Hysan Development Co Ltd
Annual Report 2007

Plain-text annual report

H y s a n D e v e o p m e n t l C o m p a n y L m i i t e d 2 0 0 7 A n n u a l R e p o r t OUR GUIDING VALUES 2007 Annual Report stock code: 00014 Hysan Development Company Limited 49/F The Lee Gardens 33 Hysan Avenue, Hong Kong T 852 2895 5777 F 852 2577 5153 www.hysan.com.hk Hysan’s fi nancial results and other accomplishments contributed to a successful 2007. Hysan’s encouraging revenue growth during the year was complemented by the Company’s strengthened competitiveness and operational effectiveness. We also, as recorded in our separate Corporate Responsibility Report, made useful contributions to our community through Hysan’s daily operations and giving projects. We are creating value and are positioned to grow further as a successful and responsible business, guided by our corporate culture and values. Hysan Annual Report 2007 Contents Overview 04 Hysan’s Mission 04 Competitive Advantages 05 Value Creation 06-07 Year 2007 in Review 10-11 Chairman’s Statement 02-11 Our Strategy in Action 14-15 Market Overview 16-25 Operations Review 28-31 Financial Policy 34-38 Internal Controls and Risk Management 39 Human Resources 42-43 Investment Properties Portfolio 12-43 Our Governance 46-49 Our Board of Directors and Offi cers 50-64 Corporate Governance Report 65-71 Directors’ Report 72-78 Directors’ Remuneration and Interests Report 79-80 Audit Committee Report 44-80 Financial Statements and Valuation 82 Directors’ Responsibilities for the Financial Statements Independent Auditor’s Report 83 84 Consolidated Income Statement 85-86 Consolidated Balance Sheet 87 Balance Sheet 88-89 Consolidated Statement of Changes in Equity 90-91 Consolidated Cash Flow Statement 92-134 Notes to the Financial Statements 135-136 Five-Year Financial Summary 137 Report of the Valuer 138 Schedule of Principal Properties 139-140 Shareholding Analysis 81-140 Shareholder Information Hysan Annual Report 2007 01 O O V V E E R R V V I I E E W W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Overview Hysan is one of Hong Kong’s leading property investment companies. We are the largest commercial landlord in the prime Causeway Bay district. This section provides important background information for our shareholders about where we are today, how we performed in 2007, and our Chairman’s outlook. 02 Hysan Annual Report 2007 CONTENT HIGHLIGHTS Hysan’s Mission Competitive Advantages Value Creation Year 2007 in Review Chairman’s Statement Hysan Annual Report 2007 03 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan’s Mission To build, own and manage quality buildings, and being the occupiers’ partner of choice in the provision of real estate accommodation and services, thereby delivering attractive and sustainable returns to shareholders. Competitive Advantages Largest Commercial Landlord in Causeway Bay, Hong Kong’s prime offi ce and retail district Balanced Portfolio of superior investment properties Quality Client Base with prominent multinational and strong local tenants Sustainable Income with high occupancy consistently achieved Established Asset Enhancement Programme with track record of adding value Exceptional Services with focus on our commercial and residential customers Strong Balance Sheet with debts of long maturity and diversifi ed funding sources Financial Prudence to keep risk and return in balance Effective Corporate Governance with widespread industry recognition achieved 04 Hysan Annual Report 2007 Value Creation Recurring Underlying Profit (HK$ million) Underlying Profit (HK$ million) Adjusted Shareholders’ Funds (HK$ million) 1,000 800 600 400 200 0 950 1,200 1,158 40,000 755 641 586 534 1,005 1,012 960 720 609 534 480 32,000 24,000 22,399 18,553 16,000 35,072 30,729 27,134 03 04 05 06 07 240 0 03 04 05 06 07 8,000 0 03 04 05 06 07 Recurring Underlying Earnings per Share (HK cents) Dividends per Share (HK cents) 100 80 60 40 20 0 90.32 71.60 60.94 56.00 51.42 03 04 05 06 07 80 64 48 32 16 0 60.00 50.00 45.00 40.00 36.50 03 04 05 06 07 Gross Floor Area (Excluding Property Under Redevelopment) 21% 24% 55% Capital Value Turnover by Sector 1% 16% 37% 