Interim Results for 1999
The Group's unaudited consolidated net profit after taxation and after exceptional provisions for the half year ended 30 June 1999 amounted to HK$7,313 million representing a 70% increase over the comparable period last year. These results include an exceptional profit of HK$5,000 million realized during the period on the sale of an approximate 4% interest in Orange plc partially offset by an exceptional provision of HK$1,657 million against the accumulated capitalized costs of new Hong Kong cellular subscribers.
The unaudited profit and loss account for the six months ended 30 June 1999 and the comparisons with last year are set out in the accompanying table.
DIVIDEND
The Directors have today declared an interim dividend for 1999 of 48 cents per share (1998 - 40 cents) payable on 15 October 1999 to those persons registered as shareholders on 14 October 1999. This represents an increase of 20% over the interim dividend paid in 1998.
The share register of members will be closed from 7 October 1999 to 14 October 1999, both days inclusive.
OPERATIONS
Ports and Related Services
The ports and related services division reported earnings before interest and tax ("EBIT") marginally lower than the comparable period last year. The Group's 88% owned Hongkong International Terminals Limited and 44% owned COSCO-HIT, which together operate ten berths at Terminals 4, 6 and 7 and the two berth facility at Terminal 8 (East) at Kwai Chung, reported a 3% decrease in combined throughput and EBIT 12% below the same period last year. Despite marginally lower throughput, Mid-Stream Holdings (HK) Limited, a wholly owned subsidiary, performed in line with the same period last year as a result of continuing operating and cost controls. Throughput at the River Trade Terminal Limited (33% interest), which is in a start-up phase, was below expectations and is not expected to improve in the second half of the year.
In the Mainland, throughput growth at the Group's ports more than offset the reduced volume at our Hong Kong ports. Shanghai Container Terminals Limited, effectively 40% owned by the Group, continues to perform well with a 31% increase in throughput and EBIT was 46% above the same period last year.
Throughput at the Group's 49.95% owned Yantian International Container Terminals Limited increased an impressive 64% over the same period last year, utilizing the increased capacity from the partially completed second phase expansion programme. As a result EBIT was more than double the previous year's comparable amount. Throughput volumes are expected to continue to grow as additional capacity comes on stream with the completion of an additional berth later this year and another in early 2000.
Although Hutchison Delta Ports ("HDP") reported combined throughput behind the same period last year, it reported year on year EBIT growth. HDP operates river and coastal ports in the Mainland and has interests in joint venture facilities in Jiuzhou, Nanhai, Gaolan, Jiangmen, Shantou, and Xiamen.
In the United Kingdom, the Group has an effective 90% interest in the Port of Felixstowe, Thamesport Container Port and Harwich International Port which reported combined EBIT in line with the same period last year. The Port of Felixstowe maintained its ranking as the UK's leading container facility with a 10% increase in throughput to 1.3 million TEUs while Thamesport recorded throughput in line with the first six months of the previous year. Harwich International Port, which provides regular passenger and freight roll-on roll-off services reported improved results over the previous year's comparable period.
The redevelopment of the effectively 72% owned port at Balboa, Panama is progressing on schedule for completion by the end of the year. Throughput at the Freeport Container Port on Grand Bahama Island (45% interest) was 42% ahead of the same period last year and EBIT was almost double last year's comparable amount. Upon completion of the second phase development which is on schedule for later this year, the port's annual throughput capacity will be increased from 560,000 TEUs to 950,000 TEUs.
On 1 April 1999, the Group successfully bid for a twenty year concession to operate Jakarta International Container Terminal ("JICT") (51% interest), the largest port operator in Indonesia with seven berths and a throughput capacity of approximately 1.7 million TEUs. JICT has already made a positive contribution to the Group's results.
Telecommunications
The telecommunications division reported a 48% increase in earnings before interest and taxes compared to the same period last year mainly due to dividend income received from the Group's portfolio investment in Western Wireless Corporation ("WWC"). The Group's telecommunication operations in Hong Kong which provide cellular, fixed-line and paging services, reported EBIT below the same period last year as a result of the continuing aggressive competition for cellular subscribers by all network operators and start up losses incurred by the fixed-line network. Hutchison Telephone, the Group's 70% owned cellular telephone business increased its subscriber base by an impressive 28% during the period which saw the introduction of mobile number portability. The current subscriber base of over 1,160,000 subscribers represents a leading market share of approximately 34%. In view of the aggressive competitive environment for subscribers, the Group has made an exceptional and prudent provision against the accumulated capitalized cost of Hong Kong cellular subscribers of HK$1,657 million.
