Retail, Manufacturing and Other Services

The Group's A S Watson division is one of Asia's largest retailers, with more than 700 stores throughout the region providing high quality personal care products, food and household items and consumer electronics and electrical appliances. The Group also manufactures ice cream, soft drinks and distilled water.

Profits from the retail, manufacturing and other services division totalled HK$2,107 million (1996 - HK$1,034 million).

A S Watson & Company

Despite increasingly difficult market conditions in the second half of the year, the Group's wholly owned subsidiary A S Watson & Company performed above the industry average to generate a satisfactory earnings growth.

The 173 store Park'N Shop supermarket chain in Hong Kong performed well. During the year, the chain increased its store space by 9% to 1,124,000 sq ft. In conjunction with this expansion, the Group accelerated the introduction of its highly successful "wet market" concept for fresh foods in Hong Kong and Macau.

In the Mainland, Park'N Shop made good progress in the southern part of the country, where it is now established as the largest non-local food retailer with its 51 outlet network. Park'N Shop's network in Central and Northern China is currently comprised of 23 outlets.

Watson's The Chemist, the Group's retailing chain of personal care products, produced a good increase in profit, tempered by the decline in Asian currency values. The chain now operates 385 outlets in Hong Kong, the Mainland and the region.

The 49 store Fortress consumer electronics and electrical appliance chain in Hong Kong generated strong sales and another year of increased profits. During the year, Pan Asian Systems was brought under the Fortress umbrella, with new areas of operations being explored to complement the existing telecommunications supply and engineering businesses.

Bhs (British Home Stores), which retails fashion and household goods and for which the A S Watson group has exclusive rights in Asia, had a disappointing start-up but it is still in its early stages of development in Hong Kong and Malaysia.

The Group's manufacturing division turned in a strong performance and further expanded its product range of distilled water, soft drinks, fruit juices and ice cream with the successful launch of several new items. In the Mainland, the Group continued to strengthen its distribution network and production facilities with the opening of a new ice cream plant in Guangzhou and the acquisition of a major interest in a sparkling water facility in Shanghai. The Group currently operates eight factories in the Mainland.

Hutchison Whampoa (China)

1997 was another year of solid growth for Hutchison Whampoa (China), which is involved in a number of successful consumer product, aviation and hotel joint ventures.

The Group's fast-expanding Procter & Gamble-Hutchison joint venture in the Mainland continued to generate strong profits from the manufacture and distribution of a widening range of hair, skin, soap, detergents, dental hygiene and paper products. To meet growing demands, production capacity at the joint venture's manufacturing facilities in the Mainland were increased.

Under the terms of an agreement to restructure, the Group obtained a series of options to sell its investment in its joint venture with Procter & Gamble ("P&G") to them. Throughout the 20-year option period, the Group retains the right to participate in P&G's expanding and, to date, highly successful activities in the Mainland. By exercising the initial options and reducing its interest from approximately 33% to 20%, the Group received US$650 million and realised an exceptional profit of HK$1,430 million in 1997 and a further exceptional profit of approximately HK$3,332 million this year.

The Guangzhou Aircraft Maintenance Engineering Company (GAMECO), in which the Group has a 25% interest, generated increased returns as its activities continued to expand. Plans are well advanced for a new maintenance facility in Wuhan, where a two-bay hangar is to be built. Construction of a joint venture aircraft maintenance facility at the new Hong Kong International Airport is proceeding on schedule and is expected to begin operation when the airport opens in July. The Group has a 20% interest in this joint venture with China National Aviation Company, British Airways and United Airlines.

Hotels

The performance of the Group's two hotels in Hong Kong was adversely affected by a decline in visitor arrivals during the second half of the year. At Sheraton Hong Kong Hotel and Towers, in which the Group has a 39% interest, revenues were also affected by the renovations being made to the shopping podium and reception area of the hotel. These enhancements are due to be completed early this year. The wholly owned Harbour Plaza Hong Kong performed satisfactorily, benefiting from occupancy rates above the local industry average and a strong performance in its food and beverage business.

In a broadening of the Group's hotel activities in the Mainland, three new hotels were acquired and are currently being renovated, namely: Harbour Plaza Beijing, with 429 rooms and suites; Harbour Plaza Shenyang, with 284 rooms and suites; and Harbour Plaza Kunming, with 348 rooms and suites. Renovations to the Beijing property are now in the final stages and the hotel is scheduled to re-open for business in April this year. The development of the Shenyang and Kunming properties are expected to be completed in early 1999.

Other hotel projects under development, and which have been referred to in the Property Development and Holdings section, include two hotel projects in Hong Kong, one in Shanghai, one in Chongqing and a hotel resort complex on Grand Bahama Island.

The Group has recently established a 50:50 joint venture hotel management company with Cheung Kong (Holdings) Limited. Under the trading name of Harbour Plaza Hotels and Resorts, the hotel group will be responsible for the management of the hotels owned by the joint venture shareholders.