The Group's A S Watson retailing arm strengthened its position as one of Asia's largest retail operators through the on-going expansion of its chain store networks in Hong Kong, China and around the region. Manufacturing activities include ice-cream products, soft drinks, fruit juices and distilled water.

Profit from the retail, manufacturing and other services activities totalled HK$1,034 million (1995 - HK$686 million).

A S Watson & Company

1996 was a successful year for the wholly owned subsidiary A S Watson & Company, which recorded a significant increase in profits despite difficult market conditions. The record performance was achieved through focused management, responsiveness to changing market conditions and strategic positioning of the company's businesses. With over 18,000 employees and a network of more than 600 outlets throughout the region, the A S Watson group has further entrenched its position as one of the largest retailing chains in Asia. Customer service and operating efficiency continue to be the key principles in the group's regional expansion plans.

The Park'N Shop supermarket chain in Hong Kong had another year of increased profitability. While the number of stores remained level at 171, the total trading floor area was increased with the introduction of larger store formats, The highlight of the year was the opening of the Park'N Shop superstore at Whampoa Garden, which offers customers more than 14,000 items in a 46,000 sq ft shopping environment. The superstore concept, which has proven popular with consumers, has also been successfully launched in Macau.

The Park'N Shop network in China has expanded to 61 outlets with stores strategically located in such cities as Shanghai, Guangzhou, Shenzhen and Zhuhai, and a superstore is to be opened in Beijing this spring. Park'N Shop's expansion plans for China include the opening of more superstores in key cities.

As Asia's leading retailing chain of personal care products, Watson's The Chemist turned in a strong performance. The chain continued its regional expansion and currently operates 133 outlets in Taiwan, 84 in Hong Kong, 43 in Singapore, 29 in Malaysia, 19 in China, and three stores have been opened in Thailand.

The Fortress consumer electronics and electrical appliance chain, which operates 46 stores in Hong Kong, had a good year with improved profits and an increase in market share. A wider product range, more consumer-friendly store layouts and better customer service were key contributing factors to its improved performance.

During the year, the A S Watson group obtained the exclusive rights to operate the Bhs (British Home Stores) concept in Asia. The concept comprises women's, men's and children's fashions as well as a wide range of home products. The first Bhs store in Hong Kong was opened in November at Whampoa Garden.

Manufacturing operations in Hong Kong had a satisfactory year, with continued growth in the distilled water, soft drinks, fruit juice and ice cream businesses. In China, A S Watson continues to expand its distribution network as well as manufacturing facilities, managing a total of seven factories. During the year, a new soft drink plant started production in Guangzhou, and construction commenced on a new ice cream factory.

Pan Asian Systems, the Group's telecommunications supply and engineering company, had a disappointing year due to delays of certain major projects. However, the recent introduction of a new line of telecommunications products is expected to have a positive effect on the company's performance in 1997.

Hutchison Whampoa (China)

1996 was another year of strong returns for the Group's joint ventures in consumer products, aviation and hotels in China.

The Procter & Gamble-Hutchison joint venture continued its upward growth by consolidating its leading position in the China market. Enhanced by a competitive edge in its sales and distribution expertise, the joint venture is a market leader in the haircare products sector in China. The joint venture produces a diversified range of skin, hair, soap, detergents, dental hygiene and paper products in a growing number of factories in China. Dental hygiene products made their debut during the year, and consumer response has been very encouraging. The construction of a new multi-product manufacturing plant in Tianjin is proceeding on schedule, and when completed in late 1998, it will substantially increase the joint venture's overall production capacity.

The Group's 25% owned Guangzhou Aircraft Maintenance Engineering Company ("GAMECO") achieved improved results during 1996 by strengthening relationships with existing customers, enlarging its customer base and increasing its capacity. GAMECO continues to benefit from its maintenance contract with China Southern Airlines, which has embarked on a fleet expansion programme. The company's new component overhaul workshops at the Guangzhou facility successfully completed their first full year of operations, and progress was made during the year for the establishment of a new maintenance base in Wuhan.

A joint venture company, in which the Group has a 20% interest, also has been awarded an aircraft maintenance licence for Hong Kong's new Chek Lap Kok Airport. The other parties in the joint venture are CNAC, British Airways and United Airlines.

Hotels

The Group's two hotel properties in Hong Kong, The Sheraton Hong Kung Hotel and Towers, in which the Group has an effective 39% interest, and the wholly owned Harbour Plaza, both had a very good year with profits well ahead of expectations. The podium of The Sheraton Hong Kong Hotel is currently being up-graded into a first-class retail shopping arcade.

Despite a soft tourism market in China, the Great Wall Sheraton Hotel in Beijing had a satisfactory year, increasing its market share and room revenues. The Group continues to explore opportunities to expand its hotel operations elsewhere in China.