"We continue to make improvements to upgrade our entire organisation to win more customers, and to achieve standards that are above and beyond the satisfactory level of operation."

In 1996 we continued to improve and enhance the KMB organisation to increase customer patronage, build on our Company image as a first class service provider, and improve our operations and technology.

Increased Ridership and Recognition

In the year under review, KMB reversed a downward trend in ridership in urban Kowloon -- a city area as challenging as any in the world for the complex interrelationship between consumer needs, scheduling and traffic management. There was a significant net gain in patronage of approximately 3.6 per cent as opposed to previous years where ridership either declined or remained flat. We believe that this increase in ridership reflects recognition on the part of our customers that KMB is a service provider of choice; and that the caliber of our service satisfies the demands of a discriminating populace accustomed to having a wide variety of transport modes at their disposal.

Operational Excellence

In July 1996 our Lai Chi Kok, Sha Tin and Tuen Mun service depots attained ISO 9002 certification. Together with the ISO 9002 certification of our Kowloon Bay service depot awarded in 1995, this achievement is an important milestone since it means that all four depots responsible for the daily repairs and maintenance of our 3,600 bus fleet have attained the international standard for quality. Every day KMB's buses convey an average of 2.8 million people to their livelihoods and back to their homes and families. The ISO 9002 credential is important in that it indicates the high priority that we place on transport efficiency and safety. Moreover, this achievement and our plans for further certification reflects KMB's determined on-going quest to provide a world class bus service.

Although we are the largest bus service provider in the territory, we have not taken our patronage for granted, and in 1996 we continued to upgrade our fleet of buses and add features to augment customer satisfaction.

The Government has indicated that it intends to grant a new 10-year franchise to KMB. We are negotiating the terms of the new franchise with the Government.

A More Modern Bus Fleet

We increased the number of air-conditioned buses so that they now represent 34 per cent of our total fleet. Our goal is eventually to replace all the buses in operation with air-conditioned ones, in response to a customer survey which we conducted and which indicated our customers' preference for such models.

We remain on the cutting edge of bus transport with innovations such as the single- deck easy-access buses we introduced in 1996, which were equipped with features such as super-low floors, kneeling mechanisms and extendable ramps. These buses are the first in Hong Kong to facilitate access to bus transportation for the handicapped, senior citizens and other riders who may need assistance in mounting buses. KMB has asked several manufacturers to produce a double-deck easy-access version in order to extend this convenience to routes serviced by double-deck buses. We will be operating these easy-access buses on selected routes after consultation with disabled persons' representatives.

We have initiated an investigation into technology systems on the market that can be adapted to the rigours and requirements of transport management in an environment such as Hong Kong. While this is admittedly a tall order, we believe that it is a necessary tool to enable us to execute better scheduling and timetabling and to record and analyse real time passenger information to help us improve our services in both the short term and long term.

KMB's continued success and greatest opportunities hinge on our ability to spot in advance bus transport needs, trends and potential hurdles and provide expert solutions. The Operational Review included in this report offers a comprehensive summary of our enhanced capabilities and initiatives for the year under review. The nature of our business requires that we think long term and make considerable investment to develop those services that our customers depend upon and mandate.

Financing

In 1996 fares for cross-harbour routes were increased by 10 per cent. For local routes, we proposed an average 7.5 per cent fare increase, but the Governor in Council eventually approved a 2.7 per cent rise instead. In a market where the cost of operations rises steeply, we strove hard to enhance revenue and contain costs without compromising on the quality of services and operations. Although this was a difficult task, we have managed to bring about satisfactory results. We will continue to work with Government to reach a reasonable mechanism to decide on the rate of bus fare increases.

In 1996, the Company had a total of 286 buses licensed to cater for the introduction of new routes and service improvements. The purchases are financed by bank loans and the working capital of the Company. The Company's wholly-owned subsidiary, Long Win Bus Company Limited (formerly known as Long Win Holdings Limited) will seek funding from banks to finance the purchase of about 140 new buses to ply the 12 new routes serving Chek Lap Kok airport and North Lantau. We believe KMB's strong cash flow will help us negotiate good terms for this financing.

Winning Satisfied Customers Everyday

Despite being the largest franchised bus company in the territory, KMB is not exempt from the influence of market forces. The ready availability of a variety of rail and motor services in the territory has created a society that will choose the supplier that offers the best value for money, efficiency, comfort and added value. We continue to make improvements to upgrade our entire organisation to win more customers, and to achieve standards that are above and beyond the satisfactory level of operation. We cannot and must not assume that the patronage of our customers is a foregone conclusion, and so, we strive everyday to keep our customers and win over new ones. Although our bus franchise has a dominant presence in the territory, we operate and continue to improve our operations as a commercial enterprise would in fulfilling customer needs and attracting patronage. As a major cosmopolitan city in Asia, Hong Kong is judged and measured by world class criteria. Our bustling and multinational populace has grown to expect a high level of transport performance and service which, if met, is rewarded with continued and increased patronage.

We are mindful of our responsibility to the public to provide high quality, efficient transport services at a reasonable price. We believe that the commuting public in Hong Kong will continue to show their recognition of our efforts by choosing KMB over other forms of transport.

We are also mindful of our responsibility to our Shareholders to achieve a steady level of profit. We affirm that prudent operations management, charging a fair price for high quality service, market responsiveness and seeking opportunities that leverage our expertise are business initiatives that should yield good financial performance.

As we set our sights to new horizons in 1997, we look forward to being a vital and vibrant part of the growth of Hong Kong -- continuing to meet, and indeed exceed, the expectations of our customers.

John Chan Cho Chak
Managing Director

Hong Kong, 10 April 1997

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