(Incorporated in Bermuda with limited liability)
Financial Highlights
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Business review
Prospects
SOCAM will be focusing on five strategic development areas which will provide the Group with long-term growth opportunities. Excellent progress has already been made:
SOCAM will systematically expand into the quality housing development market in key Mainland cities, our first undertaking being Rui Hong Xin Cheng, a prestigious, large-scale property development project in Shanghai with more than 16,000 residential units to be completed in the next 10 years. This recently acquired project, located close to the Bund and the central business area, should establish a strong foothold for the Group in Shanghai as a major property developer.
The Group's expansion plans for its cement operations in Chongqing and Guizhou coincide with the Central Government's policy to develop the Central and Western provinces. TH Cement has become the leader in the high-grade cement market in Chongqing with a total capacity of 2.8 million tonnes, following its recent acquisition of 80 percent of the largest cement producer in Chongqing. Acquisitions of cement factories and additions of new rotary kilns will enable the Group to increase its production capacity to around 3 million tonnes per annum within three years in Guizhou province alone.
SOCAM's status as one of the six Hong Kong Housing Authority's Premier League Contractors and a Quality Maintenance Contractor will give us more tendering privileges. The comprehensive electronic construction management system designed by SOCAM.com to enhance efficiency in tendering, site management and workflow should result in substantial savings when fully implemented.
Launched in March 2001, AsiaMaterials.com has already established a robust electronic platform as well as six business centres in the Chinese Mainland to serve customers of construction and home improvement materials worldwide. AsiaMaterials.com has also partnered with a number of major construction materials groups as well as global technology and service providers. Plans are now being formulated to secure exclusive agency rights for selected products and to build a product range with AsiaMaterials own brand names.
Results
2001 2000
Notes HK$ million HK$ million
Turnover 5,556.1 5,985.2
Other revenue 67.6 59.3
Changes in inventories of finished
goods, work in progress, contract
work in progress and properties
under development for sale (341.6) (247.5)
Raw materials and consumables used (745.3) (921.4)
Staff costs (552.5) (529.6)
Depreciation and amortisation expenses (70.4) (71.7)
Subcontracting, external labour costs
and other operating expenses (3,355.5) (3,696.7)
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Profit from operations 558.4 577.6
Finance costs (1.1) (1.0)
Share of results of jointly
controlled entities 30.8 35.2
Surplus on revaluation of an
investment property 10.0 -
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Profit from ordinary activities
before taxation 598.1 611.8
Taxation 1 (80.7) (102.1)
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Profit before minority interests 517.4 509.7
Minority interests (9.1) (6.6)
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Profit attributable to shareholders 508.3 503.1
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Dividends 2 475.2 473.9
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Earnings per share 3
Basic HK$ 1.93 HK$ 1.92
Diluted HK$ 1.93 HK$ 1.91
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Notes:
1. Taxation
2001 2000
HK$ million HK$ million
Company and subsidiaries
Hong Kong profits tax 76.6 95.7
Income tax of other regions
in the People's Republic of China 0.2 0.1
Deferred taxation (2.6) 0.6
Jointly controlled entities
Hong Kong profits tax 6.6 5.6
Income tax of other regions in the
People's Republic of China 0.7 0.3
Deferred taxation (0.8) (0.2)
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Total 80.7 102.1
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Hong Kong profits tax has been provided at the rate of 16% (2000: 16%) based on the estimated assessable profits for the year.
2. Dividends
2001 2000
HK$ million HK$ million
Interim dividend 158.0 144.3
Proposed final dividend 316.0 327.9
Final dividend for the prior year due
to exercise of share options 1.2 1.7
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Total 475.2 473.9
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3. Earnings per share
The calculation of the basic and diluted earnings per share is based on the following data:
2001 2000
HK$ million HK$ million
Earnings for the purposes of basic
and diluted earnings per share 508.3 503.1
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Million Million
Weighted average number of ordinary
shares for the purposes of basic
earnings per share 263.0 261.5
Effect of dilutive potential ordinary shares:
Share options 1.0 1.7
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Weighted average number of ordinary
shares for the purposes of diluted
earnings per share 264.0 263.2
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Dividends
The Directors recommend the payment of a final dividend of HK$1.2 per share. This, together with the interim dividend of HK$0.6 per share paid on 21 December 2000, will give a total of HK$1.8 per share for the year ended 31 March 2001.
