1. Basis of preparation

The interim accounts have been prepared in accordance with the principal accounting policies set out in the 1996 annual report.

Following the share placement by Cathay Pacific Airways to CITIC Pacific on 10th June 1996, Swire Pacific's interest in Cathay Pacific Airways was diluted from 52.4% to 43.9%. Cathay Pacific Airways and Hong Kong Aircraft Engineering Company are no longer consolidated by Swire Pacific from 10th June 1996. This has important implications for the presentation of the Swire Pacific Group's results. Proforma profit and loss accounts are set out in note 6 to assist in the assessment of the impact of no longer consolidating Cathay Pacific Airways and Hong Kong Aircraft Engineering Company since 10th June 1996 on the Swire Pacific Group results.

2. Net operating profit

3. Taxation

Hong Kong profits tax is calculated at 16.5% (1996: 16.5%) on the estimated assessable profits for the period. Overseas taxation is calculated at rates of tax applicable in countries in which the Group is assessed for tax.

4. Earnings per share

Earnings per share are calculated by dividing the profit attributable to shareholders for the period ended 30th June 1997 of HK$3,315 million (1996: HK$3,055 million) by the weighted average number of 966,219,642 'A' shares and 3,072,801,119 'B' shares in issue during the period (1996: 970,009,385 'A' shares and 3,076,706,271 'B' shares).

Earnings per share excluding share of associates' exceptional items are calculated in the same way, except that the profit attributable to shareholders for the period ended 30th June 1996 and the year ended 31st December 1996 have been adjusted to exclude the Group's share of associates' exceptional items of HK$468 million and HK$527 million respectively. The earnings per share excluding share of associates' exceptional items have been calculated in addition to the earnings per share required by Hong Kong Statement of Standard Accounting Practice No. 5 as, in the opinion of the directors, due to the particular nature of those exceptional items, this additional disclosure will assist in the assessment and on-going comparison of the operating results of the Group.

5. Reserves (Group)

6. Proforma profit and loss accounts

The following proforma profit and loss accounts have been prepared to assist in an assessment of the impact of no longer consolidating Cathay Pacific Airways and Hong Kong Aircraft Engineering Company on the Swire Pacific Group results. They have been prepared on the basis of Cathay Pacific Airways and Hong Kong Aircraft Engineering Company being accounted for as associated companies throughout, using the actual shareholdings held by Swire Pacific for the periods stated.

Consolidated Results

The profit attributable to shareholders for the first half of 1997 was HK$3,315 million representing an increase of 8.5% over the equivalent period in 1996. If the exceptional profit of HK$468 million arising from sale of Dragonair shares in 1996 is excluded, the Group's attributable profit increased by 28.1%.

The property division experienced further growth in rental income from its investment property portfolio which was enhanced by significant profits from developments for sale, arising in the main from further sales of residential units in the Island Place development. Within the aviation division, Cathay Pacific Airways and Dragonair suspended the operation of their A330-300 fleets for approximately two weeks at the end of May due to reliability concerns with the Rolls-Royce Trent 700 engines. They are now performing very satisfactorily. Cathay Pacific Airways' operating profits were marginally lower than those in the first half of 1996 as the benefits derived from good load factors and increased operating efficiencies were offset by continued downward pressure on yields. Meanwhile, the profits of Hong Kong Aircraft Engineering Company were also in line with those achieved in the first half of 1996 as operating margins remained stable. The industries division's results in the first half of 1997 were lower than those in the first half of 1996 due to weaker results from Swire Beverages' Coca-Cola operations, and from the China operations of Crown Can Hong Kong and Carlsberg Brewery Hong Kong. The trading division's apparel business continued to suffer from the difficult operating environment in the USA which depressed the division's results for the period. Profits from the marine services division showed satisfactory growth over the equivalent period in 1996 reflecting particularly the improved market conditions within the offshore oil support sector.

Your Directors have today declared interim dividends for 1997 of HK¢47.0 per 'A' share and HK¢9.4 per 'B' share representing an increase of 9.3% over the interim dividends paid in 1996.

Operations

PROPERTY DIVISION

Net rental income for the half-year to 30th June 1997 showed satisfactory growth over the corresponding period in 1996 and is expected to strengthen in the second half of 1997, mainly due to a full contribution from the reinstated areas of the Cityplaza shopping centre, as well as an initial contribution from the Cityplaza One office tower above, which will be completed shortly. One third of the space in Cityplaza One has been let.

In TaiKoo Place, the main building contracts for the Lincoln House and Oxford House office towers are making steady progress with completion expected in 1998. Pre-leasing of the retail space in Festival Walk continues to make progress and the office space above has also recently been offered for letting. Festival Walk will be available for handover to tenants in the first half of 1998.

