GUANGDONG INVESTMENT LIMITED
Annual Report 1998

1998 has been the most difficult year of the past decade for the Group and 1999 may prove equally challenging. The Group's turnover in the audited consolidated financial statements for 1998 amounted to HK$6,281 million (1997: HK$7,145 million) representing a decrease of 12 per cent. compared with 1997. The Group recorded a net loss attributable to shareholders of HK$2,012 million as compared with a net profit attributable to shareholders of HK$750 million in 1997. Whilst the Group's operating loss was HK$128 million, the Group also had exceptional losses of HK$1,781 million of which HK$1,269 million related to the decrease in value of property, hotel interests and provisions in respect of the diminution in value of investments.

• Chairman's Statement
• Management Review of Operating Results
• Segmented Information
• Results and Dividends
• Consolidated Profit and Loss Account
• Consolidated Balance Sheet
• Consolidated Cash Flow Statement

OVERVIEW AND PROSPECTS

1998 has been the most difficult year of the past decade for the Group and 1999 may prove equally challenging. The Group's turnover in the audited consolidated financial statements for 1998 amounted to HK$6,281 million (1997: HK$7,145 million) representing a decrease of 12 per cent. compared with 1997. The Group recorded a net loss attributable to shareholders of HK$2,012 million as compared with a net profit attributable to shareholders of HK$750 million in 1997. Whilst the Group's operating loss was HK$128 million, the Group also had exceptional losses of HK$1,781 million of which HK$1,269 million related to the decrease in value of property, hotel interests and provisions in respect of the diminution in value of investments.

Operating conditions in virtually every industry in which the Group has interests have been more difficult in 1998 than in 1997. Hong Kong's economy entered a recessionary phase in 1998, whilst growth in the economy of Mainland China slowed. Economic uncertainty led to higher interest rates, resulting in considerably higher interest costs across the Group. Negative sentiment grew among the banking community towards lending in Asia, resulting in reduced availability and upward repricing of bank credit which began to have an impact on the Group's operations by late in the third quarter of 1998. Operations were also generally affected by lower levels of business and economic activity, higher levels of business failures as well as reduced consumer demand and lower levels of tourism in Hong Kong. Flooding in Mainland China also had a negative effect on the Group's industrial and retail interests located there. These factors, taken together with downward trends in Hong Kong property values, severely undermined the Group's performance during late 1998.

Against this negative background the Group continued to strengthen its management team and improve its levels of internal financial control and cash management throughout the Group. At the same time, independent professional advisers were engaged to advise on optimum strategies for containing losses and improving the performance of certain loss-making businesses of the Group, in particular cement, trading and finance.

In October 1998 unprecedented events occurred in Guangdong Province. The announcement of the closure and liquidation of GITIC in October 1998 and the liquidity problems faced by the Group's controlling shareholder, Guangdong Enterprises (Holdings) Limited ("GDE") and its other subsidiaries resulted in a marked change in banking sentiment towards providing and renewing credit facilities to the Group as well as a general loss of market confidence which indirectly affected many of the Group's operations in the fourth quarter of 1998. GDE's announcements in late 1998 and early 1999 regarding its financial difficulties and proposed standstill with its financial creditors led to further pressures on the Group.

However, Guangdong Provincial Government at the same time indicated its intention to stand behind a restructuring of GDE which would include the Group. In order to facilitate the proposed restructuring, the Group commissioned a special audit for the nine months ended 30 September 1998, the results of which were announced on 1 March 1999. The Group's results for such period resulted in events of default arising under certain of the Group's borrowings. Accordingly, the Group (other than Guangdong Brewery Holdings Limited) requested a standstill with its financial creditors in early March 1999 involving the proposal to pay interest, but to defer the repayment of principal until the proposed restructuring of the Group is implemented.

Proposals for the restructuring have been formulated which would involve the Group focussing on its core businesses of utilities, infrastructure, property and hotels and disengaging from other activities, many of which are currently loss making.

Whilst the Group continues to face considerable uncertainty, the financial crisis it is going through has necessitated the immediate implementation of strong measures to strengthen management systems and internal controls. With the benefit of the significant asset injections which are now proposed and the continued support of the Guangdong Provincial Government, the Group should be well placed for focussed growth in the foreseeable future.

