Annual Report 2016 Hongkong Land Holdings Limited Landmark Riverside, a joint venture mixed-use development in Chongqing’s Central Business District (front cover). Contents Corporate Overview Corporate Information Highlights Chairman’s Statement Chief Executive’s Review Financial Review Directors’ Profiles Financial Statements Independent Auditors’ Report Five Year Summary Responsibility Statement Corporate Governance Principal Risks and Uncertainties Shareholder Information Offices Report of the Valuers Major Property Portfolio 1 2 3 4 6 12 18 20 64 66 67 68 74 75 76 77 78 is a listed leading property investment, management and development group. Founded in 1889, Hongkong Land’s business is built on excellence, integrity and partnership. The Group owns and manages almost 800,000 sq. m. of prime office and luxury retail property in key Asian cities, principally in Hong Kong and Singapore. Hongkong Land’s properties attract the world’s foremost companies and luxury brands. Its Hong Kong Central portfolio represents some 450,000 sq. m. of prime property. It has a further 165,000 sq. m. of prestigious office space in Singapore mainly held through joint ventures, and a 50% interest in a leading office complex in Central Jakarta. The Group also has a number of high quality residential and mixed-use projects under development in cities across Greater China and Southeast Asia, including a luxury retail centre at Wangfujing in Beijing. In Singapore, its subsidiary, MCL Land, is a well-established residential developer. Hongkong Land Holdings Limited is incorporated in Bermuda and has a standard listing on the London Stock Exchange, with secondary listings in Bermuda and Singapore. The Group’s assets and investments are managed from Hong Kong by Hongkong Land Limited. Hongkong Land is a member of the Jardine Matheson Group. Annual Report 2016 1 Corporate Information Directors Hongkong Land Limited Directors Ben Keswick Chairman Robert Wong Chief Executive R.M.J. Chow Simon Dixon Chief Financial Officer K. Foo R.L. Garman Mark Greenberg D.P. Lamb Y.K. Pang Jeremy Parr J.A. Robinson John Witt Corporate Secretary Neil M. McNamara Ben Keswick Chairman and Managing Director Robert Wong Chief Executive Charles Allen-Jones Simon Dixon Mark Greenberg Adam Keswick Sir Henry Keswick Simon Keswick Dr Richard Lee Anthony Nightingale Y.K. Pang Lord Powell of Bayswater, KCMG Lord Sassoon, Kt James Watkins Percy Weatherall Michael Wei Kuo Wu Company Secretary Neil M. McNamara Registered Office Jardine House 33-35 Reid Street Hamilton Bermuda 2 Hongkong Land Highlights • Underlying profit down 6% • Continued strong contribution from commercial portfolio • Steady residential contribution from mainland China and Singapore • Net assets per share up 9% on higher capital values Results Underlying profit attributable to shareholders* Profit attributable to shareholders Shareholders’ funds Net debt Underlying earnings per share* Earnings per share Dividends per share Net asset value per share 2016 US$m 2015 US$m Change % 848 905 3,346 2,012 31,294 28,685 (6) 66 9 2,008 2,341 (14) US¢ US¢ 36.03 38.44 142.23 85.50 19.00 19.00 US$ US$ 13.30 12.19 % (6) 66 – % 9 * The Group uses ‘underlying profit attributable to shareholders’ in its internal financial reporting to distinguish between ongoing business performance and non-trading items, as more fully described in Note 1 to the financial statements. Management considers this to be a key measure which provides additional information to enhance understanding of the Group’s underlying business performance. Annual Report 2016 3 Chairman’s Statement Overview Results from the Group’s commercial portfolio continued to be strong due to largely positive rental reversions in Hong Kong and higher occupancy in both Hong Kong and Singapore. In the residential sector, while profits from HK$221 per sq. ft in 2015. The value of the Group’s commercial portfolio in Hong Kong increased by 12% when compared to the prior year, due to office capitalisation rates compressing on strong investment demand and rental growth. mainland China were flat and profits from Singapore were In Singapore, vacancy in the Group’s office portfolio only marginally lower in 2016, overall earnings declined reduced to 0.1% from 3.0% at the end of 2015 as in the absence of a gain recorded in the prior year on previously committed space was taken up during the a redeveloped property in Hong Kong. year. Average rent decreased slightly to S$9.3 per sq. ft, Performance compared to S$9.5 per sq. ft in 2015. In mainland China, the construction of the Group’s Underlying profit attributable to shareholders in 2016 luxury retail and hotel complex in Beijing, WF CENTRAL was US$848 million, a 6% decrease compared to the at Wangfujing, is progressing well with the retail prior year. After taking into account the net non-trading component scheduled to open in late 2017 and the gains of US$2,498 million recorded on the revaluation of 74-room Mandarin Oriental Hotel scheduled to open the Group’s investment properties, the profit attributable in 2018. In Jakarta, the fifth tower at Jakarta Land, the to shareholders for the year was US$3,346 million. Group’s 50%-owned joint venture, is on schedule for This compares to US$2,012 million in 2015, which completion in 2018. included net valuation gains of US$1,107 million. The net asset value per share at 31st December 2016 was US$13.30, compared with US$12.19 at the end of 2015. Residential Developments As anticipated, the contribution from the Group’s residential interests was lower in 2016, primarily due to the absence of a gain from the redevelopment of The Directors are recommending a final dividend a residential property in Hong Kong recorded in 2015. of US¢13.00 per share, providing a total dividend for the year of US¢19.00 per share, unchanged from the previous year. Group Review Commercial Property In mainland China, revenue recognised during the year, including the Group’s attributable interest in joint ventures, increased by 34%. However, profits were flat primarily due to the product mix and the impact of a weaker Chinese Renminbi. The Group’s attributable interest in contracted sales for 2016 was 38% higher at In Hong Kong, the office leasing market in Central US$1,105 million, compared to US$802 million in 2015. continues to benefit from limited supply. Vacancy in the At 31st December 2016, the Group had US$1,083 million Group’s Central office portfolio at the end of 2016 was in sold but unrecognised contracted sales, compared 2.2%, compared with 3.4% at the end of 2015. Office with US$821 million at the end of 2015. The construction rental reversions continue to be positive, with the Group’s of the 50%-owned New Bamboo Grove began in average office rent increasing to HK$103 per sq. ft from mid-2016 and is progressing well. HK$101 per sq. ft in 2015. The Group’s Central retail portfolio remains fully occupied and base rental reversions continue to be largely positive. The impact of turnover rent, however, led to the average retail rent reducing to HK$218 per sq. ft, compared with Results from the Group’s residential business in Singapore declined marginally compared to the prior year due to lower provision writebacks on completed developments. The Group’s wholly-owned subsidiary, 4 Hongkong Land Outlook A stable performance is anticipated from Hongkong Land’s commercial property portfolio in 2017, while in the Group’s residential business a higher contribution from mainland China is expected to be offset by lower profits from Singapore. Ben Keswick Chairman 2nd March 2017 MCL Land, completed the fully sold 738-unit J Gateway project. Presales continue at two projects scheduled for completion in 2017 and 2018, respectively, while construction began in July 2016 on a project due to complete in 2019. In December 2016, MCL Land won a tender to develop a residential site on Margaret Drive, which is expected to complete in 2020. Of the Group’s other residential interests, the development of two joint venture projects in Indonesia are advancing on schedule. In September 2016, the Group formed Astra Land, a 50:50 joint venture with Astra International in Indonesia, to pursue primarily residential trading opportunities. Astra Land subsequently announced that it will develop a 69 hectare site in Jakarta Garden City in joint venture with Modernland Realty. In the Philippines, the construction of a 40%-owned 182-unit luxury development in Manila and a 40%-owned mixed-use development in Cebu are also well underway. Financing The Group’s financial position remains strong with net debt of US$2.0 billion at 31st December 2016, down from US$2.3 billion at the end of 2015. Net gearing at the end of the year was 6%, compared with 8% at the end of 2015. People On behalf of the Board, I would like to thank all of our staff for their dedication and professionalism in upholding our reputation of providing high quality offerings to our customers. Y.K. Pang stepped down as Chief Executive in July, while remaining on the Board, and was succeeded by Robert Wong. John Witt stepped down as Chief Financial Officer in March and was succeeded by Simon Dixon. Lord Leach passed away in June 2016. During his time on the Board, he made a significant contribution to the development and expansion of Hongkong Land. He will be fondly remembered and greatly missed. Annual Report 2016 5 Chief Executive’s Review Hongkong Land had a good year in 2016 with another Hong Kong’s Central Portfolio strong contribution from its commercial property The portfolio in Hong Kong comprises 12 buildings portfolio and a steady contribution from its residential that form the heart of the financial district in Central. property projects. There has also been a significant These buildings are interlinked and represent over increase in the value of the Group’s commercial property 450,000 sq. m. of Grade A office and luxury retail space. portfolio during 2016. The Group maintains a sound They are positioned as the pre-eminent office, retail, balance sheet with ample liquidity, is well positioned in restaurant and hotel accommodation in Central. its core markets in Greater China and Southeast Asia, This integrated mixed-use development continues to and continues to seek development opportunities to attract both prime office tenants and luxury retailers. further grow in these markets. As a key financial and business hub in Asia, Hong Kong’s economy is closely linked to the global economic environment. Despite current economic uncertainties, vacancy is low and rental reversions have remained positive, reflecting the unique positioning of the portfolio and the scarcity of supply of high quality space in core Central. 2012 35% Banks and other financial services 30% Legal 6% Property 8% Accounting 3% Trading 5% Governments 13% Others Strategy The Group develops prime commercial properties, which it retains and manages as long-term investments, and premium residential and accompanying commercial properties, which are developed for sale. The Group’s prime commercial properties are predominantly in core central business locations in Asian gateway cities, with a concentration in Hong Kong and Singapore. Returns principally arise from annual rental yields and long-term capital appreciation. The Group’s Hong Kong and Singapore portfolios remain its most important investments as they provide a stable stream of earnings and balance sheet strength, which enables the Group to continue to invest and grow both its commercial and residential portfolios in its core markets in Greater China and Southeast Asia. The Group’s premium residential and accompanying commercial developments are primarily in mainland China and Singapore, with emerging businesses in the Philippines, Indonesia and Vietnam. Returns principally arise from short to medium-term trading profits. The consistency of earnings contributed from these developments continues to strengthen as the mainland China operations mature. The Group’s attributable interest in the developable area of its residential projects in mainland China totals 4.6 million sq. m. Of this, construction of approximately 1.8 million sq. m., or 39%, had been completed at 2016 39% Banks and other financial services 30% Legal 6% Property 8% Accounting 2% Trading 1% Governments 14% Others Central portfolio office tenant profile by area occupied the end of 2016. In Singapore, MCL Land, the Group’s wholly-owned residential developer, continues to be an important contributor to earnings and is working to maintain a steady pipeline of projects. In Indonesia and the Philippines, the Group’s joint venture projects are progressing well and will provide additional sources of income as they mature in the coming years. 6 Hongkong Land Central portfolio top five office tenants (in alphabetical order) in 2016 ANZ BNP Paribas JP Morgan KPMG PricewaterhouseCoopers Central portfolio top five retail tenants (in alphabetical order) in 2016 Armani Group Dickson Concepts Kering LVMH Group Richemont Group The Group’s retail portfolio in Hong Kong, the 54,000 sq. m. The performance of the Group’s commercial portfolio LANDMARK, is integrated with the office buildings and is is determined by supply and demand as well as a key component of the Group’s unique and successful macro-economic conditions in Asia. Nevertheless, mixed-use business model. Its tenants include numerous the Group is committed to maintaining excellence in luxury brand flagship stores, as well as leading restaurants product quality and service to retain current tenants that have collected a total of ten Michelin stars. and attract new premium tenants and customers. It will LANDMARK is clearly established as the iconic shopping seek to grow its exceptional portfolio of commercial destination in Hong Kong. properties in prime locations across the region by investing in new developments. Commercial Property Investments in Asia Outside Hong Kong, the Group has similarly established Residential Developments itself as a leading provider of office and retail space. Based on the Group’s experience and reputation, it has In Singapore, Hongkong Land’s attributable interests of established a strong and profitable residential trading 165,000 sq. m. includes some of the finest Grade A office business focusing primarily on the premium market in space in the market, principally in the Marina Bay Area. Greater China and Southeast Asia. While the capital In Indonesia, Jakarta Land, the Group’s 50%-owned joint invested in this sector is significantly lower than the venture, is continuing to extend its 135,000 sq. m. office commercial business, the residential projects enhance development, with construction progressing well on the Group’s overall profits and returns on capital. a 73,000 sq. m. fifth tower scheduled for completion in the first half of 2018. In Beijing, the Group’s WF CENTRAL development, comprising a luxury retail complex and a prestigious Mandarin Oriental hotel, is scheduled for completion in the second half of 2017 and the first half of 2018, respectively. In Cambodia, the Group’s 30,000 sq. m. prime mixed-use complex comprising office and retail components in the heart of Phnom Penh has recently been completed. Annual returns from residential developments fluctuate due to the nature of the projects and the Group’s accounting policy of only recognising profits on sold properties on completion. Demand is also dependent on overall economic conditions, which can be significantly affected by government policies and the availability of credit. Ongoing land acquisitions are necessary to continue to build this income stream over the longer term. Annual Report 2016 7 Review of Commercial Property Profits from the Group’s commercial business were marginally higher in 2016 than 2015, largely due to positive office rental reversions in Hong Kong and higher occupancy in both Hong Kong and Singapore. The value of the Group’s commercial portfolio in Hong Kong at 31st December 2016, based on independent valuations, increased by 12% to US$26.1 billion when compared to the prior year, primarily due to office capitalisation rates compressing on strong investment demand and rental growth. Hong Kong Demand in the Hong Kong office leasing market remained strong in 2016, backed by the continued scarcity of Grade A office supply. The Group’s vacancy was 2.2% at the end of 2016, compared to 3.4% at the end of 2015. Vacancy for the overall Central Grade A market was 1.7% at the end of 2016, compared to 1.2% in 2015. The Group’s average office rent in 2016 was HK$103 per sq. ft, an increase from last year’s average of HK$101 per sq. ft. This increase was predominantly due to positive rental reversions from existing tenants. Financial institutions, legal firms and accounting firms Central portfolio at 31st December 2016 Capital value (US$m) Gross revenue (US$m) Equivalent yield (%) Office Retail 21,137 4,959* 700 250* – One and Two Exchange Square 3.50 – The Landmark Atrium Average unexpired term of leases (years) 4.50 3.8 2.8 occupy 77% of the Group’s total leased office space. Area subject to renewal/review The Group’s retail portfolio remained resilient amidst in 2017 (%) 32 34 challenging conditions in the luxury retail sector * including hotel in Hong Kong, and continued to be fully occupied. The average rent was HK$218 per sq. ft in 2016, down slightly from HK$221 per sq. ft in 2015, due to the impact of turnover rent. Base rental reversions remained largely positive, although the demand for retail space has moderated. 10.84 10.85 11.18 11.64 12.70 13.14 13.03 13.26 8.52 6.33 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Central portfolio average office effective rent (US$/sq. ft per month) 8 Hongkong Land Chief Executive’s Review Singapore In Jakarta, development of the fifth tower at the Group’s Sentiment in the office leasing market in Singapore 50%-owned joint venture, Jakarta Land, is progressing was slightly softer in 2016 compared to 2015 due as scheduled. It is planned for completion in 2018. to a projected surplus of supply. Vacancy in the Occupancy across the portfolio was 90% at the year Group’s office portfolio was 0.1% at the year end, end, a modest decline from 93% at the end of 2015. down from 3.0% at the end of 2015. The overall The average gross rent in 2016 was US$25.3 per sq. m., vacancy across the entire Grade A CBD market was unchanged from the prior year. 6.7% as at 31st December 2016, compared to 5.0% at the end of 2015. The Group’s average rent was S$9.3 per sq. ft, a slight decrease from S$9.5 per sq. ft in the previous year, due to negative rental reversions. In line with the financial nature of the district in which the Group’s portfolio is located, financial institutions, In Cambodia, the Group’s 30,000 sq. m. prime mixed-use complex, EXCHANGE SQUARE, comprising office and retail components in the heart of Phnom Penh’s emerging financial district, has recently been completed and is in the process of being handed over to tenants. legal firms and accounting firms occupy 82% of the Performances at the Group’s other commercial total leasable area. investment properties in Bangkok, Hanoi and Bermuda Other Commercial Property Investments In Beijing, the development of WF CENTRAL, the Group’s Review of Residential Property were within expectations. retail and hotel project located in Wangfujing in the Dongcheng District, continues to make progress. This unique development will be an iconic lifestyle destination for shopping and dining in the capital for both local and international customers. The retail component is scheduled to open later in the second half of 2017. The complex will also include a 74-room Mandarin Oriental hotel, scheduled to open in the first half of 2018. In the CBD Core Area of Beijing’s Chaoyang District, the Group’s 30%-owned proposed office development project remains under planning. It will be developed as a prime Grade A office building of 120,000 sq. m. In Shanghai, the agreement with the Lujiazui Group to develop a mixed-use project with both office and retail components in the Qiantan area of Pudong was finalised during the year, and is now subject to planning and regulatory approval. This prime site will have As expected, earnings from the Group’s residential property business were lower in 2016 compared to 2015, primarily due to the absence of profits from a redeveloped property in Hong Kong. Mainland China The Group’s residential businesses in mainland China are situated across the cities of Beijing, Chengdu, Chongqing and Shanghai. These are predominantly long-term projects of different product types that are being developed in phases over time. Despite cautious market conditions in Chongqing, the Group’s largest market, the Group’s sales performance improved against 2015. The Group’s attributable interest in contracted sales was US$1,105 million in 2016, compared with US$802 million in the previous year. a developable area of 230,000 sq. m. The Group’s attributable interest in revenue recognised In One Central, Macau, occupancy in the retail portfolio remained high at 95%, marginally lower than the prior year. Amidst challenging market conditions, tenant sales were down 21%. was US$676 million, compared with US$505 million in 2015, an increase of 34%. Annual Report 2016 9 At 31st December 2016, the Group’s attributable Landmark Riverside, a 50%-owned joint venture with interest in sold but yet to be recognised contracted China Merchants Shekou Holdings, is a 22 hectare site sales amounted to US$1,083 million, an increase of at Dan Zishi in Chongqing. The project, which is primarily 32% from US$821 million at the end of 2015. residential with some retail space, consists of a total Chongqing, the largest city in western China, remains the Group’s most significant residential market in the country. developable area of approximately 1 million sq. m., of which approximately 31% has been completed. The city accounts for some 88% of the Group’s total Central Avenue, the Group’s second 50%-owned residential investments in mainland China. It consists joint venture with China Merchants Shekou Holdings, of two wholly-owned projects, Yorkville South and the is a 40 hectare mixed-use development located next to adjacent Yorkville North, and four 50%-owned joint the Central Park in the Airport New Town of Yubei District ventures, being Bamboo Grove, New Bamboo Grove, in Chongqing. The project is planned to be developed in Landmark Riverside, and Central Avenue. eight phases to 2024. The first phase was completed Yorkville South and Yorkville North, at Zhaomushan near the core of the Two-River New Area of Chongqing, are being developed in six phases over nine years in December 2016. The site consists of approximately 1.1 million sq. m. of developable area, of which 6% has been completed so far. to 2020 and seven phases over ten years to 2022, In Chengdu, the 50% joint venture with KWG Property respectively. Revenue recognised during 2016 Holding Group, WE City, is a 19 hectare mix-used amounted to US$417 million, compared with development with total developable area of approximately US$236 million in 2015. Yorkville South has a total 900,000 sq. m., of which around 34% has been completed. developable area of approximately 880,000 sq. m., With the completion of phase 4, the Group’s share of of which 58% has been completed, while Yorkville North the sales recognised in 2016 reached US$127 million, has a total developable area of 1.1 million sq. m., of which compared to US$108 million in the prior year. 31% has been completed. In Beijing, at the Group’s 90%-owned Maple Place project, Construction at the Group’s joint venture projects 31 units were sold and handed over during the year in Chongqing has progressed in accordance with compared to 22 units in the prior year. Only two villas development plans. Hongkong Land’s attributable remain available for future sale. interest in sales recognised from these joint venture projects was US$92 million, compared to US$125 million in 2015, due to the timing of completed sales. Central Park in Beijing, a 40%-owned joint venture with Vantone Group, continues to hold 72 apartments which were operated as serviced apartments until June 2016. Bamboo Grove, the Group’s first 50%-owned joint The joint venture has since taken vacant possession of venture with Longfor Properties, is a 78 hectare site all apartments and is preparing the apartments for sale. at Dazhulin in Chongqing. It is primarily a residential development with total developable area of approximately 1.5 million sq. m., of which 88% has already been developed. In Shanghai, the Group holds a 50% interest in a joint venture with the CIFI Group to develop a prime residential project, Parkville, which is located in Pudong within Shanghai’s inner-ring road. The project consists of New Bamboo Grove, the second 50%-owned joint residential and commercial space with total developable venture with Longfor Properties and adjacent to Bamboo area of approximately 227,000 sq. m. The Group’s Grove, is also primarily a residential development with share of contracted sales in 2016 was US$248 million total developable area of approximately 600,000 sq. m. compared to US$157 million in 2015. The residential Construction commenced in mid-2016 and its first phase component of the project is on schedule for completion will be completed in 2017. in the first half of 2017. 