Subject to shareholders' approval at the forthcoming Annual General Meeting, the final dividend will be paid on 29 August 2001 to shareholders whose names appear on the Company's register of members on 21 August 2001.
Closure of register of members
The register of members of the Company will be closed from Tuesday, 14 August 2001 to Tuesday, 21 August 2001, both days inclusive, during which period no transfer of shares will be effected.
In order to qualify for the proposed final dividend, all share transfers accompanied by the relevant share certificates must be lodged with the Company's branch share registrar in Hong Kong, Standard Registrars Limited at 5th Floor, Wing On Centre, 111 Connaught Road Central, Hong Kong, not later than 4:00 p.m. on Monday, 13 August 2001.
MANAGEMENT DISCUSSION AND ANALYSIS
CONSTRUCTION DIVISION
Turnover for the year was HK$3,546.5 million, a decrease of 16 percent compared with HK$4,242.4 million last year. Pre-tax profit of HK$287.2 million however represented an increase of 14 percent over the previous year. This favourable result was largely due to our efforts in improving efficiency of our operations, the adoption of innovative construction methods and the continuing fall in subcontractor prices in a deflationary environment. However, with the slowing down of the Hong Kong Housing Authority's (HKHA) public housing programme, it will be difficult to maintain this exceptional performance before strategic growth areas start to contribute significantly in the next two to three years.
Public Housing - Shui On Building Contractors (SOBC)
Public housing works carried out for the HKHA and the Hong Kong Housing Society amounted to approximately HK$2,540 million and accounted for around 72 percent of the Division's turnover. Six contracts were completed, comprising 3,950 residential units and various commercial premises. They included Ma On Shan Area 77 Phase II, Ho Man Tin South Phase IV, Redevelopment of Shek Yam Estate Phase III, Ma Hang Village Phase 3, Tseung Kwan O Area 34/44 Phase III and the Sandwich-Class Housing Development at Ma On Shan Area 77 with a total contract sum of HK$4.1 billion.
Four contracts, comprising 3,300 residential units, were awarded by the HKHA with a total value of around HK$1,590 million. Three maintenance contracts for HK$232 million were also won. Margins in recent tenders have however been eroded in light of the shrinking portfolio of HKHA.
The conclusions and recommendations in two reports, namely, "Quality Housing Initiatives" by HKHA in 2000 and the paper compiled by the Construction Industry Reform Committee at the beginning of 2001, prompted HKHA to step up the enforcement of much more stringent standards to safeguard the quality of public housing works. Six large contractors, including SOBC, assessed based on their past performance, management and control procedures in place, have been selected for inclusion in a coveted Premier League. Due recognition will be given to this status and certain design-and-build as well as complex projects will be made available for tender for this small group of superior contractors. HKHA is now also assessing tenders with reference to the overall past performance of contractors and is not necessarily awarding contracts to companies submitting the lowest bids. Notwithstanding the competitive environment, SOBC is therefore well placed to expand its market share in the dwindling public housing sector.
To enhance the quality of maintenance services, the Housing Department also adopted various reform proposals, one of which was the introduction of a new status called Quality Maintenance Contractor (QMC), and preferential tender opportunities will be offered to this category of maintenance contractors. Having successfully passed the assessment and included in the QMC list, SOBC will enjoy more tendering opportunities on maintenance sector contracts valued at over HK$2 billion per annum.
Other Government and Institutional Buildings - Shui On Construction (SOC)
The three existing contracts, namely the Public Health Laboratory Centre at Nam Cheong Street, Castle Peak Hospital Redevelopment Phase II Stage I and the Government Departmental Quarters at Hong Ning Road, all progressed smoothly and on schedule.