It would be misleading to suggest that 1999 will be anything other than difficult and challenging for the Group. The continued hard work and perseverance of the Group's dedicated management and staff will be needed to help us to meet the challenges ahead. However, the Group will not waver in its determination to successfully reorganise and emerge as a focussed, streamlined professionally managed Group, well-equipped to meet the challenges of the 21st century and to benefit from the continuing growth of the economy of Guangdong Province which, prior to 1998, had always been of great benefit to the Group.

Finally, I would like to thank the Group's bankers and other financial creditors for their support and I urge their continuing confidence throughout the difficult period which lies ahead until the successful completion of the proposed restructuring.

MANAGEMENT REVIEW OF OPERATING RESULTS

The principal activities of the Group based on the intended strategic focus of the Group pursuant to the proposed restructuring (as described below) together with the contribution of each activity to the Group's results are as follows:
 

Notes:
(1) A contribution of approximately HK$18 million (1997: approximately HK$1 million) from Meixian Power Plant B is not included under "Utilities" as it is classified under "Share of profits less losses of associated companies" in the Consolidated Profit and Loss Account.
(2) Contributions of approximately HK$14 million (1997: HK$8 million) from Guangdong Transport which holds interests in two roads and two bridges are not included under "Infrastructure" as they are classified under "Share of profit of a jointly controlled entity" in the Consolidated Profit and Loss Account.
(3) A profit guarantee given by GDE exists in relation to these businesses. Please refer to the paragraph under heading "Potential Claims" below.

OVERVIEW

1998 was an extremely difficult year for the Group. The effects of the general Asian economic crisis were felt in Mainland China and Hong Kong, where GDP contracted by around 5.1 per cent. as compared with a growth rate of 5.3 per cent. in 1997. Negative general trends seen in the first six months of 1998, particularly the decline in the property market in Hong Kong, the general decline in the hotel industry in Hong Kong and the increase in interest expenses continued to adversely affect the Group in the second six months of the year. During 1998, interest rates in Hong Kong were high by historical standards and the Group's interest expenses (net of amount capitalised) for 1998 showed an increase of HK$230 million as compared with 1997.

Events in Guangdong Province outside the Group's control also had a deep impact on the Group in the last three months of 1998. GITIC's closure and commencement of its liquidation in October 1998 and the financial difficulties experienced by the Group's controlling shareholder, Guangdong Enterprises (Holdings) Limited ("GDE") and its intention to restructure which were publicly announced in December 1998 adversely affected banking sentiment towards businesses linked with Guangdong Province in general and the Group in particular. Such negative sentiment resulted in the Group beginning to experience difficulties in renewing and replacing existing financing facilities and in obtaining new finance towards the end of 1998. All these factors considerably weakened the financial position of the Group, which was also adversely affected by the disappointing performance of some of the Group's industrial operations, particularly cement and timber, and its finance and trading operations. In addition, the Group's exceptional losses of HK$1,781 million (after netting off investment property revaluation reserve and hotel property revaluation reserve of HK$1,426 million), of which HK$1,269 million related to conservative provisions made to reflect the drop in value of the Group's property and hotel interests and provisions for investments, resulted in the Group recording a net loss attributable to shareholders of HK$2,012 million.

Despite the difficulties experienced by the Group, GDI maintained a positive financial position with consolidated net assets of HK$6,215 million as at 31 December 1998. The Group also made considerable progress during the year in reviewing management structure and controls within the Group and commencing the implementation of improvements in this regard. The Group engaged independent professional advisers to advise on the strategic focus of the Group and to review the performance of certain loss-making businesses of the Group. Pending the outcome of the proposed restructuring the conclusions reached as a result of this review have not been fully implemented as it is now intended that the Group will disengage from certain businesses pursuant to the proposed restructuring and focus on four core businesses.
 

CORE BUSINESSES

Utilities

The coal-fired electricity generating plants, Shaoguan Power D Plant and Zhongshan Power Plant continued to provide a steady return to the Group.

