Earnings per share increased by 51% year-on-year to HK$3.83. The Group declared a final dividend of HK$0.65 per share, with a scrip dividend alternative.
PROPERTY DIVISION
As at 31 December 2006, the Group held a portfolio (measured in gross floor area ("GFA")) comprising 21.15 million square feet (2005: 16.17 million square feet) of properties under development, 7.47 million square feet (2005: 7.47 million square feet) of completed investment properties, 0.54 million square feet (2005: 0.50 million square feet) of hotel properties and 0.64 million square feet (2005: 0.22 million square feet) of properties held for sale.
Mainland China Property Division
For the year ended 31 December 2006, the Mainland China Property Division reported turnover of HK$1,006 million (2005: HK$1,012 million) and a net profit attributable to the Group of HK$807 million (2005: HK$372 million), after taking into account the increase in fair values of investment properties (after deferred taxation) of HK$594 million (2005: HK$77 million).
(i) Investment Properties
During the year, the Group's portfolio of investment properties in Mainland China generated rental turnover and operating profit from rental activities of HK$578 million and HK$403 million, respectively (2005: HK$542 million and HK$428 million, respectively).
As at 31 December 2006, the Group's investment property portfolio in Mainland China comprised an aggregate GFA of 3.63 million square feet (2005: 3.33 million square feet), with office, commercial and residential properties achieving occupancy rates of 95%, 92% and 67%, respectively (2005: 95%, 92% and 72%, respectively).
(ii) Sales of Completed Properties
Sales of completed properties during the year generated turnover and operating profit of HK$73 million and HK$3 million, respectively (2005: HK$149 million and HK$37 million, respectively).
(iii) Properties under Development
Shanghai
In relation to the approximately 1,598,000 square-feet Kerry Everbright City Phase II mixed-use development in Zhabei District, completion of Phase IIa of the project is currently scheduled for the third quarter of 2007, with Phase IIb currently expected to be completed in first quarter of 2008. The pre-sale of the residential towers in Phase IIa commenced in February 2007.
With regard to the 51%-owned approximately 2,536,000 square-feet mixed-use property development project in Jingan District, all the underlying contract approvals have been obtained from the PRC government authorities. Completion is currently scheduled in phases between 2010 and 2011.
Development of a 40.8%-owned approximately 2,476,000 square-feet mixed-use property project located on a site adjacent to the Shanghai New International Expo Centre in Pudong is currently scheduled for completion in second quarter of 2010.
Shenzhen
The approximately 807,000 square-feet grade-A office complex project in Futian Central District is under construction with completion currently scheduled for the fourth quarter of 2007. In May 2006, the Group acquired another site adjacent to this project, which is planned for an approximately 850,000 square-feet office property development.
Manzhouli
In Manzhouli, Inner Mongolia, the approximately 914,000 square-feet apartment and commercial property project is currently scheduled to be completed in phases to 2010.
Hangzhou
Project planning works are underway for the approximately 1,895,000 square-feet mixed-use property project adjacent to Xihu (West Lake) in Xia Cheng District, which is currently scheduled for phased completion between 2009 and 2010. In October 2006, the Group acquired another site in Xia Cheng District which is designated for residential property development with a planned GFA of approximately 2,700,000 square feet.
Yangzhou
The approximately 1,032,000 square-feet hotel and apartment development project in Yangzhou is progressing on schedule, with completion currently scheduled for 2009.
Tianjin
The Group engages in an approximately 5,371,000 square-feet mixed-use property development project in Hedong District, Tianjin in June 2006. Upon completion, the development will comprise a major component of investment properties which are expected to generate a recurrent income stream to the Group. The Group holds a 49% interest in this project, which is currently scheduled for completion in phases between 2009 and 2011.
(iv) Beijing Kerry Centre Hotel
For the year ended 31 December 2006, Beijing Kerry Centre Hotel contributed turnover and operating profit of HK$355 million and HK$125 million, respectively (2005: HK$321 million and HK$111 million, respectively), and achieved an average occupancy rate of 77% (2005: 79%) with a 14% increase in average room tariff compared with 2005.
