11th Aug 2006 07:00
MTR Corporation Ltd11 August 2006 MTR Corporation Limited (Incorporated in Hong Kong with limited liability) (Stock code: 66) ANNOUNCEMENT OF UNAUDITED RESULTS FOR SIX MONTHS ENDED 30 JUNE 2006 +------------------------------------------------------------------------------+|HIGHLIGHTS || ||Financial || ||• Revenue increased 4.1% to HK$4,566 million ||• Operating profit before depreciation of HK$2,639 million with margin of || 57.8% ||• Property development profit of HK$4,072 million with strong contributions || from The Grandiose and Metro Town at Tseung Kwan O ||• Net profit attributable to equity shareholders, excluding investment || properties revaluation and related deferred tax (profit from underlying || businesses), increased 123% to HK$3,948 million ||• Reported net profit, including investment properties revaluation, || increased 98% to HK$5,167 million ||• Debt/equity ratio at period-end of 42.7% ||• Interim dividend of HK$0.14 per share || ||Operational || ||• Patronage increased 1.3% to 423 million ||• Solid growth in station commercial and property investment businesses ||• Tseung Kwan O Area 86 Package 2 awarded in January 2006 ||• Memorandum of Understanding on merger with Kowloon-Canton Railway || Corporation ("KCRC") signed with Government on 11 April 2006 ||• Concession Agreement for Beijing Line 4 signed in April 2006 |+------------------------------------------------------------------------------+ The Directors of MTR Corporation Limited ("the Company" or "MTRCL") are pleasedto announce the unaudited interim results of the Company and its subsidiaries("the Group") for the half-year ended 30 June 2006 as follows: CONSOLIDATED PROFIT AND LOSS ACCOUNT---------------------------------------------------------------------------------------------------------------------- Half-year ended 30 June 2006 2005HK$ MILLION (Unaudited) (Unaudited)----------------------------------------------------------------------------------------------------------------------Fare revenue 3,138 2,988Station commercial and other revenue 735 754Rental and management income 693 643 ------------------ ------------------Turnover 4,566 4,385 ------------------ ------------------Staff costs and related expenses (777) (740)Energy and utilities (249) (250)Operational rent and rates (26) (45)Stores and spares consumed (52) (51)Repairs and maintenance (235) (235)Railway support services (39) (37)Expenses relating to station commercial and other businesses (183) (162)Property ownership and management expenses (132) (101)Project study and business development expenses (84) (72)General and administration expenses (82) (78)Other expenses (68) (73) ------------------ ------------------Operating expenses before depreciation (1,927) (1,844) ------------------ ------------------Operating profit from railway and related businesses before depreciation 2,639 2,541Profit on property developments 4,072 1,520 ------------------ ------------------Operating profit before depreciation 6,711 4,061Depreciation (1,315) (1,362) ------------------ ------------------Operating profit before interest and finance charges 5,396 2,699Interest and finance charges (739) (634)Change in fair value of investment properties 1,478 1,015Share of profits less losses of non-controlled subsidiaries and associates 16 15 ------------------ ------------------Profit before taxation 6,151 3,095Income tax (984) (489) ------------------ ------------------Profit for the period 5,167 2,606 ================== ==================Attributable to: - Equity shareholders of the Company 5,167 2,606 - Minority interests - - ------------------ ------------------ 5,167 2,606 ================== ==================DividendInterim dividend declared after the balance sheet date 774 764 ================== ==================Earnings per share: - Basic HK$0.94 HK$0.48 - Diluted HK$0.94 HK$0.48 CONSOLIDATED BALANCE SHEET----------------------------------------------------------------------------------------------------------------------- As at 30 June 2006 As at 31 December 2005HK$ MILLION (Unaudited) (Audited)-----------------------------------------------------------------------------------------------------------------------AssetsFixed assets - Investment properties 21,377 19,892 - Other property, plant and equipment 83,550 83,383 ------------------ ------------------ 104,927 103,275Railway construction in progress 1,185 1,006Property development in progress 3,189 2,756Deferred expenditure 420 281Prepaid land lease payments 601 608Interests in non-controlled subsidiaries 131 103Interests in associates 100 -Deferred tax assets 19 19Investments in securities 205 183Staff housing loans 29 34Properties held for sale 3,364 1,311Derivative financial assets 113 234Stores and spares 261 248Debtors, deposits and payments in advance 3,967 3,095Loan to property developer 3,268 -Amounts due from the Government and other related parties 170 154Cash and cash equivalents 369 359 ------------------ ------------------ 122,318 113,666 ------------------ ------------------LiabilitiesBank overdrafts 12 14Short-term loans 1,013 385Creditors, accrued charges and provisions 3,593 3,303Current taxation 1 2Contract retentions 171 170Amounts due to related parties 2 17Loans and obligations under finance leases 30,784 27,865Derivative financial liabilities 443 307Deferred liabilities 105 112Deferred income 2,580 3,584Deferred tax liabilities 9,045 8,011 ------------------ ------------------ 47,749 43,770 ------------------ ------------------Net assets 74,569 69,896 ================== ==================EquityShare capital, share premium and capital reserve 38,248 37,450Other reserves 36,300 32,425 ------------------ ------------------Total equity attributable to equity shareholders of the Company 74,548 69,875Minority interests 21 21 ------------------ ------------------Total equity 74,569 69,896 ================== ================== Notes: -1. INDEPENDENT REVIEW The interim results for the half-year ended 30 June 2006 are unaudited, but have been reviewed in accordance with Statement of Auditing Standards 700 "Engagements to review interim financial reports", issued by the Hong Kong Institute of Certified Public Accountants, by KPMG whose unmodified review report is included in the interim report to be sent to shareholders. The interim results have also been reviewed by the Group's Audit Committee. 