Commercial production at the Meixian Power Plant B commenced in late 1997. Whilst sales of electricity from the Meixian Plant amounted to 758.31 million kwh, profits of HK$18 million has been recorded under "Share of profits less losses of associated companies".

Infrastructure

The Group has interests in the Guangzhou -- Shantou Highway (Huizhou section), the Shantou -- Haiwan and Humen Bridges and Qinglian Highway, all of which experienced increased traffic flows resulting in improved revenue. During the year the Group obtained approval for an increase in tariffs for the Huizhou section of the Guangzhou -- Shantou Highway.

Property Investment and Development
 

1. Mainland China

Residential sales at Riverside Garden, Guangzhou continued to be strong with 893 units and 110 carpark spaces sold during the year. Despite a reduction in the sales price of 4 per cent. for residential units when compared with 1997, a 29 per cent. increase in the total area sold resulted in a 24 per cent. increase in revenue contribution compared with 1997.

Teem Plaza, one of the largest commercial complexes in Guangzhou, performed strongly, with rental income increasing 18 per cent. as compared with 1997 and a record occupancy rate of 96.7 per cent. being achieved.

Guangdong Group (Shenzhen) Ltd. in which the Group has a 70 per cent. interest continued to provide steady rental income with satisfactory occupancy rates of 67 per cent. for Jin Wei Building and 95 per cent. for the Yuehai Industrial Estate.

2. Hong Kong

The Hong Kong property market during 1998 was extremely weak and capital values suffered downward corrections throughout the sector. The drop in value of the Group's Hong Kong property interests resulted in a revaluation deficit which is included in the Group's exceptional losses. The weak market situation also resulted in no material sales of Hong Kong properties being made during 1998, whereas profit from property sales amounted to approximately HK$100 million in 1997.

Against this backdrop, the Group's rental income remained steady. Guangdong Investment Tower benefited from a 100 per cent. occupancy rate with a negligible reduction in the average rental as compared with 1997. Guangdong Parking's interest in a car park in North Point acquired in July 1997 resulted in a small attributable loss to the Group as interest expenses were too high to be offset by sales and rental income and strong occupancy levels. Property owned by Guangdong Tours and its subsidiaries in Causeway Bay provided increased income to the Group as compared with 1997.

Hotels
 

1. Mainland China

The Group has interests in two hotels in Guangdong Province, the Guangdong Hotel, Shenzhen and the Guangdong Regency Hotel, Zhuhai (acquired in early 1998) which have performed satisfactorily with average occupancy rates of 88 per cent. and 60 per cent., respectively during 1998 and small increases in average room rates.

2. Hong Kong

1998 was an unfavourable year for the Hong Kong tourist and hotel industries. The Group's three hotels, which include the Wharney Hotel and the New Cathay Hotel, together with the Group's serviced apartment complex and hostel achieved an overall average occupancy rate during 1998 of approximately 70 per cent., a small increase over the 1997 level. Average room rates achieved by the Group's hotels however were 49 per cent. lower than the 1997 average, resulting in losses being reported by the Wharney Hotel, Guangdong Hotel and New Cathay Hotel, with the Group's guest house and serviced apartment complex making only modest profit contributions. The weak state of the Hong Kong property and hotel markets resulted in a revaluation deficit of HK$96 million reflecting the downward revaluation of the Group's hotel interests in Hong Kong.

NON-CORE BUSINESSES

As part of the proposed restructuring of GDE and the Group, the Group will adopt a focussed business strategy and will take the opportunity to disengage from non-core businesses.

Industrials and Others

Guangdong Brewery

Although domestic beer consumption in Mainland China was weak during 1998 with intense competition in the beer industry, Guangdong Brewery achieved strong operating results with increased turnover of 17.8 per cent. for its sales of Kingway beer, whilst the operating profit level was reduced by 25 per cent. as compared with 1997. The reduced operating profit level was due primarily to increased advertising costs incurred with a view to increasing market share for the "Kingway" brand and to depreciation expenses in relation to a new beer production plant which commenced production in September 1998 and has not yet reached economic production levels.

