Annual Report 1999

Chairman's Statement


Chairman and Chief Executive
Gonzaga W J Li




Since the fourth quarter of 1999, the economy of Hong Kong has been recovering gradually, with unemployment declining and domestic consumption increasing.


Since the fourth quarter of 1999, the economy of Hong Kong has been recovering gradually, with unemployment declining and domestic consumption increasing. Growth in tourist arrivals and the inflow of investment capital continue to stimulate business activities. Hong Kong's projected GDP growth continues to be more encouraging than expected. While further interest rate increases in the first half of 2000 are expected, market sentiment, boosted by cyber developments, the Disney investment and ample liquidity in the banking sector, remains positive and should continue to underpin the recovery of the economy. China's probable accession to the World Trade Organisation will benefit Hong Kong and the Greater China region
.

Corporate Results

For the year ended December 31, 1999, Group profit attributable to shareholders was HK$3,216.5 million, an increase of 72 per cent. Earnings per share were HK$1.39 compared with HK$0.82 for the preceding year, an increase of 70 per cent.

An interim dividend of 28 cents per share was paid in November 1999 and the Directors recommend a final dividend of 50 cents per share to be approved at the forthcoming Annual General Meeting.

Property

With the recovery of the Hong Kong economy, the rental market has been improving visibly. Vacancy rates in Hong Kong have dropped significantly overall, with the huge supply since 1998 largely absorbed. There will be very limited new supply of Grade A office space in the next several years and a recovery of office rental levels is expected to take place in the second half of 2000. The success of the Group's investment property portfolio is expected to be enhanced by this improving market.

The third tower of Gateway II will be put in the market later this year to capitalise on the cyclical turnaround. By adding 2.7 million square feet to Harbour City, Gateway II reflects a 36 per cent growth in Wharf's core investment property portfolio. When optimum occupancy is achieved, total rental billings of Wharf should amount to about HK$4.25 billion per annum.

At present, the retail podium of Gateway II is virtually fully let, and the office space in the first two towers of Gateway II is more than 80 per cent leased.

Demand for luxury serviced apartments at Gateway II is strong, particularly from US corporations coming to Hong Kong in the wake of China's impending entry into the WTO, and from large international insurance companies wishing to tap the Mandatory Provident Fund market. Of the 190 serviced apartments at Gateway II launched since late 1999, more than 150 units have been let.

The Wharf Group has one of the strongest property management teams in the market and its ability to achieve substantial leasing in an extremely difficult market is testimony of management effectiveness. The third tower of Gateway II will come into a much stronger market in 2000 and we are confident that this team will capitalise on the more favourable conditions.

The Group has significant interest in a developable residential landbank that should generate solid earnings in the next five to six years. Acquired in 1995 at a cost below market, the Peak luxury portfolio may provide substantial income when launched for sale in mid 2000. The Sham Tseng and MTRC Kowloon Station Package II developments will be released progressively to the market in due course. Negotiations with the Government in fixing the land use conversion premium have led to significant cost reductions and the sale of the landbank will probably turn in a profit with the gradual upturn of the residential property market, expected soon.

Hotels

In tandem with the economic recovery of the Asian region, tourist arrivals have been increasing steadily, with most of the tourists coming from the Mainland, Southeast Asia and Taiwan. Tourism-related activities have also been picking up and the operating margins of Marco Polo Hotels have been improving because of effective cost saving measures and the hotels?ability to raise average room rates at healthy occupancy levels.

The financial turmoil, which started in late 1997, forced the curtailment of certain initiatives to secure more management contracts in the Asian region. The management has, however, been on the look out for opportunities throughout this period, and believes that as the economy revives, it will be able to tap opportunities as they arise.

Communications

Deputy Chairman and
Mangaing Director
Stephen T H Ng(centre)
with (from left):
Executive Director
John Hung and
Directors Quinn Law,
KH Leung and T Y Ng

 


1999 was a watershed year for the Group's communications business. It saw not only the maturation of Hong Kong Cable's investment, but also the listing of i-CABLE Communications Limited on both the NASDAQ and the Hong Kong Stock Exchange. By attracting a broad base of institutional investors in North America, Europe, Asia and Hong Kong, the public floatation provided a valuation on this business unit. The asset base of the Wharf Group has, de facto, been substantially enlarged by the establishment of i-CABLE's enterprise value.

i-CABLE is well placed to take advantage of the opportunities provided by the convergence of the broadcasting and telecommunications industries. As a multimedia company with a broadband hybrid-fibre coaxial ("HFC") network that provides the last mile to the home, it offers a virtual total solution in enabling the implementation of the "triple play" strategy of bundling video, data and voice services under the same brand name. i-CABLE's first-mover advantage in broadband access technology puts it in a strong position to compete in the high tech market.