10 Hongkong Land Chief Executive’s Review Singapore Astra Land subsequently entered into a 50%-owned MCL Land, the Group’s wholly-owned subsidiary, joint venture arrangement with Modernland Realty completed one residential project during 2016, to co-develop a predominantly residential site of the 738-unit J Gateway project, which was fully sold. 69 hectare in Jakarta Garden City, east of central Jakarta. Beyond 2016, MCL Land has one 100%-owned project scheduled for completion in each year from 2017 to 2020. The 699-unit LakeVille development, which is Construction of this project is expected to commence in 2017, and will be developed in multiple phases with total developable area of 940,000 sq. m. expecting to complete in 2017, was 99% pre-sold at In the Philippines, construction is continuing at the end of 2016. The 1,327-unit Sol Acres executive Two Roxas Triangle, the 40%-owned luxury 182-unit condominium development (previously known as residential condominium tower in Manila’s central Makati Choa Chu Kang Grove), which is scheduled for area. The development is expected to complete in 2018. completion in 2018, was 44% pre-sold. The 710-unit At the end of 2016, 99% of the units had been pre-sold. Lake Grande project, a residential site located adjacent At Mandani Bay, a 40%-owned 20 hectare development to its LakeVille project, which is scheduled for completion comprising principally of residential units with some in 2019, was 77% pre-sold. In December 2016, MCL Land office and retail components in Cebu, construction won a tender to develop a residential site on Margaret began in the first half of 2016, and the project will be Drive with a land cost of US$165 million. The Project will developed in multiple phases through to 2035. Since yield up to 316 residential units over a developable area the first sales launch in early 2016, 43% of 1,226 units of 238,000 sq. ft. Construction will commence in 2017 launched were pre-sold. Completion of these units is and is expected to complete by 2020. expected in 2020. Other Residential Developments In Indonesia, construction of the Group’s two residential projects is progressing well. Nava Park, the Group’s 49%-owned joint venture with Bumi Serpong Damai, is a 67 hectare site located southwest of central Jakarta. Upon completion in 2029, Nava Park will comprise a mix of landed houses, villas, mid-rise apartments Outlook The Group’s commercial portfolio is expected to continue generating stable returns in 2017. In the residential sector, higher completions should lead to improved profits from mainland China, but these are expected to be offset by lower contributions from other regions. and low-rise commercial components. Of the 471 units The foundation of Hongkong Land’s continued success which have been launched for sale, 81% have been is in satisfying its tenants and customers’ needs through pre-sold as at the end of 2016. The first and second the delivery of world-class services and products. phases are scheduled for completion in 2017 and By maintaining its focus on its values, Hongkong Land in 2018, respectively. At Anandamaya Residences, will further strengthen its market positions and achieve the 40%-owned joint venture project with affiliate Astra long-term success. Going forward, the Group’s strong International, the construction work of the 509-unit balance sheet, disciplined investment approach and luxury apartments is well underway and targeted to well established market presence in Greater China complete in 2018. At the end of 2016, 92% of the units and Southeast Asia position it well to take advantage have been pre-sold. of expansion opportunities. In September 2016, the Group entered into a 50%-owned joint venture arrangement with Astra International to form Astra Land in Indonesia, with the intention to jointly pursue primarily residential trading opportunities. Robert Wong Chief Executive 2nd March 2017 Annual Report 2016 11 Financial Review Accounting Policies The accounting policies are consistent with those of the prior year. The Directors continue to review the appropriateness of the accounting policies adopted by the Group with regard to developments in International Financial Reporting Standards. Results Underlying Profit The Group’s underlying profit attributable to shareholders in 2016 was US$848 million, down 6% from the prior year. This result can be analysed between the contribution from Commercial Property, Residential Property and unallocated expenses. Each of these items in the below The contribution from Commercial Property was US$946 million, a 1% increase on the prior year. Improved results from the Hong Kong and Singapore office portfolios, on positive rental reversions and lower vacancies respectively, were largely offset by a lower contribution from the Hong Kong retail portfolio and higher pre-opening costs at WF CENTRAL in Beijing. Another strong performance from the Hong Kong office portfolio, on higher average rents, was partially offset by a decline in contribution from the Group’s retail portfolio due to the impact of turnover rent. The Hong Kong commercial portfolio generated 84% of the profit contributed by the Group’s Commercial Property segment, marginally higher than the prior year. table includes the Group’s share of results from its In Singapore, the contribution to the Group’s Commercial associates and joint ventures. Given the significance Property segment was marginally higher in 2016 than the of the Group’s joint ventures, this provides the clearest prior year, with the benefit of higher occupancy offsetting summary of the Group’s performance during the year. the negative impact of slightly lower rents. Singapore Commercial Property, underlying operating profit Residential Property, underlying operating profit Corporate costs 2016 US$m 2015 US$m contributed to 13% of the Group’s Commercial Property segment, unchanged from the prior year. In mainland China, pre-letting activities at WF CENTRAL have increased as construction work progresses, 946 940 resulting in higher pre-opening expenses as compared to the prior year. The opening is scheduled for the 293 (62) 354 (60) second half of 2017. Underlying operating profit 1,177 1,234 Net financing charges and tax Non-controlling interests (316) (13) (316) (13) The contribution from Residential Property was US$293 million, a 17% decline on the prior year, predominately because of the absence of a US$63 million gain from the redevelopment of Underlying profit attributable to shareholders 848 905 The contribution from mainland China was broadly in a residential property in Hong Kong recorded in 2015. US¢ US¢ line with that of the prior year, despite lower margins and a weakening Renminbi, whilst Singapore’s contribution was moderately lower, impacted by fewer completions, Underlying earnings per share 36.03 38.44 less provision write-backs, and a weaker Singapore dollar. 12 Hongkong Land In mainland China the Group’s attributable interest in Net financing charges of US$102 million were 5% revenue, being the Group’s share of completed units lower than the prior year primarily due to lower average handed over to customers, increased by 34% compared net borrowings. The tax charge, which includes Land Appreciation Tax at the Group’s residential projects in mainland China, increased by 3% to US$214 million, with the effective tax rate of 19.7% unchanged from the prior year. The higher tax charge on lower earnings in 2016 is mainly due to the non-taxable gain recorded in 2015 arising from the redevelopment of a residential property in Hong Kong. Non-Trading Items In 2016, the Group had net non-trading gains of US$2,498 million compared with US$1,107 million in 2015. These arose principally on revaluations of the Group’s investment properties, including its share of joint ventures, which were performed at 31st December 2016 by independent valuers. The gains on valuation came predominately from the Group’s Central office portfolio in Hong Kong due to a compression in capitalisation rates and an increase in open market rents. The Central portfolio increased in value by 12% to US$26.1 billion. to the prior year, though the impact of lower margins due to fewer high-rise apartments being handed over, and a weaker Renminbi, resulted in the earnings contribution being relatively flat as compared to the prior year. Revenue was recognised at 90%-owned Maple Place in Beijing with 31 units handed over (2015: 22 units); in Chongqing at 100%-owned Yorkville South with 1,155 units handed over (2015: 1,019 units), at 100%-owned Yorkville North with 767 units (2015: 724 units), at 50%-owned Bamboo Grove with 347 units (2015: 2,014 units), at 50%-owned Landmark Riverside with 216 units (2015: 161 units), for the first time at 50%-owned Central Avenue with 512 units; and at 50%-owned WE City in Chengdu with 1,069 units handed over (2015: 858 units). At MCL Land in Singapore, 2016 results were marginally higher than the prior year despite fewer completions, fewer provision write-backs, and a weaker Singapore dollar, as margins improved. During the year, one project was completed, compared to three in 2015. This was J Gateway (738 units), which was fully sold and was completed in November 2016. In 2015 the Palms @ Sixth Avenue (32 units), Ripple Bay (679 units) and Hallmark Residence (73 units) were handed over. However the overall contribution from the Group’s Singapore residential operations declined due to the absence of profits from the Marina Bay Suites development, of which all remaining units were handed over in 2015. Annual Report 2016 13 Cash Flows The Group’s consolidated cash flows are summarised as follows: Operating activities Operating profit, excluding non-trading items Net interest and tax paid Payments for residential sites Development expenditure on residential projects Proceeds from residential sales Dividends received from joint ventures Others Investing activities Major renovations capex Funding of joint ventures Advances and loan repayments from joint ventures Development expenditure Payment of deposit for a joint venture Financing activities Dividends paid by the Company Net drawdown/(repayment) of borrowings Others Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at 1st January Effect of exchange rate changes 2016 US$m 2015 US$m 971 (216) (79) (336) 953 88 (285) 1,096 (92) (104) 103 (148) (4) (245) (444) 26 (24) (442) 409 1,566 (77) 994 (253) (281) (407) 1,079 117 (353) 896 (58) (256) 391 (152) (71) (146) (445) (347) (4) (796) (46) 1,659 (47) Cash and cash equivalents at 31st December 1,898 1,566 Cash flows from operating activities in 2016 were as a deposit payment for the Margaret Drive residential US$1,096 million, an increase of 22%. The Group’s site in Singapore, and US$66 million for the final payment operating profit from its subsidiaries (excluding for the Yorkville North residential site in China, compared non-trading items) was US$971 million, 2% lower than to US$281 million in 2015. In 2016, development the prior year. This was largely due to lower underlying expenditure on residential projects decreased by 17% profits, reflecting the absence of a gain from the to US$336 million. Proceeds from residential sales redevelopment of a residential property in Hong Kong were lower at US$953 million in 2016 compared to recorded in 2015. Net interest paid of US$75 million was US$1,079 million in 2015. Dividends received from US$3 million lower than in 2015 due to lower average joint ventures in 2016 totalled US$88 million, compared net debt. Tax paid of US$141 million was US$34 million with US$117 million in the prior year, primarily due to lower than the prior year principally as a result of timing dividends received in 2015 in relation to the completion differences. In 2016, US$79 million was paid for of Marina Bay Suites in Singapore. residential development sites, being US$13 million 14 Hongkong Land Financial Review Under investing activities in 2016, the Group had outflows of US$245 million, compared to outflows of US$146 million in the prior year. Capital expenditure of US$92 million related to major renovations, principally in respect of the Hong Kong Central portfolio. Funding of the Group’s joint venture projects totalled US$104 million. This included investments of US$71 million in the 50%-owned WE City residential project in Chengdu, and US$29 million in the 25%-owned Jakata Garden City residential project in Indonesia. Also, under investing activities in 2016, the Group received US$103 million of advances and loan repayments from joint ventures, Dividends The Board is recommending a final dividend of US¢13.00 per share for 2016, providing a total annual dividend of US¢19.00 per share, unchanged from 2015. The final dividend will be payable on 11th May 2017, subject to approval at the Annual General Meeting to be held on 3rd May 2017, to shareholders on the register of members at the close of business on 17th March 2017. No scrip alternative is being offered in respect of the dividend. Treasury Policy primarily from the Group’s residential projects in The Group manages its treasury activities within mainland China. This compared to US$391 million established risk management objectives and policies in 2015. Development expenditure of US$148 million using a variety of techniques and instruments. The main was principally for the WF CENTRAL project in Beijing. objectives are to manage exchange, interest rate and liquidity risks and to provide a degree of certainty in respect of costs. The investment of the Group’s cash balances is managed so as to minimise risk while seeking to enhance yield. The Group’s Treasury operations are managed as cost centres and are not permitted to undertake speculative transactions unrelated to underlying financial exposures. Appropriate credit guidelines are in place to manage counterparty credit risk. When economically sensible to do so, borrowings are taken in local currencies to hedge foreign currency exposures on investments. A portion of borrowings is denominated in fixed rates. Adequate headroom in committed facilities is maintained to facilitate the Group’s capacity to pursue new investment opportunities and to provide some protection against market uncertainties. Under financing activities, the Company paid dividends of US$444 million, being the 2015 final dividend of US¢13.00 per share and the 2016 interim dividend of US¢6.00 per share. Also, the Group had a net drawdown of borrowings of US$26 million. The Group’s year end cash and cash equivalents totalled US$1.9 billion. At 31st December 2016, the Group’s net debt was US$2.0 billion, down from US$2.3 billion at the beginning of the year. Year-end debt summary* 2016 US$m 1,507 1,248 675 139 78 265 5 2015 US$m 1,510 1,253 575 141 257 174 – 3,917 1,909 3,910 1,569 2,008 2,341 US$ bonds/notes HK$ bonds/notes HK$ bank loans S$ bonds/notes S$ bank loans RMB bank loans PHP bank loans Gross debt Cash Net debt * Before currency swaps Annual Report 2016 15 Funding The Group is well financed with strong liquidity. Net gearing was 6% at 31st December 2016, down from 8% at the end of 2015. Interest cover, calculated as the underlying operating profits, including the Group’s share of associates and joint ventures’ operating profits, divided by net financing charges including the Group’s share of associates and joint ventures’ net financing charges, was 11.5 times, in line with 2015. 13% 11% 10% 8% 6% 2012 2013 2014 2015 2016 Net debt Equity Net debt as a percentage of equity Both Moody’s and Standard & Poor’s have maintained their credit ratings of Hongkong Land Holdings Limited at A3 and A respectively. The average tenor of the Group’s debt was 6.4 years at 31st December 2016, down from 7.2 years at 2015 year end due to the absence of new long-dated financing. Approximately 44% of the Group’s borrowings were at floating rates and the remaining 56% were either fixed rate borrowings or covered by interest rate hedges with major credit worthy financial institutions, in line with the end of 2015. 16 Hongkong Land Interest rate 56% Fixed 44% Floating Currency Maturity 84% HK$ 9% S$ 7% RMB 62% >5 years 23% 2-5 years 9% 1-2 years 6% <1 year Debt profile at 31st December 2016 At 31st December 2016, the Group had total committed lines of approximately US$6.5 billion. Of these lines, 56% were sourced from banks with the remaining 44% from the capital markets. At the end of 2016, the Group had drawn US$3.9 billion of these lines leaving US$2.6 billion of committed, but unused, facilities. Adding the Group’s year end cash balances, the Group had overall liquidity at 31st December 2016 of US$4.5 billion, up from US$4.1 billion at the end of 2015. 3,592 1,086 882 663 294 2017 2018 2019 2020 2021 & beyond Committed facility maturity at 31st December 2016 (US$m) Financial Review Gross Assets The Group’s gross assets, including its share of joint ventures, (excluding cash balances) is analysed below, by activity and by location. 91% Commercial 9% Residential 91% Commercial 9% Residential Gross assets by activity 78% Hong Kong 13% Southeast Asia 78% Hong Kong 9% Mainland China and Macau 13% Southeast Asia 9% Mainland China and Macau Gross assets by location Principal Risks and Uncertainties A review of the principal risks and uncertainties facing the Group is set out on page 74. Simon Dixon Chief Financial Officer 2nd March 2017 Annual Report 2016 17 Directors’ Profiles Ben Keswick* Chairman and Managing Director Mr Ben Keswick joined the Board as Managing Director Mark Greenberg Mr Greenberg joined the Board in 2006. He is group in 2012 and became Chairman in 2013. He has held a strategy director of Jardine Matheson. He had previously number of executive positions since joining the Jardine spent 16 years in investment banking with Dresdner Matheson group in 1998, including finance director and Kleinwort Wasserstein in London. He is also a director of then chief executive officer of Jardine Pacific between Jardine Matheson Limited, Dairy Farm, Jardine Cycle & 2003 and 2007 and, thereafter, group managing director Carriage and Mandarin Oriental, and a commissioner of of Jardine Cycle & Carriage until 2012. He has an MBA Astra and Bank Permata. from INSEAD. Mr Keswick is chairman of Jardine Matheson Limited and Jardine Cycle & Carriage and a commissioner of Astra. He is also chairman and managing director of Dairy Farm and Mandarin Oriental, managing director of Jardine Matheson and Jardine Strategic, and a director of Jardine Pacific and Jardine Motors. Robert Wong* Chief Executive Mr Wong joined the Board as Chief Executive in August 2016. He joined the Group in 1985 and has extensive experience in property management and development. As a director of Hongkong Land Limited since 1996, he had prime responsibility for the Group’s residential property business. He is a member of both The Royal Institution of Chartered Surveyors and The Hong Kong Institute of Surveyors. Simon Dixon* Chief Financial Officer Mr Dixon joined the Board as Chief Financial Officer in April 2016. A Chartered Accountant, he joined the Jardine Matheson group in 2006 from PricewaterhouseCoopers. He was previously finance director of Astra, prior to which he was group treasurer of Jardine Matheson from 2006 to 2010. Charles Allen-Jones Mr Allen-Jones joined the Board in 2001. He was formerly senior partner of Linklaters, where he had been a partner for 33 years until 2001. Mr Allen-Jones is a non-executive director of Jardine Strategic. Adam Keswick Mr Adam Keswick joined the Board in 2012. Having joined Jardine Matheson in 2001, he was appointed to the board in 2007 and was deputy managing director from 2012 to 2016. Mr Keswick is also deputy chairman of Jardine Lloyd Thompson and a director of Dairy Farm, Jardine Matheson, Jardine Strategic and Mandarin Oriental. He is also a director of Ferrari, and a supervisory board member of Rothschild & Co. Sir Henry Keswick Sir Henry first served on the Board of the Group’s holding company between 1970 and 1975 and was re-appointed a Director in 1988. He is chairman of Jardine Matheson, having first joined the group in 1961, and is also chairman of Jardine Strategic. He is a director of Dairy Farm and Mandarin Oriental. He is also vice chairman of the Hong Kong Association. Simon Keswick Mr Simon Keswick has been a Director of the Group’s holding company since 1983. He was Chairman of the Company from 1983 to 1988 and from 1989 to 2013. He joined the Jardine Matheson group in 1962 and is a director of Dairy Farm, Jardine Matheson, Jardine Strategic and Mandarin Oriental. Dr Richard Lee Dr Lee joined the Board in 