The Group's wholly owned IDD 0080 service had approximately 770,000 activated lines at the end of June, a 19% increase from the beginning of the year, and reported better than expected EBIT in a more competitive environment. Construction of the Group's fixed-line fibre optic back bone infrastructure has been completed in the first half of 1999 and the rollout of the network to access additional commercial and residential areas and buildings is in progress for completion in phases over the next few years. During the period the SAR Government announced that, subject to certain conditions, it would not issue any additional licences for new fixed wireline based networks until 31 December 2002.
Orange plc, the Group's 44.8% owned listed associated company continues to perform well and significantly ahead of the previous year's comparable period. Currently Orange PCS has over 3.1 million subscribers, representing a significant 45% increase from the beginning of the year, and an approximate 17% share of the UK cellular market. In Europe, Connect Austria, a consortium in which Orange has a 17.45% interest, launched its network in October last year and already had a subscriber base of approximately 190,000 subscribers at the end of June, representing an approximate 5.6% share of the Austrian cellular market. KPN Orange Belgium, a consortium in which Orange holds a 50% interest, and Orange Communications S.A. in Switzerland, in which Orange has a 42.5% interest, soft launched their networks under the Orange brand name in the first half of 1999.
The Group's Asia Pacific operations overall reported EBIT ahead of the same period last year. Hutchison Telecommunications Australia ("HTA"), the Group's 77.5% owned GSM cellular service provider and paging operations in Australia performed in line with the previous years' comparable period and steady progress was made in the development of CDMA networks in the greater Sydney and Melbourne areas under licences acquired in 1998. These two networks are targeted to be launched in phases later this year under the Orange brand. On 17 August, HTA completed its initial public offering of shares and was listed on the Australian Stock Exchange with a market capitalization of over A$1,270 million based on the opening trading price of the company's shares. HTA raised A$235 million from this public offering which will be used to prepay a portion of the outstanding debt and to finance the development and initial start up of the CDMA networks. As a result of the successful share offering and the Group's sale of 22.5 million shares from its holdings, the Group's interest was reduced from 77.5% to 54% and the profit therefrom of approximately HK$300 million, net of provisions for anticipated start-up losses, will be reported in the second half of the year. Hutchison Max Telecom Limited, the Group's 49.5% owned associated company in India, reported improved results compared to the same period last year and continued improvement is expected with the recent introduction of tariff and other regulatory changes.
Partner Communications, the Group's 46.7% owned cellular network operator in Israel, successfully launched its Orange branded GSM network in January this year and has achieved, at a record setting pace, a current subscriber base of over 240,000 subscribers. Substantial progress has been made on the network rollout with over 90% population coverage achieved to date.
During the period the value of the Group's investment in VoiceStream Wireless Corporation, a PCS business in the United States, increased substantially and the Group has committed, subject to certain conditions, to increase its investment. On 3 May, VoiceStream was listed on the Nasdaq National Market and concurrently the Group received spin-off dividend income of VoiceStream shares from WWC, valued at US$75 million, which increased the Group's equity interest in VoiceStream from 19.9% to 24.0%. On 23 June 1999, the Group agreed to investment in common and convertible preferred stock of VoiceStream, at a share price of US$29 per share, to provide a total of US$957 million to support VoiceStream's proposed merger with Omnipoint Corporation. Assuming completion of the merger and the further investment in accordance with the proposed terms, the Group's interest in the common stock of the merged entity would be adjusted to approximately 19% and the Group's remaining investment would be represented by convertible preferred stock. On conversion of the preferred stock, the Group's equity interest would increase to approximately 30% of the merged entity. In terms of geographic coverage, the merged entity would be the largest GSM wireless telecommunications network operator in the United States, with licences covering a population of approximately 175 million people. As of 30 June 1999 VoiceStream had approximately 550,000 subscribers and Omnipoint Corporation had approximately 594,000 subscribers.
Property Holdings and Development
The EBIT of the property division was 27% below the comparable period last year mainly due to reduced investment property sales recognized during the first half of this year. The results of the property division include the profit from Group's portfolio of premium quality hotels which reported EBIT ahead of the previous year's comparable period. Following the successful presale of all units comprising approximately 1.53 million sq ft in the second phase of the Tierra Verde residential project at Tsing Yi (60% interest), steady progress has been made to complete construction and the occupation permit is expected to be obtained in the second half of the year when the profit will be recorded. In June, substantially all the carparks at Tierra Verde were successfully sold and the profit recorded. The Group's investment properties in Hong Kong continue to be substantially fully let and overall gross rental income is marginally ahead of the same period last year. In March, the temporary occupation permit for the second phase of the 1.26 million sq ft Cheung Kong Center was obtained and over 90% of the premises has been committed pursuant to long term leases. The Group's residential joint venture development projects at Ma On Shan and Broadcast Drive and its office and hotel joint venture development in North Point are progressing on schedule for completion later this year.