With the accelerated public housing development in the last few years and the massive urban redevelopment plans in the future, the government has plans for substantial increases in infrastructure and ancillary facilities to match the population growth in redeveloped areas and new towns. A large number of educational, recreational, health, and government facilities will be built over the next few years. More than 200 schools, youth centres and community halls, for example, are already on the drawing board. SOC, with design-and-build capability and good track record, will actively submit tenders for such works.
Renovation and Fitting-out - Pat Davie
With the property, banking, finance, retail and entertainment sectors all suffering from the sluggish economy and the downturn in the technology industry, very few businesses, institutions and public organizations have been willing to commit large sums on renovation and fitting-out works. Contracts of reasonably large size were very limited, and only four contracts won in the past fifteen months were of values exceeding HK$20 million, the largest of which being an alteration contract of HK$88 million for the City University. The total value of new jobs secured amounted to approximately HK$330 million compared with HK$450 million in the previous year. Major projects handed over to clients satisfactorily during the year included works for Time Warner, ABN-AMRO Bank and the Open University of Hong Kong.
Contracts on hand
At 30 June 2001, the gross and outstanding value of contracts on hand of the Construction Division amounted to approximately HK$10.0 billion and HK$5.6 billion respectively which should provide sufficient workload for the next two years.
SOCAM.com
SOCAM.com offers a comprehensive electronic construction management system designed to enhance efficiency in tendering, site management and workflow. Since its official launch in December 2000, over 400 suppliers and subcontractors have registered as users of its electronic tendering system and over HK$200 million of tender value has been processed which has generated about HK$2 million revenue in membership registration fees and transaction levies. An electronic Project Management System has been implemented at our new construction sites to facilitate efficient communication with the head office, eliminating the need to circulate a vast amount of management information and documents. On hand-held computer applications, we have begun making use of pocket computers for the management of traditional construction works to streamline site inspection and reporting procedures. It is expected that when the system is fully implemented, substantial savings can be achieved.
Health, Safety and the Environment
SOC and SOBC received the ISO 14001 Environmental Management System certificates from the China National Accreditation Committee for Environmental System Certification Bodies in 2000, after obtaining the same certification in Hong Kong in 1999. The two companies were also awarded the Occupational Health and Safety Assessment Series (OHSAS) 18001 certification by the Hong Kong Quality Assurance Agency in November 2000.
To further enhance our occupational health, safety and environmental management, we have established the e-HSE system (electronic Health, Safety and Environment system) to speed up data processing and analysis. The system is linked to SOCAM.com to ensure that efforts in safety and environmental management are consolidated into all aspects of our operation.
We continued to conduct regular overseas visits to learn the latest techniques and practices used in other countries. The Safe Working Cycle, which involves all site staff in safety management and improves communication between sub-contractors and project team members, was introduced after our visit to Japan last year.
With our continuous efforts in process improvement, the accident rate for SOC and SOBC dropped to 39 per 1,000 workers in 2000, or just 26% of the industry average in Hong Kong.
PROPERTY DEVELOPMENT
Private Sector Participation Scheme ("PSPS") project
Construction of the PSPS project in Tseung Kwan O Town Lot 62, Area 65A was completed and the certificate of compliance was granted in early April 2001. Named Bauhinia Garden, its residential units were offered for sale by the government in early 2001. The development was well received by the public, with an estimated 37,000 visitors visiting the showflat during the two-week preview period. Over half of the applications for the three PSPS and Home Ownership Scheme projects on sale in the same batch were for Bauhinia Garden. All of its 3,200 units were sold out within weeks, creating a talking point in the currently lack-lustre property market. If a favourable environment returns for PSPS, further involvement of the Group in such types of developments should not be ruled out. As of June 2001, the commercial arcade has also been sold.
Rui Hong Xin Cheng
Rui Hong Xin Cheng is a quality residential development project located close to the Bund and the central business areas of Shanghai. Previously developed by Shui On Properties Ltd, a privately held business owned by the Group's Chairman, Rui Hong Xin Cheng was injected into the public company with a view to establishing immediately for SOCAM a strong foothold in Shanghai as a major property developer. Backed by the recommendations of the independent directors and financial advisers, this project was accepted unanimously by minority shareholders at a special general meeting held on 13 June 2001. Already a prestigious domestic housing development attracting buyers from Shanghai's relatively young and well educated middle class, the entire project, when eventually completed, will produce a total gross floor area of approximately 1.15 million square metres of high-rise residential building space, and 250,000 square metres of retail and commercial space. The first phase of this development by the Group totals 237,000 square metres, of which approximately 160,000 square metres will be residential apartments. The rest is for commercial units and car parks situated above a subway station which will be operational in 2003.