19% 27% 3% 19% 37% 41% Office Retail Residential Property under Redevelopment Others 3.8 million sq.ft. HK$35,711 million HK$1,368 million Hysan Annual Report 2007 05 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Year 2007 in Review OVERVIEW OF THE GROUP’S FINANCIAL PERFORMANCE Turnover Offi ce Retail Residential Others 2007 HK$ million 2006 HK$ million Change HK$ million 567 505 262 34 509 491 232 36 +58 +14 +30 -2 Change % +11.4% +2.9% +12.9% -5.6% 1,368 1,268 +100 +7.9% Change % +25.8% +14.4% +27.4% Change % +12.8% +13.7% +14.1% • Group turnover rose by 7.9% (like-for-like turnover, excluding Hennessy Centre, up 18.8%) • Offi ce sector recorded strong growth in rentals, including capitalisation on Grade “A” offi ce decentralisation trend • Strong retail sales translated into higher rental rates and turnover rent Profit Indicators 1 2 3 Recurring Underlying Profi t Underlying Profi t Statutory Profi t 2007 HK$ million 2006 HK$ million Change HK$ million 950 1,158 3,949 755 1,012 3,099 +195 +146 +850 • Increase in turnover and lower operating costs have contributed to the increase in Recurring Underlying Profi t • Underlying Profi t increased principally due to higher operating profi ts and realised gain on disposal of listed securities • Statutory Profi t improvement due mainly to HK$555 million more fair value changes on investment properties 4 1 2 Asset Value Indicators Total assets Shareholders’ funds Adjusted Shareholders’ Funds 2007 HK$ million 40,890 31,652 35,072 2006 HK$ million 36,253 27,828 30,729 Change HK$ million +4,637 +3,824 +4,343 • Increase in shareholders’ funds due to growth in core operating business, revaluation gains associated with investment properties and listed securities portfolios DEFINITIONS Recurring Underlying Profit This is a performance indicator of the Group’s core property investment business. It is arrived at by excluding from Underlying Profi t gains/ losses from disposal of assets, impairment, reversal, recovery and tax provisions for prior year(s). deferred tax on such fair value changes has to be provided for despite the fact that no capital gain tax liability will arise in Hong Kong on disposal of the Group’s investment properties. Accordingly, both of these two items are excluded in arriving at the Underlying Profi t. Underlying Profit This is arrived at by excluding from Statutory Profi t unrealised fair value changes on investment properties and related deferred tax. As a property investor, the Group’s results are principally derived from the rental revenues on its investment properties. The inclusion of the unrealised fair value change on investment properties in the consolidated income statement causes an increase in fl uctuation in earnings and poses limitation on the use of the unadjusted earning fi gures, fi nancial ratios, trends and comparison against prior period(s). Besides, 3 4 Statutory Profit This is the profi t attributable to equity holders of the Company. It is prepared in accordance with Hong Kong Financial Reporting Standards issued by Hong Kong Institute of Certifi ed Public Accountants and the Hong Kong Companies Ordinance. Adjusted Shareholders’ Funds This is arrived at by adding back the Group’s share of cumulative deferred tax on property revaluation to shareholders’ funds fi gure. Deferred tax on property revaluation has to be provided for despite the fact that no capital gains tax liability will arise in Hong Kong on disposal of properties. 06 Hysan Annual Report 2007 KEY FINANCIAL AND OPERATING DATA Cash Flow Information (expressed in HK$ million) Net cash from operating activities Net cash from investing activities Net cash used in fi nancing activities Net increase (decrease) in cash and cash equivalent Per Share Data Earnings per share, based on: Recurring Underlying Profi t Basic (HK cents) Diluted (HK cents) Underlying Profi t Basic (HK cents) Diluted (HK cents) Statutory Profi t Basic (HK cents) Diluted (HK cents) Shareholders’ returns: Dividends per share (HK cents) Shareholders’ returns per share (HK$) Total shareholders’ returns per share (HK$) Assets value: Net assets value per share (HK$) Adjusted net assets value per