2003. Dr Lee’s principal business interests are in the manufacturing of textiles and apparel in Southeast Asia, and he is the honorary chairman of TAL Apparel. He is also a director of Jardine Matheson and Mandarin Oriental. * Executive Director 18 Hongkong Land Anthony Nightingale Mr Nightingale joined the Board in 2006 and was Lord Sassoon, Kt Lord Sassoon joined the Board in 2013. He began his Managing Director of the Company from 2006 to 2012. career at KPMG, before joining SG Warburg (later UBS He is also a director of Dairy Farm, Jardine Cycle & Warburg) in 1985. From 2002 to 2006 he was in the Carriage, Jardine Matheson, Jardine Strategic, Mandarin United Kingdom Treasury as a civil servant, where Oriental, Prudential, Schindler, Shui On Land and Vitasoy, he had responsibility for financial services and enterprise and a commissioner of Astra. Mr Nightingale also holds policy. Following this, he chaired the Financial Action a number of senior public appointments, including acting Task Force; and conducted a review of the UK’s system as a non-official member of the Commission on Strategic of financial regulation. From 2010 to 2013 Lord Sassoon Development, a Hong Kong representative to the Asia was the first Commercial Secretary to the Treasury Pacific Economic Cooperation (APEC) Business Advisory and acted as the Government’s Front Bench Treasury Council and a director of the UK-ASEAN Business spokesman in the House of Lords. He is a director of Council. He is chairman of The Sailors Home and Dairy Farm, Jardine Lloyd Thompson, Jardine Matheson Missions to Seamen in Hong Kong. and Mandarin Oriental. He is also chairman of the China-Britain Business Council. Y.K. Pang Mr Pang has been a Director of the Company since 2007. He was Chief Executive of the Group from 2007 to James Watkins Mr Watkins joined the Board in 2009. He was a director July 2016. He is deputy managing director of Jardine and group general counsel of Jardine Matheson from Matheson, chairman of Jardine Pacific, and chairman 1997 to 2003. Mr Watkins qualified as a solicitor in 1969 and chief executive of Jardine Motors. He previously and was formerly a partner of Linklaters. He is also held a number of senior executive positions in the Jardine a director of Asia Satellite Telecommunications Holdings, Matheson group, which he joined in 1984. Mr Pang IL&FS India Realty Fund II, Jardine Cycle & Carriage and is also deputy chairman of Jardine Matheson Limited, Mandarin Oriental. and a director of Dairy Farm, Jardine Matheson (China), Jardine Strategic, Mandarin Oriental, Yonghui Superstores and Zhongsheng Group Holdings. He is chairman of the Employers’ Federation of Hong Kong and a past chairman of the Hong Kong General Chamber of Commerce. Lord Powell of Bayswater, KCMG Lord Powell rejoined the Board in 2008, having first served as a Director between 1992 and 2000. He was previously Private Secretary and adviser on foreign affairs and defence to British Prime Ministers, Baroness Thatcher and Rt Hon John Major. He is a director of LVMH Moët Hennessy Louis Vuitton, Matheson & Co, Mandarin Oriental, Northern Trust Corporation and Textron Corporation. Previously president of the China-Britain Business Council and chairman of the Singapore-British Business Council, he is currently a British Business Ambassador. He is an independent member of the House of Lords. Percy Weatherall Mr Weatherall joined the Board in 1994 and was Managing Director from 2000 to 2006. He first joined the Jardine Matheson group in 1976 and retired from executive office in 2006. He is also a director of Dairy Farm, Jardine Matheson, Jardine Strategic and Mandarin Oriental. He is chairman of Corney & Barrow and the Nith District Salmon Fishery Board. Michael Wei Kuo Wu Mr Wu joined the Board in 2012. He is chairman and managing director of Maxim’s Caterers in Hong Kong. He is also a non-executive director of Hang Seng Bank and Jardine Matheson, a council member of the Hong Kong University of Science and Technology and a member of the court of the University of Hong Kong. Annual Report 2016 19 Consolidated Profit and Loss Account for the year ended 31st December 2016 Underlying business performance Note US$m 2016 Non- trading items US$m Underlying business performance US$m Total US$m 2015 Non- trading items US$m Revenue Net operating costs Change in fair value of investment properties Asset impairment reversals Operating profit Net financing charges – financing charges – financing income Share of results of associates and joint ventures – before change in fair value of investment properties 5 6 11 11 7 8 1,993.9 (1,023.3) 970.6 – – – – – 1,993.9 (1,023.3) 1,932.1 (938.3) 970.6 993.8 – – – 2,549.9 2,549.9 1.2 1.2 – – 999.9 13.9 970.6 2,551.1 3,521.7 993.8 1,013.8 2,007.6 Total US$m 1,932.1 (938.3) 993.8 999.9 13.9 (110.4) 41.5 (114.8) 40.4 (68.9) (74.4) – – – (114.8) 40.4 (74.4) (110.4) 41.5 (68.9) 117.0 – – – – – change in fair value of investment properties 11 – (57.9) 117.0 (57.9) 140.5 – 140.5 0.2 69.0 69.2 140.7 69.0 209.7 117.0 (57.9) 59.1 Profit before tax Tax Profit after tax Attributable to: 1,018.7 2,493.2 3,511.9 1,059.9 1,083.0 2,142.9 9 (168.1) 0.8 (167.3) (150.8) 13.6 (137.2) 850.6 2,494.0 3,344.6 909.1 1,096.6 2,005.7 Shareholders of the Company Non-controlling interests 847.8 2,498.5 3,346.3 904.5 1,107.2 2,011.7 2.8 (4.5) (1.7) 4.6 (10.6) (6.0) 850.6 2,494.0 3,344.6 909.1 1,096.6 2,005.7 Earnings per share (basic and diluted) 10 36.03 142.23 38.44 US¢ US¢ US¢ US¢ 85.50 20 Hongkong Land Consolidated Statement of Comprehensive Income for the year ended 31st December 2016 Profit for the year Other comprehensive income/(expense) Items that will not be reclassified to profit or loss: Remeasurements of defined benefit plans Tax on items that will not be reclassified Items that may be reclassified subsequently to profit or loss: Net exchange translation differences Revaluation of other investments Cash flow hedges – net gain/(loss) arising during the year – transfer to profit and loss Tax relating to items that may be reclassified Share of other comprehensive expense of associates and joint ventures Other comprehensive expense for the year, net of tax Note 2016 US$m 2015 US$m 3,344.6 2,005.7 9 9 (1.2) 0.2 (1.0) (172.1) (9.1) 41.8 (2.5) 39.3 (6.5) (144.9) (293.3) (294.3) (3.4) 0.5 (2.9) (193.4) 8.3 (32.2) (2.5) (34.7) 5.8 (214.4) (428.4) (431.3) Total comprehensive income for the year 3,050.3 1,574.4 Attributable to: Shareholders of the Company Non-controlling interests 3,055.2 (4.9) 1,583.2 (8.8) 3,050.3 1,574.4 Annual Report 2016 21 Note 2016 US$m 2015 US$m 12 13 14 15 16 17 15 18 19 20 20 16 19 21 44.9 27,712.3 4,460.7 52.2 60.1 8.7 – 34.0 24,957.3 4,617.6 61.3 41.2 13.1 0.5 32,338.9 29,725.0 2,217.4 480.3 9.2 1,908.9 2,713.9 355.7 8.3 1,569.2 4,615.8 4,647.1 (1,490.3) (220.7) (80.0) (1,791.0) 2,824.8 (3,695.7) (121.5) (1.8) (30.3) (1,483.8) (168.9) (69.0) (1,721.7) 2,925.4 (3,740.8) (102.0) (0.2) (87.0) 31,314.4 28,720.4 235.3 31,059.1 31,294.4 20.0 235.3 28,449.7 28,685.0 35.4 31,314.4 28,720.4 Consolidated Balance Sheet at 31st December 2016 Net operating assets Tangible fixed assets Investment properties Associates and joint ventures Other investments Non-current debtors Deferred tax assets Pension assets Non-current assets Properties for sale Current debtors Current tax assets Bank balances Current assets Current creditors Current borrowings Current tax liabilities Current liabilities Net current assets Long-term borrowings Deferred tax liabilities Pension liabilities Non-current creditors Total equity Share capital Revenue and other reserves Shareholders' funds Non-controlling interests Approved by the Board of Directors on 2nd March 2017 Ben Keswick Robert Wong Directors 22 Hongkong Land Consolidated Statement of Changes in Equity for the year ended 31st December 2016 Share capital US$m Share premium US$m Note Revenue reserves Hedging reserves Exchange reserves Attributable to shareholders of the Company Attributable to non- controlling interests US$m US$m US$m US$m US$m Total equity US$m 2016 At 1st January Total comprehensive income Dividends paid by the Company Dividends paid to non-controlling shareholders Unclaimed dividends forfeited Change in interests in subsidiaries 22 235.3 386.9 28,205.8 (9.1) (133.9) 28,685.0 35.4 28,720.4 – – – – – – – – – – 3,336.2 27.7 (308.7) 3,055.2 (4.9) 3,050.3 (447.0) – 0.5 (1.9) – – – – – – – 2.6 (447.0) – (447.0) – 0.5 0.7 (4.2) – (4.2) 0.5 (6.3) (5.6) At 31st December 235.3 386.9 31,093.6 18.6 (440.0) 31,294.4 20.0 31,314.4 2015 At 1st January Total comprehensive income Dividends paid by the Company Dividends paid to non-controlling shareholders Unclaimed dividends forfeited 22 235.3 386.9 26,635.0 17.5 273.4 27,548.1 50.3 27,598.4 – – – – – – – – 2,017.1 (26.6) (407.3) 1,583.2 (8.8) 1,574.4 (447.0) – 0.7 – – – – – – (447.0) – (447.0) – 0.7 (6.1) – (6.1) 0.7 At 31st December 235.3 386.9 28,205.8 (9.1) (133.9) 28,685.0 35.4 28,720.4 Total comprehensive income included in revenue reserves mainly comprises profit attributable to shareholders of the Company of US$3,346.3 million (2015: US$2,011.7 million) and a fair value loss on other investments of US$9.1 million (2015: gain of US$8.3 million). The cumulative fair value gain on other investments amounted to US$14.4 million (2015: US$23.5 million). Annual Report 2016 23 Consolidated Cash Flow Statement for the year ended 31st December 2016 Operating activities Operating profit Depreciation Reversal of writedowns on properties for sale Gain on reclassification of a trading property to investment property Change in fair value of investment properties Asset impairment reversals Decrease in properties for sale Increase in debtors (Decrease)/increase in creditors Interest received Interest and other financing charges paid Tax paid Dividends from associates and joint ventures Cash flows from operating activities Investing activities Major renovations expenditure Developments capital expenditure Investments in and loans to associates and joint ventures Advances and repayments from associates and joint ventures Payment of deposit for a joint venture Cash flows from investing activities Financing activities Drawdown of borrowings Repayment of borrowings Dividends paid by the Company Dividends paid to non-controlling shareholders Change in interests in subsidiaries Cash flows from financing activities Net cash inflow/(outflow) Cash and cash equivalents at 1st January Effect of exchange rate changes Note 6 6 12 23a 2016 US$m 2015 US$m 3,521.7 2,007.6 3.1 (3.2) – (2,549.9) (1.2) 392.4 (131.7) (7.5) 36.4 (111.4) (140.6) 88.1 1,096.2 (91.3) (148.2) (104.2) 102.8 (4.2) (245.1) 266.7 (240.6) (443.8) (4.2) (20.2) (442.1) 409.0 1,565.9 (76.5) 2.9 (21.4) (63.2) (999.9) (13.9) 45.2 (13.3) 88.0 41.2 (118.9) (174.8) 116.7 896.2 (57.8) (152.3) (255.8) 390.9 (70.9) (145.9) 229.1 (575.7) (444.9) (4.4) – (795.9) (45.6) 1,658.6 (47.1) Cash and cash equivalents at 31st December 23b 1,898.4 1,565.9 24 Hongkong Land Notes to the Financial Statements 1 Principal Accounting Policies Basis of preparation The financial statements have been prepared in accordance with International Financial Reporting Standards (’IFRS’), including International Accounting Standards (’IAS’) and Interpretations adopted by the International Accounting Standards Board. The financial statements have been prepared on a going concern basis and under the historical cost convention except as disclosed in the accounting policies below. Amendments effective in 2016 which are relevant to the Group’s operations Amendments to IFRS 11 Amendments to IAS 1 Amendments to IAS 16 and IAS 38 Annual Improvements to IFRSs Accounting for Acquisitions of Interests in Joint Operations Disclosure Initiative: Presentation of Financial Statements Clarification of Acceptable Methods of Depreciation and Amortisation 2012 – 2014 Cycle The adoption of these amendments does not have a material impact on the Group’s accounting policies and disclosures. New standards and amendments effective after 2016 which are relevant to the Group’s operations and yet to be adopted Certain new standards and amendments, which are effective after 2016, have been published and will be adopted by the Group from their effective dates. The Group is currently assessing the potential impact of these standards and amendments but expects their adoption will not have a significant effect on the Group’s consolidated financial statements except as set out below. IFRS 9 ’Financial Instruments’ (effective for accounting periods beginning on or after 1st January 2018), which replaces IAS 39 ’Financial Instruments: Recognition and Measurement’, addresses the classification and measurement of financial assets and liabilities and includes a new expected credit losses model for financial assets that replaces the incurred loss impairment model used today. A substantially-reformed approach to hedging accounting is introduced. It also carries forward the guidance on recognition and derecognition of financial instruments from IAS 39. The Group does not expect the new guidance to have a significant impact on the classification and measurement of its financial assets and financial liabilities. While the Group is still assessing the impact of how its impairment provisions would be affected by the new impairment model, it may result in an earlier recognition of credit losses. The new hedge accounting rules will align the accounting for hedging instruments closely with the Group’s risk management practices. Nevertheless, the Group does not expect a significant impact on the accounting for its hedging relationships. IFRS 15 ’Revenue from Contracts with Customers’ (effective for accounting periods beginning on or after 1st January 2018), establishes a comprehensive framework for determining when to recognise revenue and how much revenue to recognise. lFRS 15 replaces IAS 11 ’Construction Contracts’ and IAS 18 ’Revenue’ which covers contracts for goods and services. The core principle in that framework is that revenue is recognised when control of a good or service transfers to a customer. The new standard will also result in new disclosure requirements on revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue) and improve guidance for multiple-element arrangements. The new standard may change the revenue recognition on certain property sales from completion method to percentage of completion method. At this stage, the Group is still assessing the impact of the new rules on the Group’s financial statements. IFRS 16 ’Leases’ (effective for accounting periods beginning on or after 1st January 2019) replaces IAS 17 ’Leases’ and related interpretations. It will result in lessees bringing almost all their leases onto the balance sheet as the distinction between operating leases and finance leases is removed. The model requires a lessee to recognise a right-of-use asset (the right to use the underlying leased asset) and a lease liability (the obligation to make lease payments) except for leases with a term of less than 12 months or with low-value. The accounting for lessors will not change significantly. IFRS 16 will affect primarily the accounting for the Group’s operating leases. The Group is yet to undertake a detailed assessment on how the new lease model will affect the Group’s profit, classification of cash flows and balance sheet position. The principal operating subsidiaries, associates and joint ventures have different functional currencies in line with the economic environments of the locations in which they operate. The functional currency of the Company is United States dollars. The consolidated financial statements are presented in United States dollars. The Group’s reportable segments are set out in Note 4. Annual Report 2016 25 1 Principal Accounting Policies continued Basis of consolidation i) The consolidated financial statements include the financial statements of the Company, its subsidiaries, and the Group’s interests in associates and joint ventures. ii) A subsidiary is an entity over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition includes the fair value at the acquisition date of any contingent consideration. The Group recognises the non-controlling interest’s proportionate share of the recognised identifiable net assets of the acquired subsidiary. In a business combination achieved in stages, the Group remeasures its previously held interest in the acquiree at its acquisition-date fair value and recognised the resulting gain or loss in profit and loss. Changes in a parent’s ownership interest in a subsidiary that do not result in the loss of control are accounted for as equity transactions. When control over a previous subsidiary is lost, any remaining interest in the entity is remeasured at fair value and the resulting gain or loss is recognised in profit and loss. All material intercompany transactions, balances and unrealised surpluses and deficits on transactions between Group companies have been eliminated. iii) An associate is an entity, not being a subsidiary or joint venture, over which the Group exercises significant influence. A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. Associates and joint ventures are included on the equity basis of accounting. Profits and losses resulting from upstream and downstream transactions between the Group and its associates and joint ventures are recognised in the consolidated financial statements only to the extent of unrelated investor’s interests in the associates and joint ventures. iv) Non-controlling interests represent the proportion of the results and net assets of subsidiaries and their associates and joint ventures not attributable to the Group. v) The results of subsidiaries, associates and joint ventures are included or excluded from their effective dates of acquisition or disposal respectively. The results of entities other than subsidiaries, associates and joint ventures are included to the extent of dividends received when the right to receive such dividend is established. Foreign currencies Transactions in foreign currencies are accounted for at the exchange rates ruling at the transaction dates. Assets and liabilities of subsidiaries, associates and joint ventures, together with all other monetary assets and liabilities expressed in foreign currencies, are translated into United States dollars at the rates of exchange ruling at the year end. Results expressed in foreign currencies are translated into United States dollars at the average rates of exchange ruling during the year, which approximate the exchange rates at the dates of the transactions. Exchange differences arising from the retranslation of the net investment in foreign subsidiaries, associates and joint ventures, and of financial instruments which are designated as hedges of such investments, are recognised in other comprehensive income and accumulated in equity under exchange reserves. On the disposal of these investments, such exchange differences are recognised in profit and loss. Exchange differences on available-for-sale investments are recognised in other comprehensive income as part of the gains and losses arising from changes in their fair value. Exchange differences relating to changes in the amortised cost of monetary securities classified as available-for-sale and all other exchange differences are recognised in profit and loss. Goodwill and fair value adjustments arising on acquisition of a foreign entity after 1st January 2003 are treated as assets and liabilities of the foreign entity and translated into United States dollars at the rate of exchange ruling at the year end. 26 Hongkong Land Notes to the Financial Statements 1 Principal Accounting Policies continued Impairment of non-financial assets Assets that have indefinite useful lives are not subject to amortisation and are tested for impairment annually and whenever there is an indication that the assets may be impaired. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For the purpose of assessing impairment, assets are grouped at the lowest level for which there is separately identifiable cash flows. Cash-generating units or groups of cash-generating units to which goodwill has been allocated are tested for impairment annually and whenever there is an indication that the units may be impaired. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of an asset’s fair value less costs to sell and value in use. Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment annually. Goodwill Goodwill represents the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the acquisition-date fair value of any previously held equity interest in the acquiree over the acquisition-date fair value of the Group’s share of the net identifiable assets acquired. Non-controlling interests are measured at their proportionate share of the net identifiable assets at the acquisition date. If the cost of acquisition is less than the fair value of the net assets acquired, the difference is recognised directly in profit and loss. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of associates and joint ventures is included in investment in associates and joint ventures. Goodwill is allocated to cash-generating units or groups of cash-generating units for the purpose of impairment testing and is carried at cost less accumulated impairment loss. The profit or loss on disposal of subsidiaries, associates and joint ventures includes is stated after deducting the carrying amount of goodwill relating to the entity sold. Leasehold land Leasehold land represents payments to third parties to acquire short-term interests in property. These payments are stated at cost and are amortised over the useful life of the lease which includes the renewal period if the lease can be renewed by the Group without significant cost. Tangible fixed assets and depreciation Long-term interests in leasehold land are classified as finance leases and grouped under tangible fixed assets if substantially all risks and rewards relating to the land have been transferred to the Group, and are amortised over the useful life of the lease. Grants related to tangible assets are deducted in arriving at the carrying amount of the assets. The building component of owner-occupied leasehold properties are stated at cost less accumulated depreciation and impairment. Other tangible fixed assets are stated at cost less amounts provided for depreciation. Depreciation of tangible fixed assets is calculated on the straight line basis to allocate the cost or valuation of each asset to its residual value over its estimated useful life. The residual values and useful lives are reviewed at each balance sheet date. The estimated useful lives are as follows: Furniture, equipment and motor vehicles Leasehold land 3 – 10 years period of the lease Where the carrying amount of a tangible fixed asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. The profit or loss on disposal of tangible fixed assets is recognised by reference to their carrying amount. Annual Report 2016 27 1 Principal Accounting Policies continued Investment properties Properties including those under operating leases which are held for long-term rental yields or capital gains are classified and accounted for as investment properties, but the business model does not necessarily envisage that the properties will be held for their entire useful life. Investment properties are carried at fair value, representing estimated open market value determined annually by independent qualified valuers who have recent experience in the location and category of the investment property being valued. The market value of commercial properties are calculated on the discounted net rental income allowing for reversionary potential. The market value of residential properties are arrived at by reference to market evidence of transaction prices for similar properties. Changes in fair value are recognised in profit and loss. Investments Investments are classified by management as available for sale or held to maturity on initial recognition. Available-for-sale investments are shown at fair value. Gains and losses arising from changes in the fair value are recognised in other comprehensive income and accumulated in equity. On the disposal of an investment or when an investment is determined to be impaired, the cumulative gain or loss previously deferred in equity is recognised in profit and loss. Held-to-maturity investments are shown at amortised cost. Investments are classified under non-current assets unless they are expected to be realised within 12 months after the balance sheet date. At each balance sheet date, the Group assesses whether there is objective evidence that an investment is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired and are recognised in profit and loss. All purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the investment. Leases Leases are classified as finance leases when the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit and loss on a straight line basis over the period of the lease. When a lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the year in which termination takes place. Properties for sale Properties for sale, which comprise land and buildings held for resale, are stated at the lower of cost and net realisable value. The cost of properties for sale comprises land cost, and construction and other development costs. Debtors Debtors, excluding derivative financial instruments, are measured at amortised cost except where the effect of discounting would be immaterial. Provision for impairment is established when there is objective evidence that the outstanding amounts will not be collected. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the debtor is impaired. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in arriving at operating profit. When a debtor is uncollectible, it is written off against the allowance account. Subsequent recoveries of amount previously written off are credited to profit and loss. Debtors with maturities greater than 12 months after the balance sheet date are classified under non-current assets. Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise deposits with banks and financial institutions, and bank and cash balances, net of bank overdrafts. In the balance sheet, bank overdrafts are included in current borrowings. 28 Hongkong Land Notes to the Financial Statements 1 Principal Accounting Policies continued Provisions Provisions are recognised when the Group has present legal or constructive obligations as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligations, and a reliable estimate of the amount of the obligations can be made. Borrowings and borrowing costs Borrowings are initially recognised at fair value, net of transaction costs incurred. In subsequent periods, borrowings are stated at amortised cost using the effective interest method. Borrowing costs relating to major development projects are capitalised until the asset is substantially completed. Capitalised borrowing costs are included as part of the cost of the asset. All other borrowing costs are expensed as incurred. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Current and deferred tax The tax expense for the year comprises current and deferred tax. Tax is recognised in profit and loss, except to the extent that it relates to items recognised in other comprehensive income or direct in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Group operates and generates taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred tax is provided, using the liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying values. Deferred tax is determined using tax rates and laws that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Provision for deferred tax is made on the revaluation of certain non-current assets and, in relation to acquisitions, on the difference between the fair value of the net assets acquired and their tax base. Deferred tax is provided on temporary differences associated with investments in subsidiaries, associates and joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets relating to the carry forward of unused tax losses are recognised to the extent that it is probable that future taxable profit will be available against which the unused tax losses can be utilised. Pension obligations The Group operates a number of defined benefit and defined contribution plans, the assets of which are held in trustee administered funds. Pension accounting costs for defined benefit plans are assessed using the projected unit credit method. Under this method, the costs of providing pensions are charged to profit and loss spreading the regular cost over the service lives of employees in accordance with the advice of qualified actuaries, who carry out a full valuation of major plans every year. The pension obligations are measured as the present value of the estimated future cash outflows by reference to market yields on high quality corporate bonds which have terms to maturity approximating the terms of the related liability. Plan assets are measured at fair value. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in other comprehensive income in the year in which they occur. Past service costs are recognised immediately in profit and loss. The Group’s total contributions relating to the defined contribution plans are charged to profit and loss in the year to which they relate. Annual Report 2016 29 1 Principal Accounting Policies continued Derivative financial instruments The Group only enters into derivative financial instruments in order to hedge underlying exposures. Derivative financial instruments are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss is dependent on the nature of the item being hedged. The Group designates certain derivatives as a hedge of the fair value of a recognised asset or liability (fair value hedge), or a hedge of a forecast transaction or of the foreign currency risk on a firm commitment (cash flow hedge), or a hedge of a net investment in a foreign entity. Changes in the fair value of derivatives that are designated and qualify as fair value hedges and that are highly effective, are recognised in profit and loss, along with any changes in the fair value of the hedged asset or liability that is attributable to the hedged risk. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, the cumulative adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to profit and loss over the residual period to maturity. Changes in the fair value of derivatives that are designated and qualify as cash flow hedges and that are highly effective, are recognised in other comprehensive income and accumulated in equity under hedging reserves. Changes in the fair value relating to the ineffective portion is recognised immediately in profit and loss. Where the forecast transaction or firm commitment results in the recognition of a non-financial asset or of a non-financial liability, the gains and losses previously deferred in hedging reserves are transferred from hedging reserves and included in the initial measurement of the cost of the asset or liability. Otherwise, amounts deferred in hedging reserves are transferred to profit and loss in the same periods during which the hedged firm commitment or forecast transaction affects profit and loss. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in hedging reserves at that time remains in the hedging reserves and is recognised when the committed or forecast transaction ultimately is recognised in profit and loss. When a committed or forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in hedging reserves is immediately transferred to profit and loss. Certain derivative transactions, while providing effective economic hedges under the Group’s risk management policies, do not qualify for hedge accounting under the specific rules in IAS 39. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting under IAS 39 are recognised immediately in profit and loss. Hedges of net investments in foreign entities are accounted for on a similar basis to that used for cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in other comprehensive income and accumulated in exchange reserves; the gain or loss relating to the ineffective portion is recognised immediately in profit and loss. The fair value of derivatives which are designated and qualify as effective hedges are classified as non-current assets or liabilities if the remaining maturities of the hedged assets or liabilities are greater than 12 months after the balance sheet date. Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the company or the counterparty. 30 Hongkong Land Notes to the Financial Statements 1 Principal Accounting Policies continued Non-trading items Non-trading items are separately identified to provide greater understanding of the Group’s underlying business performance. Items classified as non-trading items include fair value gains or losses on revaluation of investment properties; gains and losses arising from the sale of businesses, investments and investment properties; impairment of non-depreciable intangible assets and other investments; provisions for the closure of businesses; acquisition-related costs in business combinations; and other credits and charges of a non-recurring nature that require inclusion in order to provide additional insight into underlying business performance. Earnings per share Earnings per share are calculated on profit attributable to shareholders and on the weighted average number of shares in issue during the year. Dividends Dividends proposed or declared after the balance sheet date are not recognised as a liability at the balance sheet date. Revenue recognition Revenue is measured at the fair value of the consideration received and receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts and sales related taxes. i) Revenue from sale of properties is recognised on the transfer of significant risks and rewards of ownership, which generally coincides with the time when the properties are delivered to customers. ii) Receipts under operating leases are accounted for on an accrual basis over the lease terms. iii) Revenue from rendering of services is recognised when services are performed, provided that the amount can be measured reliably. iv) Dividend income is recognised when the right to receive payment is established. v) Interest income is recognised on a time proportion basis taking into account the principal amounts outstanding and the interest rates applicable. Pre-operating costs Pre-operating costs are expensed as they are incurred. 2 Financial Risk Management Financial risk factors The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk, interest rate risk and price risk), credit risk and liquidity risk. The Group’s treasury function co-ordinates, under the directions of the board of Hongkong Land Limited, financial risk management policies and their implementation on a group-wide basis. The Group’s treasury policies are designed to manage the financial impact of fluctuations in interest rates and foreign exchange rates and to minimise the Group’s financial risks. The Group uses derivative financial instruments, principally interest rate swaps, cross-currency swaps and forward foreign exchange contracts as appropriate for hedging transactions and managing the Group’s assets and liabilities in accordance with the Group’s financial risk management policies. Financial derivative contracts are executed between third party banks and the Group entity that is directly exposed to the risk being hedged. Certain derivative transactions, while providing effective economic hedges under the Group’s risk management policies, do not qualify for hedge accounting under the specific rules in IAS 39. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting under IAS 39 are recognised immediately in profit and loss account. It is the Group’s policy not to enter into derivative transactions for speculative purposes. The notional amounts and fair values of derivative financial instruments at 31st December 2016 are disclosed in Note 24. Annual Report 2016 31 2 Financial Risk Management continued Financial risk factors continued i) Market risk Foreign exchange risk Entities within the Group are exposed to foreign exchange risk from future commercial transactions, net investments in foreign operations and net monetary assets and liabilities that are denominated in a currency that is not the entity’s functional currency. Entities in the Group use cross-currency swaps and forward foreign exchange contracts in a consistent manner to hedge firm and anticipated foreign exchange commitments and manage their foreign exchange risk arising from future commercial transactions. The Group does not usually hedge its net investments in foreign operations except in circumstances where there is a material exposure arising from a currency that is anticipated to be volatile and the hedging is cost effective. Group entities are required to manage their foreign exchange risk against their functional currency. Foreign currency borrowings are swapped into the entity’s functional currency using cross-currency swaps except where the foreign currency borrowings are repaid with cash flows generated in the same foreign currency. The purpose of these hedges is to mitigate the impact of movements in foreign exchange rates on assets and liabilities and the profit and loss account of the Group. Currency risks as defined by IFRS 7 arise on account of monetary assets and liabilities being denominated in a currency that is not the functional currency. At 31st December 2016, there are no significant monetary balances held by group companies that are denominated in a non-functional currency other than the cross-currency swap contracts with contract amounts of US$1,637 million (2015: US$1,640 million). Differences resulting from the translation of financial statements into the Group’s presentation currency are not taken into consideration. Since the Group manages the interdependencies between foreign exchange risk and interest rate risk of foreign currency borrowings using cross-currency swaps, the sensitivity analysis on financial impacts arising from cross-currency swaps is included in the sensitivity assessment on interest rates under the interest rate risk section. Interest rate risk The Group is exposed to interest rate risk through the impact of rate changes on interest bearing liabilities and assets. These exposures are managed partly by using natural hedges that arise from offsetting interest rate sensitive assets and liabilities, and partly through fixed rate borrowings and the use of derivative financial instruments such as interest rate swaps. The Group monitors interest rate exposure on a monthly basis by currency and business unit, taking into consideration proposed financing and hedging arrangements. The Group’s guideline is to maintain 40% to 60% of its gross borrowings in fixed rate instruments. At 31st December 2016, the Group’s interest rate hedge was 56% (2015: 56%) with an average tenor of eight years (2015: nine years). The interest rate profile of the Group’s borrowings after taking into account hedging transactions are set out in Note 20. Cash flow interest rate risk is the risk that changes in market interest rates will impact cash flows arising from variable rate financial instruments. Borrowings at floating rates therefore expose the Group to cash flow interest rate risk. The Group manages this risk by using forward rate agreements to a maturity of one year, and by entering into interest rate swaps for a maturity of generally up to five years or longer to match the maturity of the underlying exposure. Forward rate agreements and interest rate swaps have the economic effect of converting borrowings from floating rates to fixed rates. Fair value interest rate risk is the risk that the value of a financial asset or liability and derivative financial instrument will fluctuate because of changes in market interest rates. The Group manages its fair value interest rate risk by entering into interest rate swaps which have the economic effect of converting borrowings from fixed rates to floating rates, to maintain the Group’s fixed rate instruments within the Group’s guideline. 32 Hongkong Land Notes to the Financial Statements 2 Financial Risk Management continued Financial risk factors continued i) Market risk continued Interest rate risk continued At 31st December 2016, if interest rates had been 100 basis points higher/lower with all other variables held constant, the Group’s profit after tax would have been US$8 million (2015: US$3 million) higher/lower and hedging reserve would have been US$59 million (2015: US$73 million) higher/lower, as a result of fair value changes to cash flow hedges. The sensitivity analysis has been determined assuming that the change in interest rates had occurred at the balance sheet date and had been applied to the exposure to interest rate risk for both derivative and non-derivative financial instruments in existence at that date. The 100 basis point increase or decrease represents management’s assessment of a reasonably possible change in those interest rates which have the most impact on the Group, specifically the United States, Hong Kong and Singapore rates, over the period until the next annual balance sheet date. In the case of effective fair value hedges, changes in fair value of the hedged item caused by interest rate movements balance out in profit and loss account against changes in the fair value of the hedging instruments. Changes in market interest rates affect the interest income or expense of non-derivative variable-interest financial instruments, the interest payments of which are not designated as hedged items of cash flow hedges against interest rate risks. As a consequence, they are included in the calculation of profit after tax sensitivities. Changes in the market interest rate of financial instruments that were designated as hedging instruments in a cash flow hedge to hedge payment fluctuations resulting from interest rate movements affect the hedging reserves and are therefore taken into consideration in the equity-related sensitivity calculations. Price risk The Group is exposed to securities price risk because of listed investments which are available for sale and held by the Group at fair value. Gains and losses arising from changes in the fair value of available-for-sale investments are recognised in other comprehensive income. The performance of the Group’s listed and unlisted available-for-sale investments are monitored regularly, together with an assessment of their relevance to the Group’s long term strategic plans. Details of the Group’s available-for-sale investments are contained in Note 14. Available-for-sale investments are unhedged. At 31st December 2016, if the price of listed available-for-sale investments had been 25% higher/lower with all other variables held constant, total equity would have been US$13 million (2015: US$15 million) higher/lower unless impaired. The sensitivity analysis has been determined based on a reasonable expectation of possible valuation volatility over the next 12 months. ii) Credit risk The Group’s credit risk is primarily attributable to deposits with banks, credit exposures to customers and derivative financial instruments with a positive fair value. The Group has credit policies in place and the exposures to these credit risks are monitored on an ongoing basis. The Group manages its deposits with banks and financial institutions and transactions involving derivative financial instruments by monitoring credit ratings and capital adequacy ratios of counterparties, and limiting the aggregate risk to any individual counterparty. The utilisation of credit limits is regularly monitored. At 31st December 2016, 83% (2015: 82%) of deposits and balances with banks and financial institutions were made to institutions with Moody’s credit ratings of no less than A3, 11% (2015: 16%) at Baa1 and 6% (2015: 2%) at Baa2 or below. Similarly transactions involving derivative financial instruments are with banks with sound credit ratings and capital adequacy ratios. In developing countries it may be necessary to deposit money with banks that have a lower credit rating, however the Group only enters into derivative transactions with counterparties which have credit ratings of at least investment grade. Management does not expect any counterparty to fail to meet its obligations. In respect of credit exposures to customers, the Group has policies in place to ensure that investment properties are leased principally to corporate companies with appropriate credit history, and rental deposits in the form of cash or bank guarantee are usually received from tenants. The Group receives progress payments from sales of residential properties to individual customers prior to the completion of transactions. In the event of default by customers, the Group undertakes legal proceedings to recover the property. Amounts due from associates and joint ventures are generally supported by the underlying assets. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet after deducting any impairment allowance. Annual Report 2016 33 2 Financial Risk Management continued Financial risk factors continued iii) Liquidity risk Prudent liquidity risk management includes managing the profile of debt maturities and funding sources, maintaining sufficient cash and marketable securities, and ensuring the availability of funding from an adequate amount of committed credit facilities and the ability to close out market positions. The Group’s ability to fund its existing and prospective debt requirements is managed by maintaining diversified funding sources with adequate committed funding lines from high quality lenders, and by monitoring rolling short-term forecasts of the Group’s cash and gross debt on the basis of expected cash flows. In addition long-term cash flows are projected to assist with the Group’s long-term debt financing plans. At 31st December 2016, total committed and uncommitted borrowing facilities amounted to US$6,662 million (2015: US$6,606 million) of which US$3,917 million (2015: US$3,910 million) was drawn down. Undrawn committed facilities, in the form of revolving credit and term loan facilities, totalled US$2,607 million (2015: US$2,554 million). The following table analyses the Group’s non-derivative financial liabilities, net-settled derivative financial liabilities and gross-settled financial instruments into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. Derivative financial liabilities are included in the analysis if their contractual maturities are essential for an understanding of the timing of the cash flows. The amounts disclosed in the table are the contractual undiscounted cash flows. Within one year US$m Between one and two years US$m Between two and three years US$m Between three and four years US$m Between four and five years US$m Beyond five years US$m Total undiscounted cash flows US$m 374.0 508.9 486.5 8.9 559.2 10.3 474.7 1.7 240.8 2,788.6 4,923.8 0.2 3.3 533.3 74.0 63.6 74.0 63.6 317.1 482.3 350.3 7.1 150.9 137.7 411.1 7.3 132.9 122.1 546.1 4.3 68.0 59.4 1,655.0 1,643.9 2,154.8 2,090.3 475.0 2,922.8 5,022.4 0.2 45.1 546.3 74.0 60.6 74.0 60.6 74.0 60.6 150.9 136.3 132.9 120.1 1,724.0 1,691.5 2,229.8 2,129.7 2016 Borrowings Creditors Gross settled derivative financial instruments – inflow – outflow 2015 Borrowings Creditors Gross settled derivative financial instruments – inflow – outflow 34 Hongkong Land Notes to the Financial Statements 2 Financial Risk Management continued Capital management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern whilst seeking to maximise benefits to shareholders and other stakeholders. Capital is equity as shown in the consolidated balance sheet plus net debt. The Group actively and regularly reviews and manages its capital structure to ensure optimal capital structure and shareholder returns, taking into consideration the future capital requirements of the Group and capital efficiency, prevailing and projected profitability, projected operating cash flows, projected capital expenditures and projected strategic investment opportunities. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, purchase Group shares, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group monitors capital on the basis of the Group’s consolidated gearing ratio and consolidated interest cover. The gearing ratio is calculated as net debt divided by total equity. Net debt is calculated as total borrowings less bank balances. Interest cover is calculated as underlying operating profit and the Group’s share of underlying operating profit of associates and joint ventures divided by net financing charges including the Group’s share of net financing charges within associates and joint ventures. The Group does not have a defined gearing or interest cover benchmark or range. The ratios at 31st December 2016 and 2015 are as follows: Gearing ratio (%) Interest cover (times) Fair value estimation 2016 6 12 2015 8 12 i) Financial instruments that are measured at fair value For financial instruments that are measured at fair value in the balance sheet, the corresponding fair value measurements are disclosed by level of the following fair value measurement hierarchy: a) Quoted prices (unadjusted) in active markets for identical assets or liabilities (’quoted prices in active markets’) The fair value of listed securities, which are classified as available-for-sale, is based on quoted prices in active markets at the balance sheet date. The quoted market price used for listed investments held by the Group is the current bid price. b) Inputs other than quoted prices in active markets that are observable for the asset or liability, either directly or indirectly (’observable current market transactions’) The fair values of derivative financial instruments are determined using rates quoted by the Group’s bankers at the balance sheet date. The rates for interest rate swaps and forward foreign exchange contracts are calculated by reference to market interest rates and foreign exchange rates. There were no changes in valuation techniques during the year. Annual Report 2016 35 2 Financial Risk Management continued Fair value estimation continued i) Financial instruments that are measured at fair value continued The table below analyses financial instruments carried at fair value, by the levels in the fair value measurement hierarchy. 2016 Assets Available-for-sale financial assets – listed securities Derivative designated at fair value – through other comprehensive income – through profit and loss Liabilities Derivative designated at fair value – through profit and loss 2015 Assets Available-for-sale financial assets – listed securities Derivative designated at fair value – through other comprehensive income – through profit and loss Liabilities Derivative designated at fair value – through other comprehensive income – through profit and loss Quoted prices in active markets US$m Observable current market transactions US$m 52.2 – – 52.2 – 28.0 16.5 44.5 Total US$m 52.2 28.0 16.5 96.7 – (7.6) (7.6) 61.3 – – 61.3 – – – – 4.4 22.3 26.7 61.3 4.4 22.3 88.0 (18.0) (6.8) (18.0) (6.8) (24.8) (24.8) There were no transfers among the two categories during the year ended 31st December 2016. 36 Hongkong Land Notes to the Financial Statements 2 Financial Risk Management continued Fair value estimation continued ii) Financial instruments that are not measured at fair value The fair values of current debtors, bank balances, current creditors and current borrowings are assumed to approximate their carrying amounts due to the short-term maturities of these assets and liabilities. The fair values of long-term borrowings are based on market prices or are estimated using the expected future payments discounted at market interest rates. Financial instruments by category The fair values of financial assets and financial liabilities, together with carrying amounts as at 31st December 2016 and 2015 are as follows: Loans and receivables US$m Derivatives used for hedging US$m Available- for-sale US$m Other financial instruments at amortised cost US$m Other financial instruments at fair value through profit and loss US$m Total carrying amount US$m Fair value US$m 2016 Assets Other investments Debtors Bank balances Liabilities Borrowings Creditors 2015 Assets Other investments Debtors Bank balances Liabilities Borrowings Creditors – 276.3 1,908.9 2,185.2 – – – – 151.9 1,569.2 1,721.1 – – – – 44.5 – 44.5 – (7.6) (7.6) – 26.7 – 26.7 – (24.8) (24.8) 52.2 – – 52.2 – – – 61.3 – – 61.3 – – – – – – – – 11.8 – 52.2 332.6 52.2 332.6 1,908.9 1,908.9 11.8 2,293.7 2,293.7 (3,916.4) (533.3) (4,449.7) – – – (3,916.4) (3,988.3) (540.9) (540.9) (4,457.3) (4,529.2) – – – – – 11.4 – 61.3 190.0 61.3 190.0 1,569.2 1,569.2 11.4 1,820.5 1,820.5 (3,909.7) (546.3) (4,456.0) – – – (3,909.7) (4,019.9) (571.1) (571.1) (4,480.8) (4,591.0) Annual Report 2016 37 3 Critical Accounting Estimates and Judgements Estimates and judgements used in preparing the financial statements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below. Acquisition of subsidiaries, associates and joint ventures The initial accounting on the acquisition of subsidiaries, associates and joint ventures involves identifying and determining the fair values to be assigned to the identifiable assets, liabilities and contingent liabilities of the acquired entities. The fair values of leasehold land, tangible assets and investment properties are determined by independent valuers by reference to market prices or present value of expected net cash flows from the assets. Any changes in the assumptions used and estimates made in determining the fair values, and management’s ability to measure reliably the contingent liabilities of the acquired entity will impact the carrying amount of these assets and liabilities. On initial acquisition or acquisition of further interests in an entity, an assessment of the level of control or influence exercised by the Group is required. For entities where the Group has a shareholding of less than 50%, an assessment of the Group’s level of voting rights, board representation and other indicators of influence is performed to consider whether the Group has de facto control, requiring consolidation of that entity, or significant influence, requiring classification as an associate. Investment properties The fair values of investment properties are determined by independent valuers on an open market for existing use basis calculated on the discounted net income allowing for reversionary potential. For investment properties in Hong Kong and Singapore, capitalisation rates in the range of 3.20% to 3.85% for office (2015: 3.50% to 4.20%) and 4.50% to 5.50% for retail (2015: 4.50% to 5.50%) are used in the fair value determination. Considerations have been given to assumptions that are mainly based on market conditions existing at the balance sheet date and appropriate capitalisation rates. These estimates are regularly compared to actual market data and actual transactions entered into by the Group. Impairment of assets The Group tests annually whether goodwill and other assets that have indefinite useful lives suffered any impairment. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset exceeds its recoverable amount. The recoverable amount of an asset or a cash generating unit is determined based on the higher of its fair value less costs to sell and its value-in-use, calculated on the basis of management’s assumptions and estimates. Changing the key assumptions, including the discount rates or the growth rate assumptions in the cash flow projections, could materially affect the value-in-use calculations. In determining when an available-for-sale equity investment is impaired, significant judgement is required. In making this judgement, the Group evaluates, among other factors, the duration and extent to which the fair value of an investment is less than its cost; and the financial health of and near-term business outlook for the investee, including factors such as industry and sector performance, changes in technology and operational and financial cash flows. Income taxes The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. Provision of deferred tax follows the way management expects to recover or settle the carrying amount of the related assets or liabilities, which the management may expect to recover through use, sale or combination of both. Accordingly, deferred tax will be calculated at income tax rate, capital gains tax rate or combination of both. There is a rebuttable presumption in International Financial Reporting Standards that investment properties measured at fair value are recovered through sale. Thus deferred tax on revaluation of investment properties held by the Group are calculated at the capital gain tax rate. Recognition of deferred tax assets, which principally relate to tax losses, depends on the management’s expectation of future taxable profit that will be available against which the tax losses can be utilised. The outcome of their actual utilisation may be different. 38 Hongkong Land Notes to the Financial Statements 3 Critical Accounting Estimates and Judgements continued Non-trading items The Group uses underlying business performance in its internal financial reporting to distinguish between the underlying profits and non-trading items. The identification of non-trading items requires judgement by management, but follows the consistent methodology as set out in the Group’s accounting policies. 4 Segmental Information Operating segments are identified on the basis of internal reports about components of the Group that are regularly reviewed by the executive directors of the Company for the purpose of resource allocation and performance assessment. The Group has two operating segments, namely Commercial Property and Residential Property. No operating segments have been aggregated to form the reportable segments. Set out below is an analysis of the Group’s underlying profit and total equity by reportable segment. 2016 2015 Commercial Property US$m Residential Property US$m Corporate US$m Total US$m Commercial Property US$m Residential Property US$m Corporate US$m Total US$m Revenue 986.3 1,007.6 – 1,993.9 973.2 958.9 – 1,932.1 Net operating costs (183.2) (778.6) (61.5) (1,023.3) (172.9) (705.6) (59.8) (938.3) Share of operating profit of associates and joint ventures 142.9 63.5 – 206.4 139.4 100.4 – 239.8 Underlying operating profit 946.0 292.5 (61.5) 1,177.0 939.7 353.7 (59.8) 1,233.6 Net financing charges – subsidiaries – share of associates and joint ventures Tax – subsidiaries – share of associates and joint ventures Non-controlling interests – subsidiaries – share of associates and joint ventures Underlying profit attributable to shareholders Non-trading items: – change in fair value of investment properties – asset impairment reversals Profit attributable to shareholders (68.9) (33.2) (102.1) (168.1) (46.4) (214.5) (2.8) (9.8) (12.6) 847.8 2,497.3 1.2 2,498.5 3,346.3 (74.4) (32.8) (107.2) (150.8) (58.2) (209.0) (4.6) (8.3) (12.9) 904.5 1,093.1 14.1 1,107.2 2,011.7 Annual Report 2016 39 4 Segmental Information continued By geographical location Greater China Southeast Asia and others Corporate, net financing charges and tax By business 2016 Commercial Property Residential Property Unallocated assets and liabilities 2015 Commercial Property Residential Property Unallocated assets and liabilities By geographical location 2016 Greater China Southeast Asia and others Unallocated assets and liabilities 2015 Greater China Southeast Asia and others Unallocated assets and liabilities Revenue Underlying operating profit Underlying profit attributable to shareholders 2016 US$m 2015 US$m 2016 US$m 2015 US$m 2016 US$m 2015 US$m 1,396.7 1,218.3 597.2 713.8 – – 975.7 262.8 (61.5) 1,028.4 265.0 (59.8) 959.0 261.5 1,014.3 263.6 (372.7) (373.4) 1,993.9 1,932.1 1,177.0 1,233.6 847.8 904.5 Investment properties US$m Segment assets Properties for sale US$m Segment liabilities US$m Unallocated assets and liabilities US$m Total assets and liabilities US$m Others US$m 31,550.7 – 340.9 4,052.9 – – 384.7 460.3 – (647.2) (2,189.7) – – 31,288.2 2,664.4 – (2,638.2) (2,638.2) 31,891.6 4,052.9 845.0 (2,836.9) (2,638.2) 31,314.4 28,925.7 – 327.6 4,484.8 – – 352.3 359.1 – (542.8) (1,923.8) – – 28,735.2 3,247.7 – (3,262.7) (3,262.7) 29,253.3 4,484.8 711.4 (2,466.6) (3,262.7) 28,720.2 27,893.7 3,997.9 – 2,587.6 1,465.3 – 436.4 408.6 – (1,867.2) (969.7) – – 29,050.5 4,902.1 – (2,638.2) (2,638.2) 31,891.6 4,052.9 845.0 (2,836.9) (2,638.2) 31,314.4 25,203.3 4,050.0 – 2,784.5 1,700.3 – 465.2 246.2 – (1,630.3) (836.3) – – 26,822.7 5,160.2 – (3,262.7) (3,262.7) 29,253.3 4,484.8 711.4 (2,466.6) (3,262.7) 28,720.2 Unallocated assets and liabilities include tax assets and liabilities, bank balances and borrowings. 40 Hongkong Land Notes to the Financial Statements 5 Revenue Rental income Service income Sales of properties 2016 US$m 858.8 130.8 1,004.3 1,993.9 Service income includes service and management charges and hospitality service income. Total contingent rents included in rental income amounted to US$10.4 million (2015: US$10.5 million). The future minimum rental payments receivable under non-cancellable leases are as follows: Within one year Between one and two years Between two and five years Beyond five years Generally the Group’s operating leases are for terms of three years or more. 2015 US$m 851.1 126.1 954.9 1,932.1 2015 US$m 764.9 543.9 501.7 362.1 2016 US$m 766.7 525.0 579.4 341.2 2,212.3 2,172.6 Annual Report 2016 41 6 Net Operating Costs Cost of sales Gain on reclassification of a trading property to investment property Other income Administrative expenses The following credits/(charges) are included in net operating costs: Cost of properties for sale recognised as expense Operating expenses arising from investment properties Reversal of writedowns on properties for sale Depreciation of tangible fixed assets Employee benefit expense – salaries and benefits in kind – defined contribution pension plans – defined benefit pension plans Auditors’ remuneration – audit – non-audit services The number of employees at 31st December 2016 was 1,621 (2015: 1,503). 2016 US$m (923.0) – 11.7 (112.0) (1,023.3) (756.0) (170.2) 3.2 (3.1) (106.4) (1.5) (1.5) (109.4) (1.5) (0.4) (1.9) 2015 US$m (904.6) 63.2 10.0 (106.9) (938.3) (762.1) (163.9) 21.4 (2.9) (102.3) (1.6) (1.4) (105.3) (1.4) (0.4) (1.8) 42 Hongkong Land Notes to the Financial Statements 7 Net Financing Charges Interest expense – bank loans and overdrafts – other borrowings Total interest expense Interest capitalised Commitment and other fees Financing charges Financing income 2016 US$m (24.2) (106.9) (131.1) 34.1 (97.0) (13.4) (110.4) 41.5 (68.9) Financing charges and financing income are stated after taking into account hedging gains or losses. 8 Share of Results of Associates and Joint Ventures By business Commercial Property Residential Property Underlying business performance Non-trading items: Change in fair value of investment properties – Commercial Property – Residential Property Asset disposals 2016 US$m 86.6 30.4 117.0 (60.9) 3.0 (57.9) – (57.9) 59.1 Results are shown after tax and non-controlling interests in the associates and joint ventures. The Group’s share of revenue of associates and joint ventures was US$538.5 million (2015: US$554.0 million). 2015 US$m (24.6) (112.0) (136.6) 36.2 (100.4) (14.4) (114.8) 40.4 (74.4) 2015 US$m 84.8 55.7 140.5 63.2 5.8 69.0 0.2 69.2 209.7 Annual Report 2016 43 9 Tax Tax charged to profit and loss is analysed as follows: Current tax Deferred tax – changes in fair value of investment properties – other temporary differences Reconciliation between tax expense and tax at applicable tax rate: Tax at applicable tax rate Change in fair value of investment properties not taxable in determining taxable profit Asset impairment reversals not taxable in determining taxable profit Income not subject to tax Expenses not deductible in determining taxable profit Withholding tax Overprovision in prior years Land appreciation tax in mainland China Others Tax relating to components of other comprehensive income is analysed as follows: Remeasurements of defined benefit plans Cash flow hedges 2016 US$m 2015 US$m (149.3) (148.0) 0.8 (18.8) (18.0) 13.6 (2.8) 10.8 (167.3) (137.2) (580.5) 419.0 – 24.6 (8.4) (8.8) – (13.8) 0.6 (318.6) 166.5 2.3 32.0 (7.9) (6.5) 0.1 (5.5) 0.4 (167.3) (137.2) 0.2 (6.5) (6.3) 0.5 5.8 6.3 The applicable tax rate for the year of 16.8% (2015: 16.5%) represents the weighted average of the rates of taxation prevailing in the territories in which the Group operates. The increase in the applicable tax rate was caused by a change in the geographic mix of the Group’s profits. Share of tax charge of associates and joint ventures of US$47.4 million (2015: US$62.7 million) is included in share of results of associates and joint ventures. 44 Hongkong Land Notes to the Financial Statements 10 Earnings per Share Earnings per share are calculated on profit attributable to shareholders of US$3,346.3 million (2015: US$2,011.7 million) and on the weighted average number of 2,352.8 million (2015: 2,352.8 million) shares in issue during the year. Earnings per share are additionally calculated based on underlying profit attributable to shareholders. A reconciliation of earnings is set out below: Underlying profit attributable to shareholders Non-trading items (see Note 11) 2016 2015 Earnings per share US¢ 36.03 US$m 847.8 2,498.5 US$m 904.5 1,107.2 Earnings per share US¢ 38.44 Profit attributable to shareholders 3,346.3 142.23 2,011.7 85.50 11 Non-trading Items An analysis of non-trading items after interest, tax and non-controlling interests is set out below: Change in fair value of investment properties Deferred tax on change in fair value of investment properties Asset impairment reversals Share of results of associates and joint ventures – change in fair value of investment properties – deferred tax – asset disposals Non-controlling interests 2016 US$m 2,549.9 0.8 1.2 (56.9) (1.0) (57.9) – (57.9) 4.5 2015 US$m 999.9 13.6 13.9 73.5 (4.5) 69.0 0.2 69.2 10.6 2,498.5 1,107.2 Annual Report 2016 45 12 Investment Properties 2016 At 1st January Exchange differences Additions Increase/(decrease) in fair value At 31st December Freehold properties Leasehold properties 2015 At 1st January Exchange differences Additions Increase/(decrease) in fair value At 31st December Freehold properties Leasehold properties Completed commercial properties US$m Under development commercial properties US$m Completed residential properties US$m Total US$m 23,984.7 (25.4) 132.6 2,573.7 741.4 (45.0) 143.4 (35.6) 231.2 24,957.3 (0.6) 0.1 11.8 (71.0) 276.1 2,549.9 26,665.6 804.2 242.5 27,712.3 157.3 27,555.0 27,712.3 22,797.7 (20.1) 87.1 1,120.0 754.7 (35.7) 154.8 (132.4) 144.9 23,697.3 (2.9) 76.9 12.3 (58.7) 318.8 999.9 23,984.7 741.4 231.2 24,957.3 132.4 24,824.9 24,957.3 The Group measures its investment properties at fair value. The fair values of the Group’s investment properties at 31st December 2016 and 2015 have been determined on the basis of valuations carried out by independent valuers who hold a recognised relevant professional qualification and have recent experience in the locations and segments of the investment properties valued. The Group employed Jones Lang LaSalle to value its commercial investment properties in Hong Kong, mainland China, Singapore, Vietnam and Cambodia which are either freehold or held under leases with unexpired lease terms of more than 20 years. The valuations, which conform to the International Valuation Standards issued by the International Valuation Standards Council and the HKIS Valuation Standards issued by the Hong Kong Institute of Surveyors, were arrived at by reference to the net income, allowing for reversionary potential, of each property. The Report of the valuers is set out on page 77. The valuations are comprehensively reviewed by the Group. At 31st December 2016, investment properties of US$676.1 million (2015: US$638.2 million) were pledged as security for borrowings (see Note 20). Fair value measurements of residential properties using no significant non-observable inputs Fair values of completed residential properties are generally derived using the direct comparison method. This valuation method is based on comparing the property to be valued directly with other comparable properties, which have recently transacted. However, given the heterogeneous nature of real estate properties, appropriate adjustments are usually required to allow for any qualitative differences that may affect the price likely to be achieved by the property under consideration. 