2. BASIS OF PREPARATION These unaudited consolidated accounts should be read in conjunction with the 2005 annual accounts. The accounting policies adopted in the preparation of these accounts are consistent with those used in the annual accounts for the year ended 31 December 2005 except for changes in accounting policies made thereafter in adopting certain revised Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards ("HKASs") as follow: • Amendment to HKAS 19 "Employee Benefits" - Actuarial Gains and Losses, Group Plans and Disclosures; and • Amendment to HKAS 39 "Financial Instruments: Recognition and Measurement" - Financial Guarantee Contracts The adoption of these accounting standards has no impact on the Group's results of operations. 3. RETAINED PROFITS The movements of the retained profits during the half-year ended 30 June 2006 and the year ended 31 December 2005 were as follows: ---------------------------------------------------------------------------------------------------------------- HK$ Million (Unaudited) ---------------------------------------------------------------------------------------------------------------- Balance as at 1 January 2006 31,698 Dividend approved/paid (1,534) Profit for the period 5,167 ---------------- Balance as at 30 June 2006 35,331 ================ ---------------------------------------------------------------------------------------------------------------- HK$ Million (Audited) ---------------------------------------------------------------------------------------------------------------- Balance as at 1 January 2005 25,521 Dividends approved/paid (2,273) Profit for the year 8,450 ---------------- Balance as at 31 December 2005 31,698 ================ 4. PROFIT ON PROPERTY DEVELOPMENTS ---------------------------------------------------------------------------------------------------------------- Half-year ended 30 June 2006 2005 HK$ Million (Unaudited) (Unaudited) ---------------------------------------------------------------------------------------------------------------- Profit on property developments comprises: Transfer from deferred income 916 1,003 Share of surplus from development 3,118 - Profit on sale of properties held for sale 19 185 Profit recognized from sharing in kind 26 341 Other overhead costs (7) (9) ---------------- ---------------- 4,072 1,520 ================ ================ Included in profit on sale of properties held for sale is cost of properties sold of HK$21 million (2005: HK$514 million). 5. INCOME TAX ---------------------------------------------------------------------------------------------------------------- Half-year ended 30 June 2006 2005 HK$ Million (Unaudited) (Unaudited) ---------------------------------------------------------------------------------------------------------------- Current tax - overseas 1 8 ---------------- ---------------- Deferred tax expense relating to the origination and reversal of temporary differences on: - change in fair value of investment properties 259 178 - others 724 303 ---------------- ---------------- 983 481 ---------------- ---------------- Income tax in the consolidated profit and loss account 984 489 ================ ================ Share of income tax of non-controlled subsidiaries 8 4 ================ ================ No provision for current Hong Kong Profits Tax has been made in the consolidated profit and loss account in respect of the Company and its subsidiaries, as the Company and its subsidiaries either have substantial accumulated tax losses brought forward which are available for set off against current period's assessable profits or have sustained tax losses for the half-year ended 30 June 2006. Taxation for overseas subsidiaries is charged at the appropriate current rates of taxation ruling in the relevant countries. Provision for deferred tax on temporary differences arising in Hong Kong is calculated at Hong Kong Profits Tax rate at 17.5% (2005: 17.5%). 6. DIVIDEND The Board has resolved to pay an interim dividend of HK$0.14 per share. The Company proposes that a scrip dividend option will be offered to all shareholders except shareholders with registered addresses in the United States of America or any of its territories or possessions. The interim dividend will be distributed on or about 27 October 2006 to shareholders whose names appear on the Register of Members of the Company as at the close of business on 7 September 2006. The Company's majority shareholder, The Financial Secretary Incorporated, has agreed to elect to receive all or part of its entitlement to dividends in the form of scrip to the extent necessary to ensure that a maximum of 50% of the total dividend paid by the Company will be in the form of cash. 7. EARNINGS PER SHARE The calculation of basic earnings per share is based on the profit for the half-year ended 30 June 2006 attributable to equity shareholders of HK$5,167 million (2005: HK$2,606 million) and the weighted average number of ordinary shares of 5,484,385,261 in issue during the period (2005: 5,394,737,292). The calculation of diluted earnings per share is based on the profit for the half-year ended 30 June 2006 attributable to equity shareholders of HK$5,167 million (2005: HK$2,606 million) and the weighted average number of ordinary shares of 5,490,717,070 in issue during the period (2005: 5,400,498,206) after adjusting for the number of dilutive potential ordinary shares under the employee share option schemes. Both basic and diluted earnings per share would have been HK$0.72 (2005: HK$0.33) if the calculation is based on profit from underlying businesses attributable to equity shareholders, i.e. excluding increase in fair value of investment properties net of related deferred tax. 8. SEGMENTAL INFORMATION ---------------------------------------------------------------------------------------------------------------- Revenue Contribution to profit Half-year ended 30 June Half-year ended 30 June 2006 2005 2006 2005 HK$ Million (Unaudited) (Unaudited) (Unaudited) (Unaudited) ---------------------------------------------------------------------------------------------------------------- Railway operations 3,138 2,988 522 349 Station commercial and other businesses 735 754 505 525 ---------------- ---------------- ---------------- ---------------- 3,873 3,742 1,027 874 Property ownership and management 693 643 559 540 ---------------- ---------------- ---------------- ---------------- 4,566 4,385 1,586 1,414 ================ ================ Property developments 4,072 1,520 ---------------- ---------------- 5,658 2,934 Unallocated corporate expenses (1,001) (869) Change in fair value of investment properties 1,478 1,015 Share of profits less losses of non-controlled subsidiaries and associates 16 15 Income tax (984) (489) ---------------- ---------------- 5,167 2,606 ================ ================ No geographical analysis is shown as substantially all the principal operating activities of the Group were carried out in Hong Kong throughout the reporting periods. 9. PROPERTIES HELD FOR SALE ---------------------------------------------------------------------------------------------------------------- At 30 June 2006 At 31 December 2005 HK$ Million (Unaudited) (Audited) ---------------------------------------------------------------------------------------------------------------- Properties held for sale - at cost 2,349 1,090 - at net realizable value 1,015 221 ---------------- ---------------- 3,364 1,311 ================ ================ Properties held for sale are properties received by the Company, either as sharing in kind or as part of the profit distribution upon completion of the development. Properties held for sale at 31 December 2005 comprised residential units, retail and car parking spaces at the Olympic Station, Kowloon Station and Hang Hau Station developments. Properties held for sale at 30 June 2006 included unsold properties brought forward from 2005 and unsold units and retail spaces at Tseung Kwan O Area 55b and Tiu Keng Leng station developments received during the first half of 2006. 10. LOAN TO PROPERTY DEVELOPER ---------------------------------------------------------------------------------------------------------------- At 30 June 2006 At 31 December 2005 (Unaudited) (Audited) HK$ Million Nominal Carrying Nominal Carrying amount amount amount amount ---------------------------------------------------------------------------------------------------------------- Interest free loan to property developer 4,000 3,268 - - ======== ======== ======== ======== The loan was provided to the developer of Package 2, Tseung Kwan O Area 86 property development project to assist the developer in financing the project. The loan is interest-free and guaranteed by the developer's ultimate holding company and is repayable on completion of the respective phases of the project. The difference between the nominal and carrying amount of the loan at inception, amounting to HK$768 million, has been capitalised as property development in progress. 11. DEBTORS AND CREDITORS A The Group's debtors, deposits and payments in advance amounted to HK$3,967 million (2005: HK$3,095 million), out of which HK$2,948 million (2005: HK$1,991 million) are receivables in respect of property developments which are not yet due, and HK$565 million (2005: HK$655 million) are amounts receivable from rentals, advertising and telecommunication activities with due dates ranging from 7 to 50 days, swap interest receivable from debt portfolio management activities due in accordance with the respective terms of the agreements, and amounts receivable from consultancy services income due within 30 days. As of 30 June 2006, HK$129 million (2005: HK$185 million) were overdue out of which HK$32 million (2005: HK$78 million) were overdue by more than 30 days. B Creditors, accrued charges and provisions amounted to HK$3,593 million (2005: HK$3,303 million), majority of which relate to capital project payments to be settled upon certification of work in progress, as well as swap interest payable under the terms of respective swap agreements for debt portfolio management purposes. The Group has no significant balances of trade creditors resulting from its provision of transportation and related services. 12. PURCHASE, SALE OR REDEMPTION OF OWN SECURITIES During the half-year ended 30 June 2006, neither the Company nor any of its subsidiaries has purchased, sold or redeemed any of its listed securities. 13. CHARGE ON GROUP ASSETS None of the Group's assets was charged or subject to any encumbrance as at 30 June 2006. 14. CORPORATE GOVERNANCE The Company has complied throughout the half-year ended 30 June 2006 with the Code Provisions set out in the Code on Corporate Governance Practices contained in Appendix 14 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the "Stock Exchange") except that, with respect to Code Provision A.4.1, non-executive Directors of the Company are not appointed for a specific term but are subject (save for those appointed pursuant to Section 8 of the Mass Transit Railway Ordinance (Cap. 556 of the Laws of Hong Kong)) to retirement by rotation and re-election at the Company's annual general meetings in accordance with Articles 87 and 88 of the Company's Articles of Association. Dr. Raymond Ch'ien Kuo-fung, a Member of the Board, was appointed as the non-executive Chairman of the Company with effect from 21 July 2003 for a term of three years. He was recently re-appointed as the non-executive Chairman of the Company with effect from 21 July 2006 until 31 July 2007. 