Earnings per share increased by 24% year-on-year to HK$1.64. The Group declared an interim dividend of HK20 cents per share, with a scrip dividend alternative.
PROPERTY DIVISION
Mainland China Property Division
During the six months ended 30 June 2006, the Mainland China Property Division reported turnover of HK$485 million (2005: HK$486 million) and a net profit attributable to the Group of HK$140 million (2005: HK$137 million).
(i) Investment Properties
During the first six months of 2006, the Group's portfolio of investment properties in Mainland China generated rental turnover and operating profit from rental activities of HK$284 million and HK$205 million, respectively (2005: HK$265 million and HK$191 million, respectively).
As at 30 June 2006, the Group's investment property portfolio in Mainland China totalled an aggregate gross floor area ("GFA") of 3,316,920 square feet (as at 31 December 2005: 3,334,070 square feet), with the office, commercial and residential properties achieving occupancy rates of 95%, 91% and 70%, respectively (as at 31 December 2005: 95%, 92% and 72%, respectively).
(ii) Sales of Completed Properties
Sales of completed properties in Mainland China during the first six months of 2006 contributed turnover and operating loss of HK$32 million and HK$0.1 million, respectively (2005: HK$69 million and operating profit of HK$13 million, respectively).
(iii) Properties under Development
Shanghai
The 641,000 square-feet Central Residences Phase II in Changning District, Shanghai, is scheduled to be completed by the fourth quarter of 2006. The 1,576,000 square-feet Kerry Everbright City Phase II mixed-use development project in Zhabei District progresses as scheduled. The residential towers are expected to be completed in 2007.
As at 30 June 2006, all the underlying contract approvals were obtained from the PRC government authorities with regard to the mixed-use property development project in Jingan District, Shanghai, which the Group joint ventures with Shangri-La Asia Limited ("SA") on a 51%/49% basis. With a maximum investment amount of US$700 million, the project comprises the development of two luxury hotels, office and retail properties and over an aboveground GFA of approximately 2,536,000 square feet. Development of the project is expected to be completed in phases between 2009 and 2011.
Development of a mixed-use property in Pudong, Shanghai, continues with expected completion in phases between 2009 and 2011. The site, which is adjacent to the Shanghai New International Expo Centre, is expected to offer an aboveground buildable GFA of 2,476,000 square feet, comprising hotel, offices, serviced suites/serviced apartments, commercial properties and related ancillary facilities. The Group has a 40.8% interest in this joint venture project.
Shenzhen
In Shenzhen's Futian Central District, development of a grade-A office complex is progressing as scheduled. The project will deliver a GFA of 807,000 square feet and is expected to be completed in the third quarter of 2007.
In May 2006, the Group acquired through public tender a 85,000 square-feet site in Futian, Shenzhen which is located adjacent to the abovementioned site designated for office property development. The new site is expected to offer a developable GFA of 850,000 square feet, which is intended to be held for leasing purpose upon its expected completion in 2009.
Manzhouli
The development of the 716,000 square-feet (in terms of GFA) apartment and commercial property project in Manzhouli, Inner Mongolia, is expected to be completed by 2009.
Hangzhou
Project planning works have commenced on a site in Xia Cheng District, Hangzhou, Zhejiang Province. Offering a total buildable GFA of 1,895,000 square feet, the site will be designated for mixed-use development comprising a hotel, apartments and a commercial shopping complex. The project is expected to be completed in phases between 2009 and 2010.
Yangzhou
The hotel and apartment development project in Yangzhou, Jiangsu Province, offers a total buildable GFA of 1,032,000 square feet and is expected to be completed in 2009.
Tianjin
In June 2006, the Group entered into a share transfer agreement and joint venture contract for the undertaking of a mixed-use property development project in Hedong District, Tianjin. Pursuant to the contract, the total investment amount will be RMB4,552.5 million (HK$4,390.8 million), of which the Group's share is HK$2,151.5 million. The project site has the potential of being developed into a mixed-use property with an aboveground GFA of approximately 5,371,000 square feet, which is currently intended to include hotel, serviced apartments, offices, residence, shopping mall and related ancillary facilities. The first phase of construction is expected to be completed in late 2009.