Guangdong Tannery

Guangdong Tannery's operating profits for 1998 of HK$17 million (a 67 per cent. reduction as compared with 1997) were substantially affected by the overall reduction in its leather product prices necessitated by an extremely competitive leather market with weak consumer demand in Hong Kong and China. Trade credit facilities for Guangdong Tannery became increasingly difficult to maintain and renew or replace towards the end of 1998 following the general credit tightening in 1998 and negative banking sentiment towards businesses in Guangdong Province.

Nevertheless, given the fundamentally sound business and operations of Guangdong Tannery and its proven track record in the leather industry, its business should be well placed to return to its previous levels of profitability in the medium term.

Guangdong Building Industries

Substantial drops in turnover and operating profit were reported by the Group's curtain wall construction subsidiary, Guangdong Building Industries Limited, which has been adversely affected by the downward trend in the property market and banks' tightened credit policy in Hong Kong. Guangdong Building Industries has adopted a conservative and selective approach in undertaking new contracts, which has had a constraining effect on the Group's business levels in the second half of 1998.

In view of the general deterioration in the business environment in Hong Kong and Mainland China, Guangdong Building Industries made provisions, including provisions for doubtful debts of HK$26 million for 1998.

Cement

The results of the Group's cement operations, which are located in Guangdong Province, were extremely disappointing. Guangdong Construction Materials (International) Limited, a wholly-owned subsidiary of the Company, the principal assets of which are 70 per cent. interest in Guang Dong Nanhua Cement Limited and a 40 per cent. interest in Qing Yuan Long Shan Cement Co., Ltd., reported a consolidated operating loss of HK$182 million (1997: HK$87 million). The loss was principally due to the continued high levels of competition amongst cement producers in Guangdong Province, an increase in depreciation expenses of HK$13 million due to the commencement of operation of a new kiln, a provision in relation to fixed assets of HK$21 million, an increase in interest costs of HK$41 million on the substantial borrowings made to finance the construction of the cement plants, and an increase in the provision for accounts receivable of HK$27 million. Included in exceptional items was a loss of HK$41 million arising from the provision for the construction costs in relation to Long Shan, the construction plan for which has been suspended. Although cement sales increased by 57,800 tonnes and coal consumption reduced by 16.7 per cent., these benefits have been more than offset by the aforesaid expenses and interest expenses. The Group's attempts in 1997 to restructure the management of the cement operations have not been successful. The Group has been actively seeking solutions to improve the position, including pursuing negotiations with third party international cement producers with a view to introducing industry-specific management expertise and investment into the restructured operations. To date, such negotiations have not progressed beyond a preliminary stage.

Timber

The Group acquired Guangdong Timber Limited with timber businesses engaged in the manufacture of plywood, laminated boards and office furniture, and the production of medium density fibre boards as well as timber trading in Guangdong Province from GDE in 1997. The results of the timber businesses have been very disappointing. The businesses reported an operating loss of HK$117 million as compared with a profit of HK$18 million in 1997. The high level of losses was principally due to difficult market operating conditions resulting from an intensely competitive market pushing sales prices down as well as damage to timber stocks as a result of the flooding in Mainland China. The terms of the acquisition of the timber businesses gave certain rights to the Group to claim against GDE under a profit guarantee in the event of a shortfall, which the Group believes has occurred.

Other Industrials

Malting

Guangzhou Malting Co., Ltd., Guangzhou Yangcheng Malting Plant and Ningbo Malting Co., Ltd. ("the malting businesses") are engaged in the production and sale of malt, a commodity principally used in the brewing of beer and as an ingredient of a range of bakery and other food products. Despite a competitive operating environment and reduced market demand around the time of the extensive flooding in Mainland China in summer 1998, the malting businesses achieved 29 per cent. and 27 per cent. increases in overall production and sales levels, respectively, in 1998. However a reduction in the sales price of malt and the relatively high interest expenses borne by Ningbo Malting as a result of its high gearing level and increased interest rates resulted in the malting businesses suffering an overall loss of HK$25 million for 1998 (1997: HK$5 million).

Retail, Trading and Travel

The retail sector of the Group mainly comprises a 56.01 per cent. interest in Guangzhou Nanfang Dasha Co., Ltd. ("NanDa"), one of the largest department store chains in Guangzhou.