15. PUBLICATION OF THE INTERIM RESULTS ANNOUNCEMENT AND INTERIM REPORT This interim results announcement is published on the Company's website at www.mtr.com.hk and the website of the Stock Exchange. The Interim Report will also be available at the Company's and the Stock Exchange's websites in mid-September 2006 and will be despatched to shareholders of the Company in mid-September 2006. KEY STATISTICS---------------------------------------------------------------------------------------------------------------------- Half-year ended 30 June 2006 2005----------------------------------------------------------------------------------------------------------------------Total passenger boardings - MTR Lines (in millions) 418.4 413.6 - Airport Express (in thousands) 4,512 4,050Average number of passengers (in thousands) - MTR Lines (weekday) 2,470 2,451 - Airport Express (daily) 24.9 22.4Operating profit from railway and related businesses before depreciation as a percentage of turnover 57.8% 58.0% MANAGEMENT REVIEW AND OUTLOOK The first six months of 2006 saw a number of significant developments for MTRCorporation. On the possible merger of the rail systems of MTR Corporation andKCRC, a Memorandum of Understanding was signed between Government and theCompany on 11 April. In our overseas development, all government approvals wereobtained for our 49% owned joint venture company for the Beijing Metro Line 4project. This was followed by the signing of the Concession Agreement with theBeijing Municipal Government and the commencement of project work. The Company's financial results for the first half of 2006 benefited from strongproperty development income and continued growth in our recurring businesses. Asa result, revenue increased by 4.1% to HK$4,566 million while operating profitfrom railway and related operations before depreciation rose by 3.9% to HK$2,639million. Property development profit realised in the period was HK$4,072 millionmainly from the booking of profit from The Grandiose at Tseung Kwan O Stationand from Metro Town, Tiu Keng Leng Station Phase One Development. Profitattributable to equity shareholders, excluding gain from revaluation ofinvestment properties net of tax, increased by 123.2% to HK$3,948 million. Gainfrom investment properties revaluation was HK$1,478 million pre-tax (HK$1,219million post-tax) resulting in reported net profit of HK$5,167 million, anincrease of 98.3% over the corresponding period in 2005. Reported earnings pershare increased by 95.8% to HK$0.94. The Board has declared an interim dividendof HK$0.14 per share. Railway Operations For the first six months of 2006, total fare revenue for the MTR Lines and theAirport Express increased by 5.0% to HK$3,138 million. The MTR Lines recordedtotal patronage of 418.4 million, a 1.2% increase over the same period lastyear. The increase reflected the state of Hong Kong's economic activities andopening of the Disneyland Resort Line ("DRL") last August. The Company's overall share of total franchised public transport was 24.7%,comparable to the same period last year. Share of the cross-harbour market wasunchanged at 60.4%. The Airport Express recorded total patronage of 4.5 million during the firsthalf of 2006, an 11.4% increase over the same period last year, but market sharedropped slightly from 24% to 23% reflecting intense competition in this sector. As in prior periods, MTR Corporation continued to meet or exceed therequirements under our Operating Agreement and our own more stringent CustomerService Pledges. Service improvements during the first six months included installation of newpassenger lifts in Cheung Sha Wan and Sham Shui Po stations, completion of newpedestrian links at Choi Hung and Kwai Fong stations, and completion ofretrofitting platform screen doors for all 74 platforms in our 30 undergroundstations on the Island Line, Tsuen Wan Line and Kwun Tong Line. Continuing efforts were made to further improve the connectivity of the MTRnetwork with other modes of transport, which enhances MTR's attraction to thetravelling public. During the period, three new green minibus routes were addedto the intermodal fare discount scheme, taking the scheme total to 28, while onenew fare saver machine was installed in Tai Kok Tsui, bringing the total to 19machines. Station Commercial and Other Businesses The continued growth of the Hong Kong economy and rising MTR patronage supportedfurther increase in revenue from the Company's station commercial and otherbusinesses. Although reported revenue at HK$735 million showed a 2.5% reductionfrom the same period last year, this was due to a one-off income received in2005 from settlement of an early termination of a telecommunication contractwhich did not repeat in 2006. Revenue for the first half of 2006 also included asmall one-off income relating to mobile network upgrade. Excluding these twoone-off items, revenue from station commercial and other businesses would haveincreased by 7.1%. Advertising revenue increased by 8.6% to HK$239 million, boosted by higherpassenger volume. A number of new formats and services were introduced. In May,Real-time Projection Zone went live at eight MTR stations in conjunction withpromotion of the Hollywood blockbuster movie The Da Vinci Code. A newadvertising train, the "Spectacular Mobile Showcase", made its debut in June.These innovative formats demonstrate the Company's commitment to enhancing ourleadership position in the out-of-home advertising market in Hong Kong. Station commercial revenue rose by 15.9% to HK$190 million due to improvementsin rental rates and station commercial retail space layout from our stationrenovation programme as well as the continued buoyant economy. During theperiod, retail floor area in stations increased by 134 square metres as newlayouts and refurbishments were completed at Po Lam, Ngau Tau Kok and Admiraltystations. However, due to the repossession of 367 square metres of retail spaceat other stations to facilitate station improvement works, the net retail floorspace in the first half was slightly reduced to 18,837 square metres in total.These stations' improvement, when completed, will benefit future revenue. Alsoduring the period, 12 new shops were added to the MTR station portfolio. Reported revenue from telecommunications services decreased by 31.3% to HK$138million, mainly due to the one-off payment received in 2005 for