46 Hongkong Land Notes to the Financial Statements 12 Investment Properties continued Fair value measurements of commercial properties using significant unobservable inputs Fair values of completed commercial properties in Hong Kong and Singapore are generally derived using the income capitalisation method. This valuation method is based on the capitalisation of the net income and reversionary income potential by adopting appropriate capitalisation rates, which are derived from analysis of sale transactions and valuers’ interpretation of prevailing investor requirements or expectations. The prevailing market rents adopted in the valuation have reference to valuers’ view of recent lettings, within the subject properties and other comparable properties. Fair values of completed commercial properties in Vietnam and Cambodia are generally derived using the discounted cash flow method. The net present value of the income stream is estimated by applying an appropriate discount rate which reflects the risk profile. Fair values of under development commercial properties are generally derived using the residual method. This valuation method is essentially a means of valuing the land by reference to its development potential by deducting development costs together with developer’s profit and risk from the estimated capital value of the proposed development assuming completion as at the date of valuation. The Group’s policy is to recognise transfers between fair value measurements as of the date of the event or change in circumstances that caused the transfer. Information about fair value measurements using significant unobservable inputs at 31st December 2016: Fair value US$m Valuation method Range of significant unobservable inputs Prevailing market rent per month US$ Capitalisation/ discount rate % Completed properties Hong Kong Singapore 26,096.2 Income capitalisation 4.8 to 39.1 per square foot 518.2 Income capitalisation 5.4 to 7.9 per square foot 3.20 to 5.50 3.50 to 5.50 Vietnam and Cambodia 51.2 Discounted cash flow 21.0 to 50.9 per square metre 13.00 to 15.00 Total 26,665.6 Properties under development Mainland China Cambodia Total 676.1 128.1 804.2 Residual Residual 104.7 per square metre 30.0 to 59.0 per square metre 6.00 10.50 Prevailing market rents are estimated based on independent valuers’ view of recent lettings, within the subject properties and other comparable properties. The higher the rents, the higher the fair value. Capitalisation and discount rates are estimated by independent valuers based on the risk profile of the properties being valued. The lower the rates, the higher the fair value. Annual Report 2016 47 13 Associates and Joint Ventures Unlisted associates Unlisted joint ventures Share of attributable net assets By business Commercial Property Residential Property Movements of associates and joint ventures during the year: At 1st January Exchange differences Share of results after tax and non-controlling interests Share of other comprehensive expenses after tax and non-controlling interests Dividends received and receivable Investments in and loans to associates and joint ventures Advances/repayments from associates and joint ventures Asset impairment reversal Others At 31st December 2016 US$m 69.9 4,390.8 4,460.7 3,313.7 1,147.0 4,460.7 2015 US$m 42.3 4,575.3 4,617.6 3,437.1 1,180.5 4,617.6 Associates Joint ventures 2016 US$m 2015 US$m 2016 US$m 2015 US$m 42.3 (0.1) 0.6 (0.6) (1.2) 29.1 (0.2) – – 45.7 (0.4) 1.5 (2.8) (1.2) – (0.5) – – 4,575.3 4,858.4 13.9 58.5 (144.3) (85.9) 75.1 (102.6) – 0.8 (45.8) 208.2 (211.6) (111.3) 254.4 (390.4) 13.9 (0.5) 69.9 42.3 4,390.8 4,575.3 The material joint ventures of the Group are listed below. These joint ventures have share capital consisting solely of ordinary shares, which are held directly by the Group. Nature of investments in material joint ventures in 2016 and 2015: Name of entity Nature of business Properties Sub F, Ltd BFC Development LLP Central Boulevard Development Pte Ltd One Raffles Quay Pte Ltd Property investment Property investment Property investment Property investment Country of incorporation/ principal place of business Macau Singapore Singapore Singapore % of ownership interest 2016 2015 49.0 33.3 33.3 33.3 49.0 33.3 33.3 33.3 48 Hongkong Land Notes to the Financial Statements 13 Associates and Joint Ventures continued Summarised financial information for material joint ventures Set out below are the summarised financial information for the Group’s material joint ventures. Summarised balance sheet at 31st December: 2016 Non-current assets Current assets Cash and cash equivalents Other current assets Total current assets Non-current liabilities Properties Sub F, Ltd US$m BFC Development LLP US$m Central Boulevard Development Pte Ltd US$m One Raffles Quay Pte Ltd US$m 1,373.7 3,301.5 2,546.9 2,526.1 43.7 32.0 75.7 10.9 3.5 14.4 32.0 8.9 40.9 15.0 0.5 15.5 Financial liabilities (excluding trade payables) Other non-current liabilities (including trade payables) (15.4) (143.8) (1,175.1) (1,118.4) – (19.6) (717.1) (183.6) Total non-current liabilities Current liabilities Financial liabilities (excluding trade payables) Other current liabilities (including trade payables) Total current liabilities Net assets 2015 Non-current assets Current assets Cash and cash equivalents Other current assets Total current assets Non-current liabilities (159.2) (1,175.1) (1,138.0) (900.7) (0.4) (41.7) (42.1) (0.8) (63.6) (64.4) (5.6) (31.4) (37.0) (3.3) (47.3) (50.6) 1,248.1 2,076.4 1,412.8 1,590.3 1,573.5 3,373.0 2,605.3 2,580.6 19.8 47.8 67.6 8.6 4.9 13.5 40.8 14.1 54.9 10.5 1.1 11.6 Financial liabilities (excluding trade payables) Other non-current liabilities (including trade payables) (34.6) (166.5) (1,196.2) (1,134.8) – (18.9) (727.6) (187.7) Total non-current liabilities Current liabilities Financial liabilities (excluding trade payables) Other current liabilities (including trade payables) Total current liabilities Net assets (201.1) (1,196.2) (1,153.7) (915.3) (0.9) (37.5) (38.4) (0.9) (65.3) (66.2) (6.2) (38.2) (44.4) (3.1) (44.1) (47.2) 1,401.6 2,124.1 1,462.1 1,629.7 Annual Report 2016 49 13 Associates and Joint Ventures continued Summarised statement of comprehensive income for the year ended 31st December: 2016 Revenue Depreciation and amortisation Interest income Interest expense Profit from underlying business performance Income tax expense Profit after tax from underlying business performance Loss after tax from non-trading items Profit/(loss) after tax Other comprehensive expense Properties Sub F, Ltd US$m BFC Development LLP US$m Central Boulevard Development Pte Ltd US$m One Raffles Quay Pte Ltd US$m 86.1 (7.5) – (0.9) 45.1 (4.9) 40.2 (169.1) (128.9) (0.9) 168.5 (0.1) 0.1 (45.8) 85.1 (14.2) 70.9 (3.8) 67.1 (33.3) 105.7 (0.1) 0.2 (29.2) 51.2 (8.5) 42.7 (3.6) 39.1 (36.9) 121.1 – 0.1 (22.3) 70.9 (11.9) 59.0 (3.0) 56.0 (36.5) Total comprehensive income/(expense) (129.8) 33.8 2.2 19.5 Group’s share of dividends received and receivable from joint ventures 11.7 27.2 17.2 19.6 2015 Revenue Depreciation and amortisation Interest income Interest expense Profit from underlying business performance Income tax expense Profit after tax from underlying business performance Profit after tax from non-trading items Profit after tax Other comprehensive income/(expense) Total comprehensive income/(expense) 93.9 (6.7) – (1.5) 47.5 (6.2) 41.3 1.7 43.0 1.2 44.2 161.0 (0.1) – (52.4) 69.9 (11.8) 58.1 42.7 100.8 (148.2) 191.8 (0.1) 0.2 (24.2) 90.2 (14.7) 75.5 113.0 188.5 (96.8) 119.6 – – (22.2) 63.4 (10.9) 52.5 30.2 82.7 (109.7) (47.4) 91.7 (27.0) Group’s share of dividends received and receivable from joint ventures 26.2 19.8 42.3 17.6 The information above reflects the amounts presented in the financial statements of the joint ventures adjusted for differences in accounting policies between the Group and the joint ventures, and fair value of the joint ventures at the time of acquisition. 50 Hongkong Land Notes to the Financial Statements 13 Associates and Joint Ventures continued Reconciliation of summarised financial information Reconciliation of the summarised financial information presented to the carrying amount of the Group’s interest in the material joint ventures for the year ended 31st December: 2016 Net assets Shareholders’ loans Adjusted net assets Properties Sub F, Ltd US$m BFC Development LLP US$m Central Boulevard Development Pte Ltd US$m One Raffles Quay Pte Ltd US$m 1,248.1 15.8 2,076.4 1,175.1 1,412.8 – 1,590.3 93.3 1,263.9 3,251.5 1,412.8 1,683.6 Interest in joint ventures (%) 49.0 33.3 33.3 33.3 Group’s share of net assets in joint ventures 619.3 1,083.8 470.9 561.2 2015 Net assets Shareholders’ loans Adjusted net assets 1,401.6 35.5 2,124.1 1,196.2 1,462.1 – 1,629.7 95.3 1,437.1 3,320.3 1,462.1 1,725.0 Interest in joint ventures (%) 49.0 33.3 33.3 33.3 Group’s share of net assets in joint ventures 704.3 1,106.7 487.4 575.0 The Group has interests in a number of individually immaterial joint ventures. The following table analyses, in aggregate, the share of profit and other comprehensive income and carrying amount of these joint ventures. Share of profit Share of other comprehensive expense Share of total comprehensive expense 2016 US$m 67.4 (108.4) (41.0) 2015 US$m 63.8 (94.8) (31.0) Carrying amount of interests in these joint ventures 1,655.6 1,701.9 At 31st December 2016, the Group’s commitments to provide funding to its joint ventures, if called, amounted to US$404.5 million (2015: US$446.0 million). There were no contingent liabilities relating to the Group’s interest in the joint ventures at 31st December 2016 and 2015. Annual Report 2016 51 14 Other Investments Available-for-sale financial assets – listed securiites 15 Debtors Trade debtors Other debtors – third parties – associates and joint ventures Non-current Current By geographical area of operation Greater China Southeast Asia and others 2016 US$m 2015 US$m 52.2 61.3 2016 US$m 176.9 323.6 39.9 540.4 60.1 480.3 540.4 255.0 285.4 540.4 2015 US$m 83.9 279.9 33.1 396.9 41.2 355.7 396.9 239.9 157.0 396.9 Trade and other debtors excluding derivative financial instruments are stated at amortised cost. The fair value of these debtors approximates their carrying amounts, as the impact of discounting is not significant. Derivative financial instruments are stated at fair value. An allowance for impairment of trade debtors is made based on the estimated irrecoverable amount. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payment are considered indicators that the debt is impaired. At 31st December 2016, trade debtors of US$5.9 million (2015: US$5.9 million) were past due but not impaired. The ageing analysis of these trade debtors is as follows: Below 30 days Between 31 and 60 days Between 61 and 90 days Over 90 days 2016 US$m 5.1 0.4 0.3 0.1 5.9 2015 US$m 4.8 0.6 0.3 0.2 5.9 The risk of trade and other debtors that are neither past due nor impaired at 31st December 2016 becoming impaired is low as they have a good track record with the Group. Based on past experience, management believes that no impairment allowance is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are still considered fully recoverable. 52 Hongkong Land Notes to the Financial Statements 2015 US$m 206.9 26.7 33.1 46.3 313.0 Total US$m (88.9) 0.4 (18.0) (6.3) 15 Debtors continued Other debtors are further analysed as follows: Prepayments Derivative financial instruments Amounts due from associates and joint ventures Others 16 Deferred Tax Assets and Liabilities 2016 US$m 207.9 44.5 39.9 71.2 363.5 Accelerated capital allowances US$m Revaluation surpluses of investment properties US$m Other temporary differences US$m Tax losses US$m 2016 At 1st January Exchange differences Credited/(charged) to profit and loss Charged to other comprehensive income At 31st December Deferred tax assets Deferred tax liabilities 2015 At 1st January Exchange differences Credited/(charged) to profit and loss Credited to other comprehensive income At 31st December Deferred tax assets Deferred tax liabilities 0.5 – (0.4) – 0.1 0.1 – 0.1 0.3 – 0.2 – 0.5 0.5 – 0.5 (70.3) – (5.1) – (75.4) – (75.4) (75.4) (64.5) – (5.8) – (70.3) – (70.3) (70.3) (2.5) – 0.8 – (1.7) – (1.7) (1.7) (17.2) 1.1 13.6 – (2.5) – (2.5) (2.5) (16.6) 0.4 (13.3) (6.3) (35.8) (112.8) 8.6 (44.4) 8.7 (121.5) (35.8) (112.8) (25.7) (107.1) – 2.8 6.3 1.1 10.8 6.3 (16.6) (88.9) 12.6 (29.2) 13.1 (102.0) (16.6) (88.9) Deferred tax balances predominantly comprise non-current items. Deferred tax assets and liabilities are netted when the taxes relate to the same taxation authority and where offsetting is allowed. Deferred tax assets of US$0.9 million (2015: US$1.0 million) arising from unused tax losses of US$5.0 million (2015: US$5.6 million) have not been recognised in the financial statements. Included in the unused tax losses, US$5.0 million (2015: US$4.8 million) have no expiry date. Annual Report 2016 53 17 Properties for Sale Properties under development Completed properties Provision for impairment 2016 US$m 1,968.2 262.7 2,230.9 (13.5) 2015 US$m 2,628.5 102.2 2,730.7 (16.8) 2,217.4 2,713.9 At 31st December 2016, properties under development which were not scheduled for completion within the next 12 months amounted to US$1,386.4 million (2015: US$2,018.1 million). At 31st December 2016, there were no properties for sale or pledged as security for borrowings (2015: US$795.6 million) (see Note 20). 18 Bank Balances Deposits with banks and financial institutions Bank balances 2016 US$m 994.3 914.6 1,908.9 2015 US$m 1,399.9 169.3 1,569.2 Deposits and bank balances of certain subsidiaries amounting to US$122.7 million (2015: US$77.5 million) are held under the Housing Developers (Project Account) Rules in Singapore, withdrawals from which are subject to the provision of these Rules. The weighted average interest rate on deposits with banks and financial institutions is 1.2% (2015: 1.3%) per annum. 54 Hongkong Land Notes to the Financial Statements 19 Creditors Trade creditors Other creditors Tenants’ deposits Derivative financial instruments Rent received in advance Proceeds from properties for sale received in advance Non-current Current By geographical area of operation Greater China Southeast Asia and others 2016 US$m 403.0 130.3 222.6 7.6 19.9 737.2 1,520.6 30.3 1,490.3 1,520.6 854.8 665.8 2015 US$m 424.1 122.2 223.2 24.8 11.9 764.6 1,570.8 87.0 1,483.8 1,570.8 951.4 619.4 Derivative financial instruments are stated at fair value. Other creditors are stated at amortised cost. The fair value of these creditors approximates their carrying amounts. 1,520.6 1,570.8 20 Borrowings Current Bank overdrafts Current portion of long-term borrowings – bank loans – notes Long-term Bank loans Notes Secured Unsecured 2016 Carrying amount US$m Fair value US$m 2015 Carrying amount US$m Fair value US$m 10.5 10.5 3.3 3.3 175.1 35.1 220.7 175.1 35.1 220.7 165.6 – 168.9 165.6 – 168.9 838.0 2,857.7 838.0 2,929.6 836.7 2,904.1 836.7 3,014.3 3,695.7 3,767.6 3,740.8 3,851.0 3,916.4 3,988.3 3,909.7 4,019.9 264.7 3,651.7 3,916.4 195.4 3,714.3 3,909.7 Annual Report 2016 55 20 Borrowings continued The fair values are based on market prices or are estimated using the expected future payments discounted at market interest rates ranging from 1.4% to 6.2% (2015: 1.4% to 6.2%) per annum. This is in line with the definition of 'observable current market transactions’ under the fair value measurement hierarchy. The fair value of current borrowings approximates their carrying amounts, as the impact of discounting is not significant. Secured borrowings at 31st December 2016 and 2015 were certain subsidiaries’ bank borrowings which were secured against their properties for sale and investment properties. The borrowings are further summarised as follows: By currency 2016 Hong Kong dollar Singapore dollar Chinese renminbi Vietnam dong Philippines peso 2015 Hong Kong dollar Singapore dollar Chinese renminbi Vietnam dong Fixed rate borrowings Weighted average interest rates % Weighted average period outstanding Years 3.5 2.8 5.0 6.2 2.5 3.4 3.1 6.2 5.7 8.6 3.2 – – – 9.6 4.2 – – Floating rate borrowings US$m Total US$m 1,288.1 3,284.5 180.6 264.7 0.6 5.0 361.6 264.7 0.6 5.0 US$m 1,996.4 181.0 – – – 2,177.4 1,739.0 3,916.4 1,997.2 183.2 – – 1,194.0 3,191.2 361.5 173.5 0.3 544.7 173.5 0.3 2,180.4 1,729.3 3,909.7 The weighted average interest rates and period of fixed rate borrowings are stated after taking into account hedging transactions. The exposure of the Group’s borrowings to interest rate changes and the contractual repricing dates at 31st December after taking into account hedging transactions are as follows: 2016 US$m 1,739.0 103.1 232.3 – 1,842.0 3,916.4 2015 US$m 1,729.2 – 103.1 234.5 1,842.9 3,909.7 Within one year Between two and three years Between three and four years Between four and five years Beyond five years 56 Hongkong Land Notes to the Financial Statements 20 Borrowings continued An analysis of the carrying amount of notes at 31st December is as follows: Maturity 2016 Current US$m Non-current US$m 2015 Non-current US$m Medium term notes S$50m 8–year notes at 3.86% HK$200m 10–year notes at 4.135% HK$300m 10–year notes at 4.1875% HK$300m 10–year notes at 4.25% HK$500m 10–year notes at 4.22% HK$500m 10–year notes at 4.24% S$150m 10–year notes at 3.43% HK$500m 10–year notes at 3.95% HK$500m 12–year notes at 4.28% HK$410m 10–year notes at 3.86% US$500m 10–year notes at 4.50%* HK$305m 10–year notes at 3.00% HK$200m 10–year notes at 2.90% HK$1,100m 10–year notes at 3.95% HK$300m 10–year notes at 3.95% US$400m 10–year notes at 4.625%* HK$300m 15–year notes at 4.10% US$600m 15–year notes at 4.50%* HK$302m 15–year notes at 3.75% HK$785m 15–year notes at 4.00% HK$473m 15–year notes at 4.04% HK$200m 15–year notes at 3.95% HK$300m 15–year notes at 3.15% HK$325m 15–year notes at 4.22% HK$400m 15–year notes at 4.40% HK$800m 20–year notes at 4.11% HK$200m 20–year notes at 4.125% HK$240m 20–year notes at 4.00% HK$250m 30–year notes at 5.25% * Listed on the Singapore Exchange. 2017 2019 2019 2019 2020 2020 2020 2020 2021 2022 2022 2022 2022 2023 2023 2024 2025 2025 2026 2027 2027 2027 2028 2028 2029 2030 2031 2032 2040 35.1 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 25.7 38.7 38.7 67.3 64.4 103.6 64.3 66.8 52.6 487.7 39.1 25.7 141.0 38.5 405.5 38.5 613.3 38.6 99.6 60.8 25.7 38.1 41.6 50.9 103.2 25.4 30.3 32.1 35.8 25.7 38.7 38.7 69.2 64.4 105.8 64.3 69.8 52.6 487.6 39.1 25.7 141.0 38.4 407.7 38.6 614.6 38.6 99.6 60.9 25.7 38.1 41.6 50.9 103.2 25.4 30.3 32.1 35.1 2,857.7 2,904.1 Annual Report 2016 57 21 Share Capital Authorised Shares of US$0.10 each Issued and fully paid At 1st January and 31st December 22 Dividends Ordinary shares in millions 2016 2015 2016 US$m 2015 US$m 4,000.0 4,000.0 400.0 400.0 2,352.8 2,352.8 235.3 235.3 Final dividend in respect of 2015 of US¢13.00 (2014: US¢13.00) per share Interim dividend in respect of 2016 of US¢6.00 (2015: US¢6.00) per share 2016 US$m 305.8 141.2 447.0 2015 US$m 305.8 141.2 447.0 A final dividend in respect of 2016 of US¢13.00 (2015: US¢13.00) per share amounting to a total of US$305.8 million (2015: US$305.8 million) is proposed by the Board. The dividend proposed will not be accounted for until it has been approved at the Annual General Meeting. The amount will be accounted for as an appropriation of revenue reserves in the year ending 31st December 2017. 23 Notes to Consolidated Cash Flow Statement a) Developments capital expenditure in 2016 included US$110.3 million (2015: US$101.9 million) for property developments in mainland China. b) Cash and cash equivalents Bank balances Bank overdrafts (see Note 20) 2016 US$m 1,908.9 (10.5) 2015 US$m 1,569.2 (3.3) 1,898.4 1,565.9 58 Hongkong Land Notes to the Financial Statements 24 Derivative Financial Instruments The fair values of derivative financial instruments at 31st December are as follows: Designated as cash flow hedges – cross currency swaps Designated as fair value hedges – interest rate swaps – cross currency swaps 2016 Positive fair value US$m Negative fair value US$m 2015 Positive fair value US$m Negative fair value US$m 28.0 – 4.4 18.0 2.9 13.6 – 7.6 5.7 16.6 – 6.8 Interest rate swaps The notional principal amounts of the outstanding interest rate swap contracts at 31st December 2016 were US$99.1 million (2015: US$99.9 million). The fair values of interest rate swaps are based on the estimated cash flows discounted at market rates ranging from 1.02% to 2.3% (2015: 0.39% to 2.06%) per annum. Cross currency swaps The contract amounts of the outstanding cross currency swap contracts at 31st December 2016 were US$1,636.9 million (2015: US$1,639.9 million). 25 Commitments Capital commitments Authorised not contracted Contracted not provided – joint ventures – others Operating lease commitments Due within one year Due between one and two years Due between two and five years 2016 US$m 81.8 404.5 136.7 541.2 623.0 2.6 1.5 1.3 5.4 2015 US$m 155.4 446.0 201.5 647.5 802.9 3.3 1.2 0.4 4.9 Annual Report 2016 59 26 Contingent Liabilities Various Group companies are involved in litigation arising in the ordinary course of their respective businesses. Having reviewed outstanding claims and taking into account legal advice received, the Directors are of the opinion that adequate provisions have been made in the financial statements. 27 Related Party Transactions The parent company of the Group is Jardine Strategic Holdings Limited and the ultimate holding company is Jardine Matheson Holdings Limited (‘JMH’). Both companies are incorporated in Bermuda. In the normal course of business, the Group has entered into a variety of transactions with the subsidiaries, associates and joint ventures of JMH (‘Jardine Matheson group members’). The more significant of these transactions are described below: Management fee The management fee payable by the Group, under an agreement entered into in 1995, to Jardine Matheson Limited (‘JML’) in 2016 was US$4.2 million (2015: US$4.5 million), being 0.5% per annum of the Group’s underlying profit in consideration for management consultancy services provided by JML, a wholly-owned subsidiary of JMH. Property and other services The Group rented properties to Jardine Matheson group members. Gross rents on such properties in 2016 amounted to US$20.2 million (2015: US$19.1 million). The Group provided project consultancy services to Jardine Matheson group members in 2016 amounting to US$0.4 million (2015: US$0.4 million). Jardine Matheson group members provided property maintenance and other services to the Group in 2016 in aggregate amounting to US$53.7 million (2015: US$50.7 million). Hotel management services Jardine Matheson group members provided hotel management services to the Group in 2016 amounted to US$2.4 million (2015: US$2.8 million). Outstanding balances with associates and joint ventures Amounts of outstanding balances with associates and joint ventures are included in debtors and creditors as appropriate (see Notes 15 and 19). The amounts are not material. Directors’ emoluments Details of Directors’ emoluments (being the key management personnel compensation) are shown on page 69 under the heading of ‘Directors’ Appointment, Retirement, Remuneration and Service Contracts’. 