Earnings per share for the year were HK$4.95, representing an increase of 29%. The Board of Directors has recommended the payment of a final dividend of HK$0.65 per share, with a scrip dividend alternative. Together with the interim dividend of HK$0.30 per share, the total dividend for the year will be HK$0.95 per share, representing an increase of 11.8% compared with HK$0.85 per share in 2006.
(I) PROPERTY DIVISION
As at the year end, the Group maintained a property portfolio with a gross floor area ("GFA") of 45.8 million square feet (2006: 21.2 million square feet) of properties under development, 8.7 million square feet (2006: 7.5 million square feet) of completed investment properties, 0.5 million square feet (2006: 0.5 million square feet) of hotel properties and 0.3 million square feet (2006: 0.6 million square feet) of properties held for sale.
(1) Mainland China Property Division
In the year under review, turnover of the Mainland China Property Division increased 18% year-on-year to HK$1,187 million (2006: HK$1,006 million), reflecting increased property sales and leasing activities. Net profit attributable to the Group also rose 10% to HK$885 million (2006: HK$807 million), after incorporating the increase in fair values of investment properties (after deferred taxation) of HK$623 million (2006: HK$594 million). Excluding this, net profit attributable was adjusted to HK$262 million (2006: HK$213 million).
(i) Investment Properties
During the year, the Group derived rental turnover and operating profit from rental activities of HK$614 million and HK$413 million, respectively (2006: HK$578 million and HK$403 million, respectively) from its portfolio of investment properties in Mainland China.
As at 31 December 2007, the Group held an aggregate GFA of 3.7 million square feet (2006: 3.6 million square feet) in its investment property portfolio in Mainland China, with office, commercial and residential properties achieving occupancy rates of 83%, 93% and 61%, respectively (2006: 95%, 92% and 67%, respectively).
(ii) Sales of Completed Properties
Sales of completed properties during the year contributed turnover and operating profit of HK$172 million and HK$23 million, respectively (2006: HK$73 million and HK$3 million, respectively), reflecting mainly the contribution from the sales of office units in Shenzhen Kerry Centre.
(iii) Properties under Development
The Group has actively pursued land acquisitions in major secondary cities in the past year, and continues to take forward plans to develop large-scale, mixed-use property projects in prime locations.
Shanghai The Kerry Everbright City Phase II project in Zhabei District, a mixed-use development with approximately 1,600,000 square feet of GFA, is scheduled for completion in phases to 2008. The launch of Phase IIa of the project has received strong market response. Phase IIb has already topped off, with external works currently ongoing. The Kerry Everbright City Phase III project is currently at the conceptual design stage and the construction works will commence in 2008.
Site works for the mixed-use development in Jing An District commenced in January 2008. Jing An Kerry Centre, the 51%/49% joint-venture project with Shangri-La Asia Limited is earmarked for the development of two luxury hotels, office and retail properties with a buildable GFA of approximately 2,750,000 square feet. Completion is scheduled for 2011.
Kerry Centre, Pudong Shanghai, the 40.8%-held joint-venture mixed-use property project includes the development of a hotel, offices, an apartment-style hotel, commercial properties and related ancillary facilities, all targeted for completion by the second quarter of 2010.
Shenzhen The grade-A office complex project in Futian Central District is expected to complete in the first quarter of 2008. The project has an aboveground GFA of approximately 807,000 square feet. The Group expanded its portfolio in Shenzhen by acquiring an adjacent site for development into an office property. The project will yield a buildable GFA of approximately 850,000 square feet on scheduled completion in 2010.
Manzhouli The development of an apartment and commercial property in Manzhouli, Inner Mongolia, continued with Phase I of the project already topped out. Completion is targeted to be in phases up to 2011. It is expected to deliver a buildable GFA of approximately 927,000 square feet.
Hangzhou The Group acquired two sites in Xiacheng District in Hangzhou. The first site, which lies in the heart of Hangzhou adjacent to Xihu (West Lake), is designated for the development of a mixed-use property incorporating 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 to 2011.
The second site in Xiacheng District is earmarked for residential development and is configured to deliver a GFA of approximately 2,700,000 square feet. Completion is planned to be in phases up to 2010.
Yangzhou The Group's hotel and apartment project in Yangzhou is currently under development. Upon completion scheduled for 2010, this development will generate a total buildable GFA of approximately 1,161,000 square feet.
Tianjin The Group acquired a site in Hedong District in Tianjin's central business area. The site is planned for a mixed-use property development comprising a hotel, serviced apartments, offices, residences, a shopping mall and related ancillary facilities, with an aggregate GFA of approximately 5,705,000 square feet. Construction of this project is expected to be completed in phases between 2010 and 2011.