Hong Kong Property Division
During the year, the Hong Kong Property Division reported turnover of HK$2,827 million (2005: HK$1,415 million) and a net profit attributable to the Group of HK$2,676 million (2005: HK$1,429 million), after taking into account the increase in fair values of investment properties (net of deferred taxation) of HK$653 million (2005: HK$649 million).
(i) Investment Properties
During the year, the Group's portfolio of investment properties in Hong Kong contributed rental turnover of HK$384 million (2005: HK$352 million) and operating profit of HK$86 million (2005: HK$135 million).
As at 31 December 2006, the Group held an investment property portfolio in Hong Kong measuring an aggregate GFA of 1.5 million square feet (2005: 1.8 million square feet), of which residential, commercial and office properties achieved occupancy rates of 90%, 91% and 83%, respectively (2005: 93%, 94% and 96%, respectively).
(ii) Novotel Century Harbourview
The Novotel Century Harbourview, a hotel acquired by the Group in June 2006, benefits from strong tourist arrivals as well as the planned Mass Transit Railway line extensions.
(iii) Sales of Completed Properties
Sales of completed properties in Hong Kong during the year contributed turnover of HK$2,443 million (2005: HK$1,063 million), which were attributable mainly to the sales of units in Tregunter Towers, 15 Homantin Hill and Enterprise Square Three, as well as the sales of 34th Floor, 36th Floor and 37th Floor of Citibank Tower. Together with the disposal of the Group's 10.16% minority interest in Citibank Plaza by way of participation in the global offering of the Champion REIT, the Division recorded an operating profit of HK$1,914 million from property sales during the year (2005: HK$516 million), representing an increase of 271% year-on-year.
(iv) Properties under Development
Enterprise Square Five/"MegaBox", Kowloon Bay
This grade-A retail, entertainment and office complex is the Group's another landmark development in Kowloon Bay. The complex incorporates a 1.1 million square-feet retail portion, "MegaBox", which is designated to become the largest commercial mall in East Kowloon and a unique destination for shopping, dining and family entertainment. With the leased space within the shopping mall currently being handed over to tenants, "MegaBox" is scheduled for opening in mid-2007. As at 31 December 2006, "MegaBox" was over 80% pre-leased whilst the two office towers, with an aggregate GFA of approximately 500,000 square feet, were more than 70% pre-leased ahead of the expected grant of occupation permit by mid-2007. The Enterprise Square Five development is expected to benefit from, and fits well with, the first-mover advantage offered by the old Kai Tak airport site re-development blueprint announced by the Hong Kong SAR Government in October 2006.
Shelley Street, Central Mid-Levels
In relation to the approximately 50,000 square-feet residential property development project at No. 38 Shelley Street, 79 residential units are planned and is currently expected to be completed by the fourth quarter of 2007.
First Street/Second Street, Mid-Levels West
This approximately 400,000 square-feet joint development project with the Urban Renewal Authority comprises a total of 468 residential units and is currently expected to be completed by the first quarter of 2009.
Tsuen Wan
With regard to this approximately 400,000 square-feet residential development project in Kwok Shui Road, Tsuen Wan, completion is currently expected for the second quarter of 2009. A total of 548 units are planned for this residential project.
Ap Lei Chau
The Group holds a 35% interest and an attributable share of GFA measuring approximately 320,000 square feet in this project. The development is currently scheduled for completion in the third quarter of 2009 and is expected to offer a total of 776 residential units.
Yuk Yat Street, To Kwa Wan
The approximately 163,000 square-feet re-development project at No. 5 and No. 9 Yuk Yat Street in To Kwa Wan, is currently expected for completion in the fourth quarter of 2009.
Shan Kwong Road/Village Terrace, Happy Valley
The approximately 220,000 square-feet re-development project at No. 20 Shan Kwong Road and No. 1-5 Village Terrace, Happy Valley, is currently expected to be completed by the second quarter of 2010.
863-865 King's Road, North Point
Plans are being prepared for the development of this 40%-owned approximately 502,000 square-feet grade-A office tower, which is currently expected to be completed in the second quarter of 2011.
Macau
With regard to the Group's planned residential development in Macau, the necessary reclamation scheme has been endorsed with positive environmental assessment by the authority and formal procedure leading up to the reclamation works is underway. It is currently expected that reclamation works would commence around the third quarter of 2007.