More than 80 percent of the completed units in the previous phase, currently developed by Shui On Properties Ltd., have already been sold at an average price of Rmb 6,700 per square metres. The current development cost is estimated to be below Rmb 6,000 per square metres. The 16,000 residential units to be built over the next 10 years in a rising Shanghai property market should therefore provide continuous growth for the Group in the future. The expected upward adjustment in property prices is buoyed by the robust economy in Shanghai, tax incentives available to home buyers and the rapidly developing mortgage market. The investment cost of Rmb 1.4 billion for the first phase will largely be financed by banking facilities and internal funds.
CONSTRUCTION MATERIALS DIVISION
Ready-mixed concrete - Ken On
The continual downturn in the property and building sectors significantly eroded the profitability of the concrete division as total sales volume dropped by about 15 percent. Approximately 950,000 cubic metres were sold by Ken On in a much weaker concrete market in Hong Kong with total consumption industry-wise further shrinking to only 7 million cubic metres, from 9 million cubic metres in the previous year. A decrease in average selling price, together with the aforementioned reduction in sales volume, has the combined effect of substantially reducing Ken On's results by 49 percent as compared with the previous year.
Six batching plants were in operation, two of which, namely the Tung Chung Plant and Cheung Sha Wan Plant, are scheduled to be closed down upon the expiry of leases in late 2001 and early 2002 respectively. With reduced workload, efforts have been made in plant rationalization and elimination of excess capacity.
The two batching plants in Guangzhou continued to operate under stiff competition with small losses resulting from a 30 percent reduction in sales. The new plant in the south-eastern part of Guangzhou had begun supplying to the prestigious Mass Transit Railway contract though only a small contribution was generated. At 30 June 2001, the order book of Ken On stood at over 800,000 cubic metres which should allow a stable production level in the coming year.
Quarrying Operations
Rock processing discontinued on Lamma Island following the expiry of quarrying rights in March 2000. Rehabilitation works of the Lamma quarry continue on schedule. With the production of the replacement quarries gradually coming on line, total production of the division amounted to 2.9 million tonnes and represented a reduction of 15 percent compared to last year. Ken On's usage accounted for approximately 80 percent of aggregates produced. Part of the quarrying activities was replaced by the new site formation contract in Guishan Island, Zhuhai where crushed rocks are by-products of the project. The setting up of crushing and loading facilities at Guishan is now at the final stage and full-scale production will commence around October. The quarry in Chik Wan, while also replacing the production in the Lamma quarry last year, is now preparing for a large marine rock contract recently secured for the reclamation of the Lamma Power Station of Hong Kong Electric. With the reduction in the number of quarries in Hong Kong and the commencement of infrastructure works on Disneyland and Container Terminal 9, prices of rock products are expected to hold firm and the quarrying division should make a gradual recovery in contribution in the foreseeable future.
Cement Import and Distribution - Far East Cement
Amid the shrinking volume of the concrete sector and a depressed cement market in Asia in general, Far East Cement's trading volume for the year was reduced to approximately 330,000 tonnes, 74 percent of which was taken up by Ken On. Following the expiry of the quarrying rights in Lamma Island in March 2000, Far East Cement, the sub-tenant adjacent to the quarry, also ceased operation on 1 April 2001. This joint venture between Sumitomo Osaka Cement, the IMC Group and Shui On Building Materials had been most fruitful since its inception in 1980. Apart from being a vehicle for steady shipments of high quality cement from Japan, it had also been recognized as a reputable cement trader in the Hong Kong market. In place of Far East Cement, Shui On Cement Co. Ltd. was formed in April 2001 by the Group to continue handling the import of cement from Sumitomo Osaka Cement and our Nanjing cement plant, the latter supplying 84,000 tonnes of cement to the Hong Kong market last year.