Beijing Construction of the Xinyuanli residential project is expected to complete in October 2008. Upon completion this development will generate an aggregate GFA of approximately 334,000 square feet.
Qinhuangdao In April 2007, the Group acquired residential sites in prime locations within metropolitan Qinhuangdao. The sites are ideal for the development of deluxe sea-view residences. This development is planned to produce an aggregate GFA of approximately 4,760,000 square feet upon its scheduled completion in phases up to 2012.
Chengdu The Group acquired three sites in the southern part of the Chengdu High-Tech Industrial Development Zone, an area zoned as Chengdu's future central business centre. These sites are designated mainly for residential property development, and are expected to yield a total developable GFA of approximately 6,478,000 square feet.
Shenyang In June 2007, the Group acquired a site located on the east side of Qingnian Street, the new focus of development in Shenyang. The developable site area is approximately 1,859,000 square feet with a plot ratio of not exceeding 12. The site will be developed into a mixed-use development, consisting of hotels, offices, retail shops, convention centre and apartments, with completion to be in phases up to mid-2016.
Changsha The Group engaged in a 61%-held joint-venture residential and commercial property project located in the Tianxin District in Changsha in December 2007. The project is expected to yield a GFA of approximately 3,295,000 square feet.
(iv) Beijing Kerry Centre Hotel
In the year to 31 December 2007, Beijing Kerry Centre Hotel recorded turnover and operating profit of HK$401 million and HK$152 million, respectively (2006: HK$355 million and HK$125 million, respectively), and achieved an average occupancy rate of 75% (2006: 77%), with average room tariff growing 3% year on year.
(2) Hong Kong Property Division
In the year to 31 December 2007, the rapid development of the Hong Kong Property Division recorded a 24% increase in turnover to HK$3,503 million (2006: HK$2,827 million). Net profit attributable to the Group also advanced 76% year on year to HK$4,716 million (2006: HK$2,676 million which includes HK$1,160 million profit arising from the Group's disposal of its 10.16% minority interest in Citibank Plaza by way of participation in the global offering of the Champion Real Estate Investment Trust), after taking into account the increase in fair values of investment properties (net of deferred taxation) of HK$3,076 million (2006: HK$653 million).
(i) Investment Properties
During the year, the Hong Kong investment property portfolio contributed rental turnover of HK$492 million (2006: HK$384 million) and an operating profit of HK$158 million (2006: HK$86 million), representing year-on-year increases of 28% and 84%, respectively.
As at 31 December 2007, the Group held an investment property portfolio in Hong Kong with an aggregate GFA of 2.9 million square feet (2006: 1.5 million square feet), of which residential, commercial and office properties achieved occupancy rates of 98%, 92% and 92%, respectively (2006: 97%, 91% and 83%, respectively)
Enterprise Square Five / "MegaBox" The Group's proprietary retail and entertainment project, "MegaBox", has been successfully established as a destination for both local shoppers and overseas visitors since its opening in June 2007. This 1.1-million square-feet retail landmark forms a key part of the 1.6-million square-feet Enterprise Square Five development in Kowloon Bay. As at the year end, "MegaBox" was 91% leased.
The two grade-A office towers of Enterprise Square Five were completed in the third quarter of 2007, adding a GFA of approximately 519,000 square feet to the Group's portfolio of prime office and commercial space in Kowloon Bay. The office towers were 92% leased as at year end.
(ii) Sales of Completed Properties
During the year, turnover achieved from sales of completed properties in Hong Kong increased 23% to HK$3,011 million (2006: HK$2,443 million), which were contributed mainly by the sales of units in 15 Homantin Hill, Tregunter Towers and Enterprise Square Three. An operating profit of HK$1,627 million (2006: HK$1,914 million after or HK$754 million before the profit of HK$1,160 million arising from the Group's disposal of its 10.16% minority interest in Citibank Plaza) was posted, representing a decrease of 15% or an increase of 116% over the year respectively with or without the effect of the said disposal.
The launch of 15 Homantin Hill during the year generated a strong market response as the property meets the current keen demand for supply-constrained luxury residences.
(iii) Properties under Development
SOHO 38, Central Mid-Levels
Construction of the fashionable residential development, SOHO 38, at No. 38 Shelley Street in Central Mid-Levels is aimed to be completed by first quarter of 2008. SOHO 38 will bring 79 voguish residential units over a developable GFA of approximately 50,000 square feet. The project is expected to be launched in the second quarter of 2008.