earlytermination of an agreement which did not repeat in 2006. Excluding this and theone-off income from mobile network upgrade in 2006, revenue would have increasedby 3.0%. Our fixed network services provider TraxComm Limited recorded higherrevenue and is operating an over 100 Gbps bandwidth network with coverageextended to all major data centres in Hong Kong. However, revenue from mobileservices has dropped due to fierce competition amongst operators resulting inlower tariffs as usage volume remained unchanged. Octopus Holdings Limited ("Octopus") continued to expand its operations bothwithin and outside the transport sector. Cards in circulation rose to 13.8million and average daily transaction volume and value rose to 9.3 million andHK$70.0 million respectively. MTR Corporation's share of Octopus' post-taxearnings increased by 9.1% to HK$28 million for the six-month period. Revenue from external consultancy was HK$98 million during the six months. Theproject to construct an Automated People Mover System to connect the Hong KongInternational Airport to SkyPlaza and the SkyPier is underway. In Taiwan, twonew contracts started in early 2006, one with the Kaohsiung Rapid TransitCompany to provide operations and maintenance support for three years to 2009,and the second, with the Taiwan High Speed Rail Company to cover station, trainservice, and operations control centre management as well as signalling systemmaintenance for two years to 2008. In the Mainland of China, the Company secureda consultancy contract to provide consultancy for the Integrated SupervisionControl System for Beijing Line 5. Property businesses While Hong Kong's economy continued to grow in the first half of 2006, sentimentin the residential property market has become more cautious as interest ratescontinued to trend higher and financial markets around the world became morevolatile. As a result, residential property transaction volume declinedthroughout the period, and prices softened. The office and retail rental sectorshowever continued to be active in the first half although the rate of growth mayslow in the second half. The Company's profit from property developments in the first half of 2006 wasHK$4,072 million. Along the Airport Railway, we recognised profit from deferredincome relating to Coastal Skyline and Caribbean Coast in Tung Chung, HarbourGreen at Olympic Station and fitting out works for Elements at Kowloon Station,from sharing in kind relating to receipt of a small area of the retail shell ofElements as well as surplus proceeds from The Harbourside at Kowloon Station.Along Tseung Kwan O Line, as I noted at the time of the 2005 annual results, webooked surplus proceeds from Metro Town, Tiu Keng Leng Station Phase OneDevelopment and The Grandiose at Tseung Kwan O Station. The tender for Package Two of Tseung Kwan O Area 86 was awarded in January toRich Asia Investments Limited ("Rich Asia"), a subsidiary of Cheung Kong(Holdings) Limited ("Cheung Kong"), and the development agreement was signed inFebruary. This was followed in June by our consent to Cheung Kong's transfer of15% of its interest in Rich Asia to Nan Fung Development Limited, a wholly ownedsubsidiary of Chen's Holdings Limited. As part of our strategy to attract betterprofit sharing from this tender and in line with the tender conditions, theCompany has provided an interest-free loan of HK$4,000 million (equals to abouthalf of the land premium) to Rich Asia. This loan is supported by a guaranteefrom Cheung Kong for the full amount. Along the Airport Railway, to meet the increased desire for town houses, we haveobtained Town Planning Board approval in June to convert low-rise residentialdevelopment to town houses at Caribbean Coast. Rental income from investment properties increased by 7.8% to HK$624 millionsupported by higher rents. A vibrant retail sector, further refinements to thetrade mix and strong promotional efforts at our shopping centres continued toincrease shopper traffic. During the first half of 2006, favourable growth inrental rates was achieved for renewal of leases at our shopping centres. The continuing demand for high quality retail space enabled us to maintain 100%occupancy levels at all of our shopping centres except for Luk Yeung Galleria,where a total of 427 square metres was repossessed in April in preparation forrenovation work. The Company's 18 floors at Two IFC continued to be fully letduring the period. A total of 504 car parking spaces at Choi Hung (including 450Park & Ride Carpark spaces) were added to the portfolio upon commencement ofoperation of the carpark. To enhance the retail environment of Telford Plaza I, a major renovationprogramme was launched in April to refurbish its entrances, atria, shopfronts,ceilings and floors, with target completion by year-end 2006. Pre-letting of Elements, the forthcoming 82,750 square metres gross MTR flagshipmall at Union Square in Kowloon Station, progressed well, with good responsefrom both overseas and local retailers, as well as food and beverage operators.Pre-letting of The Edge, the new shopping centre of 11,877 square metres grossat Area 55b of Tseung Kwan O Station, also saw good progress. Our property management business experienced steady growth, with revenue rising7.8% to HK$69 million. During the period, a total of 2,842 residential unitswere added to the management portfolio, bringing the total number of residentialunits under management to 57,200. Our property management business in the Mainland of China continued to expandwith the award in April of a service contract by SOHO Shangdu, a majorcommercial-cum-shopping mall development, in Beijing. The Company will take overmanagement responsibility of this property by the end of 2006. Renovation of the 31,000 square metres gross shopping centre under a long-termhead lease in Beijing's Dong Cheng district is now underway. This shoppingcentre has been renamed Ginza Mall, and is scheduled to open by early 2007 aftermajor upgrading and refurbishment. Hong Kong Projects MTR Corporation continued the development and planning of new rail and non-railprojects