(iv) Beijing Kerry Centre Hotel
During the six months ended 30 June 2006, Beijing Kerry Centre Hotel recorded turnover and operating profit of HK$169 million and HK$67 million, respectively (2005: HK$152 million and HK$58 million, respectively), and achieved an average occupancy rate of 75% (2005: 80%).
Hong Kong Property Division
During the first six months of 2006, the Hong Kong Property Division reported turnover of HK$616 million (2005: HK$506 million) and a net profit attributable to the Group of HK$1,432 million (2005: HK$645 million), after taking into account the increase in fair value of investment properties (net of deferred taxation) of HK$128 million (2005: HK$286 million).
(i) Investment Properties
During the six months ended 30 June 2006, the Group's investment properties in Hong Kong contributed rental turnover and operating profit from rental activities of HK$190 million and HK$30 million, respectively (2005: HK$170 million and HK$64 million, respectively).
As at 30 June 2006, the Group's investment property portfolio in Hong Kong totalled an aggregate GFA of 1,668,921 square feet (as at 31 December 2005: 1,803,751 square feet), of which the occupancy rates of residential, commercial and office properties were 93%, 91% and 94%, respectively (as at 31 December 2005: 93%, 94% and 96%, respectively).
(ii) Sales of Completed Properties
Sales of completed properties in Hong Kong during the first six months of 2006 generated turnover of HK$426 million (2005: HK$336 million). Together with the disposal of interest in Citibank Plaza by way of the Group's participation in the global offering of the Champion REIT, the Division recorded an operating profit of HK$1,260 million from property sales during the six month period ended 30 June 2006 (2005: HK$196 million).
Occupation permit in relation to the Group's 155,000 square-feet (in terms of GFA) luxury residential development at 15 Ho Man Tin Hill Road, Kowloon was issued in April 2006. The project is expected to be launched in the market in the fourth quarter of 2006.
(iii) Properties under Development
Enterprise Square Five/Megabox
Completion of the Group's major grade-A retail, entertainment and office development complex, Enterprise Square Five in Kowloon Bay, is scheduled for mid-2007. The project, measuring a planned GFA of 1.6 million square feet, comprises two office towers with an aggregate GFA of 0.5 million square feet, as well as the 1.1 million square-feet "MegaBox", a proprietary retail and entertainment destination which upon completion of development will be the largest commercial mall in East Kowloon. In May 2006, the Group signed a lease agreement with Hang Seng Bank Limited in relation to the tenancy of the entire 15-storey office Tower 2, with a GFA measuring 262,000 square feet.
Shelley Street
The 47,000 square-feet (in terms of GFA) residential project in Central Mid-Levels at No. 38 Shelley Street, Hong Kong is expected to be completed by the fourth quarter of 2007.
First Street/Second Street
The 394,000 square-feet (in terms of GFA) joint residential and commercial development project with the Urban Renewal Authority at First Street/Second Street in Mid-Levels West, Hong Kong is expected to be completed in the fourth quarter of 2008.
Tsuen Wan
The 398,000 square-feet (in terms of GFA) residential property development project in Kwok Shui Road, Tsuen Wan, is expected to be completed by the third quarter of 2009.
Ap Lei Chau
The residential sales project in Ap Lei Chau, in which the Group has a 35% interest and an attributable share of GFA measuring 320,000 square feet, is expected for completion in the second quarter of 2009.
Yuk Yat Street
The redevelopment of No. 5 and No. 9 Yuk Yat Street in To Kwa Wan, Kowloon, is expected to be completed by the first quarter of 2009. The site has a developable GFA of 163,000 square feet and is earmarked for development into residential and commercial properties.
(iv) Major Acquisitions and Developments
Hong Kong
In March 2006, the Group acquired a property site located at 865 King's Road, Hong Kong. With a site area of 34,000 square feet, the project is expected to offer a developable GFA of over 511,000 square feet which is planned for redevelopment into an office property with an expected completion date in 2009. On 8 September 2006, the Company entered into a sale and purchase agreement with Kerry Holdings Limited ("Kerry Holdings", the controlling shareholder of the Company) pursuant to which Kerry Holdings agreed to acquire from the Group a 60% interest in the holding company of the site together with the same proportion of the shareholder's loans advanced from the Group to such holding company up to the date of completion of the aforesaid sale and purchase agreement. The transaction is pending the approval from the Company's independent shareholders.