First Street/Second Street, Mid-Levels West This joint development residential project with the Urban Renewal Authority, at First Street/Second Street in Mid-Levels West will yield 496 residential units and commercial accommodation with a total GFA of approximately 410,000 square feet. This project is slated for completion by the second quarter of 2009.
Tsuen Wan Construction of the residential and commercial development at Kwok Shui Road, Tsuen Wan progressed further. A total of 548 units over a GFA of approximately 400,000 square feet are planned with completion scheduled for the third quarter of 2009.
Ap Lei Chau This 35%-held joint venture residential project will deliver a Group's attributable GFA of approximately 320,000 square feet. It is planned for completion in 2010 and will bring approximately 700 residential units.
863-865 King's Road, North Point This 40%-held joint venture development of a grade-A office tower will yield a developable GFA of approximately 511,000 square feet. It is planned to be completed in the fourth quarter of 2010.
Shan Kwong Road/Village Terrace, Happy Valley With a developable GFA of approximately 220,000 square feet, the sites are earmarked for redevelopment into luxury residential properties. Completion is scheduled for the second quarter of 2011.
Chun Yan Street, Wong Tai Sin The Group further increased its land bank in Hong Kong through the acquisition of a site at Chun Yan Street, Wong Tai Sin, at a public land auction held in July 2007. This site is expected to deliver a buildable GFA of approximately 767,000 square feet of residential properties and approximately 153,000 square feet for commercial use. This project is planned to be completed in the third quarter of 2011.
Yuk Yat Street, To Kwa Wan The redevelopment of No. 5 and No. 9 Yuk Yat Street into residential and commercial properties is in the planning phase. The project is expected to deliver a GFA of approximately 163,000 square feet.
Macau In July 2007, the Group secured an approximately 40,000 square feet site in Nam Van Lake for the development of a luxury residential apartment building. This project will yield a developable GFA of approximately 400,000 square feet upon its scheduled completion in the second quarter of 2011.
As for the reclamation project in Macau, the Central Government's approval on the proposed reclamation scheme is expected to come through in the first half of 2008. The finalisation of the land exchange contract with the Macau SAR Government will immediately follow to allow planning and design of the project to commence in the second half of 2008.
(3) Overseas Property Division
The Group maintains an overseas property portfolio in Australia and the Philippines. During the year, this Division reported a net profit after tax of HK$59 million (2006: HK$36 million), a 64% increase year on year.
(i) Australia
As at the year end, 96% of the total of 1,064 units of the Group's 25%-owned Jacksons Landing residential and commercial project were sold. The project is located at the Pyrmont Peninsula in Sydney.
(ii) The Philippines
In the Philippines, the Group's property investments were held through direct and indirect interests in EDSA Properties Holdings, Inc. ("EPHI"). Subsequent to a merger of EPHI with its listed affiliate Kuok Philippine Properties, Inc., the corporate name of EPHI was changed to Shang Properties, Inc. ("SPI"). With the merger, the Group now maintains an aggregate 65.36% direct and indirect interest in SPI.
Currently included in the SPI's portfolio are (i) a 78.72% interest in the Shangri-La Plaza Mall, Manila and (ii) indirect interests in The Enterprise Centre, an office and commercial property in Makati, Manila's financial district. The occupancy rates of Shangri-La Plaza Mall and The Enterprise Centre as at the year end were 99% and 99%, respectively (2006: 99% and 97%, respectively).
The sustained strong performance of Shangri-La Plaza Mall has enabled the Division to embark on an extension programme to develop an adjacent site into an extension of the mall and residential units, yielding a total GFA of approximately 1,668,000 square feet. Completion is planned for the fourth quarter of 2011.
Also in the SPI development pipeline are (i) The Shang Grand Tower, a residential property project in Makati, Manila, and (ii) The St. Francis Shangri-La Place, also residential development project, in Mandaluyong City, Manila.
(II) LOGISTICS NETWORK DIVISION
The Division achieved a 22% turnover growth to HK$7,683 million (2006: HK$6,316 million) in the year to 31 December 2007. Net profit attributable to the Group for the year dropped 31% to HK$812 million (2006: HK$1,173 million). The decrease in net profit is due to the inclusion of the gain on disposal of two warehouse properties in Hong Kong in 2006 of HK$169 million and a comparatively mild fair value adjustment on the warehouse properties, logistics centres and buildings this year of HK$260 million (2006: HK$500 million). Excluding the effects of these two, profit for the year attributable to operations increased by 9% to HK$552 million (2006: HK$504 million), made up of (i) HK$218 million (2006: HK$174 million) contributed by warehousing operations in Hong Kong; (ii) HK$113 million (2006: HK$107 million) by logistics operations; and (iii) HK$221 million (2006: HK$223 million) by the Division's logistics investments.