during the first half of 2006. "Ngong Ping 360", comprising the Ngong Ping Skyrail and the Ngong Ping Villageat Ngong Ping, is undergoing pre-opening trials and is expected to open forbusiness later in the year. Following approval of the revised proposal for the West Island Line byGovernment and Executive Council last year, discussion with Government iscontinuing over detailed scope, cost and funding requirements. The decision onthe South Island Line (East) proposal is still awaiting completion ofGovernment's review of the Southern District's planning of tourism andcommercial development. In the "Dream City" development at Area 86 in Tseung Kwan O, the constructioncontract for Tseung Kwan O South Station was awarded in late June. This latestextension to the MTR network is designed to serve the "Dream City" propertydevelopment and is scheduled to open in 2009. New pedestrian links in Admiralty and Sheung Wan stations are targeted foropening by the end of this year, and another at Lai Chi Kok Station is plannedfor completion in 2008. Further license agreements have been signed and areunder negotiation with adjacent developers respectively for Tsim Sha Tsui andChoi Hung stations. At the Hong Kong International Airport, the project to construct a secondplatform at the departure level of the Airport Station continued with theconnection to the Skyplaza retail development and the project is expected to becompleted by the end of 2006. Merger with KCRC On 11 April, the Company signed a Memorandum of Understanding with Governmentsetting out the terms for the proposed rail merger between the Company and KCRC,together with the acquisition of a property package. The proposed transaction is subject to approval by both the Legislative Council("LegCo") of Hong Kong SAR and independent shareholders of the Company. A RailMerger Bill was submitted to LegCo by Government on 5 July which was followed bythe first meeting of the Bills Committee to examine the Bill on 27 July. Weexpect the approval processes by LegCo and independent shareholders to takeabout a year or more from the 11 April announcement day. An Independent Board Committee ("IBC") comprising six independent non-executiveDirectors of the Company has been established to examine the proposedtransaction and advise independent shareholders. The IBC will appoint and beadvised by an Independent Financial Adviser. Overseas Growth Mainland of ChinaIn Beijing, the public-private partnership ("PPP") company formed with theBeijing Infrastructure Investment Co. Ltd. and Beijing Capital Group for theBeijing Line 4 project obtained its business license in January, and the relatedconcession, lease and financing agreements were signed in April. With managementin place, and the rolling stock and signalling contracts having been awarded,construction of the project has commenced with target completion in 2009. In Shenzhen, we are still awaiting approval from the National Development andReform Commission for Shenzhen Metro Line 4. We have put in place a managementteam which has progressed detailed design of the system, and the master plan forproperty developments along the line. In line with our strategy, we have progressed negotiations regarding plans forthe investment, construction and operation of Shenzhen Metro Line 3 followingthe signing of a Memorandum of Understanding ("MoU") last year with themunicipal government on this potential 32.8-kilometre line in the eastern partof the municipality. In Beijing, feasibility studies are also progressing on twopossible metro lines, one for Beijing Line 4 Extension and the other for BeijingMetro Line 9, following signing of the respective MoU's and Letter of Interestthis year. Elsewhere in the Mainland, the Company submitted an investment proposal to WuhanMunicipal Government in April following the signing of an MoU with thegovernment in 2005 to explore co-operation opportunities for the constructionand operation of metro lines in Wuhan. In May, we signed an MoU with theHangzhou Municipal Government for a joint study on a metro development plan forthat city. However, we must point out that MoU's do not always result ininvestments. EuropeIn Europe, we continued to pursue "asset light" rail operating service contractsduring the first half of 2006. In the U.K., a tender for the South Western Train Franchise was submitted inconjunction with our partner National Express in June and the result is expectedto be announced by October. A joint venture between MTR Corporation and LaingRail has been pre-qualified to bid for the London Rail Concession, formerlycalled the North London Railway Franchise, and is currently working on thetender submission for October. Both of these are competitive tenders where theCompany will compete with other bidders. Financial Review of Operations Revenue for the first half of 2006 was HK$4,566 million, an increase of 4.1%over the same period last year. Revenue from the MTR Lines and the AirportExpress reported increases of 4.7% and 7.7% respectively as a result ofpatronage growth, particularly in the early months of 2006, and increase inaverage fare of the MTR Lines. Patronage on the MTR Lines increased 1.2% and theAirport Express 11.4% whilst average fare for the MTR Lines increased 3.5% toHK$6.8 but on the Airport Express decreased 3.2% to HK$64.8 mainly due to thelower fares paid by passengers travelling to the AsiaWorld-Expo Station openedin December 2005. Revenue from station commercial and other businesses amounted to HK$735 million,a 2.5% drop from the same period last year due to the one-off income receivedfrom settlement of an early termination of a telecommunication contract in 2005which did not repeat this year. Revenue for the first half of 2006 also includeda small one-off income relating to mobile network upgrade. Excluding these twoone-off items, revenue from station commercial and other businesses would haveincreased by 7.1% when compared to the same period last year. Property rentaland management income increased 7.8% to HK$693 million. Operating cost before depreciation for the first half year increased by 