The Group is actively developing e-commerce and related contents, whether on B2B or B2C connections, in order to complement i-CABLE's multimedia capabilities and to take advantage of the technological synergies it provides. Its joint venture with Commerce One and other leading Hong Kong corporations should add substantial value to the Group.

New T&T continues to be an innovative mover in the telecommunications industry with its "Building e-Connections"vision. With the fall of the last monopoly in the telecom market, New T&T has built its own international gateway and has, in effect, become a full service provider. Its total broadband access platform will allow New T&T to offer near-perfect voice, data, audio and video conferencing capabilities, from a general spectrum of product and service, to more focused data and bandwidth applications such as IP Connect, Broadband IP Connect and IP Multicasting, for Internet service providers, carriers and PABX customers.

Like its cable counterpart, New T&T achieved positive EBITDA during the year and earnings are expected to improve significantly in coming years. Now that it is, in effect, the fastest growing FTNS operator in Hong Kong, New T&T's accentuated fixed line business will enable the company to place less reliance on IDD revenue. Margins here are tightening because of competitive price-undercutting in the market.

Over the past years, the Wharf Communications group has assembled a strong management and technical team to exploit new technology opportunities in the areas of cable television, high speed Internet and telephony. Such expertise has enabled us to actively develop these dynamic businesses and meet the challenges of changing trends.

Terminals

Since becoming a subsidiary of the Group, Modern Terminals has been sustaining good growth while actively engaging in strategic development to enhance Modern Terminals?position as a leading terminal operator in Hong Kong. Modern Terminals?commitment in the development of the Container Terminal 9 project and the acquisition of a strategic stake in the container terminals operations in Western Shenzhen are both strategically compatible with the impending entry of China into the WTO.

In line with its enterprising corporate culture and outlook, Modern Terminals launched a new company logo to fully reflect its management initiatives in the development of the Group one step ahead of the challenges offered by the new millennium.

Group Finance

Improvements in the banking market have led to a more favourable climate for financing. The majority of the Group's financial requirements has been covered not only for the current year, but well into 2001. Average borrowing maturity within the portfolio has been lengthened at an average borrowing cost of under eight per cent per annum.

Total net debt has decreased from HK$29 billion to approximately HK$22 billion with diversified sources funding. Debt to asset ratio at 24 per cent is well below the Group's policy of not exceeding 30 per cent gearing.

Given the progressive sale through of its residential property landbank, the leasing of Gateway II, and the strong cashflow generated by both the telecommunications and terminal operations in the coming years, the Group has ample liquidity to seize future opportunities.

Going Forward

The Wharf Group is on a firmer footing than at any time during the past five years.

We see the economy decidedly on the rebound. Hong Kong is now looking at a four per cent GDP growth and the PRC is projecting a seven per cent GDP growth for 2000. China is poised for a significant economic rejuvenation after seven years of decline in growth, and Hong Kong corporates with the correct strategy can capitalise on these potentials. Given the Group's existing fundamentals and resources, especially in the form of telecommunication capabilities, and equipped as we are with a healthy portfolio of old and new economy businesses, we believe we will be among the corporates to benefit from an increasingly rosier future.

In the next five years, we see property forming 55 per cent of our business, telecommunications, 35 per cent, and terminals, 10 per cent. Whilst not forgetting the strength of our roots in core businesses, we continue to be alert in the pursuit of modern trends. Broadband access and Internet content businesses are obvious opportunities, but other new business lines will not be ignored.

Our team approach, hard work and dedication of the Group management and staff are all elements that are needed in these exciting times. On behalf of our shareholders and my fellow board members, I would like to record my heartfelt thanks to them all.


Gonzaga W J Li
Chairman and Chief Executive
Hong Kong, May 15, 2000