As at the year end, the Division operated a portfolio of warehouses, logistics centres and port facilities with a total GFA of more than 16 million square feet, served by a truck fleet of about 3,500 vehicles, with a range of operations reaching across over 180 cities in 25 countries and supported by a staff strength of over 6,200.
(1) Warehousing Operations in Hong Kong The Division continues to be the market leader in the local warehousing sector, operating a portfolio of 11 warehouses with an aggregate GFA of 6.28 million square feet. The warehousing operation achieved higher tariffs and an overall occupancy rate of 96% (2006: 96%) for its warehouse portfolio in Hong Kong. The Division recorded a continuous increase in warehouse revenue and profitability, reflecting improved rental rates upon renewal of major leasing contracts and reduced interest expenses following the disposal of two non-core warehouses in November 2006.
(2) Logistics Operations
The Division's business focus for its logistics operations is in two strategic disciplines: integrated logistics ("IL") and international freight forwarding ("IFF").
During the reporting year, the Division's logistics operations generated turnover of HK$7,243 million (2006: HK$5,543 million) and profit attributable to the Group of HK$137 million (2006: HK$116 million), which represent an increase of 31% and 18% respectively. The turnover growth is mainly due to the increase in business generated in the Division's operation in Mainland China as well as its active geographical expansion and enhanced sales and marketing capabilities in the European market in 2007. The relatively slight growth in profit when compared with turnover is mainly attributable to the cost incurred in the setting up of new freight forwarding offices in Europe since late 2006.
(i) Hong Kong
2007 saw the continued growth of the Division's logistics operations in Hong Kong. Revenue generated from the Division's IL and IFF businesses in Hong Kong grew 19% year on year. Activities over the year included the incorporation of Kerry FSDA Limited in the second half of 2007 to strengthen the Division's existing trading and merchandising capabilities and expand its food supply network beyond Hong Kong.
(ii) China Focus
Kerry EAS Logistics Limited ("KEAS") achieved a 19% turnover growth to HK$3,573 million (2006: HK$3,011 million) for the year ended 31 December 2007. Net profit attributable to the Division before fair value adjustment on properties also increased to HK$71 million (2006: HK$47 million). Included in the net profit of 2007 was a gain on disposal of a non-core wholly-owned shipping operation amounting to HK$18 million. Looking into the future, Mainland China is geared to become the biggest revenue contributor for the Division's logistics operations.
The Division has continued to pursue further penetration into towns and counties. During the year, offices were established in Lianyungang, Jiangsu Province and Leshan, Sichuan Province.
At the same time, the Division continues to derive steady recurrent income from its hardware investments in Mainland China. The Division maintains nationwide coverage of Mainland China with the operation of a logistics centre portfolio of approximately 3.5 million square feet, of which 1.4 million square feet consist of wholly owned facilities located in Shenzhen Yantian, Shenzhen Futian, Tianjin, Shanghai Waigaoqiao and Beijing.
(iii) Asia Based
In Southern Asia, the development of the pan-Asia highway and railway that link Southwest China and Southeast Asia is opening up new opportunities for trade among members of the Association of Southeast Asian Nations ("ASEAN"). In response to this development, since late 2006 the Division has been developing road transport routes connecting China with Laos, Thailand, Malaysia and Singapore. In its next move, the Division established an office in Guangxi to open up another land transport route to tap the border trade between Southwest China and Vietnam. These business initiatives were crystallised in August 2007 when the Division set up Kerry Asia Road Transport Limited ("KART") as the vehicle to achieve the Division's goal of becoming the leading ASEAN road transport service provider in the region within a period of two years.
With the completion of the berth expansion project at Kerry Siam Seaport, the Division has greatly strengthened its container handling capabilities in Thailand. The first container vessel called on Kerry Siam Seaport on 15 September 2007. Works are also ongoing to convert two conventional warehouses into modernised distribution centres.
Meanwhile, Vietnam is another growth engine for the Division's regional operations. The Division is operating a warehouse facility of 267,000 square feet at Binh Duong Province at Southern Vietnam near Hochiminh City and has planned an active business rollout over the next few years.
The Division's development in India is spearheaded by its 51%-held Kerry Reliable Logistics Private Limited ("KRL"). KRL engages in IFF business with nationwide coverage supported by seven offices across the Indian sub-continent.
The Division believes its strong performance in Asia Pacific will continue to be driven by developments in Thailand, Vietnam and India, and by its new road transport business initiative through KART.
