK$1,128 million on the effective
dilution of the Group's interest in Cathay Pacific Airways which
has been taken to reserves. Minority interests at 30th June 1996
were HK$2,724 million (31st December 1995: HK$11,538 million),
with the decrease mainly reflecting the fact that Cathay Pacific
Airways and Hong Kong Aircraft Engineering Company are no longer
consolidated. At 30th June 1996 net borrowings were HK$12,613
million, as compared with HK$19,653 million at 31st December 1995.
The Group's gearing ratio was 0.16/1 as compared with 0.24/1
at 31st December 1995. The significant reductions in the Group's
net borrowings and gearing ratio reflect the fact that the net
borrowings of Cathay Pacific Airways and Hong Kong Aircraft Engineering
Company have not been recorded in the consolidated balance sheet
at 30th June 1996. If restated on a comparable basis, at 31st
December 1995 the Group's net borrowings and gearing ratio would
have been HK$12,969 million and 0.18/1 respectively.
Prospects
Operating profits at Cathay Pacific Airways
are expected to be higher in the second half due mainly to seasonal
factors, but yields are expected to remain under pressure. Profits
from Hong Kong Aircraft Engineering Company are likely to remain
subdued. The property division expects significant growth in
profits in the second half over the first half as a result of
the recognition of profits on the sale of the residential portion
of the Island Place development. Profits from the remaining divisions
are expected to show modest growth.
P D A Sutch
Chairman
Hong Kong, 8th August 1996
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