The Group's investments in Hongkong Electric and Husky Oil reflect the diversification of the Group's activities. In addition to power generation and distribution, and oil and gas exploration, the Group also provides consultancy services in these industries in China and regionally.

Income from finance and investment came primarily from interest earned on surplus cash and dividends received. The energy, finance and investment division earned a profit of HK$3,566 million (1995 - HK$3,420 million).

Hongkong Electric Holdings

Hongkong Electric Holdings Limited, in which the Group's interest was recently increased from 34.6% to 35.01%, recorded a profit of HK$4,154 million in 1996, marginally down from $4,186 million in 1995, reflecting the absence of property development revenue during the year following completion of the South Horizons development. However, the core business operating profit showed healthy growth, rising 11.7% in the year on a 5.9% increase in electricity sales.

The company now operates seven coal-fired and seven gas-turbine units with a total generating capacity of 2,955 MW. A new 350 MW coal-fired unit is scheduled to come into operation towards the end of this year.

As a result of the recent reorganisation, the Group has transferred its shareholding in Hongkong Electric Holdings to Cheung Kong Infrastructure ("CKI") for new shares of CKI and has simultaneously acquired from Cheung Kong (Holdings) Limited its interest in CKI, increasing the Group's shareholding in CKI to 84.6%.

Husky Oil

Husky Oil's performance improved substantially in 1996, with earnings increasing by approximately 45% over the previous year.

During the year, Husky succeeded in meeting its objectives of increasing oil and gas reserves as well as meeting its overall production targets. The Bi-Provincial Upgrader continued to operate efficiently and made a positive contribution. In addition, Husky obtained an investment grade rating from two international rating agencies and successfully refinanced its debt on a stand alone basis.

Future development projects of Husky include the Terra Nova and White Rose oil fields off Canada's east coast. Approval of the development plan for Terra Nova is expected to be received by the end of this year. Construction of production facilities is expected to begin in 1998, with initial production anticipated in 2000.

Husky, in addition to holding a 42% acreage pooled interest in White Rose, is the field's operator. A three-year well delineation and testing programme will begin in 1998, with potential production starting in 2004.

ComPass Card

The COMPASS credit card, in which the Group has a 50% interest, celebrated its first full year of operation with more than 120,000 card holders. During the year, several new merchants joined the bonus scheme, which now provides benefits at more than 400 retail outlets throughout Hong Kong.

Group Liquidity and Financial Resources

The Group's capital expenditures for the year, excluding expenditures for properties under development and for resale, amounted to HK$7,611 million (1995 - HK$6,174 million), and these were funded from cash on hand, internal cash generation, and to the extent required by external borrowings. At 31 December 1996, the Group's borrowings, net of cash, managed funds and other listed investments, were HK$10,416 million (1995 - HK$11,915 millionj. Approximately 48% of the Group's total borrowings were denominated in HK dollars, 43% in US dollars, 8% in pounds sterling and the remaining 1% in other currencies. The non-HK dollar and non-US dollar loans are either directly tied in with the businesses conducted in the countries of the currencies concerned, or these loans are balanced by assets in the same currencies. At year-end, approximately 14% of the Group's borrowings, excluding non-interest bearing loans from minority shareholders, were repayable within one year, 56% were repayable between one to five years and 30% were repayable beyond five years. Committee borrowing facilities available to Group companies, but not drawn at 31 December 1996, amounted to the equivalent of HK$20,501 million.

An important borrowing facility which was arranged during the year was a US$1,500 million multiple option facility for general funding requirements, which was strongly supported by the international banking sector. The Group was the recipient of the "1996 Review of the Year Award" for this facility in the Asian Loan Deal category presented by International Financing Review.

Treasury Policies and Capital Structure

The Group's overall treasury and funding policy is that of risk management and control, with transactions being directly related to the underlying businesses of the Group. Where possible, we endeavour to match the Group's assets located in other countries and denominated in the currencies of those countries with an appropriate level of borrowings in the same currencies. Forward foreign exchange contracts and interest and currency swaps are utilised when suitable opportunities arise and, when considered appropriate, to hedge against major non-HK and non-US dollar exposures as well as assist in managing the Group's interest rate exposures.

Community Service

The Group continues to provide support to a wide range of charities, organisations and cultural and sporting events which are aimed at improving the quality of life throughout the community.

During the year, the Group extended strong support to the Community Chest, which provides funds to more than 140 member agencies. Some of the other charitable groups that received assistance from the Group included the Save the Children's Fund, UNICEF, Oxfam Hong Kong, Helping Hand and organisers of earthquake relief in China. The Group also supported a wide range of community and cultural activities, such as the Hong Kong Arts Society, the Asian Cultural Society and the World Wide Fund for Nature. A number of environmental awareness events also received assistance. In aid of education, the Group continued to provide scholarships for eligible local students to study overseas.

Employee Relations

Excluding associated companies, the Group employs 27,733 people (1995 - 29,137 people) of which 16,946 (1995 - 16,115) are employed in Hong Kong. Employee costs, excluding Directors' emoluments, amounted to HK$5,301 million (1995 - HK$5,120 million). All subsidiary operating companies of the Group are equal-opportunity employers, with the selection and promotion of individuals being based on suitability for the position offered. The pay levels of the Group's employees are kept at a competitive level and employees are rewarded on a performance-related basis within the general framework of the Group's salary and bonus system, which is reviewed annually. The Group also has in place a share option scheme for its senior executives. This scheme was introduced in 1988 following approval by the shareholders. Career development opportunities along with a wide range of benefits including medical coverage, provident funds and retirement plans, and long-service awards are also provided to the employees.

During the year, many social, sporting and recreational activities were arranged for employees on a Group-wide basis. Some of the events organised for the employees included the Annual Sports and Family Day, singing and fishing competitions as well as charity walks and other community-oriented events.

To keep skill levels up-to-date, employee development and training programmes are provided on an on-going basis throughout the Group. Financial assistance is also available for qualifying employees who wish to further their education through part-time diploma or degree-courses.

Outlook

Supported by the underlying strengths of its core businesses and the strong cash flows which they continue to generate, the Group remains firmly committed to its policy of focused, controlled growth. With its sound financial footing, the Group is well positioned to maintain the pace of its expansion in Hong Kong, China and internationally.

The results for 1996 were achieved through the hard work and dedication of the employees of the Group, and I would like to join our Chairman in thanking them for their efforts throughout the year.

Canning K N Fok
Group Managing Director

Hong Kong, 26 March 1997