share (HK$) Net debt per share (HK$) Share Information Number of shares in issue at year end (million) Weighted average number of shares (million) Highest share price (HK$) Lowest share price (HK$) Closing share price at year end (HK$) Investments in Listed Securities 2007 2006 Change 1,044 212 (1,157) 99 918 175 (2,110) (1,017) 90.32 90.27 110.09 110.04 375.46 375.25 60.00 2.42 5.21 30.51 33.81 2.29 1,037 1,052 23.80 18.54 22.25 71.60 71.53 96.03 95.94 293.96 293.70 50.00 1.60 3.81 26.37 29.12 2.31 1,055 1,054 23.95 18.60 20.35 +13.7% +21.1% +45.2% N/A +26.1% +26.2% +14.6% +14.7% +27.7% +27.8% +20.0% +51.3% +36.7% +15.7% +16.1% -0.9% -1.7% -0.2% -0.6% -0.3% +9.3% Total return (i.e. dividends received plus capital value growth) 65.9% 57.3% +8.6pp Financial Data Average fi nance costs Net debt to equity Net interest coverage (times) Floating rate debt (% on total debt) Average debt maturity Bank facilities: Capital market issuance Key Operating Data (expressed in HK$ million) Investment properties value Offi ce Retail Residential Hennessy Centre Others Occupancy rate as at year end Offi ce Retail Residential 5.6% 6.8% 7.8X 60.1% 4.0 years 4.9% 7.9% 6.9X 64.7% 5.0 years 24.7% : 75.3% 24.7% : 75.3% 35,711 13,202 9,616 6,810 5,650 433 97% 98% 90% 32,473 11,876 9,062 6,206 4,900 429 97% 99% 92% +0.7pp -1.1pp +0.9X -4.6pp N/A N/A +10.0% +11.2% +6.1% +9.7% +15.3% +0.9% – -1pp -2pp Hysan Annual Report 2007 07 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I 08 Hysan Annual Report 2007 O V E R V I E W Hysan aims to achieve its market leadership by providing the fi nest products and services. We are proud to be the largest commercial landlord in Causeway Bay, the thriving home of more than 500 offi ces, retail shops and restaurants. Our Causeway Bay portfolio perfectly refl ects Hong Kong’s energetic and progressive personality. Hysan Annual Report 2007 09 Chairman’s Statement OVERVIEW While the global economy experienced overall growth in 2007, the second half of the year saw signifi cant slowdown in the United States economy, stemming from subprime debt issues. Hong Kong’s economic fundamentals continued to be supported by domestic consumption and good employment conditions. The supply of Grade A offi ce units in core districts remained limited relative to the demand, leading to signifi cant rental increases. In particular, rental trends in the central business district resulted in more tenants choosing to relocate to other core areas including Causeway Bay. Retail rents were again boosted by strong private consumption, while luxury residential rental demand remained high. PERFORMANCE Overall 2007 turnover was HK$1,368 million, up 7.9% from 2006. If the element of Hennessy Centre (under redevelopment since late 2006) is excluded, the turnover increase would be 18.8%. Healthy growth was recorded in all sectors (Offi ce: 23.3%; Retail: 17.7%; Residential: 12.9%), with the offi ce sector growth due partly to the decentralisation factor. Recurring Underlying Profi t, which is profi t excluding asset value changes and prior years’ tax provision, was HK$950 million, up 25.8% from HK$755 million in 2006. Earnings per share, based on Recurring Underlying Profi t, rose to HK90.32 cents (2006: HK71.60 cents). Underlying Profi t, excluding unrealised revaluation changes on investment properties and related deferred tax, was HK$1,158 million (2006: HK$1,012 million). Statutory Profi t increased 27.4% to HK$3,949 million (2006: HK$3,099 million), due mainly to higher valuation of the Group’s investment properties. The external valuation of the Group’s investment property portfolio increased to HK$35,711 million, a rise of 10.0% from HK$32,473 million in 2006. Adjusted shareholders’ funds went up by 14.1% to HK$35,072 million. The Board recommends the payment of a fi nal dividend of HK48.0 cents per share (2006: HK40.0 cents). Together with the interim dividend of HK12.0 cents per share (2006: HK10.0 cents), there is an aggregate distribution of HK60.0 cents per share, representing a year-on-year increase of 20.0%. Subject to shareholder approval, the fi nal dividend will be payable in cash with a scrip dividend alternative. OUR GUIDING VALUES I believe a company’s corporate culture and values play a very important role in its success. They defi ne the way it does things, and ensure that all staff pursue a common goal. Hysan takes pride in our corporate culture underpinning our aim to be a successful as well as responsible business. “Our Guiding Values” is the theme of this year’s annual report. I trust it will give readers a better understanding of the values that underpin our achievements. 