60 Hongkong Land Notes to the Financial Statements 28 Summarised Balance Sheet of the Company Included below is certain summarised balance sheet information of the Company disclosed in accordance with Bermuda law. Net operating assets Investments at cost Unlisted shares in subsidiaries Net amounts due from subsidiaries Creditors and other accruals Total equity Share capital (see Note 21) Revenue and other reserves Contributed surplus Share premium Revenue reserves Shareholders’ funds 2016 US$m 2015 US$m 4,481.7 1,371.4 5,853.1 (23.7) 4,481.7 1,238.1 5,719.8 (20.9) 5,829.4 5,698.9 235.3 235.3 2,249.6 386.9 2,957.6 5,594.1 5,829.4 2,249.6 386.9 2,827.1 5,463.6 5,698.9 Subsidiaries are shown at cost less amounts provided. The contributed surplus was set up on the formation of the Company in 1989 and, under the Bye-laws of the Company, is distributable. 29 Principal Subsidiaries, Associates and Joint Ventures The principal subsidiaries, associates and joint ventures of the Group at 31st December 2016 are set out below. Attributable interests 2016 2015 % % Issued share capital Main activities Place of incorporation Subsidiaries Hongkong Land China Holdings Ltd* 100 100 USD 200,000,000 Investment holding Bermuda Hongkong Land International Holdings Ltd* 100 100 USD 200,000,000 Investment holding Bermuda Hongkong Land Ltd* 100 100 USD 12,000 Group management Bermuda The Hongkong Land Company, Ltd 100 100 HKD 1,293,180,006 Property investment Hong Kong * Owned directly Annual Report 2016 61 29 Principal Subsidiaries, Associates and Joint Ventures continued Attributable interests 2016 2015 % % Issued share capital Main activities Place of incorporation 100 100 HKD 200 Property investment Hong Kong Subsidiaries continued The Hongkong Land Property Company, Ltd HKL (Chater House) Ltd 100 100 HKD 1,500,000 Property investment Hong Kong HKL (Landmark Hotel) Ltd 100 100 HKD 2 Hotel investment Hong Kong HKL (Prince’s Building) Ltd 100 100 HKD 200 Property investment Hong Kong Mulberry Land Company Ltd 100 100 HKD 200 Property investment Hong Kong Hongkong Land (Chongqing) Development Co Ltd Hongkong Land (Chongqing North) Development Co Ltd Wangfu Central Real Estate Development Co Ltd 100 100 USD 479,990,000 Property development Mainland China 100 100 HKD 3,980,000,000 Property development Mainland China 84 90 RMB 3,500,000,000 Property development Mainland China HKL (Esplanade) Pte Ltd 100 100 SGD 150,000,000 Property investment Singapore HKL Treasury (Singapore) Pte Ltd 100 100 SGD The Hongkong Land Treasury Services (Singapore) Pte Ltd 100 100 SGD 2 2 Finance Finance Singapore Singapore MCL Land Limited 100 100 SGD 511,736,041 Investment holding Singapore MCL Land (Brighton) Pte Ltd 100 100 SGD 1,000,000 Property development Singapore MCL Land (Prestige) Pte Ltd 100 100 SGD 1,000,000 Property development Singapore MCL Land (Vantage) Pte Ltd 100 100 SGD 1,000,000 Property development Singapore MCL Land (Pantai View) Sdn Bhd 100 100 MYR 2,260,000 Property investment Malaysia Central Building Ltd 65 65 USD 1,991,547 Property investment Vietnam Doan Ket International Co Ltd 73.9 73.9 USD 7,291,500 Property investment Vietnam HKL (Treasury Services) Ltd 100 100 USD The Hongkong Land Notes Co Ltd 100 100 USD The Hongkong Land Finance 100 100 USD (Cayman Islands) Co Ltd 1 2 2 Finance Finance British Virgin Islands British Virgin Islands Finance Cayman Islands King Kok Investment Ltd 90 90 USD 10,000 Property investment Mauritius 62 Hongkong Land Notes to the Financial Statements 29 Principal Subsidiaries, Associates and Joint Ventures continued Attributable interests 2016 2015 % % Issued share capital Main activities Place of incorporation Associates and joint ventures Normelle Estates Ltd Properties Sub F, Ltd Beijing Landmark Trinity Real Estate Development Co Ltd Beijing Premium Real Estate Ltd Chengdu Premium Property Development Co Ltd China West Premier Housing Development Co Ltd Chongqing Central Park Co Ltd Longfor Hongkong Land (Chongqing) Development Co Ltd Longhu Land Ltd Shanghai Xujing Property Co Ltd 50 49 30 40 50 50 HKD 10,000 Property investment Hong Kong 46.6 MOP 1,000,000 Property investment Macau 30 RMB 2,800,000,000 Property development Mainland China 40 50 USD USD 12,000,000 Property development Mainland China 699,980,000 Property development Mainland China 50 50 USD 569,960,000 Property development Mainland China 50 50 50 50 50 50 50 50 HKD 4,640,000,000 Property development Mainland China USD 200,000,000 Property development Mainland China USD 27,000,000 Property development Mainland China RMB 4,200,000,000 Property development Mainland China BFC Development LLP 33.3 33.3 SGD Central Boulevard Development Pte Ltd 33.3 33.3 SGD One Raffles Quay Pte Ltd 33.3 33.3 SGD 6 6 6 Property investment Singapore Property investment Singapore Property investment Singapore PT Brahmayasa Bahtera PT Bumi Parama Wisesa PT Jakarta Land Golden Quantum Acres Sdn Bhd MSL Properties Sdn Bhd Sunrise MCL Land Sdn Bhd NorthPine Land Inc Gaysorn Land Co Ltd Nassim JV Co Ltd Jardine Gibbons Properties Ltd 40 49 50 50 50 50 40 49 50 40 40 49 50 50 50 50 40 49 50 40 IDR 166,000,000,000 Property development Indonesia IDR 1,950,000,000,000 Property development Indonesia IDR 3,320,000,000 Property investment Indonesia MYR MYR MYR 2,764,210 Property development Malaysia 3,000,000 Property development Malaysia 2,000,000 Property development Malaysia Peso 1,224,635,200 Property investment The Philippines THB 61,250,000 Property investment Thailand VND 286,200,000,000 Property development Vietnam BD 600,000 ‘A’ Property investment Bermuda 400,000 ‘B’ Annual Report 2016 63 Independent Auditors’ Report To the members of Hongkong Land Holdings Limited Report on the Consolidated Financial Statements Our opinion In our opinion, Hongkong Land Holdings Limited’s consolidated financial statements (the ‘financial statements’): • present fairly, in all material respects, the financial position of the Group as at 31st December 2016 and its financial performance and its cash flows for the year then ended; and • have been properly prepared in accordance with International Financial Reporting Standards (‘IFRSs’) and The Companies Act 1981 (Bermuda). What we have audited The financial statements, included within the Annual Report, comprise: • the Consolidated Balance Sheet as at 31st December 2016; • the Consolidated Profit and Loss Account and the Consolidated Statement of Comprehensive Income for the year then ended; • the Consolidated Cash Flow Statement for the year then ended; • the Consolidated Statement of Changes in Equity for the year then ended; and • the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information. The financial reporting framework that has been applied in the preparation of the financial statements is applicable law in Bermuda and IFRSs as issued by the International Accounting Standards Board (IASB). In applying the financial reporting framework, the Directors have made a number of subjective judgements, for example in respect of significant accounting estimates. In making such estimates, they have made assumptions and considered future events. Responsibilities for the Financial Statements and the Audit Our responsibilities and those of the Directors As explained more fully in the Responsibilities Statement set out on page 67, the Directors are responsible for the preparation and fair presentation of the financial statements in accordance with IFRSs and The Companies Act 1981 (Bermuda). Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland) (‘ISAs (UK & Ireland)’). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinion, has been prepared for and only for the Company’s members as a body in accordance with Section 90 of The Companies Act 1981 (Bermuda) and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come, including without limitation under any contractual obligations of the Company, save where expressly agreed by our prior consent in writing. What an audit of financial statements involves We conducted our audit in accordance with ISAs (UK & Ireland). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: • whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; • the reasonableness of significant accounting estimates made by the Directors; and • the overall presentation of the financial statements. 64 Hongkong Land We primarily focus our work in these areas by assessing the Directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. PricewaterhouseCoopers LLP Chartered Accountants London United Kingdom 2nd March 2017 (a) The maintenance and integrity of the Hongkong Land Holdings Limited website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. (b) Legislation in Bermuda governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Annual Report 2016 65 Five Year Summary 2012 US$m 2013 US$m 2014 US$m 2015 US$m 2016 US$m Profit attributable to shareholders 1,438 1,190 1,327 2,012 3,346 Underlying profit attributable to shareholders 776 935 930 905 848 Investment properties 23,494 23,583 23,697 24,957 27,712 Net debt 3,273 3,025 2,657 2,341 2,008 Shareholders’ funds 26,148 26,857 27,548 28,685 31,294 Net asset value per share 11.11 11.41 11.71 12.19 13.30 US$ US$ US$ US$ US$ 39.73 39.52 38.44 36.03 33.11 17.00 18.00 19.00 19.00 19.00 11.11 11.41 11.71 12.19 13.30 2012 2013 2014 2015 2016 Underlying earnings Dividends 2012 2013 2014 2015 2016 Underlying earnings/dividends per share (US¢) Net asset value per share (US$) 66 Hongkong Land Responsibility Statement The Directors of the Company confirm to the best of their knowledge that: a. b. the consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, including International Accounting Standards and Interpretations adopted by the International Accounting Standards Board; and the sections of this Report, including the Chairman’s Statement, Chief Executive’s Review and Principal Risks and Uncertainties, which constitute the management report include a fair review of all information required to be disclosed by the Disclosure Guidance and Transparency Rules 4.1.8 to 4.1.11 issued by the Financial Conduct Authority in the United Kingdom. For and on behalf of the Board Robert Wong Simon Dixon Directors 2nd March 2017 Annual Report 2016 67 Corporate Governance Hongkong Land Holdings Limited is incorporated in Bermuda. The Company’s property interests are almost entirely in Asia. The Company’s equity shares have a standard listing on the Main Market of the London Stock Exchange, and secondary listings in Bermuda and Singapore. The Disclosure Guidance and Transparency Rules (the ‘DTRs’) issued by the Financial Conduct Authority in the United Kingdom (the ‘FCA’) require that this Report address all relevant information about the corporate governance practices applied beyond the requirements under Bermuda law. The Company attaches importance to the corporate stability and opportunities that result from it being part of the Jardine Matheson Holdings Limited (‘Jardine Matheson’) group, which is considered to be fundamental to the Company’s ability to pursue a long-term strategy in Asian markets. By coordinating objectives, establishing common values and standards, and sharing experience, contacts and business relationships, Jardine Matheson helps the Group to optimise its opportunities in the countries in which it operates. The Group is committed to high standards of governance. The system of governance it has adopted is based on a well-tried approach to oversight and management that has been developed over many years by the members of the Jardine Matheson group. It enables the Group to benefit from Jardine Matheson’s strategic guidance and professional expertise, while at the same time the independence of the Board is respected and clear operational accountability rests with the Company’s executive management team. The Management of the Group The Company has its dedicated executive management under the Chief Executive. The Memorandum of Association of the Company, however, provides for the chairman of Jardine Matheson to be, or to appoint, the Managing Director of the Company. Reflecting this, and the Jardine Matheson group’s 50% interest in the Company’s share capital, the Chief Executive and the Managing Director meet regularly. Similarly, the board of the Hong Kong-based Group management company, Hongkong Land Limited (‘HKL’), and its finance committee are chaired by the Managing Director and include Group executives as well as Jardine Matheson’s deputy managing director, group finance director, group strategy director and group general counsel. The presence of Jardine Matheson representatives on the Board and on the board of HKL, as well as on its audit and finance committees, provides an added element of stability to the Company's financial planning and supervision, enhancing its ability to raise finance and take a long-term view of business development. It also eases the ability of management to work effectively together in exploiting the full range of the Jardine Matheson group’s commercial strengths. The Directors of the Company retain full power to manage the business affairs of the Company, other than matters reserved to be exercised by the Company in general meeting under Bermuda legislation or the Company’s Bye-laws. Among the matters on which the Board decides are the Group’s business strategy, its annual budget, dividends and major corporate activities. The Board The Company currently has a Board of 16 Directors. Their names and brief biographies appear on pages 18 and 19 of this Report. The Chairman has been appointed in accordance with the provisions of the Bye-laws of the Company, which provide that the chairman of Jardine Matheson, or any Director nominated by him, shall be the Chairman of the Company. The Board composition and operation helps to provide the Company with the necessary stability as it seeks to grow its business. The role of the Chairman is to lead the Board as it oversees the Group’s strategic and financial direction, while the principal role of the Managing Director is to act as chairman of HKL and of its finance committee. Ben Keswick is currently appointed to both positions. The responsibility for running the Group’s business and all the executive matters affecting the Group rests with the Chief Executive, Robert Wong. The implementation of the Group’s strategy is delegated to the Company’s executive management, with decision-making authority within designated financial parameters delegated to the HKL finance committee. The Board is scheduled to hold four meetings in 2017 and ad hoc procedures are adopted to deal with urgent matters. In 2016 one meeting was held in Bermuda and three were held in Asia. The Board receives high quality, up to date information for each of its meetings. In addition, certain Directors of the Company who do not serve on the board of HKL and who are based outside Asia regularly visit Asia and Bermuda to discuss the Group’s business, as well as to participate in the four strategic reviews that precede the regular Board meetings. These Directors are not directly involved in the operational management of the Group’s business activities, but their knowledge and close oversight of the Group’s affairs reinforces the process by which business is reviewed before consideration at Board meetings. 68 Hongkong Land Directors’ Appointment, Retirement, Remuneration and Service Contracts Candidates for appointment as executive Directors of the Company, as executive directors of HKL or as senior executives elsewhere in the Group may be sourced internally, or from the Jardine Matheson group or externally, including by using the services of specialist executive search firms. The aim is to appoint individuals who combine international best practice with familiarity of or adaptability to Asian markets. When appointing non-executive Directors, the Board pays particular attention to the Asian business experience and relationships that they can bring. Each new Director is appointed by the Board and, in accordance with the Company’s Bye-laws, each new Director so appointed is subject to retirement at the first annual general meeting after appointment. Thereafter, Directors are subject to retirement by rotation under the Bye-laws whereby one-third of the Directors retire at the annual general meeting each year. These provisions apply to both executive and non-executive Directors, but the requirement to retire by rotation does not extend to the Chairman or Managing Director. On 31st March 2016 John Witt stepped down as Chief Financial Officer and Simon Dixon joined the Board in his place on 28th April 2016. Y.K. Pang stepped down as Chief Executive on 31st July 2016 and Robert Wong joined the Board in his place on 1st August 2016. Y.K. Pang remains as a non-executive Director. In accordance with Bye-law 85, Charles Allen-Jones, Sir Henry Keswick, Simon Keswick and Y.K. Pang retire by rotation at this year’s Annual General Meeting and, being eligible, offer themselves for re-election. In accordance with Bye-law 92, Robert Wong will also retire and, being eligible, offers himself for re-election. Robert Wong has a service contract with a subsidiary of the Company that has a notice period of six months. None of the other Directors proposed for re-election has a service contract with the Company or its subsidiaries. Lord Leach of Fairford, who had been a Director of the Company since 1989, passed away on 12th June 2016. The Company’s policy is to offer competitive remuneration packages to its senior executives. It is recognised that, due to the nature of the Group and its diverse geographic base, a number of its senior executives are required to be offered international terms and the nature of the remuneration packages is designed to reflect this. Executive Directors joining from outside the Group may be offered an initial fixed-term service contract to reflect any requirement for them to relocate. Recommendations and decisions on remuneration and other benefits payable or made available to executive Directors result from consultations between the Chairman and other Directors as he considers appropriate. Directors’ fees, which are payable to all Directors other than the Chief Executive and the Chief Financial Officer, are decided upon by shareholders in general meeting as provided for by the Company’s Bye-laws. A motion to increase the Directors’ fees to US$60,000 each per annum and the fee for the Chairman and Managing Director to US$85,000 per annum with effect from 1st January 2017 will be proposed at the forthcoming Annual General Meeting. For the year ended 31st December 2016, the Directors received from the Group US$7.7 million (2015: US$7.6 million) in Directors’ fees and employee benefits, being US$0.8 million (2015: US$0.8 million) in Directors’ fees, US$6.6 million (2015: US$6.6 million) in short-term employee benefits including salary, bonuses, accommodation and deemed benefits in kind and US$0.3 million (2015: US$0.2 million) in post-employment benefits. The information set out in this paragraph forms part of the audited financial statements. The Company has in place notional share option plan under which cash bonuses are paid based on the performance of the Company’s share price over a period. The notional plan was established to provide longer-term incentives for executive Directors and senior managers. Notional share options are granted after consultation between the Chairman and the Chief Executive as well as other Directors as they consider appropriate. The Company purchases insurance to cover its Directors against their costs in defending themselves in civil proceedings taken against them in that capacity and in respect of damages resulting from the unsuccessful defence of any proceedings. To the extent permitted by law, the Company also indemnifies its Directors. Neither the insurance nor the indemnity provides cover where the Director has acted fraudulently or dishonestly. Annual Report 2016 69 Corporate Governance Audit Committee The Board has established within HKL an audit committee (the ‘Audit Committee’), the current members of which are Y.K. Pang, Mark Greenberg, Jeremy Parr and John Witt; they have extensive knowledge of the Group while at the same time not being directly involved in operational management. The chairman, chief executive and chief financial officer of HKL, together with representatives of the internal and external auditors, also attend the Audit Committee meetings by invitation. The Audit Committee meets and reports to the Board semi-annually. Prior to completion and announcement of the half-year and year-end results, a review of the financial information and of any issues raised in connection with the preparation of the results, including the adoption of new accounting policies, is undertaken by the Audit Committee with the executive management and a report is received from the external auditors. The external auditors also have access to the full Board, in addition to the Chief Executive, Chief Financial Officer and other senior executives. The Audit Committee keeps under review the nature, scope and results of the audits conducted by the internal audit function. The Audit Committee’s responsibilities extend to reviewing the effectiveness of both the internal and external audit functions; considering the independence and objectivity of the external auditors; and reviewing and approving the level and nature of non-audit work performed by the external auditors. The terms of reference of the Audit Committee can be found on the Company’s website at www.hkland.com. Risk Management and Internal Control The Board has overall responsibility for the Group’s systems of risk management and internal control. The Board has delegated to the Audit Committee responsibility for providing oversight in respect of risk management activities. The Audit Committee considers the Group’s principal risks and uncertainties and potential changes to the risk profile, and reviews the operation and effectiveness of the Group’s systems of internal control and the procedures by which these risks are monitored and mitigated. The Audit Committee considers the systems and procedures on a regular basis, and reports to the Board semi-annually. The systems of internal control are designed to manage, rather than eliminate, business risk; to help safeguard the Group’s assets against fraud and other irregularities; and to give reasonable, but not absolute, assurance against material financial misstatement or loss. Executive management is responsible for the implementation of the systems of internal control throughout the Group. The internal audit function also monitors the effectiveness of the systems of internal control and the approach taken by the business units to risk. The internal audit function is independent of the operating businesses and reports its findings, and recommendations for any corrective action required, to the Audit Committee. The Group has in place an organisational structure with defined lines of responsibility and delegation of authority. There are established policies and procedures for financial planning and budgeting; for information and reporting systems; for assessment of risk; and for monitoring the Group’s operations and performance. The information systems in place are designed to ensure that the financial information reported is reliable and up to date. The Company’s policy on commercial conduct underpins the Group’s internal control process, particularly in the area of compliance. The policy is set out in the Group’s Code of Conduct, which is a set of guidelines to which every employee must adhere, and is reinforced and monitored by an annual compliance certification process. The Audit Committee has also been given the responsibility to oversee the effectiveness of the formal procedures for employees to raise any matters of serious concern, and is required to review any reports made under those procedures that are referred to it by the internal audit function. The principal risks and uncertainties facing the Company are set out on page 74. 