Overseas Property Division
During the year ended 31 December 2006, the Division recorded a net profit after tax of HK$36 million (2005: HK$68 million). The decrease in the Group's share of profit from this Division is mainly attributable to the deferred tax credit recognized in the year ended 31 December 2005 (as a result of the reduction in profits tax rate).
Australia
As at 31 December 2006, 922 units (2005: 868 units) of the Group's 25%-owned Jacksons Landing project were sold, representing 96% of a total of 957 units available for sale.
The Philippines
The Group's investments in property interests in the Philippines are held through its 73.88% aggregate direct and indirect interests in EDSA Properties Holdings Inc. ("EPHI"), which has (i) investment property interests in Shangri-La Plaza Mall and The Enterprise Centre in Manila; and (ii) residential development property interests in The Shang Grand Tower and The St. Francis Towers in Manila. As at 31 December 2006, the Shangri-La Plaza Mall reported an occupancy rate of 99% (2005: 96%), whilst the occupancy rate at The Enterprise Centre was 97% (2005: 96%). As at 31 December 2006, 98% (2005: 84%) of the GFA of The Shang Grand Tower in Manila was sold, and a total of 501 units of the two towers of The St. Francis Towers project were sold. Development of The St. Francis Towers project continues with completion currently scheduled for the first quarter of 2009.
LOGISTICS NETWORK DIVISION
During the year, the Logistics Network Division recorded a turnover of HK$6,316 million (2005: HK$5,541 million), representing a 14% increase year-on-year. Net profit attributable to the Group for the year increased by 8% year-on-year to HK$1,173 million (2005: HK$1,085 million). Excluding the effects of the increase in fair values of the warehouse properties, logistics centres and buildings (after deferred taxation) of HK$500 million (2005: HK$578 million), profit for the year attributable to operations increased by 33% to HK$673 million (2005: HK$507 million), and of which (i) HK$343 million (2005: HK$163 million) was contributed by warehousing operations in Hong Kong; (ii) HK$107 million (2005: HK$129 million) was contributed by logistics operations; and (iii) HK$223 million (2005: HK$215 million) was contributed by logistics investments.
The Division operates a portfolio of warehouses, logistics centres and port facilities measuring more than 16 million square feet backed by a truck fleet of over 3,000 vehicles, with operations stretching across over 150 cities in 18 countries and supported by around 6,000 staff in total.
Warehousing Operations in Hong Kong
The Division maintains its position as a leading warehouse operator in Hong Kong, with a portfolio of 11 warehouses occupying an aggregate GFA of 6.28 million square feet (2005: 6.74 million square feet) as at 31 December 2006. The occupancy rate for its entire Hong Kong warehouse portfolio was 96% as at 31 December 2006 (2005: 97%).
During the year, the Division sold its warehouse properties in Yuen Long and Fanling for an aggregate consideration of HK$345 million.
Logistics Operations
During the year, the Division's logistics operations contributed turnover of HK$5,543 million (2005: HK$5,142 million), reflecting the results of the restructuring of Kerry EAS Logistics Limited ("KEAS") which cut down certain low-margin booking agency operations. The slight drop in profit contributed from the logistics operation for 2006 is mainly attributable to the costs incurred in the setting up of 17 freight forwarding offices in Europe and Australia, as well as the loss of businesses resulting from the termination of the previous agency operations in these countries.
(i) Hong Kong
The Division has been successful in securing large, integrated third-party logistics contracts from customers seeking to establish regional logistics hubs in Hong Kong.
During the year, KerryFlex Supply Chain Solutions Limited ("KerryFlex"), the trading arm of the Division, continued to register business growth across its broad customer base. In March 2006, KerryFlex acquired Wah Cheong Company, Limited, which is a company with more than 50 years of specialist food distribution experience in Hong Kong.
(ii) China Focus
After the acquisition of a 70% equity interest in KEAS, the Division now leads in terms of nationwide logistics coverage in Mainland China, serving over 1,100 cities in more than 32 provinces with around 120 offices and over 4,500 staff, 1,600 trucks and around 3,000,000 square feet of warehouse and logistics facilities. Operating profit contributed by KEAS to the Division for the year ended 31 December 2006 has increased by over 30% year-on-year.