10 Hysan Annual Report 2007 DIRECTORS AND STAFF I would like to take this opportunity to express my sincere thanks to Per Jorgensen, who stepped down as an Independent non- executive Director after serving the Board for 26 years. I would also like to thank Michael Lee, who stepped down as the Managing Director, for his contribution to the Group. I welcome Tom Behrens-Sorensen, our new Independent non-executive Director, who joined us in May. Finally, I also thank all staff members for their dedication and hard work throughout the year. OUTLOOK Hong Kong’s economic fundamentals remain sound, underpinned by solid domestic demand and employment conditions. Challenges, however, include the risk of further slowdown in the U.S. economy and in Europe. We are cautiously optimistic about the year ahead. Signifi cant price differential for Grade A offi ces between central business district and other core areas, together with limited new supply in such districts, should continue to benefi t our property investment portfolio situated in the prime Causeway Bay district. Peter Ting Chang Lee Chairman Hong Kong, 13 March 2008 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 11 Our Strategy in Action This section talks about a number of key areas of interest, from market dynamics to our operations; from business opportunities to the way we manage risks. These are supported by our fi nancial as well as our human resources strategies. 12 Hysan Annual Report 2007 CONTENT HIGHLIGHTS Market Overview Operations Review Financial Policy Internal Controls and Risk Management Human Resources Investment Properties Portfolio Hysan Annual Report 2007 13 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Market Overview This market report intends to give general background rather than Group-specifi c information. Views expressed shall not be regarded as providing any advice or recommendation for whatever purpose. For the Group’s performance – see “Operations Review” section. HONG KONG ECONOMY Hong Kong’s economy expanded by 6.3% in 2007, after growing by 7.0% in 2006. There was broad-based growth in both the external and domestic sectors. Export of services increased 11.2% year-on-year while better employment conditions helped private consumption spending to go up by 7.8% in 2007. OFFICE The growth in Hong Kong’s economy ensured many business sectors to remain in an expansive mode over the last 12 months. This continuous growth translated into demand for additional offi ce space in terms of net take-up. In 2007, overall net take-up amounted to 3.4 million sq ft net, which is more than twice the amount achieved in 2006. Overall vacancy was down to just 5.1% in 2007, compared to 5.4% in 2006. Overall supply of Grade A offi ces in core districts remained limited relative to the demand. Growing demand and tightening vacancy levels combined to lift Central’s rentals up 32.2% for 2007. Rising rents continued to drive relocation of Central tenants into other core areas, including Causeway Bay/Wanchai, in addition to in-house expansions by tenants in those districts. Source: Census and Statistics Department 14 Hysan Annual Report 2007 2007 2006 3,302,070 1,131,327 1.6% 4.2% 2.1% 4.1% 5.1% 5.4% +32.2% +27.9% +12.4% +19.2% Grade A Offi ce Completion* Central Grade A Offi ce Vacancy Rate Causeway Bay/ Wanchai Grade A Offi ce Vacancy Rate Overall Grade A Offi ce Vacancy Rate Change in Central Grade A Offi ce Rents Change in Causeway Bay/Wanchai Grade A Offi ce Rents * sq.ft. net Source: Jones Lang LaSalle RETAIL Strong domestic consumption, supplemented by a growing tourism sector, helped create strong leasing demand for prime retail spaces. Due to intense competition for