In May 2006, the Group acquired the Novotel Century Harbourview Hotel located at 508 Queen's Road West, Hong Kong. The hotel has 288 guest rooms and measure a total GFA of 125,000 square feet.
Also in May 2006, the Group acquired a 71% interest and proportionate shareholder's loans in a company which holds certain existing residential properties located at No. 20 Shan Kwong Road and No. 1 - 5 Village Terrace in Happy Valley, Hong Kong. The existing site offers a developable GFA of 218,000 square feet, and the Group intends to redevelop the existing residential properties which is expected to be completed in 2009.
Macau
As regards the residential property development project in Macau, an agreement has been reached with the Macau SAR Government for the exchange of land. Approval has also been obtained from the Macau SAR Government on the conceptual design of the planned development with a maximum GFA of 2,800,000 square feet.
Overseas Property Division
During the first six months of 2006, the Overseas Property Division recorded a net profit after tax of HK$14 million (2005: HK$12 million).
LOGISTICS NETWORK DIVISION
During the six months ended 30 June 2006, the Logistics Network Division recorded a 6.6% drop in turnover to HK$2,648 million (2005: HK$2,834 million). Net profit attributable to the Group amounted to HK$262 million (2005: HK$261 million, before taking into account the increase in fair value of HK$475 million (net of deferred taxation) on warehouse properties held by the Group as investment properties). This relatively mild earnings growth was mainly due to the increase in interest expenses, as well as a drop in the Division's share of profit after tax from its 25%-owned Chiwan Container Terminal due to slower growth in cargo volume handled.
(i) Logistics Operations
The Division's logistics operations contributed turnover of HK$2,435 million (2005: HK$2,635 million) during the first half of 2006. The drop in turnover was mainly a result of the restructuring of the business of Kerry EAS Logistics Limited ("KEAS") by cutting down certain high-risk, low-margin business operations to refocus its Mainland China operations on niche international freight forwarding businesses. A 13% growth in operating profit to HK$107 million (2005: HK$95 million) was recorded from logistics operations which was partly a result of this business portfolio enhancement.
During the six months ended 30 June 2006, a total of 51,728 tons (2005: 56,105 tons) of cargo was handled by air and 127,939 TEUs (2005: 180,684 TEUs) by sea.
Hong Kong
During the period under review, the trading arm of the Division, KerryFlex Supply Chain Solutions Limited, recorded strong business growth and extended its foothold in the food service sector with the acquisition of Wah Cheong Company Limited, a leading local importer and distributor of non-perishable products.
China Focus
After the acquisition of a 70% interest in KEAS, the Division now leads in terms of nationwide logistics coverage in Mainland China, serving over 1,100 cities in over 32 provinces with around 120 offices, 4,000 staff, 1,500 trucks and over 3,000,000 square feet of warehouse and logistics facilities. Synergies between Kerry Logistics and KEAS have already begun to materialize and have contributed to an enhanced operating margin for the Division.
The 173,000 square-feet bonded logistics centre in Tianjin's Free Trade Zone commenced operations in the first half of 2006. Construction of the 269,000 square-feet bonded logistics centre in Shenzhen's Futian Free Trade Zone has also been completed.
Asia Based
In Thailand, the commencement of operations at the new 800,000 square-feet Inland Container Depot ("ICD") at Siam Seaport, together with container berth expansion works in progress and efforts to establish a nationwide distribution network, have significantly strengthened the Division's substantial foothold in the country. Solid growth in freight forwarding and logistics operations was also recorded in Singapore, Malaysia and Indonesia. In Vietnam, the Division has acquired a 140,000 square-feet distribution centre at the Song Than II Industrial Zone in Binh Duong Province in July 2006.
To date, the Division is operating a fleet of more than 240 trucks and a portfolio of over 4,500,000 square feet of logistics facilities in Southeast Asia, including Australia.
Global Network
Leveraging its dominant position in Mainland China and Asia, the Division was able to add value to the existing logistics operations in Europe where the Division continues to expand its agency network, and in developing Asia-bound freight forwarding businesses. In Australia, the construction of an 88,000 square-feet logistics centre is underway and will commence operation before end of 2006.
(ii) Hong Kong Warehouses and Distribution Centres
With a portfolio of 13 warehouses occupying an aggregate GFA of 6.74 million square feet as at 30 June 2006, the Division continues to be the single largest warehouse owner and operator in Hong Kong.