The Hong Kong residential market continued to strengthen during the first half of 1997. 315 residential units in Island Place were sold in the first half of 1997 at appreciably higher prices than the 376 unit sales concluded in 1996. It is anticipated that the remaining 93 units will be sold in the second half of the year. The Island Place office tower was completed in July 1997, with only 2 of its 25 floors remaining unsold, and the adjacent shopping centre is almost fully let. Since 30th June 1997, 103 of the 214 completed residential units in The Floridian, Sai Wan Terrace have been sold. There is keen demand and the remaining 111 units are likely to be sold before the end of 1997.

In April 1997, a joint venture company owned 50:50 by Swire Properties and Sun Hung Kai Properties Limited acquired a 98% interest in a company owning the Shiu Wing steel mill site at Tseung Kwan O. The site has a development potential of approximately four million square feet of residential space and it is intended to construct over 4,000 residential units, plus neighbourhood shopping space and ancillary carpark spaces over a five year development programme.

The 272 unit Courvoisier Courts rental apartment tower on Brickell Key, Miami was sold to an institutional investor in July 1997. In the neighbouring 288 unit One Tequesta Point condominium tower, 8 units remain to be sold.

AVIATION DIVISION

The Cathay Pacific Airways group's profit attributable to shareholders for the period was HK$1,068 million. This represents a marginal reduction from the profit before exceptional item for the equivalent period in 1996 amounting to HK$1,106 million.

Turnover increased by 4% to HK$15,775 million while airline capacity, measured in available tonne kilometres (ATKs), rose by 6.8%. Continuing downward pressure on yields and weak currencies have offset good load factors and increased operational efficiencies. The passenger yield fell by 5.3%, and the cargo and mail yield decreased by 4.1%.

Cathay Pacific Airways and Dragonair suspended operations of their Airbus Industrie A330-300 fleets on 24th May, due to reliability concerns with the Rolls-Royce Trent 700 engine. The decision to suspend operations was taken when three inflight engine shutdowns, including one on a Dragonair aircraft, occurred in a period of less than three weeks. Caused by insufficient lubrication to a bearing in the step-aside gearbox, the problem was quickly rectified and operations were resumed just over two weeks later. During the period, Cathay Pacific Airways leased a number of aircraft from other carriers and operated an average of more than 85% of scheduled flights.

In the first six months, services to a number of destinations have been increased, including Kuala Lumpur, Osaka, London, Bahrain and Dubai. Freighter services to Chicago have been resumed but the joint venture service to Mauritius will be terminated for commercial reasons. The service to New York, which recently celebrated its first anniversary, has been a consistent success.

During the period, an A330-300 and an A340-300 joined the fleet while the two remaining leased A340-200s were retired. In April and May, the airline's A340-300 fleet was reconfigured as a result of the increased demand for Business Class seats on longhaul routes. Over half of the passenger fleet has now been equipped with Economy Class personal televisions. In addition, the entire Boeing 747-200 fleet has been refitted with a new interior cabin design, new overhead bins and seats in a two-class configuration. This product upgrade programme is scheduled for completion in 1999.

The new airport at Chek Lap Kok is scheduled to open early next year and the airline's HK$4,900 million investment, Cathay Pacific City, is on schedule and fitting out is well under way. In May, two land leases were signed with the Hong Kong Airport Authority for the flight training centre and stores building. The flight training centre, with capacity for 14 simulators, will be the world's most technologically advanced.

Hong Kong Aircraft Engineering Company reported profits in line with those for the equivalent period in 1996. Operating margins have remained stable in the first half of the year, with productivity improvements helping to offset the continuing adverse impact of Hong Kong inflation. There were positive contributions from the engine overhaul business undertaken by Hong Kong Aero Engine Services and from the maintenance services provided by Taikoo (Xiamen) Aircraft Engineering Company during the period. Meanwhile, construction of a single hangar capable of fully enclosing three widebodied aircraft is progressing well at Chek Lap Kok.

The performance of AHK Air Hong Kong was better than that for the same period last year. There are continued improvements in productivity and management is confident about the prospects for the remainder of the year.

Dragonair made good progress in terms of revenue growth especially in respect of cargo business. The company began services to Chongqing in April, and in June took delivery of its fifth A330-300.

The results of other companies within the division were satisfactory.

INDUSTRIES DIVISION

The industries division's results for the first half of 1997 were below those for the equivalent period in 1996 with profit declines arising from difficult trading conditions in some of the China operations being partly offset by better performances from other companies.