prime street shops especially among luxury brand name retailers, rentals for prime street shops were pushed up by 17.9% in 2007. On the back of limited supply, rentals in prime shopping centres increased by 15.3% during the year. Retail Sales by Value 2007 2006 +12.8% +7.3% Visitor Arrivals +11.6% +8.1% Change in Prime Shopping Centre Rents Change in Prime Street Shop Rents +15.3% +8.1% +17.9% +1.3% Sources: Jones Lang LaSalle, Census and Statistics Department and Hong Kong Tourism Board O V E R V I E W O O U U R R S S T T R R A A T T E E G G Y Y I I N N A A C C T T O O N N I I LUXURY RESIDENTIAL The luxury residential leasing market continued to pick up, supported by strong demand from expatriates. Overall rentals increased by 17.6% in 2007 compared to the previous year. Sub-markets with limited supply including Mid-levels, The Peak and Island South continued to outperform. 2007 2006 +17.6% +8.9% Change in Luxury Residential Rents Source: Jones Lang LaSalle O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 15 Operations Review OUR BUSINESS Hysan is principally engaged, together with its subsidiaries and joint ventures, in investment, development and management of quality properties in prime locations. As at 31 December 2007, Hysan’s investment property interests totaled some 3.8 million gross square feet of high-quality offi ce, retail and residential space in Hong Kong. The former Hennessy Centre at 500 Hennessy Road is currently under redevelopment. 2007 PERFORMANCE The Group’s turnover was HK$1,368 million, up 7.9% (2006: HK$1,268 million). Excluding the revenue attributable to Hennessy Centre (under redevelopment since the fourth quarter of 2006), the like-for-like turnover would increase by 18.8% over the prior year (2006: HK$1,152 million). Recurring Underlying Profi t1 was HK$950 million, 25.8% up from last year (2006: HK$755 million). Underlying Profi t1 (excluding unrealised revaluation changes on investment properties and related deferred tax from the Statutory Profi t1), amounted to HK$1,158 million (2006: HK$1,012 million). Statutory Profi t for the year increased by HK$850 million (27.4%), to HK$3,949 million (2006: HK$3,099 million), mainly due to HK$555 million higher fair value changes on the Group’s investment properties taken to the consolidated income statement, refl ecting rising asset values. PERFORMANCE INDICATORS AND THEIR SIGNIFICANCE TO THE GROUP Although many factors contributed to the results of the Group’s businesses, some of the key drivers for assessment of our performance include those set out below. The nature of these performance indicators, the way they are measured and their signifi cance to the Group are set out as follows: Performance indicator Operations: How it is measured Significance to the Group Occupancy Rate – Percentage of total area leased to tenants over total lettable area of each sector – Rental revenue and management fees are directly proportional to occupancy rate – Optimises revenue by balancing occupancy rate and rental level Turnover Growth – Rental revenue in 2007 compared to that in – Refl ects the combined effect of changes in 2006 rental rate and occupancy rate – Like-for-like basis: excluding rental income attributable to Hennessy Centre in computing 2006 comparative fi gures – Like-for-like change refl ects the growth in the Group’s businesses on a comparable lettable area basis with prior year Property Expenses and as a Percentage on Turnover – Principally being direct costs associated with daily operations of the Group’s property portfolio – Measures the direct costs incurred in managing the Group’s property portfolio – An indication of the gross margin of our – Calculated by dividing property expenses by business turnover Investments in listed securities: Total Return – Aggregate of dividends received and capital – The Group’s equity investment portfolio is value growth signifi cant in size and it is crucial to optimise the returns from these investments 1 Please refer to “Year 2007 in Review” section for defi nitions. 