Cement Operations in the Chinese Mainland
The Group's investment in cement operations in the Chinese Mainland now enters its sixth year. Our experience in acquisitions and reforming state-owned plants, marketing and technological know-how as well as our established reputation in the industry enable us to plan our expansion to coincide with the Central Government's modernization of the Central and Western provinces. The injection of resources into numerous substantial infrastructural projects resulted in the rapid increase in high grade cement consumption in these areas. The official upgrading of cement specifications nationwide as well as the closure of small and polluted cement plants are conducive to our target of becoming one of the top producers in the Chinese Mainland with a total capacity of six to seven million tonnes within the next three years.
Chongqing Operation
80 percent of the TH Cement Group in Chongqing is now equally owned by the Group and its Hong Kong partner. The addition of the second new kiln has brought the capacity of the existing plant to one million tonnes per annum and actual sales in 2000 reached 820,000 tonnes, albeit profit, achieved consecutively for five years, was reduced due to an aggressive strategy to expand market share. As the first producer of the environmentally friendly fly ash cement in the Chinese Mainland, the operation continued to enjoy tax concessions. The clinker grinding mill with a capacity of 400,000 tonnes in the city area has greatly extended the radius of sales and TH Cement has firmly established itself as one of the three largest producers in Chongqing. The Group is also negotiating to set up a clinker grinding mill adjacent to the largest Chongqing steel factory to capture the market of steel-slag cement, another popular and environmentally friendly product in developed countries.
On 30 June, 2001 TH Cement signed the acquisition agreement for 80 percent of Diwei Cement, the largest of the three high grade cement producers in Chongqing with a capacity of around 1.8 million tonnes per annum. This important acquisition now places TH Cement as the leader in Chongqing and eliminates a hitherto strong competitor. The new joint venture is expected to commence in October and the resultant savings in human resources and other operating areas should enhance the profitability of the expanded TH Cement Group. The joint venture for the acquisition of the 300,000 tonne Fuling cement plant, signed in June 2000, was delayed pending restructuring of existing bank financing.
Guizhou Operation
Guizhou province, though among the poorest of the Chinese provinces, abounds with valuable natural resources, including coal and limestone, the latter being the main ingredient for cement production. In Guizhou, massive plans have been formed for the construction of electric power plants, dams, roads and other substantial infrastructure works, one of the purposes of which is to transfer some of the energy produced to the affluent eastern and coastal regions. With TH Cement now concentrating in the Chongqing market, our Group will effectively be the sole foreign investor and will play a leading role in building up a sizeable cement entity in Guizhou to complement the TH Cement Group. A small plant in Zunyi city of Guizhou was acquired in November 2000. This 300,000-tonne production plant generated an encouraging profit of Rmb 5 million in the first six months under our management which justifies the construction of a new kiln of 400,000-tonne capacity nearby. This approach to expansion follows the successful formula established in Chongqing to ensure excess human resources in an acquired plant can be well utilized in appropriate market conditions. The joint venture contract for this extension, together with a letter of intent for the acquisition of a small plant and the addition of another 400,000-tonne kiln in the adjacent city of Xishui, were signed at the end of May 2001 in Beijing under the auspices of senior government officials from the Mainland and Hong Kong. In June 2001 a formal contract was signed for the Xishui project. Further acquisitions and expansion should enable the Group to develop a production capacity of around three million tonnes per annum within three years in Guizhou alone.
Nanjing Operation
The Jiangnan cement plant continued to operate under the severe market conditions which have been prevailing among the coastal cities since the Asian financial crisis. In order to optimize operational capacity, all markets have been investigated and developed with 200,000 tonnes being supplied to Australia, Hong Kong and Guangzhou, in the latter two cases to Ken On's batching plants in Hong Kong and Guangzhou. Annual throughput to Hong Kong in 2001 will amount to approximately 200,000 tonnes. The Jiangnan cement plant is still operating at a loss due to the highly competitive prices applicable locally, but efforts are being made to improve further the efficiency of operations and to secure concessions from various suppliers and partners.
