1998 in Retrospect

1998 was a difficult year for Hong Kong and Asia because of the regional financial crisis. The economy of Hong Kong has been undergoing a major adjustment since the last quarter of 1997 when the general economic sentiment was dampened by the decline in the stock and property markets and rising unemployment.

In the first quarter of 1998, contraction in Hong Kongs gross domestic product ("GDP") was experienced for the first time since 1984. Construction, retail sales and tourism all experienced a serious downturn during the year. Despite these difficulties, the Group performed satisfactorily, demonstrating that our core business is solid, steady, and relatively recession-proof.

Results for the Year

The Groups profit attributable to Shareholders for the year ended 31 December 1998 was HK$585.5 million, representing an increase of 6.3% over the HK$550.8 million for the previous year. The profit from franchised bus operations for the year amounted to HK$571.4 million, an increase of 2.5% over the HK$557.5 million reported at the end of 1997. Earnings per share for the year amounted to HK$1.45 compared with HK$1.36 the year earlier.

Dividends

At the forthcoming Annual General Meeting, the Directors will recommend the payment of a final dividend of 88 cents per share for the year ended 31 December 1998. This compares with 82 cents per share in 1997. Together with the interim dividend of 27 cents per share paid on 9 October 1998 (1997 - 26 cents per share), dividends for the year will amount to HK$1.15 per share compared with HK$1.08 at the end of 1997, totalling HK$464.2 million compared with HK$435.9 million in 1997.

Meeting Customer Needs

Bus transport - the most convenient, flexible and least expensive form of public transportation - is the heart of our business. When the economy is weak and people are economising, it is likely that they will choose buses over more costly forms of public transport.

At the same time, while the recession encourages bus patronage from budget conscious customers, we recognise that our industry will also be highly competitive when the economy recovers. Therefore, we view this period as a time to build the loyalties of new customers and to do everything possible to retain them.

Changing Environment

An area of significant change in our business has to do with the growth in competition from other bus companies. A significant development during the year was the demise of China Motor Bus. We tendered a bid for the right to operate its previous bus network, but it was awarded to another company. It is noteworthy that, in inviting tenders for the franchise, the Government stated specifically that "in the spirit of competition, credit will be given to tenderers who are currently not operating franchised bus services in the Hong Kong SAR".

Young in Spirit

We now have two young and aggressive competitors, one that is four years old and another that is brand new. KMB is 66 years old. Operating in a highly competitive environment makes us keenly aware that we must keep ourselves fit and continue to behave as though we were 18. And, while we are the largest bus company in the market, with an enviable franchise from the community we serve, the growth in competition sharpens our competitive edge and our quest for innovation.

Our strategy to remain the leader in the Hong Kong market is based on our eagerness to embrace change. We continue to look for ways to be innovative and to remain in the forefront of the bus industry.

Capitalising on Change

Looking ahead, the proposed development of new rail projects will result in overall change in our community's transport infrastructure. While this will have an impact on our existing services, it will provide opportunities to strengthen our leadership position. Historically, major infrastructure developments have led to the creation and growth of new areas. Coupled with the projected population increase of Hong Kong, this will mean a greater need for bus services to link with new rail stations and emerging new towns. In addition, the new rail projects will enable further route rationalisation such as the reduction of circuitous and overlapping routes.

The Future

In planning ahead, we look at our course of action from the customer's point of view as well as the Group's. We are always mindful that as we realign and adjust for the future, everything we do must in the end provide value for money and greater convenience and comfort for our customers while at the same time maximise return for our shareholders.

Hong Kong, by being a small place geographically, is particularly conducive to efficient and cost effective public transport. The demand for bus transport will increase as concern grows about the environment. We believe the current Government policy of encouraging public transport will continue.

In the long term, the projected increase in population will be through immigration from Mainland China and these newcomers can be expected to use public transport, particularly buses. We will capitalise on these growth opportunities and utilise fully our established core competencies and economies of scale that we have built up over our history.

Developing Our People

The bus industry is labour intensive and much of our future success will depend on our people. We have an excellent team of experienced and dedicated professionals and we are grateful for their contributions throughout the years. We will continue to develop and enrich our human resources through sound management.

Directors

Under the Public Bus Services Ordinance, the Commissioner for Transport and the Deputy Secretary for Transport are appointed by the Chief Executive of the Hong Kong Special Administrative Region Government to sit on the Boards of The Kowloon Motor Bus Company (1933) Limited ("KMB") and Long Win Bus Company Limited ("LWB"). On 1 June 1998, Miss Eliza Lee was appointed Deputy Secretary for Transport in place of Mr Isaac Chow Yiu Nam, JP. On 7 July 1998, Miss Linda Lai was appointed as Deputy Secretary for Transport in place of Miss Eliza Lee. On 16 November 1998, Mr Robert Footman, JP was appointed Commissioner for Transport in place of Mrs Fanny Law Fan Chiu Fun, JP. The Board welcomes Miss Lai and Mr Footman to the Boards of KMB and LWB.

On 16 July 1998, Dr Lee Quo Wei, GBM, JP due to personal reasons, resigned from the offices as an independent non-executive Director of the Kowloon Motor Bus Holdings Limited ("the Company") and as Director of KMB and LWB. On the same date, the Board appointed Dr James Kung Ziang Mien, OBE as an independent non-executive Director of the Company, KMB and LWB and Mr George Chien Yuan Hwei as a Director of the Company, KMB and LWB. On 10 December 1998, the Board further appointed the Hon Eric Li Ka Cheung, OBE, JP as an independent non-executive Director of the Company, KMB and LWB. On 14 October 1998, Mr Walter Kwok Ping Sheung appointed Mr Patrick Chan Kai Lung as his alternate in place of Mr George Chien Yuan Hwei.

On behalf of the Group, I would like to express my sincere appreciation for the valuable contributions that Mrs Law, Mr Chow, Miss Lee and Dr Lee have made to the Group throughout their terms as Directors and welcome Dr Kung, Mr Li, Mr Chien and Mr Chan to the Group.

Dedicated to Public Service

As a public service company, we have an obligation to our valued customers and the community at large. We recognise that the franchise we have received from the community is a privilege to provide service, not a monopoly. As such, we have an obligation to earn the right to continue to exercise this privilege. We do this by responsibly and competitively offering the best possible services to the community.

The Group, as a top performing entity with a strong record in good as well as bad times, represents a sound long-term investment. There is considerable growth potential within Hong Kong in our core business. Management is prepared for the challenges and the opportunities that lie ahead. We will continuously build on our capabilities to maximise those opportunities and provide value for all of our stakeholders: our customers, our employees, the community at large and our shareholders.

P C Woo
Chairman
15 April 1999

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