During the six months ended 30 June 2006, the Division's Hong Kong warehouse portfolio generated turnover of HK$213 million (2005: HK$199 million) and an operating profit of HK$114 million (2005: HK$109 million, before revaluation adjustment).
INFRASTRUCTURE DIVISION
Net profit attributable to the Group from this Division during the six months ended 30 June 2006 amounted to approximately HK$19 million (2005: HK$17 million).
In Hong Kong, the Group's share of net profits from its 15% interest in the Western Harbour Crossing and 15% interest in the Cross Harbour Tunnel management contract amounted to HK$21 million during the six months ended 30 June 2006 (2005: HK$18 million).
In China, the Division holds an effective 13% interest in a water treatment project in Hohhot Municipality, Inner Mongolia Autonomous Region, and a 25% interest in REDtone Telecommunications (China) Limited which collaborates with TieTong Telecommunications Corporation Shanghai Branch company to provide discount phone call packages in Mainland China.
OUTLOOK
Property Division
In May 2006, the relevant PRC government authorities jointly introduced new measures to further curb rapid increases in property prices in metropolitan areas and to promote a healthy development of Mainland China's property market. The Group is of the view that such measures, which target mainly at the residential sector, are unlikely to have a significant impact on the Group, for reason that the Group does not have a high concentration of residential properties to be developed for sales within the Group's existing property development portfolio.
"The Group's mixed-use property development projects have a diversified development mix comprising a fairly sizeable leasing portion," says Mr Ang Keng Lam, Chairman of the Company. "This enables the Group to capitalize on its experience, expertise and successful track records in the development of high quality office, commercial and apartment complexes, and to benefit from a recurrent income stream."
"With a strong history of high quality property development and an established market niche in the high-end property sector, the Group is confident that the changes in the landscape of Mainland China's property market will be favourable to the Group and will strengthen the Group's competitive advantages and leading position," continues Mr Ang.
In Hong Kong, the Group maintains its view that the high-end residential property sector will continue its healthy development over the long term. For the office sector, the Group is confident of the ongoing demand for grade-A office space, fuelled by continually active business activities. The continually improving economic environment is also a favourable factor behind the strengthening of the retail property sector. The Group's positive outlook is validated by the strong response from tenants who have signed up for MegaBox.
Logistics Network Division The Division maintains a very positive outlook for its future business developments across the Asia-Pacific region, Europe and North America. In particular, the Division is now exploring further investment and development opportunities in Europe. Mr Ang adds: "The Division continues to explore business opportunities in other regions, following its successful penetration into the China market through the acquisition and integration of KEAS into Kerry Logistics' Mainland China operations."
Infrastructure Division
The Division will evaluate and pursue viable investment opportunities in infrastructure projects which are capable of generating attractive financial returns and steady recurrent income to the Group, as and when suitable opportunities arise.
FINANCING AND CREDIT RATING
The Group signed a syndicated loan agreement on 27 February 2006 for an unsecured HK$6 billion revolving loan facility, with participations received from 18 reputable international and local banks and financial institutions.
On 15 August 2006, Standard & Poor's reaffirmed to Kerry Properties Limited a"BBB-"credit rating with a stable outlook.
On 25 August 2006, Gain Silver Finance Limited, a wholly owned subsidiary of the Company, issued fixed rate bonds in the aggregate principal amount of US$420,000,000 (the "Fixed Rate Bonds"). The Fixed Rate Bonds carry a coupon rate of 6.375% and have a maturity term of 10 years. The issuance of the Fixed Rate Bonds enables the Group to extend its debt maturity profile and to broaden its fixed-income investor base. Standard & Poor's awarded the Fixed Rate Bonds with a"BBB-"credit rating.
About Kerry Properties Limited
Kerry Properties Limited is a company listed on the Main Board of The Stock Exchange of Hong Kong Limited. The principal business activities of Kerry Properties Limited and its subsidiaries are (i) property development and investment in Hong Kong, Mainland China and the Asia Pacific region; (ii) the provision of independent third party logistics, freight services and warehouse operations; (iii) investments in infrastructure projects in Hong Kong and Mainland China; and (iv) hotel ownership and operations in Mainland China.