During the first half of 1998, NanDa showed an improvement when compared to the same period of 1997. However, the operations of NanDa were adversely affected by the generally less buoyant economic sentiment in Guangdong Province and flooding in Mainland China in the latter part of 1998 and have suffered from a decline in sales volumes with a turnover level of HK$519 million for 1998 (1997: HK$603 million) and an operational loss of HK$73.6 million for 1998 (1997: HK$52.8 million) of which HK$22.6 million related to provisions and additional interest paid in respect of its investments in the second half of 1998. Even in the poor business environment, NanDa continued to enhance its centralized computerised purchasing system, improve management efficiency, aggressively control costs and strategically expanding by opening a store in a highly populated estate. As a matter of prudence, the Company made substantial provisions in respect of its loss making operations, the closure of loss making outlets in the second half of 1998 and the devaluation of property interests. The Group will continue to implement the policy of downsizing and closing loss making operations, will look for opportunities to open new department stores in suitable locations and will further reduce costs.

Guangdong (H.K.) Tours Company Limited ("Guangdong Tours"), which is 100 per cent. owned by the Group, owns 60 per cent. of Funai International Pte Ltd ("Funai"), a company incorporated in Singapore, which reported an operating loss of HK$127 million for 1998 (1997: HK$4 million). The core business of Funai is the trading of electrical appliances and computer products. It was acquired by Guangdong Tours in October 1995. Funai made profits during 1995 and 1996. However, from 1997, Funai's two major markets, namely, Eastern Europe and Russia, underwent structural economic changes resulting in Funai making a significant loss in 1998. Extensive provisions of HK$77 million were made in relation to bad and doubtful trade debts and inventory in 1998.

Guangdong Tours has a total of 12 sales offices in Hong Kong. Whilst affected by the downturn in tourism in Hong Kong and the general recessionary climate, Guangdong Tours remained profitable at the operating level, reporting an operating profit of approximately HK$14 million. However Guangdong Tours reported exceptional losses of approximately HK$153 million attributable to provisions for bad debts in relation to non-travel trading activities carried on by Guangdong Tours.

Finance

The Group acquired Guangdong Finance Co., Limited in December 1997 from the Group's controlling shareholder, GDE. Guangdong Finance is a licensed money lender incorporated in Hong Kong with a principal activity being the provision of mortgage financing. Despite an operating profit of approximately HK$26 million for 1998, substantial provisions of HK$49 million have been made in the financial statements of Guangdong Finance, principally in respect of its portfolio of mortgage loans, a proportion of which have been categorised as non-performing, largely due to the decline in Hong Kong property values and the recessionary economy leading to an increase in defaulting loans.

The Group has taken action to contain Guangdong Finance's risk exposure including curtailing Guangdong Finance's lending activities for the time being and ensuring that appropriate action is taken in respect of non-performing loans. The terms of the acquisition of Guangdong Finance gave certain rights to the Group to claim against GDE under a profit guarantee in the event of a profit shortfall, which has occurred.
 

FINANCE EXPENSES

During 1998, interest rates in Hong Kong were high by historical standards, due to concerns that the Hong Kong dollar may have to be devalued or allowed to float against other world currencies. During the summer of 1998, local interest rates were in excess of 10 per cent. for short-term funding. As a consequence of higher borrowing levels and increased cost of funds, the Group suffered an increase in finance costs of approximately HK$230 million in 1998 as compared with 1997.
 

EXCEPTIONAL ITEMS

The Group recorded a net loss attributable to shareholders of HK$2,012 million for 1998, which was principally due to exceptional losses which amounted to HK$1,781 million (after netting off investment property revaluation reserve and hotel property revaluation reserve of HK$1,426 million) of which HK$1,269 million related to the drop in value of property and hotel interests, and provisions for investments. Due to uncertainties surrounding the comprehensive restructuring described below which could include the exchange of significant assets among the Group, GDE and the Guangdong Provincial Government and the planned future focus on core businesses, based on professional advice, certain long term investments of the Group, including an interest in Nam Fong International Holdings Limited have been reclassified as short term investments, resulting in a provision of HK$556 million in respect of the diminution in value of listed investments. These investments are not consistent with the Group's future core businesses, and will be disposed of as part of the restructuring. In addition the Group increased substantially the provision for specific doubtful debts to HK$460 million as a number of debts became doubtful during the latter part of 1998, primarily due to deteriorating economic conditions.
 