In the Mainland at Qingdao, residential units in two towers of the second phase of Pacific Plaza (15% interest) are currently being marketed for sale and approximately one quarter of the units have been sold to date. Construction of the first phase shopping mall of the Beijing Oriental Plaza has progressed steadily and is on schedule to open in 2000. The Group's other property projects in the Mainland are progressing as expected. Overseas the Group has a number of property development projects in London, Tokyo and Singapore which are progressing satisfactorily. The first phase of the Lucayan Hotel redevelopment on Grand Bahama Island was completed and the hotel was reopened in April.
Retail, Manufacturing and Other Services
This division reported significantly higher EBIT than the same period last year due to the sale, earlier this year, of its ice cream businesses in Hong Kong and the Mainland and an increased contribution from the Group's Mainland joint ventures with Procter & Gamble. In the first half of the year PARKnSHOP in Hong Kong recorded modest year on year sales growth although the profitability will be reduced in the second half of the year due to increased competition. In the Mainland PARKnSHOP continued to be affected by a slow economy and competition from local and international supermarkets. Despite the adverse effects of both lower local consumer demand and reduced number of tourists visiting Hong Kong in the early part of the year, Watson's Personal Care Stores in Hong Kong also reported increased year on year sales, outperforming the market. In Taiwan, Watson's Personal Care Stores performed very well reporting increased year on year sales due to store expansion and a successful national advertising campaign. The Fortress electrical consumer goods chain in Hong Kong was adversely affected by the slow economy and after a number of years of strong growth reported sales just marginally ahead of the comparable period last year. The Group's 50% owned joint venture which operates perfume, cosmetics and general merchandise concessions at the Hong Kong International Airport performed in line with expectations during the period and the steady increase of passengers in the first half of the year is encouraging.
The manufacturing division which produces and distributes a range of well known brands of distilled water, soft drinks and fruit juices in Hong Kong and the Mainland, successfully launched several new product types and sizes during the period. Overall sales and profits declined marginally compared to the same period last year, affected by cooler weather than normal and also by lower priced imports into Hong Kong. During the period the Group acquired three additional home and office water businesses in the United Kingdom and overall the UK water division performed ahead of expectations in the first half of the year.
Energy, Infrastructure, Finance and Investment
Cheung Kong Infrastructure ("CKI"), the Group's 84.6% owned listed subsidiary, announced a 10% increase in its consolidated profit compared to the same period last year. CKI's cement, asphalt and aggregates business performed marginally below expectations while the transportation division, which currently has joint venture interests in toll roads and bridges in six provinces in the Mainland, contributed increased profits over the comparable period last year. The energy division, which holds a 36.78% interest in Hongkong Electric Holdings and joint venture interests in power projects in four provinces in the Mainland, also reported profits ahead of the same period last year.
Husky Oil, the Group's 49% owned Canada based integrated oil and gas company, reported EBIT 33% below the previous year's comparable period mainly due to depressed oil and gas prices during the earlier part of the year and the non-recurring receipt of payments in the first half of 1998 from the termination of gas sales contracts. The recent recovery of oil and gas prices is encouraging for the second half of the year's performance. Husky Oil's development and exploration programmes off the east coast of Canada are continuing on schedule. Delineation drilling at the White Rose oil field project, in which Husky has a 71% interest, is on schedule and results to date have exceeded expectations. The development of the Terra Nova oil field is progressing on schedule for production to commence in late 2000.
On 15 February 1999, the Group issued HK$1,500 million principal amount, three year 7.88% fixed rate notes that are listed on the Hong Kong and Luxembourg stock exchanges and on 16 March 1999 the Group successfully concluded the issue of Euro 500 million principal amount, seven year 5.5% fixed rate bonds which are listed on the Hong Kong and Frankfurt stock exchanges. In addition, on 3 August 1999, the Group issued HK$1,500 million of five year floating rate notes that are listed on the Hong Kong stock exchange.
OUTLOOK
The interim results have been achieved in an environment of reduced consumer spending, slow albeit modestly recovering economies in Asia and increased competition in all the Group's core businesses but particularly in the cellular telephone business in Hong Kong where operators are aggressively competing for subscribers. In this operating environment the remainder of 1999 will continue to be challenging.
Overall, Hong Kong's economy had stabilized by the mid year. There are now some signs of a steady recovery as indicated by less fluctuation in interest rate movements, a stabilized stock market, rising tourist arrivals, and improved sentiment in the local property market. The unemployment rate has also moderated recently. After the current difficult period of adjustment, Hong Kong should emerge stronger and more competitive than before, and I have every confidence in its long term future.