(iv) Global Network
2007 saw the successful completion of the Division's efforts to build a logistics network in Central and Western Europe, with offices being opened in the Czech Republic and France. Going forward, the Division will focus on unleashing the network's sales capability on the continent. With all the set-up's now in place, the losses incurred by this operation are expected to decline significantly in 2008.
(3) 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"). They continue to contribute steady recurrent earings to the Group. During the year ended 31 December 2007, the Division's equity share of profits after tax from AAT, CCT and other associated companies remained stable at HK$221 million (2006: HK$223 million).
(III) INFRASTRUCTURE DIVISION
Net profit attributable to the Group from this Division during the year ended 31 December 2007 was approximately HK$43 million (2006: HK$31 million).
In Hong Kong, Division has a 15% interest in the Western Harbour Crossing and a 15% interest in the Cross Harbour Tunnel management contract. These investments contributed shared aggregate net profits of HK$41 million during the year (2006: HK$43 million).
In Mainland China, the Group's 13%-held water treatment project in Hohhot Municipality, Inner Mongolia Autonomous Region provided a shared net profit of HK$4.6 million (2006: HK$0.1 million) during the year.
The reporting period witnessed positive development of the Group's 25%-owned REDtone Telecommunications (China) Limited, which has extended the coverage of its discounted international call service offerings.
(IV) OUTLOOK
(1) Mainland China Property Division
Mainland China's Government further enhanced its efforts in 2007 to structure the regulated, healthy and sustainable growth of the real estate market. A number of austerity measures were introduced in a move to rein in speculation in the real estate market and irrational property price hikes. The Group maintains its optimistic outlook for continued economic growth for Mainland China, in particular in the fast-expanding municipalities in developing areas. Factors such as the appreciaton of Renminbi, the vast demand within the domestic market, the resultant urban population expansion as urbanisation gathers pace, the scarcity of land, and the rising costs of land and construction will continue to underpin the robust demand in the real estate market.
Meanwhile, the Group is bolstering its land bank in cities with strong economic fundamentals and geographical advantages. The Group's ongoing policy is to develop mixed-use property projects, a policy which has yielded a portfolio with a considerable proportion of leased properties. The Group maintains the view that the short-term macro-economic control measures are unlikely to have a significant impact on the Group. On the contrary, it is expected that the Group will be able to identify appropriate development opportunities in the consolidation process under the austerity measures.
In maintaining a balanced property portfolio, the Group will, after prudent consideration, continue to seek new land acquisitions in prime locations in Beijing, Shanghai, provincial capital cities and locations with unique characteristics, which offer tremendous growth potential.
(2) Hong Kong Property Division
The Hong Kong property market saw 2007 as one of its best years in a decade. It is expected that the local market will head into the second phase of a bullish cycle in 2008. At the same time, supply is expected to tighten even further in coming years due to limited land supply.
With home completions and new constructions in 2007 touching a ten-year low, Hong Kong residential property prices are likely to continue their upturn as strong demand accentuates limited supply, and negative interest rates provide a favourable environment for the Hong Kong housing market. Factoring in the anticipated market boom, the Group projects healthy property sales in the years ahead.
The Group also maintains a positive outlook for the grade-A office market. Strong demand from corporate tenants as well as investment activities will fuel the continuing upward trend in office rentals.
Vibrant job growth, an expanding middle class, increasing retail sales and tourism, and heightened interest from cross-boundary retailers have all converged to result in a continuing uptrend in retail space rentals and high occupancy rates. The Group believes the local retail sector will see continued growth on the strength of favourable economic fundamentals.
(3) Logistics Network Division
Demand for distribution and logistics is expected to be strong throughout Asia Pacific. Leveraging its extensive presence in Asia, the Division will continue to strengthen its IL capabilities in strategic markets across Asia Pacific. Growth in the region will also be supported by the Division's enhanced business portfolio and the performance of KEAS in Mainland China, as well as strengthened logistics capabilities through the KART initiative to fulfil new China-ASEAN demand. To strengthen its infrastructure network in strategic locations, new logistics facilities in Hanoi, Chengdu and Nanjing will be built with total GFA of around 700,000 square feet. The enhanced IL capabilities and competitiveness in the Asian Pacific will serve as a base for the Division to further developing its IFF business on a global scale.
(4) Infrastructure Division
The Division will continue to provide a steady source of recurrent income for the Group, and will stay alert to new business opportunities that show viability.
(V) FINANCIAL REVIEW
As at 31 December 2007, the gearing ratio for the Group was 20.3% (2006: 34.8%), calculated based on net debt of HK$8,933 million and shareholders' equity of HK$44,011 million.
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). 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.