Profits from Swire Beverages' Coca-Cola operations were below those for the first half of 1996. Volume growth in China was satisfactory but margins remained under pressure. Commissioning has started on the non-carbonated drinks plant at Dongguan and progress continues on the construction of new plants in Guangzhou, Xiamen and Hefei. A start was also made on constructing a new distribution centre for Swire Coca-Cola USA at Draper near Salt Lake City.

The results of Swire Industrial, which includes Taikoo Sugar, Swire Duro and Swire Engineering, were in line with those of the same period last year.

Profits from the division's associated companies declined as a result of weaker results at both Crown Can Hong Kong and Carlsberg Brewery Hong Kong which continued to experience difficult market conditions in their expansion into China. Construction of Carlsberg's new brewery in Shanghai is also progressing more slowly than originally planned. Swire BFI Waste Services reported higher profits as a result of the completion of the construction of the Island West Transfer Station. ICI Swire Paints, Schneider Swire and Tate & Lyle Swire all made satisfactory progress in developing their China operations.

TRADING DIVISION

The motor vehicle business in Taiwan continued to be adversely affected by unfavourable market conditions. However, the division has confidence in the prospects for the longer term and commitments were made to expand the distribution network.

In July 1997, an agreement was signed for the exclusive distribution of Volvo cars in Hong Kong and South and Central China. The arrangement with Volvo Car Corporation now establishes the Swire Pacific Group as the importer and distributor for Volvo cars for Greater China.

In Hong Kong, the distribution businesses for apparel, sporting goods and healthcare products achieved comparable results with those of the same period last year. Camberley Enterprises, engaged in the design and manufacture of apparel, improved on last year's strong performance. The division's sports business has benefited from growth in the Marathon Sports retail activity, primarily with new shops opened in Shanghai and Guangzhou; Marathon Sports now has 21 shops in China with further openings planned for later in the year.

In the USA, the apparel industry has shown little sign of revival. The Eagle's Eye has embarked on a programme of product development which will be supported by new investment in the brand.

MARINE SERVICES DIVISION

Strong demand for drilling rigs has caused a corresponding demand for offshore support vessels resulting in an increase in both utilisation and charter rates for Swire Pacific Offshore's fleet during first half of 1997. The craneship, Pacific Constructor, was sold in the half-year whilst an order was placed with Ulstein Verft of Norway for two further 12,600 BHP anchor handling tug supply vessels for delivery in mid 1998. The first two of these six newbuildings were delivered in the first half of 1997 and are operating in the North Sea.

There was no growth in container throughput at Modern Terminals in the first half of 1997, but the company has focused on procedures to improve the efficiency of its operations. Meanwhile, good growth in throughput is being achieved by Shekou Container Terminals as more shipping lines commence calls at the terminal.

As a result of the continuing weakness in the shiprepair market, Hongkong United Dockyards had a difficult half-year but is introducing measures to improve its efficiency. However, The Hongkong Salvage & Towage Company continued to benefit from increased ship movements in Hong Kong harbour and from the entry into service of two new refuse disposal container ships.

Finance

Shareholders' funds and minority interests at 30th June 1997 totalled HK$108,534 million (31st December 1996: HK$104,436 million). At 30th June 1997, net borrowings were HK$16,283 million, as compared with HK$10,418 million at 31st December 1996; the increase was largely attributable to expenditure incurred on the acquisition of an interest in the Shiu Wing steel mill site at Tseung Kwan O and to capital expenditure across the divisions. The Group's gearing ratio was 0.15/1 as compared with 0.10/1 at 31st December 1996.

Prospects

The property division expects further enhancement of profits in the second half-year as a result of sales of residential development properties and growth in net rental income. Operating profits at Cathay Pacific Airways are expected to be higher in the second half-year due mainly to seasonal factors, although yields are expected to remain under pressure and certain markets remain very soft. Profits from Hong Kong Aircraft Engineering Company are expected to be broadly in line with 1996. The results from operations of the remaining divisions are expected to improve in the second half-year.

P D A Sutch
Chairman

Hong Kong, 7th August 1997

During the period under review, Swire Pacific Limited made the following purchases of its shares. These purchases were made as a result of a fall in the price of both 'A' and 'B' shares. All the shares purchased were cancelled.

Interim dividends

Interim dividends of HK¢47.0 (1996 : HK¢43.0) per 'A' share and HK¢9.4 (1996 : HK¢8.6) per 'B' share have today been declared payable on 3rd October 1997 to shareholders registered at the close of business on 19th September 1997; the share registers will be closed from 15th September 1997 to 19th September 1997, both dates inclusive.

For further information please contact:

Mr. Charlie Stewart-Cox - 2840-8092
Ms. Maisie Shun Wah - 2840-8097

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