The Group remains in a strong financial position with a large pool of liquid assets, a sound long term debt capital structure, and ready access to capital market facilities at attractive interest rates. The Group also benefits from its geographic spread of overseas principal subsidiaries and associates which have performed well, built significant incremental value and are generally financially self sufficient in the countries in which they operate. From this solid base, the Group is committed to pursue strategic investments pursuant to a focused strategy of controlled growth of its core businesses in Hong Kong, the Mainland and overseas.
I would like to thank the Board of Directors and all the employees of the Group for their continuing support, dedication and hard work.
Li Ka-shing
Chairman
Hong Kong, 26 August 1999
PURCHASE, SALE OR REDEMPTION OF SHARES
During the six months ended 30 June 1999, neither the Company nor any of its subsidiaries has purchased or sold any of the Company's ordinary shares. In addition, the Company has not redeemed any of its ordinary shares during this period.
THE YEAR 2000
The Group continues to progress according to schedule with the implementation of its Year 2000 action plan in both its operational and financial systems, working under the Year 2000 Committee spearheaded by the Group Finance Director. Based on the current assessment, approximately 95% of the Group's operational and financial systems have already achieved Year 2000 compliance with the remaining remedial work to be completed in the third quarter of 1999.
To ensure business continuity amidst internal and external Year 2000 threats, contingency planning has been established at all levels within the Group. Fallback systems and procedures have been developed to handle possible interruption of operations that might be caused by internal systems, external infrastructure or supply chain failures. Response centres at operations units as well as head office levels have been set up to administer the contingency plans to ensure a smooth transition into the new millennium. Testing of and drilling relating to contingency plans are being conducted.
It is the belief of the Group that the Year 2000 issue will not cause any material adverse effect on the Group's business operations as a whole. Further details of the Group's Year 2000 compliance will be set out in the 1999 Group's Interim Report.
CONSOLIDATED PROFIT AND LOSS ACCOUNT
For the six months ended 30 June 1999
Six Months Ended Year Ended
30 June 31 December
(unaudited) (audited)
1999 1998 1998
HK$ Millions HK$ Millions HK$ Millions
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Turnover 24,165 22,896 51,383
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Operating profit 4,405 4,173 7,779
Share of profits less losses
of associated companies 801 986 2,307
Share of profits less losses
of jointly controlled entities (174) 266 513
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Profit before exceptional items 5,032 5,425 10,599
Exceptional items 3,343 (118) 566
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Profit before taxation 8,375 5,307 11,165
Taxation
Hong Kong
Company and subsidiaries 231 277 685
Associated companies 71 72 179
Jointly controlled entities 12 19 43
Overseas
Company and subsidiaries 69 49 120
Associated companies 55 124 140
Jointly controlled entities 20 3 23
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Profit after taxation 7,917 4,763 9,975
Minority interests 604 453 1,269
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Profit Attributable to
the Shareholders 7,313 4,310 8,706
Dividends 1,860 1,550 4,962
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Profit for the Period Retained 5,453 2,760 3,744
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Earnings per Share HK$1.89 HK$1.11 HK$2.25
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Dividends per Share HK$0.48 HK$0.40 HK$1.28
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Notes:
1. Exceptional items for the six months ended 30 June 1999 comprise of a profit of HK$5,000 million on disposal of approximately 4% of the Group's shareholding in Orange plc less a provision against the accumulated capitalized cost of acquiring new Hong Kong cellular subscribers of HK$1,657 million, net of minority interest. Exceptional items for the periods ended 30 June 1998 and 31 December 1998 comprise of a profit of HK$3,332 million on disposal of a portion of the Group's shareholding in Procter & Gamble-Hutchison Limited less provisions of HK$2,450 million for property developments and HK$1,000 million for diminution in value of the Group's portfolio of listed investments, and in addition, for the period ended 31 December 1998 the amount also includes the profit of HK$684 million on disposal of the Group's investment in Asia Satellite Telecommunications Holdings Limited.
2. Hong Kong profits tax has been provided for at the rate of 16% (1998 - 16%) on the estimated assessable profits for the period less available tax losses. Overseas taxation has been provided for at the applicable rate on the estimated assessable profits less available tax losses.
3. The calculation of earnings per share is based on profit attributable to shareholders on 3,875,791,619 shares in issue during the period ended 30 June 1999 (30 June 1998 and 31 December 1998 - on the weighted average of 3,875,068,423 shares and 3,875,355,723 shares respectively).
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