POTENTIAL CLAIMS

As referred to above, the Group received certain profit guarantees from GDE when it acquired from GDE the businesses relating to timber, finance and a hotel in Mainland China. The Group believes that the levels of guaranteed profit for the relevant periods have not been met in relation to at least the timber and finance businesses and the Group has been advised that it has or will have valid claims under the relevant profit guarantees against GDE.

Although the magnitude of the profit guarantee claims cannot be confirmed with a reasonable degree of certainty at the date of this statement, GDE has made a provision of HK$1.4 billion in its audited consolidated accounts for the nine month period ended 30 September 1998 in respect thereof. The positive value of these profit guarantee claims has not, for the sake of prudence, been reflected in the Group's accounts. The Group has been informed by the Guangdong Provincial Government that a settlement of its profit guarantee claims will form part of the proposed restructuring described below, failing which the Group will take all necessary steps to protect its position.
 

EVENTS SUBSEQUENT TO 31 DECEMBER 1998

Guangdong Enterprises

In January 1999, GDE and its subsidiaries, other than the Group (the GDE Group") announced that the GDE Group had proposed a standstill with their financial creditors and confirmed that a restructuring would be proposed which would include the Group.

A meeting of the Guangdong Provincial Government, GDE and the GDE's financial creditors was held on 1 March 1999 at which it was explained that the objective of the proposed comprehensive restructuring of the GDE Group is to create a commercially viable, financially independent GDE Group. It was again confirmed that the Group would be included in such restructuring.

Proposed Restructuring

The proposed restructuring of the GDE Group, which is subject to the support of the GDE Group's financial creditors, is intended by the Guangdong Provincial Government to rebuild international creditors' and investors' confidence in GDE, to provide GDE with an opportunity to revive itself and to form a basis for solving the GDE Group's immediate financial and operational difficulties. Such measures are likely to include the Guangdong Provincial Government injecting assets with cashflow into the GDE Group and the Group and the disposal of non-core and underperforming assets. Amongst other things, the restructuring is conditional upon implementation of certain arrangements with respect to facilities and obligations entered into between members of the GDE Group and the GDE Group's financial creditors being proposed to the GDE Group's financial creditors (which may include the non-payment of principal by members of the GDE Group during the period the arrangements apply). The Guangdong Provincial Government intends the restructuring to strengthen the GDE Group financially to a level where it is a commercially viable and financially independent entity.

The Group had been informed that the proposed restructuring would allow the Group to focus on four core businesses of utilities, infrastructure, property and hotels.

In addition, in connection with the restructuring, Guangdong Provincial Government envisages that companies within the GDE Group and the Group will over time disengage from activities determined to be non-core businesses.

The following chart sets out the possible organisational structure of the GDE Group and the GDI Group after completion of the restructuring, it is emphasised such structure is only preliminary, and accordingly does not represent a definitive group structure as the final structure may well be different:

The Group has been informed that the Guangdong Provincial Government has on a preliminary basis, identified the following assets as potential candidates for injection as part of the comprehensive restructuring of the GDE Group and the Group. It should also be noted that it may ultimately be decided that such assets would not be injected or other assets not listed below would be injected instead, and that the proportion of the assets to be injected has not been determined:

* Dongshen Water Supply
* Shaoguan Power Plant
* Shantou Bay Bridge
* Humen Bridge
* Shantou Huizhou Highway
* Qinglian Highway
* Huaiji Highway
* Yuehui Highway and Bridge
* Huiguang Highway and Bridge

The implementation of the proposed restructuring is subject to numerous external factors outside the control of the Group and accordingly there can be no assurance that the proposed restructuring will take place or, if it proceeds, as to the form which the proposed restructuring will ultimately take.

