The Group’s consolidated net profit attributable to shareholders for the six months ended 30 June 2007 was HK$2,470 million, representing an increase of 24% compared with HK$1,996 million reported for 2006. Due to the effect of a profit of HK$1,160 million booked in the first half of 2006 from the Group’s disposal of its 10.16% minority interest in Citibank Plaza, profit attributable to shareholders before taking into account the net increase in fair values of investment properties and related tax effects for the reporting period decreased 27% year on year to HK$1,372 million. Excluding the effect of the said disposal, the attributable profit represented an increase of 94%.
During the first half of 2007, the net increase in fair values of the Group’s investment properties and related tax effects in the aggregate amount of HK$1,098 million was recognised (2006: HK$128 million). Earnings per share were HK$1.94. The Group declared an interim dividend of HK$0.3 per share, with a scrip dividend alternative.
PROPERTY DIVISION
Mainland China Property Division
During the six months ended 30 June 2007, the Mainland China Property Division reported a turnover of HK$605 million (2006: HK$485 million) and a net profit attributable to the Group of HK$162 million (2006: HK$140 million).
(i) Investment Properties
During the period under review, rental income and operating profit generated from the Group’s portfolio of investment properties in Mainland China amounted to HK$299 million and HK$200 million, respectively (2006: HK$284 million and HK$205 million, respectively).
As at 30 June 2007, the Group held an investment property portfolio of office, commercial and residential properties in Mainland China with an aggregate gross floor area (“GFA”) of 2.9 million square feet (as at 31 December 2006: 3.0 million square feet), with their respective occupancy rates being 90%, 93% and 47% (as at 31 December 2006: 95%, 92%, 67%, respectively).
Leasing of the luxury residential development, Central Residences Phase II, in Changning District, Shanghai, has met with good response. As at 30 June 2007, 55 units out of a total of 154 units in Tower 3 of the development were leased as serviced apartments.
(ii) Sales of Completed Properties
Sales of completed properties in Mainland China during the six months ended 30 June 2007 contributed turnover of HK$121 million (2006: HK$32 million) and operating profit of HK$31 million (2006: operating loss of HK$0.1 million).
(iii) Properties under Development
Shanghai
Phase IIa of the approximately 1,598,000 square-feet Kerry Everbright City Phase II project in Zhabei District comprises an office tower with a two-storey retail podium and four residential towers, and is due for completion in early 2008. Phase IIb will add four residential towers to this mixed-use development on completion, which is scheduled in the first quarter of 2008. As at 30 June 2007, 380 units or 66% out of a total of 572 residential units of Phase IIa were pre-sold at an average price of approximately RMB1,610 per square foot.
Construction of the mixed-use development in Jingan District will commence soon, with completion expected in 2011. This project, which is being developed as a joint venture with Shangri-La Asia Limited on a 51%/49% basis, is intended to have two luxury hotels, office and retail properties with an aggregate GFA of approximately 2,750,000 square feet.
The 40.8%-held joint-venture mixed-use property project in Pudong is planned for completion in the second quarter of 2010. With an expected aboveground GFA of approximately 2,476,000 square feet, the development incorporates a hotel, offices, an apartment-style hotel and commercial properties. It is located on a prime site adjacent to the Shanghai New International Expo Centre, which is expected to turn its neighbourhood into a new hub of business activity.
Shenzhen
Construction of the approximately 807,000 square feet grade-A office complex project in Futian Central District is expected to be completed in the fourth quarter of 2007.
The Group expanded its portfolio in Shenzhen by acquiring through public tender an adjacent site of 85,000 square feet, which will add a further buildable GFA of approximately 850,000 square feet. Development of the project is expected to be completed in 2010.
Manzhouli
Completion of the approximately 927,000 square feet apartment and commercial property project in Manzhouli, Inner Mongolia is scheduled in phases to 2010.
Hangzhou
The Group has acquired two sites in Xiacheng District. The first site, which is adjacent to Xihu (West Lake), has been designated for a mixed-use development comprising a hotel, offices, apartments and a commercial shopping complex with a total buildable GFA of approximately 2,217,000 square feet. The project is expected to be completed in phases between 2010 and 2011.