4.5% toHK$1,927 million as compared to the same period last year. The increase wasmainly due to the opening of DRL and AsiaWorld-Expo Station, increases inexpenditures in the development of our overseas growth business in the Mainlandand Europe, as well as expenses relating to "Ngong Ping 360". Operating profitfrom railway and related businesses before depreciation amounted to HK$2,639million, a 3.9% increase from the same period last year, with an operatingprofit margin of 57.8%, similar to last year. Excluding the one-off impacts fromtelecommunication contract termination and mobile network upgrade, operatingprofit would have increased by 6.7% whilst operating profit margin would haveincreased by 0.5% point. Property development profit during the first half year amounted to HK$4,072million, mainly comprising surplus proceeds from The Grandiose and Metro Townalong the Tseung Kwan O Line, deferred income recognition from Coastal Skyline,Caribbean Coast, Harbour Green and Elements along the Airport Railway as well assharing in kind from the receipt of an additional 572 square metres at Elements.Operating profit before depreciation amounted to HK$6,711 million, an increaseof 65.3% as compared to the same period last year. Depreciation charge for the first half year dropped by 3.5% to HK$1,315 millionmainly due to adjustments made for depreciation charges on some systems in theTseung Kwan O Line and Nam Cheong Station in 2005. Net interest expenseincreased by 16.6% to HK$739 million mainly due to higher interest rates andincreased borrowings as compared to the same period last year. The increase infair value of investment properties since the end of 2005 amounted to HK$1,478million pre-tax or HK$1,219 million post-tax. Including the share of profit from Octopus and the share of cost incurred by thejoint venture company for the bidding of the South Western Train Franchise inthe U.K., profit before taxation for the first half year amounted to HK$6,151million, a 98.7% increase from the same period last year. Correspondingly,income tax increased by 101.2% to HK$984 million, which was mainly non-cashdeferred income tax. The resulting net profit attributable to shareholders forthe first half year amounted to HK$5,167 million, an increase of 98.3% comparedto the same period last year. Reported earnings per share therefore increasedfrom HK$0.48 for the first half of 2005 to HK$0.94 for 2006. Excludinginvestment property revaluation gain and related deferred tax, underlying netprofit was HK$3,948 million, an increase of 123.2% compared to same period lastyear. The Directors have declared an interim dividend of HK$0.14 per share. A scripdividend option will be offered to all shareholders except those with registeredaddresses in the United States of America or any of its territories orpossessions. As in previous years, Government has agreed to receive itsentitlement to dividends in the form of shares to the extent necessary to ensurethat a maximum of 50% of the Company's total dividend will be paid in cash. The Group's balance sheet remains strong. During the first half of 2006,shareholders' equity increased by 6.7% to HK$74,548 million as of 30 June, fromretained profit as well as the re-investment of scrip dividends by Governmentand other shareholders. Total assets increased by 7.6% to HK$122,318 million mainly due to aninterest-free loan of HK$4,000 million (recognised on balance sheet at fairvalue of HK$3,232 million at inception) provided to the property developer ofTseung Kwan O Area 86 Package Two as part of the tender terms, an increase ofHK$2,053 million on properties held for sale from unsold units at Metro Town andThe Grandiose along the Tseung Kwan O Line, gross revaluation gain on propertiesof HK$1,770 million, and increases in amount receivable in respect of propertydevelopments of HK$957 million. Other increases in assets include capitalexpenditures incurred on the "Ngong Ping 360" project and other capitalimprovement projects. The Group's net cash inflow generated from railway and related activitiesincreased to HK$2,737 million in the first half of 2006 compared to HK$2,562million for the same period in 2005, whilst cash receipts from developers forproperty development project decreased to HK$584 million from HK$2,332 millionin 2005. Total cash outflow rose from HK$3,095 million to HK$6,366 million whichincluded the HK$4,000 million interest-free loan for Package Two of Tseung KwanO Area 86, capital project payments of HK$1,339 million, interest expenses ofHK$830 million and other minor items. The Group had net cash outflow of HK$3,045million before dividend as compared to a net cash inflow of HK$1,799 million inthe same period last year. After dividend payment of HK$767 million and net loandrawdown of HK$3,824 million, there was net cash inflow of HK$12 million. During the period, borrowings of the Group increased from HK$28,264 million toHK$31,809 million due mainly to amounts drawn to finance the interest-free loanto developer. As a result, the debt-to-equity ratio increased from 40.4% at 31December 2005 to 42.7% at period-end. Financing Activities The credit markets continued to see high levels of liquidity leading to tightcredit spreads. Given this favourable environment, we successfully arrangedtotal financings of HK$3.1 billion during the first half of 2006, including aHK$500 million 4.3% 2-year fixed rate note, and a number of 5-year and 7-yearbilateral facilities totalling HK$2.6 billion. As at the end of June 2006, theGroup had total undrawn committed facilities of HK$2.9 billion, which togetherwith cash on hand and projected significant positive cash flows from ourproperty development business, are expected to cover all of the Company'sestimated funding needs until the first quarter of 2007. As at the end of June, the Company's debt portfolio was well balanced with 17%of total outstanding repayable within 2 years, 47% between 2 and 5 years, and36% beyond 5 years. As a measure of exposure to foreign currency risk, only 0.2%of the debt portfolio was denominated in US dollar with the remainder eitherhedged