Standstill Arrangements

In order to facilitate the development of the restructuring proposal, the Group commissioned a special audit to be carried out for the nine months ended 30 September 1998. The results of the third quarter audit showed a loss for the Group of HK$2,185 million which triggered events of default under certain of the Group's loan and other facilities giving certain of the Group's financial creditors the right to make immediate demands for repayment. The Group and its advisers therefore met with the Group's financial creditors on 4 March 1999 to inform them of the Group's financial position, the general position regarding events of default which had arisen under certain of the Group's loan and other facilities and to commence discussions regarding a rescheduling of the Group's borrowings involving a proposal that interest payments would continue to be made and that repayments of principal will be postponed until the proposed restructuring referred to above is completed. The Group invited a number of banks to form a steering group to negotiate the rescheduling of principal repayments which HSBC agreed to lead and which includes ABN AMRO Bank, Banque Nationale de Paris, Citibank, N.A., International Bank of Asia Limited, SG and Dai-Ichi Kangyo Bank.

Subsequent to such meeting, the Group issued a circular letter to HSBC as liaison bank on behalf of the Group's financial creditors outlining the terms of an interim standstill pending formal arrangements with financial creditors being entered into and/or the completion of the proposed restructuring. The circular letter requests the Group's financial creditors to abide by certain standstill terms during an interim period, which include the continued payment of interest at contractual rates and a moratorium on repayments of principal and makes proposals as to how the Group intends to operate under the standstill. Guangdong Brewery Holdings Limited and its subsidiaries are not included in the standstill arrangements. To date, one bank has served an originating summons on a member of the Group in respect of the repayment of principal amounts of US$3.9 million and HK$15 million plus interest and the enforcement of rights under a legal charge over property.
 

MANAGEMENT OUTLOOK

The general business outlook for the Group in 1999, given the difficult operating environment, the Group's current financial position and the uncertainties surrounding the proposed restructuring, is extremely challenging. The immediate prospects of the Group are clearly inextricably linked with the ability of Guangdong Provincial Government, which is advised by Goldman Sachs, to effect the proposed restructuring. Based on the Group's current understanding, the proposals would involve the Group disengaging from or radically reorganising a number of its loss-making activities in particular cement, timber, finance and trading activities and focussing on utilities, infrastructure, property and hotels in which areas assets may be injected.

On the basis that the proposed restructuring is implemented, interests in utilities should provide strong cash flow to the Group, whilst the medium and long-term prospects for the infrastructure sector in Guangdong Province are positive. The property sector, although currently in downturn in Hong Kong and to a lesser extent in Guangdong Province should, in the long-term, offer a balance of capital appreciation and rental income which would provide a stable basis underpinning the Group's operations. The sector of the tourist market in Hong Kong towards which the Group's hotels are targeted, which includes tourists from Mainland China and business travellers, should represent a growing market after the current financial crisis is over. The performance of the Group's hotels in Mainland China, although currently satisfactory, should also improve given stronger economic conditions.

Assuming the proposed restructuring is successfully completed, the Group should benefit from a clearer, more focussed strategy and the continued growth and development of the economy of Guangdong Province, the prospects for which remain excellent in the medium to long term.
 

PURCHASE, SALE OR REDEMPTION OF LISTED SECURITIES

Neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the Company's securities listed on the Hong Kong Stock Exchange during the year under review.

During the year, the Group repurchased a total of US$17.3 million (in nominal amount) 1% guaranteed convertible bonds due 2002 ("Convertible Bonds") issued by a wholly-owned subsidiary of the Company. The repurchased Convertible Bonds were cancelled subsequently.

On 7 April 1998, the Company issued US$125 million 3¹/₄% convertible bonds due 2003 which were exchanged for 125,000 Preference Shares of the Company on 26 May 1998. The par value and paid-up value of each Preference Share is US$1.00 and US$1,000 respectively. The global depositary receipts representing the Preference Shares are listed on the Luxembourg Stock Exchange.

During the year, 38,050 Preference Shares were converted by way of redemption into 73,322,350 Ordinary Shares of the Company. The Ordinary Shares were issued at HK$4.02 each. The Preference Shares were redeemed at US$1,000 each.
 