The other site in Xiacheng District is earmarked for an approximately 2,700,000 square feet residential property project, which is scheduled for completion in phases to 2010.
Yangzhou
The approximately 1,032,000 square feet hotel and apartment project in Yangzhou is scheduled for completion in 2009.
Tianjin
The approximately 5,565,000 square feet mixed-use property in Hedong District, which incorporates a hotel, serviced apartments, offices, residences and a shopping mall, is scheduled for completion in phases between 2010 and 2011.
Beijing
The approximately 334,000 square feet Xinyuanli residential project in Beijing is scheduled for completion by end 2008.
(iv) Major Acquisitions and Developments
Qinhuangdao
In April 2007, the Group acquired residential sites through public bidding in Qinhuangdao, Hebei Province. The sites are in prime locations of the metropolitan area on the southern seafront, ideal for the development of prime quality residential properties. This development is planned to deliver a total aboveground GFA of approximately 4,760,000 square feet and is scheduled for completion in phases to 2012. Qinhuangdao has been selected as a venue for the 2008 Summer Olympics and enjoys tremendous potential for further economic development.
Chengdu
In June 2007, the Group acquired through public bidding two adjacent sites in the southern part of the Chengdu High-Tech Industrial Development Zone for an approximately 3,831,000 square-feet residential property development. This zone will become the city’s future central business district with the Municipal Government’s offices to be relocated to it.
Shenyang
Also in June 2007, the Group acquired a site near Qingnian Street, Shenhe District, the central business district of Shenyang. The area, which has been dubbed the “Golden Corridor”, has been designated the city’s new centre of business and retail activities. The developable site area is approximately 1,859,000 square feet with a plot ratio of not exceeding 12, of which 30% will be designated for residential use and 70% for commercial properties.
(v) Beijing Kerry Centre Hotel
During the first six months of 2007, Beijing Kerry Centre Hotel contributed turnover and operating profit of HK$185 million and HK$83 million, respectively (2006: HK$169 million and HK$67 million, respectively), and achieved an average occupancy rate of 72% (2006: 75%).
Hong Kong Property Division
During the six months ended 30 June 2007, the Hong Kong Property Division recorded turnover of HK$1,778 million (2006: HK$616 million) and a net profit attributable to the Group of HK$1,877 million (2006: HK$1,432 million), after taking into account the increase in fair value of investment properties (net of deferred taxation) of HK$1,098 million (2006: HK$128 million).
(i) Investment Properties
During the first six months of 2007, rental turnover and operating profit generated from the Group’s investment properties in Hong Kong were HK$211 million and HK$37 million, respectively (2006: HK$190 million and HK$30 million, respectively).
As at 30 June 2007, the Group’s investment property portfolio of residential, commercial and office properties in Hong Kong totalled an aggregate GFA of 2.5 million square feet (as at 31 December 2006: 1.5 million square feet) and their respective occupancy rates were 95%*, 88% and 76%, respectively (as at 31 December 2006: 97%*, 91% and 83%, respectively).
In June 2007, the Group made a successful foray into the local retail property sector with the opening of the 1.1 million square feet “MegaBox”, being the largest shopping and leisure destination in East Kowloon incorporating Hong Kong’s largest world-standard ice rink, new-to-Hong-Kong home improvement retailers, the city’s first and only commercial IMAX cinema and the largest electrical and electronics centre, complemented by a book city and selected collection of retailers and gourmet restaurants. Encouraging and sustainable traffic flows have been recorded. In June 2007, “MegaBox” was named the winner in the “Extreme Retail Complex” category of the prestigious “2007 Digie Awards” by world-leading real estate conference and exposition organizer Realcomm, against two other finalists: Mall of the Emirates and The Dubai Mall, both in Dubai.
* Excluded the occupancy rates of Tavistock and Belgravia, which are currently under extensive renovation programme and are not offered for lease.
(ii) Sales of Completed Properties
During the reporting period, turnover amounted to HK$1,567 million (2006: HK$426 million), mainly from the continuing sales of property units at 15 Homantin Hill, Tregunter Towers and Enterprise Square Three. An operating profit of HK$845 million (2006: HK$100 million which excludes the profit of HK$1,160 million arising from the Group’s disposal of its 10.16% minority interest in Citibank Plaza) was recorded from property sales during the first half of 2007.