A substantial part of KEAS' structural rationalization, as well as the integration between Kerry Logistics' Mainland China business and KEAS, has been completed. The elimination of certain low-margin businesses for KEAS was a result of such efforts and has helped to enhance KEAS' operating margin despite a decrease in revenue.
The newly-completed approximately 173,000 square-feet bonded logistics centre in Tianjin's Free Trade Zone commenced operations in the first half of 2006. This is the Division's largest bonded facility in Northern China. In June 2006, the approximately 269,000 square-feet bonded logistics centre in Shenzhen's Futian Free Trade Zone also commenced operations. The Division will continue to explore opportunities for building new logistics facilities in other strategic locations in Mainland China, such as Shanghai, Chengdu and Xiamen.
(iii) Asia Based
During the year, the Division invested in four warehouses in Vietnam with an aggregate GFA of approximately 268,000 square feet, and obtained licenses for bonded warehouse and container freight station (CFS).
In Thailand, the Division has established a nationwide distribution network and an information technology platform, with the container berth expansion works to be completed in 2007.
In India, the acquisition of a 51% equity interest in Reliable Freight Forwarders Private Limited, now renamed Kerry Reliable Logistics Private Limited, was successfully completed in September 2006 and offered the Division a country-wide network in this country. The Indian operation is headquartered in Chennai and is supported by a staff force of around 200.
In Australia, the Division has opened three offices during the year in Sydney, Brisbane and Melbourne, as a platform for further business expansion in the country.
(iv) Global Network
Outside Asia, in addition to its established businesses in the United Kingdom and Spain, the Division has further extended its operation in the European continent. With the headquarters for Central Europe and Western Europe operations located at Hamburg and Antwerp, respectively, the Division has to date set up 14 offices in Germany, Austria, Switzerland, Belgium and the Netherlands. By setting up its own offices and thus establishing its own direct representation in these countries, the Division has successfully strengthened its sales and marketing capabilities in Central and Western Europe.
Logistics Investments
The Division's logistics investments include a 15% interest in Asia Airfreight Terminal ("AAT") and a 25% interest in Chiwan Container Terminal ("CCT"). During the year, the Division's equity share of profits after tax from AAT, CCT and other associated companies amounted to HK$223 million (2005: HK$215 million).
INFRASTRUCTURE DIVISION
Net profit attributable to the Group from the Infrastructure Division during the year amounted to approximately HK$31 million (2005: HK$38 million).
The Group's share of aggregate net profits from its 15% interest in the Western Harbour Crossing and 15% interest in the Cross Harbour Tunnel management contract amounted to HK$43 million during the year ended 31 December 2006 (2005: HK$41 million).
The water treatment project in Hohhot Municipality, Inner Mongolia Autonomous Region, in which the Group has an effective 13% interest, commenced commercial operation in 2006. The Group's investment in this operation amounted to RMB27.7 million (equivalent to HK$27.8 million).
In collaboration with TieTong Telecommunications Corporation Shanghai Branch Company, the Group's 25%-owned REDtone Telecommunications (China) Limited launched an "e-secretary" service in 2006, and continued to roll out new packages for long distance discounted calls, initially in Shanghai. Plans are being considered to tap further into new market segments. The Group's investment in this operation amounted to US$937,500 (equivalent to approximately HK$7.3 million).
OUTLOOK
Property Division
During the year, a number of government authorities in Mainland China jointly introduced and enforced new measures to further curb rapid increases in property prices in metropolitan areas and to promote the healthy future development of Mainland China's property market.
The Group is of the view that these 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 its existing portfolio. On the other hand, the Group's mixed-use property development projects, comprising a fairly sizeable leasing portion, will enhance the Group's overall recurrent income base going forward.
Furthermore, as of 1 February 2007, the State Administration of Taxation began to enforce more strictly the levy of land appreciation tax on the sale or transfer of state-owned land use rights, buildings and their ancillary facilities in Mainland China. The Group has made appropriate provisions for such land appreciation tax in the financial statements as at 31 December 2006, in respect of the properties sold prior to that date. Furthermore, the diversified development mix between leasing and sales properties within the Group's development portfolio in Mainland China also limits the Group's exposure to the impact of land appreciation tax going forward.