AsiaMaterials.com
AsiaMaterials.com, launched in March 2001 to tap the vast building materials trading market worldwide, offers its services to customers via a robust business-to-business electronic platform that facilitates online trading of building materials as well as a global network of AsiaMaterials Business Centres. Six business centres in Beijing, Shanghai, Tianjin, Guangzhou, Hangzhou and Wuhan, as well as a technology centre in Shenzhen, have been opened in the first quarter of 2001. Three more business centres will be set up in the USA, Europe and Asia Pacific by the end of this year.
AsiaMaterials.com has also partnered with a number of major construction materials groups as well as global technology and service providers. Plans are now being formulated to secure exclusive agency rights for selected products and to build a product range bearing brandnames owned by AsiaMaterials.
FINANCIAL REVIEW
Liquidity and Financing
As at 31 March 2001, the Group's outstanding bank borrowings amounted to HK$2,023 million, consisting entirely of the drawn-down portion of the project loan arranged to finance the PSPS project at Tseung Kwan O Town Lot No. 62. This project loan was fully repaid on 2 May 2001.
At the year end date, the gearing ratio of the Group, calculated on the basis of bank borrowings over shareholders' equity, was 1.60 (2000: 0.97) Following the repayment of the PSPS project loan on 2 May 2001 as aforementioned, the Group will practically be debt-free, other than amounts due under normal trade payables. The Group's borrowings were on floating rate basis.
With cash on hand, marketable securities and available banking facilities at the year end date, the Group's liquidity position remained strong and should provide sufficient financial resources to satisfy its commitments and working capital requirements.
Treasury Policies
The objective of the Group's treasury policies is to arrange the assets and liabilities so as to reduce appropriately its exposure to fluctuations in exchange and interest rates. Treasury transactions unrelated to underlying financial exposure are not undertaken.
At 31 March 2001, the Group's borrowings, revenue and cash balances were mainly in Hong Kong Dollars. The Group did not have any significant commitments and exposure in foreign currencies.
Contingent liabilities and pledge of assets
At the balance sheet date, the Group had contingent liabilities not provided for in these financial statements as follows:
(a) performance bonds established amounting to approximately HK$171.1 million (2000: HK$159.4 million);
(b) guarantees in lieu of utility deposits amounting to approximately HK$0.8 million (2000: HK$1.7 million).
At 31 March 2001, the Company has given guarantees to banks in respect of general facilities granted to its subsidiaries (including a PSPS project loan of HK$2,265 million) and jointly controlled entities amounting to approximately HK$3,729.4 million and HK$161.1 million (2000: HK$3,793 million and HK$nil) respectively.
Properties held for resale and sales proceeds from the PSPS project have been pledged as securities for the drawn-down portion of the PSPS project loan of HK$2,022.6 million at 31 March, 2001 (2000: HK$1,194.3 million), which was fully repaid on 2 May 2001. The related guarantees to banks were subsequently released.
Employees
At 31 March 2001, the number of salaried staff of the Group was approximately 1,300 in Hong Kong and 3,200 in subsidiaries and jointly controlled entities in the Chinese Mainland. The Group ensures that its employees' remuneration packages are competitive. Employees are rewarded on a performance-related basis within the general framework of the Group's salary and bonus systems. Share options are granted annually by the Board of Directors to senior management staff members as appropriate.
Purchase, sale or redemption of shares
Neither the Company nor any of its subsidiaries has purchased, sold or redeemed any of the Company's listed shares during the year.
Publication of detailed annual results on the Stock Exchange's website
All the information of the annual results of the Group for the year ended 31 March 2001 required by paragraph 45(1) to 45(3) of Appendix 16 to the Rules Governing the Listing of Securities on the Stock Exchange will be published on the Stock Exchange's website in due course.
Acknowledgment
SOCAM's achievements would not have been possible without the commitment and hard work of our people, the most important asset of your company. I would like to extend my heartfelt appreciation to all staff members for their dedication and contribution this past year.
By Order of the Board
Lo Hong Sui, Vincent
Chairman
Hong Kong, 3 July 2001
Web Site : www.shuion.com
* For identification purposes only