The launch of 15 Homantin Hill during the period met with excellent market response owing to its strong appeal to buyers looking for luxury residences in exclusive locations.
(iii) Properties under Development
Enterprise Square Five, Kowloon Bay
The approximately 500,000 square feet office portion of Enterprise Square Five project was completed in the third quarter of 2007. With the continued economic upturn of the local economy driving demand for high quality office space, the office portion of Enterprise Square Five was 75% pre-leased as at 30 June 2007 with Hang Seng Bank Limited taking the entire 15-storey Tower 2 and DHL Hong Kong taking up 7 floors of Tower 1.
Shelley Street, Central Mid-Levels
The approximately 50,000 square feet residential development at No. 38 Shelley Street is expected to be completed in the fourth quarter of 2007. Sale of the 79 residential units is scheduled in the first quarter of 2008.
First Street/Second Street, Mid-Levels West
This joint development project with the Urban Renewal Authority will deliver 496 residential units and commercial accommodation with a total GFA of approximately 400,000 square feet. This project is scheduled for completion by the second quarter of 2009.
Tsuen Wan
The approximately 400,000 square-feet residential and commercial development at Kwok Shui Road is expected to be completed in the third quarter of 2009, and is planned to deliver 548 residential units.
Ap Lei Chau
This 35%-held joint-venture residential project is scheduled for completion in 2010. The Group has an attributable share of GFA measuring approximately 320,000 square feet in this project with a total of approximately 700 residential units.
Yuk Yat Street, To Kwa Wan
With a developable GFA of approximately 163,000 square feet, the site is designated for re-development into residential and commercial properties.
Shan Kwong Road/Village Terrace, Happy Valley
The existing sites offer a developable GFA of approximately 220,000 square feet and are intended for re-development into luxury residential properties. Completion is scheduled for the fourth quarter of 2010.
863-865 King’s Road, North Point
This 40%-held joint-venture development consists of a grade-A office tower with a developable GFA of approximately 511,000 square feet. This project is expected to be completed in the second quarter of 2011.
(iv) Major Acquisitions and Developments
Hong Kong
The Group won the bid for a site at Chun Yan Street, Wong Tai Sin, at a public land auction held in July 2007. The approximately 102,000 square feet site has a plot ratio of 9, and is expected to yield buildable GFA of approximately 767,000 square feet of residential properties and approximately 153,000 square feet for commercial use. The Group is confident of the success of this development, which will benefit from the keen demand for urban core properties in prime locations.
Macau
In July 2007, the Group secured an approximately 40,000 square-feet site in Nam Van Lake where it plans to develop a luxury residential apartment building with approximately 170 units and a developable GFA of approximately 400,000 square feet. Pre-sale launch is planned for the second quarter of 2008 and completion is scheduled for the fourth quarter of 2009.
Overseas Property Division
In the first six months of 2007, the Group’s Overseas Property Division derived a net profit after tax of HK$22 million (2006: HK$14 million) from its portfolio of properties in Australia and the Philippines.
LOGISTICS NETWORK DIVISION
During the six months ended 30 June 2007, the Logistics Network Division recorded a 28% increase in turnover to HK$3,401 million (2006: HK$2,648 million). Net profit attributable to the Group from the Division during the period dropped 8% to HK$241 million (2006: HK$262 million).
(i) Logistics Operations
Turnover and net profit generated from the logistics operations of the Division for the first half of 2007 amounted to HK$3,188 million and HK$50 million, respectively (2006: HK$2,435 million and HK$64 million, respectively). The drop in profit was mainly attributable to the cost incurred in the setting up of various freight forwarding offices in Europe and Australia since late 2006, as well as the loss of business resulting from the termination of the previous agency operations in these countries.
During the first half of 2007, a total of 68,406 tons (2006: 51,728 tons) of cargo was handled by air and 168,408 TEUs (2006: 127,939 TEUs) by sea, representing year-on-year increases of 32% and 32%, respectively.