into or denominated in HK dollar. At the end of June, 54% of the debt portfolio was based on fixed interest ratewith the balance based on floating rate. This prudent level of fixed rate debt,together with the attractive terms of the Group's financings, has enabled theCompany to contain our financing cost in a rising interest rate environment. Asa result, despite the significant increase in short-term interest rates duringthe first half of 2006 as compared with the same period last year, the Company'saverage borrowing cost rose to 5.5% from 5.0%. In the Mainland of China, agreements for two project loans of RMB1.6 billioneach provided separately by China Development Bank and Industrial and CommercialBank of China for the development and construction of Beijing Metro Line 4 weresigned by the associated PPP company in April. Human Resources Immediately following signing of the Memorandum of Understanding on the proposedmerger, the Company held a total of 60 briefing sessions to provide staff withupdated information and opportunities to raise their concerns. Going forward, wewill regularly update our staff on the merger using a variety of means such asstaff communication sessions, merger newsletters, MTR Express, Corporate Noticesand additional briefing sessions. We are committed to looking after the interests of all staff, and will consultthem on matters affecting them during the merger process before any finaldecisions are made. To ensure that best practices are adopted for the mergedcompany, the Company in conjunction with KCRC have commenced a series ofin-depth studies on different aspects of human resources integration such asgrading and reward structure, and employment terms and conditions. Outlook Although business conditions remain generally positive in Hong Kong, successiveinterest rate increases coupled with high oil and commodity prices have slowedthe rate of economic growth. While there was patronage growth in the earlymonths of 2006, MTR Lines patronage in May and June was lower than prior yeardue to the combination of the impact of Football World Cup and slower growth ofeconomic activities. Although MTR Lines patronage growth has resumed in the lasttwo weeks of July, it would be prudent to adopt a cautious outlook for the railand related businesses in the second half. On the other hand, althoughcompetition continues to increase, we see positive rental reversions in ourproperty investment business. Given this environment we continue to pay closeattention to cost and enhance efficiency whilst at the same time continuing ourefforts in the overseas growth business. In our property development business we recognised profit from both TheGrandiose at Tseung Kwan O Station and Metro Town, Tiu Keng Leng Station PhaseOne Development in the first half of 2006. For the balance of the year, in linewith our accounting treatment, property development profit recognition isexpected to come mainly from developments along the Airport Railway,particularly from deferred income and the expected receipt as sharing in kind ofa small area of some 7,100 square metres gross at Elements in Kowloon Station.In Tseung Kwan O, property development profit recognition in the second halfwould depend on sales progress of the 390-unit development at Central Heights,Tseung Kwan O Town Centre Area 57a. Given most of the property developmentprofit for 2006 has been recognised in the first half, the amount of developmentprofit to be recognised in the second half is expected to be significantly less. Finally, I would like to take this opportunity to thank all my colleagues fortheir hard work and support. By Order of the BoardC K ChowChief Executive Officer Hong Kong, 10 August 2006 The interim financial information set out above does not constitute the Group'sinterim financial report for the half-year ended 30 June 2006, but is derivedand represents an extract from that interim financial report. Certain statements contained in this Press Announcement may be viewed as"forward-looking statements" within the meaning of Section 27A of the U.S.Securities Act of 1933, as amended, and Section 21E of the U.S. SecuritiesExchange Act of 1934, as amended. Such forward-looking statements involve knownand unknown risks, uncertainties and other factors, which may cause the actualperformance, financial condition or results of operations of the Company to bematerially different from any future performance, financial condition or resultsof operations implied by such forward-looking statements. Further informationregarding these risks, uncertainties and other factors is included in the AnnualReport on Form 20-F for the year ended 31 December 2005 filed with the U.S.Securities and Exchange Commission (the "SEC") and in the Company's otherfilings with the SEC. CLOSURE OF REGISTER OF MEMBERS The Register of Members of the Company will be closed from 1 September 2006 to 7September 2006 (both dates inclusive). In order to qualify for the interimdividend, all transfers, accompanied by the relevant share certificates, must belodged with the Company's Registrar, Computershare Hong Kong Investor ServicesLimited at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East,Hong Kong for registration not later than 4 p.m. on 31 August 2006. It isexpected that the interim dividend will be paid on or about 27 October 2006. Members of the Board: Dr. Raymond Ch'ien Kuo-fung (Chairman)**, Chow Chung-kong(Chief Executive Officer), Professor Cheung Yau-kai*, David Gordon Eldon*,Christine Fang Meng-sang*, Edward Ho Sing-tin*, Lo Chung-hing*, T. BrianStevenson*, Frederick Ma Si-hang (Secretary for Financial Services and theTreasury)**, Secretary for the Environment, Transport and Works (Dr. Sarah LiaoSau-tung)** and Commissioner for Transport (Alan Wong Chi-kong)** Members of the Executive Directorate: Chow Chung-kong, Russell John Black,William Chan Fu-keung, Thomas Ho Hang-kwong, Lincoln Leong Kwok-kuen, FrancoisLung Ka-kui, Andrew McCusker and Leonard Bryan Turk* independent non-executive Directors** non-executive Directors This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
MTR.L