The Group will continue to leverage its proven business models in Beijing, Shanghai and Shenzhen to pursue further opportunities, in these metropolitan cities and in the major secondary cities, which offer attractive development potential.
In Hong Kong, the Group maintains its view that the high-end residential property sector will continue its healthy development over the long term. The Group will continue to leverage its strong brand equity in the development of premium quality residential properties in prime and strategic locations, particularly in neighbourhoods with good connectivity to Hong Kong's commuting system, facilities and amenities and which possess long term potential for further development.
The Group also remains optimistic about the outlook of the grade-A office property market, as Hong Kong continues to enjoy the benefits arising from institutional capital inflows in acquiring quality office and commercial properties, as well as the competitive advantages as the commercial gateway to Mainland China offered by the Qualified Foreign Institutional Investor (QFII) Scheme.
For the commercial property sector, the Group's positive outlook is validated by the remarkable achievements in the pre-leasing of "MegaBox", the Group's major retail property project in Kowloon Bay which is scheduled to open in mid-2007.
Logistics Network Division
With the renewal of major warehouses' leasing contracts during the year with improved rental rates, the Division expects a continuous but very moderate increase in warehousing revenue and profit in 2007.
The Division will actively position itself to remain competitive in the face of the establishment of a China-ASEAN free trade area in phases from 2010 to 2015. The Division's main target for 2007 is to extend its land transportation connectivity from Mainland China to various ASEAN countries. Besides, the Division will also continue to drive the development of niche markets, such as the Philippines and Cambodia and plans to expand further into Bangladesh.
The Division's expansion plan will continue in 2007 and more offices will be set up in Germany, France, Poland, the Czech Republic and Hungary. It is expected that break-even position would be achieved by these European businesses by 2008.
Infrastructure Division
The Division will continue to identify and evaluate investment opportunities in commercially viable projects which are capable of contributing recurrent income in the long run.
FINANCING AND CREDIT RATING
On 27 February 2006, the Group signed a syndicated loan agreement for an unsecured HK$6 billion revolving loan facility. The interest rate for this facility is HIBOR (Hong Kong Interbank Offered Rate) plus 29 basis points. This facility is for general corporate funding requirements of the Group including refinancing of the outstanding loan balance under a previous HK$4.5 billion syndicated loan facility obtained in January 2002. The facility received participations from 18 reputable international and local banks and financial institutions.
On 15 August 2006, Standard & Poor's reaffirmed a "BBB-" credit rating for Kerry Properties Limited with a stable outlook.
On 25 August 2006, the Group issued fixed rate bonds in the aggregate principal amount of US$420,000,000 (the "Fixed Rate Bonds"), the net proceeds of which were used to repay part of the Company's outstanding corporate loans. The Fixed Rate Bonds were guaranteed by the Company and carry a coupon rate of 6.375% per annum, and have a maturity term of 10 years until 25 August 2016. The issuance of the Fixed Rate Bonds enables the Group to extend its debt maturity profile and broaden its fixed-income investor base. Standard & Poor's awarded the Fixed Rate Bonds with a "BBB-" credit rating.
On 22 February 2007, the Group issued convertible bonds in the aggregate principal amount of HK$2,350,000,000 (the "Convertible Bonds"). The Convertible Bonds are zero coupon-based, have a maturity term of 5 years until 22 February 2012 and are convertible into the Company's ordinary shares at a conversion price of HK$52.65 per share (subject to adjustments). The issuance of the Convertible Bonds provides a flexible and cost-efficient funding opportunity which is in the best interest of the Group. Upon conversion of the Convertible Bonds, the capital base of the Company will be enlarged and strengthened which will benefit the Group's future growth and developments. Standard & Poor's awarded the Convertible 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, investment and management in Hong Kong, Mainland China and the Asia Pacific region; (ii) logistics, freight and warehouse ownership and operations; (iii) infrastructure-related investments in Hong Kong and Mainland China; and (iv) hotel ownership in Hong Kong, and hotel ownership and operations in Mainland China.