Hong Kong
In January 2007, the Division completed the acquisition of a 51% interest in Multiple Gain Enterprises Limited (subsequently renamed as Kerry Far East Logistics (Hong Kong) Limited), which owns Far East Multi-Trans Shipping Limited, a Hong Kong company with about 20 years of history in international freight forwarding, mainly to and from Hong Kong, the Philippines, Bangladesh and Cambodia. The acquisition has further strengthened the Division’s freight forwarding capabilities in Asia, especially in intra-Asia trade.
Profit generated from the Division’s logistics and freight forwarding businesses in Hong Kong during the period grew 49% year on year to HK$29 million.
China Focus
As a result of the continuing business restructuring of KEAS, the Division’s business arm in China, the Division has successfully refocused its Mainland China operations on the niche international freight market and pan-China distribution. KEAS reported a more than 50% growth in profit attributable to the Division for the first half of 2007.
The Division is now operating a logistics centre portfolio of 3.5 million square feet in Mainland China, of which 1.4 million square feet are self-owned facilities located at Shenzhen Yantian, Shenzhen Futian, Tianjin, Shanghai Waigaoqiao and Beijing.
Asia Based
In Thailand, the berth expansion project at Siam Seaport has been completed and the operating equipment is now being installed. These new facilities will spearhead the Division’s efforts to enter the container handling business, thereby adding value to its existing conventional and bulk cargo services.
In October 2006, the Division successfully established its first logistics foothold in India with the acquisition of a 51% stake in an India-based freight forwarding company, Reliable Freight Forwarders Private Limited (subsequently renamed as Kerry Reliable Logistics Private Limited (“KRL”)). KRL has been engaged in the business of international freight forwarding for about 10 years and has seven offices in India and approximately 200 staff. The acquisition has strengthened the Division’s freight forwarding capability in the South Asian region.
In response to development of the pan-Asia highway and railway that links Southwest China and Southeast Asia, since late 2006 the Division has been developing road transport routes in ASEAN countries, including China, Vietnam, Laos, Malaysia and Thailand. The Division plans to become the leading ASEAN road transport service provider in the region within two years.
Global Network
In 2007, the Division further strengthened its presence in Central and in Western Europe with new offices being set up in the Czech Republic, Poland and Hungary. The Division now has operations in 23 cities in Europe, covering Germany, Switzerland, Austria, Poland, the Czech Republic, Belgium, Hungary, the Netherlands, the United Kingdom and Spain. Further expansion into France is scheduled for the third quarter of 2007.
The Division’s trade development focus in Europe is mainly on import and export of cargoes between European countries and Asia, in particular Mainland China. It is expected that the new offices will achieve break-even by the year 2008.
(ii) Hong Kong Warehouses and Distribution Centres
With a portfolio of 11 warehouses occupying an aggregate GFA of 6.28 million square feet, the Division continues to be the single largest warehouse owner and operator in Hong Kong. As at 30 June 2007, the Division’s warehouse portfolio in Hong Kong maintained an occupancy rate of 97% (as at 31 December 2006: 96%).
During the six months ended 30 June 2007, the Division’s Hong Kong warehouse portfolio generated turnover of HK$213 million (2006: HK$213 million) and a profit attributable to the Division of HK$103 million (2006: HK$94 million). The increase in profit is mainly attributable to the disposal of the two non-core warehouses in November 2006, which has successfully reduced the Division’s interest burden, as well as the renewal of major leasing contracts during 2006 with improved rental rates.
INFRASTRUCTURE DIVISION
During the six months ended 30 June 2007, net profit attributable to the Group from this Division amounted to HK$20 million (2006: HK$19 million).
In Hong Kong, the Group’s share of aggregate net profits from its 15% stake in the Western Harbour Crossing and a 15% interest in the management contract for the Cross Harbour Tunnel amounted to HK$18 million during the first six months of 2007 (2006: HK$21 million).
In China, the Group holds a 13% effective interest in a water treatment project in Hohhot Municipality, Inner Mongolia Autonomous Region and its share of net profit from this investment during the six months ended 30 June 2007 amounted to HK$3 million.
The reporting period witnessed further business rollouts of the Group’s 25%-owned REDtone Telecommunications (China) Limited (“REDtone”), which focuses on the provision of discounted international call packages to mobile phone and fixed line subscribers in Shanghai. A number of premium service initiatives have been launched based on REDtone’s new exclusive “17991” short-code platform.