70 Hongkong Land Directors’ Responsibilities in respect of the Financial Statements The Directors are required under the Bermuda Companies Act to prepare financial statements for each financial year and to present them annually to the Company’s shareholders at the annual general meeting. The financial statements are required to present fairly in accordance with International Financial Reporting Standards (‘IFRS’) the financial position of the Group at the end of the year and the results of its operations and its cash flows for the year then ended. The Directors consider that applicable accounting policies under IFRS, applied on a consistent basis and supported by prudent and reasonable judgements and estimates, have been followed in preparing the financial statements. The financial statements have been prepared on a going concern basis. Code of Conduct The Group conducts business in a professional, ethical and even-handed manner. Its ethical standards are clearly set out in its Code of Conduct, which is modelled on the Jardine Matheson group’s code of conduct. The Code of Conduct requires that all Group companies comply with all laws of general application, all rules and regulations that are industry specific and proper standards of business conduct. The Code of Conduct prohibits the giving or receiving of illicit payments, and requires all employees to be treated fairly, impartially and with respect. It also requires that all managers must be fully aware of their obligations under the Code of Conduct and establish procedures to ensure compliance at all levels within their organisations. The Group has in place procedures by which employees can raise, in confidence, matters of serious concern in areas such as financial reporting or compliance. Directors’ Share Interests The Directors of the Company in office on 2nd March 2017 had interests (within the meaning of the EU Market Abuse Regulation (‘MAR’), which applies to the Company as it is listed on the London Stock Exchange) as set out below in the ordinary share capital of the Company. These interests include those notified to the Company in respect of the Directors’ closely associated persons (as that term is used under MAR). Charles Allen-Jones Dr Richard Lee Anthony Nightingale Y.K. Pang 60,000 3,678,685 2,184 38,000 In addition, Robert Wong held share options in respect of 710,000 ordinary shares issued pursuant to the Company’s notional share option plan. Substantial Shareholders As a non-UK issuer, the Company is subject to the DTRs pursuant to which a person must in certain circumstances notify the Company of the percentage of voting rights attaching to the share capital of the Company that he holds. The obligation to notify arises if that person acquires or disposes of shares in the Company which results in the percentage of voting rights which he holds reaching, exceeding, or falling below, 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%. The Company has been informed of the holding of voting rights of 5% or more attaching to the Company’s issued ordinary share capital by Jardine Strategic Holdings Limited (‘Jardine Strategic’), which is directly interested in 1,176,616,646 ordinary shares carrying 50.01% of the voting rights. By virtue of its interest in Jardine Strategic, Jardine Matheson is also interested in the same ordinary shares. Apart from this shareholding, the Company is not aware of any holders of voting rights of 5% or more attaching to the issued ordinary share capital of the Company as at 2nd March 2017. There were no contracts of significance with corporate substantial shareholders during the year under review. Annual Report 2016 71 Corporate Governance Governance Principles The Company’s primary listing on the London Stock Exchange is a standard listing on the Main Market. Under a standard listing, the Company is subject to the UK Listing Rules (other than those which apply only to companies with a premium listing), the DTRs, the UK Prospectus Rules and MAR. The Company, therefore, is bound by the rules in relation to continuous disclosure, periodic financial reporting, disclosure of interests in shares and market abuse, including the rules governing insider dealing, market manipulation and the disclosure of inside information. The Company is also subject to regulatory oversight from the FCA, as the Company’s principal securities regulator, and is required to comply with the Admission and Disclosure Standards of the Main Market of the London Stock Exchange. When shareholders approved the Company’s move to a standard listing from a premium listing in 2014, the Company stated that it intended to maintain certain governance principles on the same basis as was then applicable to the Company’s premium listing, as follows: 1. When assessing a significant transaction, being a larger transaction which would be classified as a class 1 transaction under the provisions of the UK Listing Rules, the Company will engage an independent financial adviser to provide a fairness opinion on the terms of the transaction. 2. In the event of a related party transaction, being a transaction with a related party which would require a sponsor to provide a fair and reasonable opinion under the provisions of the UK Listing Rules, the Company will engage an independent financial adviser to confirm that the terms of the transaction are fair and reasonable as far as the shareholders of the Company are concerned. 3. Further, as soon as the terms of a significant transaction or a related party transaction are agreed, an announcement will be issued by the Company providing such details of the transaction as are necessary for investors to evaluate the effect of the transaction on the Company. 4. At each annual general meeting, the Company will seek shareholder approval to issue new shares on a non-pre-emptive basis for up to 33% of the Company’s issued share capital, of which up to 5% can be issued for cash consideration. 5. The Company will continue to adhere to its Securities Dealing Rules. These rules, which were based on the UK Model Code, have since been revised to follow the provisions of MAR with respect to market abuse and disclosure of interests in shares. 6. The Company will continue its policies and practices in respect of risk management and internal controls. Related Party Transactions Details of transactions with related parties entered into by the Company during the course of the year are included in Note 27 to the financial statements on page 60. Securities Purchase Arrangements The Directors have the power under the Bermuda Companies Act and the Company’s Memorandum of Association to purchase the Company’s shares. Any shares so purchased shall be treated as cancelled and, therefore, reduce the issued share capital of the Company. When the Board reviews the possibility for share repurchases, it will take into consideration the potential for the enhancement of earnings or asset values per share. When purchasing such shares, the Company is subject to the provisions of MAR. Takeover Code The Company is subject to a Takeover Code, based on London’s City Code on Takeovers and Mergers. The Takeover Code provides an orderly framework within which takeovers can be conducted and the interests of shareholders protected. The Takeover Code has statutory backing, being established under the Acts of incorporation of the Company in Bermuda. 72 Hongkong Land Annual General Meeting The 2017 Annual General Meeting will be held at Rosewood Tucker’s Point, Bermuda on 3rd May 2017. The full text of the resolutions and explanatory notes in respect of the meeting are contained in the Notice of Meeting which accompanies this Report. A corporate website is maintained containing a wide range of information of interest to investors at www.hkland.com. Power to Amend Bye-laws The Bye-laws of the Company can be amended by the shareholders by way of a special resolution at a general meeting of the Company. Annual Report 2016 73 Principal Risks and Uncertainties The Board has overall responsibility for risk management and internal control. The process by which the Group identifies and manages risk is set out in more detail on page 70 of the Corporate Governance section of this Report. The following are the principal risks and uncertainties facing the Company as required to be disclosed pursuant to the Disclosure Guidance and Transparency Rules issued by the Financial Conduct Authority in the United Kingdom and are in addition to the matters referred to in the Chairman’s Statement and Chief Executive’s Review. Economic Risk and Financial Risk The Group is exposed to the risk of negative developments in global and regional economies, and financial and property markets, either directly or through the impact on the Group’s joint venture partners, bankers, suppliers or tenants. These developments can result in: • recession, inflation, deflation and currency fluctuations; • restrictions in the availability of credit, increases in financing and construction costs and business failures; and • reductions in office and retail rents, office and retail occupancy and sales prices of, and demand for, residential developments. Such developments might increase costs of sales and operating costs, reduce revenues, increase net financing charges, or result in reduced valuations of the Group’s investment properties or in the Group being unable to meet in full its strategic objectives. The steps taken by the Group to manage its exposure to financial risk are set out in the Financial Review on page 15 and Note 2 to the financial statements on pages 31 to 37. Commercial Risk Risks are an integral part of normal commercial practices, and where practicable steps are taken to mitigate such risks. These risks are further pronounced when operating in volatile markets. The Group makes significant investment decisions in respect of commercial and residential development projects that take time to come to fruition and achieve the desired returns and are, therefore, subject to market risks. These risks are further pronounced when operating in volatile markets. The Group operates in areas that are highly competitive, and failure to compete effectively in terms of price, tender terms, product specification or levels of service can have an adverse effect on earnings or market share, as can construction risks in relation to new developments. Significant pressure from such competition may also lead to reduced margins. The quality and safety of the products and services provided by the Group are important and there is an associated risk if they are below standard, while the potential impact of cyber-crime may be significant. Regulatory and Political Risk The Group is subject to a number of regulatory environments in the territories in which it operates. Changes in the regulatory approach to such matters as foreign ownership of assets and businesses, exchange controls, planning controls, tax rules and employment legislation have the potential to impact the operations and profitability of the Group. Changes in the political environment in such territories can also affect the Group. Terrorism, Pandemic and Natural Disasters A number of the Group’s interests are vulnerable to the effects of terrorism, either directly through the impact of an act of terrorism or indirectly through the impact of generally reduced economic activity in response to the threat of or an actual act of terrorism. The Group would be impacted by a global or regional pandemic which could be expected to seriously affect economic activity and the ability of our business to operate smoothly. In addition, many of the territories in which the Group is active can experience from time to time natural disasters such as earthquakes and typhoons. 74 Hongkong Land Shareholder Information Financial Calendar 2016 full-year results announced Shares quoted ex-dividend on the Singapore Exchange Shares quoted ex-dividend on the London Stock Exchange Share registers closed Annual General Meeting to be held 2016 final dividend payable 2017 half-year results to be announced Shares quoted ex-dividend on the Singapore Exchange Shares quoted ex-dividend on the London Stock Exchange Share registers to be closed 2017 interim dividend payable * Subject to change Dividends 2nd March 2017 15th March 2017 16th March 2017 20th to 24th March 2017 3rd May 2017 11th May 2017 3rd August 2017 * 23rd August 2017 * 24th August 2017 * 28th August to 1st September 2017 * 19th October 2017 * Shareholders will receive their cash dividends in United States dollars, unless they are registered on the Jersey branch register where they will have the option to elect for sterling. These shareholders may make new currency elections for the 2016 final dividend by notifying the United Kingdom transfer agent in writing by 21st April 2017. The sterling equivalent of dividends declared in United States dollars will be calculated by reference to a rate prevailing on 26th April 2017. Shareholders holding their shares through CREST in the United Kingdom will receive their cash dividends in sterling only. Shareholders holding their shares through The Central Depository (Pte) Limited (‘CDP’) in Singapore will receive their cash dividends in United States dollars unless they elect, through CDP, to receive Singapore dollars. Registrars and Transfer Agent Shareholders should address all correspondence with regard to their shareholdings or dividends to the appropriate registrar or transfer agent. Principal Registrar Jardine Matheson International Services Limited P.O. Box HM 1068 Hamilton HM EX Bermuda Jersey Branch Registrar Capita Registrars (Jersey) Limited 12 Castle Street St Helier, Jersey JE2 3RT Channel Islands United Kingdom Transfer Agent Capita Asset Services The Registry 34 Beckenham Road Beckenham, Kent BR3 4TU United Kingdom Singapore Branch Registrar M & C Services Private Limited 112 Robinson Road #05-01 Singapore 068902 Press releases and other financial information can be accessed through the internet at www.hkland.com. Annual Report 2016 75 Offices Offices Hongkong Land Holdings Limited Jardine House 33-35 Reid Street Hamilton Bermuda Tel +1441 292 0515 E-mail: gpobox@hkland.com Philip A. Barnes Hongkong Land Limited One Exchange Square, 8th Floor Hong Kong Tel +852 2842 8428 E-mail: gpobox@hkland.com Robert Wong Hongkong Land (Shanghai) Management Company Limited Unit 1601a, 07-08 Finance Square 333 Jiujiang Road, Huangpu District Shanghai 200001 China Tel +8621 6333 3921 E-mail: gpobox.sh@hkland.com Calvin Tong Hongkong Land (Singapore) Pte. Ltd. One Raffles Quay North Tower #34-03 Singapore 048583 Tel +65 6238 1121 E-mail: gpobox.sg@hkland.com Robert Garman Hongkong Land (Asia Management) Limited Beijing Yee Zhi Real Estate Consultancy Co., Ltd. Suite 601, 6/F Central Building 31 Hai Ba Trung, Trang Tien Hoan Kiem Hanoi Vietnam Tel +844 3825 1480 E-mail: gpobox.hanoi@hkland.com Cao, Ly Anh Hongkong Land (Beijing) Management Company Limited Room 303, Block 26, Central Park No. 6 Chaoyangmenwai Avenue Chaoyang District Beijing 100020 China Tel +8610 6597 0921 E-mail: gpobox.bj@hkland.com James Zhang Hongkong Land (Chongqing) Management Company Limited 7/F, Zone D, Neptune Building No. 62 Star Light Road New North Zone Chongqing 401147 China Tel +8623 6703 3016-8 E-mail: gpobox.cq@hkland.com Ling Chang Feng Hongkong Land (Premium Investments) Limited No. 1A, Street 102 Sangkat Wat Phnom Khan Daun Penh Phnom Penh Cambodia Tel +855 2399 2063 E-mail: gpobox.cambodia@hkland.com David Tibbott 76 Hongkong Land Room 1013, 10/F Office Tower 1 Beijing APM No. 138 Wangfujing Street Dongcheng District Beijing 100006 China Tel +8610 6520 4828 E-mail: gpobox.bj@hkland.com Stanley Ko MCL Land Limited 78 Shenton Way #33-00 Singapore 079120 Tel +65 6221 8111 E-mail: gpobox.mcl@hkland.com Koh Teck Chuan PT Hongkong Land Consultancy and Management World Trade Centre 1, 17th Floor Jl. Jend. Sudirman Kav. 29–31 Jakarta 12920 Indonesia Tel +6221 521 1125 E-mail: gpobox.indonesia@hkland.com Arthur Choo Representative Offices Shanghai Unit 1109C, Bund Centre 222 Yanan Road (East) Shanghai 200002 China Tel +8621 6335 1220 E-mail: gpobox.sh@hkland.com Stanley Ko / Vincent Sun Vietnam Unit 503, 5/F CJ Tower 2 bis-4-6 Le Thanh Ton, District 1 Ho Chi Minh City Vietnam Tel +848 3827 9006 E-mail: gpobox.hcmc@hkland.com Cosimo Jencks Report of the Valuers To Hongkong Land Holdings Limited Dear Sirs Revaluation of investment Properties Held under Freehold and Leasehold Further to your instructions, we have valued in our capacity as external valuers the investment properties held under freehold and leasehold as described in the consolidated financial statements of Hongkong Land Holdings Limited. We are of the opinion that the market value of the investment properties held under freehold in Cambodia and leasehold in China, Hong Kong, Singapore and Vietnam as at 31st December 2016, totalled US$27,700,300,000 (United States Dollars Twenty Seven Billion Seven Hundred Million and Three Hundred Thousand). Our valuations were prepared in accordance with the International Valuation Standards by the International Valuation Standards Council and The HKIS Valuation Standards by The Hong Kong Institute of Surveyors. We have inspected the properties without either making structural surveys or testing the services. We have been supplied with details of tenure, tenancies and other relevant information. In arriving at our opinion, each property was valued individually, on market value basis, calculated on the net income allowing for reversionary potential, however no allowance has been made for expenses of realisation or for taxation which might arise in the event of disposal. Yours faithfully Jones Lang LaSalle Limited Hong Kong, 1st February 2017 Annual Report 2016 77 Major Property Portfolio at 31st December 2016 Commercial Investment Property Completed development Hong Kong Alexandra House Chater House Exchange Square One Exchange Square Two Exchange Square Three Exchange Square Podium The Forum Jardine House Gloucester Tower Landmark Atrium Edinburgh Tower York House Prince's Building Macau One Central Singapore One Raffles Link One Raffles Quay North Tower South Tower Marina Bay Financial Centre Tower 1 Tower 2 Tower 3 Jakarta, Indonesia World Trade Centre 1 World Trade Centre 2 World Trade Centre 5 World Trade Centre 6 Bangkok, Thailand Gaysorn Hanoi, Vietnam Central Building 63 Ly Thai To 78 Hongkong Land Attributable interests % 100 100 100 100 100 100 100 100 100 49 100 33.3 33.3 50 50 50 50 49 65 73.9 Lettable area Total Office Retail (in thousands of square metres) 35 43 139 63 44 24 44 10 51 453 20 29 123 286 438 42 59 15 19 135 17 4 7 11 30 39 53 47 30 – 4 59 44 – 31 10 38 385 – 23 71 52 57 95 117 415 37 56 14 17 124 5 4 6 10 5 4 – – – 5 – 4 – 24 13 – 13 68 20 6 – – 2 7 8 23 5 3 1 2 11 12 – 1 1 Residential Development Property for Sale Completed development Mainland China Maple Place Central Park Under development Mainland China Bamboo Grove Landmark Riverside Yorkville South Yorkville North Central Avenue New Bamboo Grove WE City Parkville Singapore LakeVille Sol Acres Lake Grande Indonesia Anandamaya Residences Nava Park The Philippines Two Roxas Triangle Mandani Bay Pampanga Property Greenwoods Village Kahaya Place Kohana Grove Vietnam The Nassim Attributable interests % 90 40 Attributable interests % 50 50 100 100 50 50 50 50 100 100 100 40 49 40 50 40 40 40 40 50 Location Available units Beijing Beijing Location Chongqing Chongqing Chongqing Chongqing Chongqing Chongqing Chengdu Shanghai Jurong West Street 41 Choa Chu Kang Grove Jurong West Street 41 Jakarta Serpong, Greater Jakarta Manila Cebu Pampanga Cavite Cavite Cavite 2 72 Site area (in square metres) 142,147 171,716 176,428 425,347 370,517 348,370 113,403 87,180 22,357 32,909 17,804 13,150 653,500 3,719 195,915 249,304 136,473 58,596 23,213 Ho Chi Minh City 4,448 Annual Report 2016 79 Major Property Portfolio Hong Kong – Central District R A L E N ’ S R O A D C E N T Q U E P E D D E R S T R E E T R A L S V O E U X R O A D C E N T D E I C E H O U S E 9a 10 9 8 S T R E E T 11 R O A D C E N T L A R 3 C O N N A U G H T Hongkong Land properties Public car park Pedestrian bridges Mass Transit Railway access L A R T N E C Standard Chartered Bank D A O R S ’ N E E U Q Bank of China L A R T N E D C HSBC A O X R U E O S V E D 7 IC E H 6 O U S E S T R E E T 12 1 2 Stock Exchange O A R B H 4 U R V IE W S T R E E T Airport E xpress Station G S T R E E T N Statue Square D A O R R E T A H C Statue Square N R O A D N O C Mandarin Oriental L A R T N E C D A O R T H G U A N J A C K S O 5 General Post Office H E U N C A M M A N Y I U S T R E E T D A O R O G W N L U 9 8 11 9a 10 7 6 1 2 5 12 3 4 1 One Exchange Square 2 Two Exchange Square 3 Three Exchange Square 4 The Forum Jardine House 5 6 Chater House 7 Alexandra House 8 Gloucester Tower 9 Edinburgh Tower 9a The Landmark Mandarin Oriental 10 York House 11 Landmark Atrium 12 Prince’s Building 80 Hongkong Land Singapore Marina Bay Financial Centre One Raffles Quay One Raffles Link CityLink Mall LakeVille Sol Acres* Lake Grande* J Gateway * This rendering is for reference only, subject to change and government approval. Macau Thailand One Central Indonesia Gaysorn WTC* Anandamaya Residences* Nava Park* Cambodia Philippines Central Mansions EXCHANGE SQUARE* Roxas Triangle Towers* Mandani Bay* Vietnam 63 Ly Thai To Central Building The Nassim* Beijing, China WF CENTRAL* CBD Site* Central Park Beijing, China Chongqing, China Maple Place Bamboo Grove New Bamboo Grove* Central Avenue* Chongqing, China Landmark Riverside Yorkville South Yorkville North Chengdu, China Shanghai, China Shenyang, China WE City* Parkville* One Capitol * This rendering is for reference only, subject to change and government approval. Hongkong Land Holdings Limited Jardine House Hamilton Bermuda www.hkland.com