CORPORATE GOVERNANCE

The Company has complied throughout the year with the Code of Best Practice as set out in Appendix 14 of the Listing Rules. In compliance with the additional requirement of the Hong Kong Stock Exchange in its Code of Best Practice, the Company has on 25 September 1998 established an Audit Committee comprising Dr. The Honourable Li Kwok Po, David, JP and Mr. Chan Cho Chak, John, JP with written terms of reference and which has held two meetings prior to the date of this report.
 

YEAR 2000

The Group adopts the Year 2000 ("Y2K") conformity requirements issued by the British Standards Institution "BSI") as its guide to the Y2K compliance issue.

In order to ensure the Group's operations will be Y2K compliant before the turn of the century, in January 1997 the Group's management commenced a review of all the relevant issues that may stem from the Y2K problem in relation to the Group's operations.

The scope of Y2K compliance project covers the Group's headquarters as well as its subsidiaries and associated companies. The procedures involved in addressing the Y2K problem include identification, assessment and prioritization, system modification or replacement, testing, and implementation.

As at 31 December 1998, the assessment of the compliance level of the Group's mission-critical computer systems was completed. The study revealed that the Group had achieved an average of 70% Y2K compliance. Scheduled replacement or modification of the remaining non-compliant systems has been confirmed with major system suppliers and is expected to be completed by the end of the second quarter of 1999.

So far as the contingency plans to address potential risks and necessary remedial action in relation to unforeseeable interruptions at the millennium date to the Group, formulation of a contingency plan that highlights the possibility of falling back on manual processes has been started. The estimated completion date for the contingency plan is the end of the third quarter of 1999.

The plan includes identifying procedures that can be operated by manual process, documenting and consolidating these procedures. Emphasis has put on resources allocation before, on, and after the millennium date to take care of unexpected events. Special procedures to ensure data backup during the Year 2000 will be one of the highlights of the contingency plan.

The Group cannot guarantee that there will be no business interruption due to its business partners' Y2K incompatibility. The estimated amount of commitments contracted for Y2K compliance expenditure up to the 1998 year end is approximately HK$2.4 million, which is in accordance with the previously budgeted total of HK$5.2 million referred to in the 1998 Interim Report.

The principal activities of the Company are investment holding and investment in infrastructure projects and marketable securities. The subsidiaries are principally engaged in investment holding, the provision of travel and transportation services, hotel ownership and operations, hotel management, property holding and investment, property development for sale, the design, supply and installation of curtain walls and aluminium windows, trading of timber and manufacture of timber-related products, manufacture of furniture, the manufacture of malt for the brewing industry, the production of beer, the processing and sale of semi-finished and finished leather, the design, manufacture and sale of leather ware products, the production of cement, investment in infrastructure and energy projects, provision of mortgage finance, money lending, investment dealing, and wholesaling and retailing.

SEGMENTED INFORMATION

An analysis of the Group's turnover and operating profit/(loss) after exceptional items by principal activity and geographical area of operations for the year ended 31 December 1998 is as follows:
 
 

RESULTS AND DIVIDENDS

An interim dividend of 1.5 Hong Kong cents ("HK cent") per ordinary share of HK$0.50 each ("Ordinary Share") was paid on 3 November 1998. The Directors do not recommend the payment of a final dividend on the Ordinary Shares of the Company for the year ended 31 December 1998 (1997: final dividend of HK cen 5.0 per Ordinary Shares).

A dividend on the 3¹/₄% redeemable cumulative convertible preference shares (the "Preference Shares") for the semi-annual period from 7 April 1998 to 6 October 1998 was paid on 7 October 1998, whereas the dividend on the Preference Shares in respect of the semi-annual period from 7 October 1998 to 6 April 1999 will not be paid on the due date, 7 April 1999. Pursuant to the terms of the Preference Shares, such unpaid dividend will accumulate and be paid in preference to any dividend in respect of the Ordinary Shares of the Company.

Year ended 31 December 1998
 
 
 

CONSOLIDATED BALANCE SHEET

31 December 1998
 
 
 

Year ended 31 December 1998