OUTLOOK
(i) Mainland China Property Division
Mainland China’s central government has continued its effort to moderate property price surges through further tightening measures. The Group maintains its view that these measures, which are targeted primarily at the residential sector, are unlikely to have a significant impact on the Group, as it does not hold a substantial proportion of residential sales properties within its portfolio in Mainland China. The Group’s ongoing policy is to develop mixed-use property projects, which has resulted in a diversified mix of leased properties across the office, commercial and hotel sectors.
Despite short-term industry corrections, the Mainland property market is expected to record healthy long-term growth, which is both demand and investment driven. While Mainland China is entering a negative interest environment, a migration of savings to higher-yield investments such as the property market is expected be triggered, giving a further boost to the real estate sector. Also supporting the inflow of foreign capital into the Mainland property market is the appreciation trend of the Renminbi, giving Mainland properties greater upside potential in value.
To maintain positive momentum, the Group will continue to increase its landbank in Mainland China. The Group made its first forays into Qinhuangdao, Shenyang and Chengdu during the period under review, and will leverage its successful development model in Beijing, Shanghai and Shenzhen in order to expand its presence in other locations of strategic value.
(ii) Hong Kong Property Division
Robust fundamentals such as strong market liquidity, low mortgage rates, low land supply and real interest rates turning negative will continue to underpin the value of Hong Kong properties. The recent proposed plan set out by a Hong Kong SAR Government think-tank to promote the joint development of Hong Kong and Shenzhen is also expected to generate further demand across the office, residential and retail sectors.
The broad-based recovery bodes well for the overall residential sector. The luxury sector will continue to outperform, underpinned by tight supply. The mass market sector will also receive encouragement from a number of positive factors, such as the stamp duty reduction for residential properties under HK$2 million, the strength of the job market, improved domestic household incomes and strengthened financial security. The Group aspires to build and manage premium quality residences and to contribute to the creation of comfortable and environmentally-conscious neighbourhoods.
The Group is of the view that prime office space will continue to be in demand, particularly in light of institutional capital inflows for acquiring quality office and commercial properties, as well as the positive momentum driven by the Qualified Foreign Institutional Investor (QFII) Scheme.
Retail space rentals have also been on a continuing upward trend, with occupancies rising to new levels. The Group’s optimistic outlook is validated by the encouraging business volume and visitor traffic recorded since the opening in June 2007 of its major retail property, “MegaBox”, in Kowloon Bay.
(iii) Logistics Network Division
In the second half of the year, the Division will continue to expand in strategic markets in Asia and Europe. Growth in Asia will be underpinned by its enhanced business portfolio and the performance of KEAS in Mainland China, as well as strengthened logistics capabilities that fulfil new China-ASEAN demands. Direct and self-owned operations will also be added to the Division’s expanding European presence, which already covers Germany, Switzerland, Austria, Poland, the Czech Republic, Belgium, Hungary, the Netherlands, the United Kingdom and Spain.
(iv) Infrastructure Division
The Division will continue to evaluate and pursue viable investment opportunities in infrastructure projects that are capable of generating good financial returns and stable recurrent income for the Group.
FINANCING AND CREDIT RATING
On 22 February 2007, Gainlead International Limited, a wholly-owned subsidiary of the Company, issued convertible bonds in the aggregate amount of HK$2,350,000,000 (the “Convertible bonds”). The Convertible Bonds are zero coupon-based, have a maturity term of five 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. Standard & Poor’s awarded the Convertible Bonds with a “BBB-” credit rating.
During the six months ended 30 June 2007, an aggregate principal amount of HK$1,738,000,000 of the convertible bonds issued in 2005 has been converted into an aggregate of 66,962,017 ordinary shares of HK$1 each in the Company. Subsequent to 30 June 2007 and up to 14 September 2007, a further aggregate principal amount of HK$467,000,000 of the convertible bonds has been converted into an aggregate of 17,992,670 ordinary shares of HK$1 each in the Company. The total conversion represents 88.2% of the entire issued principal of HK$2,500,000,000.
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.