16 Hysan Annual Report 2007 Condensed Consolidated Income Statement for the year ended 31 December 2007 HK$ million 2006 HK$ million Change HK$ million Change % Turnover Property expenses Investment income Other gains and losses Administrative expenses Finance costs Change in fair value of investment properties Share of results of associates Taxation – current – deferred Minority interests Statutory Profi t Underlying Profi t 1,368 (208) 98 302 (106) (175) 3,131 452 (185) (560) (168) 1,268 (240) 147 201 (111) (163) 2,576 120 (89) (469) (141) 3,949 3,099 1,158 1,012 Recurring Underlying Profi t 950 755 Occupancy Rate as at Year End Turnover Turnover comprised principally rental income derived from the Group’s investment properties portfolio in Hong Kong. The occupancy rate and turnover of the Group’s investment properties portfolio are as follows: 100 32 (49) 101 5 (12) 555 332 (96) (91) (27) 850 146 195 7.9 13.3 (33.3) 50.2 4.5 (7.4) 21.5 276.7 (107.9) (19.4) (19.1) 27.4 14.4 25.8 Turnover Offi ce Retail Residential Others 2007 Total HK$ million Hennessy Centre HK$ million 2006 Other Buildings HK$ million Total HK$ million Like-for-like HK$ million 567 505 262 34 49 62 – 5 460 429 232 31 509 491 232 36 1,368 116 1,152 1,268 107 76 30 3 216 Year-on-year Change % 23.3 17.7 12.9 9.7 18.8 Total HK$ million 58 14 30 (2) 100 % 11.4 2.9 12.9 (5.6) 7.9 Note: Hennessy Centre was fully vacated as of 30 September 2006 in preparation for redevelopment and therefore was excluded in calculating the like-for-like changes from the 2006 comparative fi gures. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 17 Operations Review Office Sector There was healthy growth in the offi ce sector rental revenue during the year, attributable to both new lettings as well as positive rental reversion on renewals and rent reviews. In particular, the Group successfully capitalised on the decentralisation trend and attracted new tenants including international accountancy fi rms, as well as others in the fi nancial industries. The like-for-like turnover increased by 23.3% to HK$567 million (2006: HK$460 million). Overall, the offi ce sector revenue increased by 11.4% (2006: HK$509 million). Occupancy for the sector as at year-end was 97% (2006: 97%). Retail Sector Strong domestic consumptions on the back of favourable employment conditions and strong fi nancial market performance remained the main driving force for the growth in retail sales. Increased tourists arrivals also supplemented such growth. Strong retail sales in turn supported the rise in retail rental rates, as well as increased contribution from turnover rent. Like-for-like rental revenue grew 17.7% over last year to HK$505 million (2006: HK$429 million). Overall retail sector revenue increased by 2.9% (2006: HK$491 million). Occupancy for the sector as at year-end was 98% (2006: 99%). Residential Sector There was sustained demand for luxury residential properties from expatriates. Year-on- year growth was HK$30 million, up 12.9% from last year. Occupancy for the sector as at year- end was 90% (2006: 92%). Property Expenses Property expenses are the costs of providing property services directly associated with the daily operations of our investment properties, being primarily related to utilities costs, front-line staff wages, repairs and maintenance, agency fees, government rents and rates, as well as other rent-related expenses. The like-for-like decrease in property expenses as compared with last year was HK$8 million. The implementation of a number of energy saving initiatives led to a 9% reduction in overall energy costs compared to 2006 on a like-for- like basis (after adjusting for tariff changes and other relevant factors). Other factors for less property expenses included lower repairs and maintenance costs and promotion expenses. Total property expenses amounted to HK$208 million in 2007, being HK$32 million (13.3%) lower than last year (2006: HK$240 million). Overall the property expenses in 2007 were 15.2% of turnover, signifi cantly lower than the 18.9% level in 2006, refl ecting both the increase in turnover as well as reduction in costs. 2007 HK$ million 2006 HK$ million Property expenses 208 240 Percentage on turnover 15.2% 18.9% Investment Income Investment income mainly comprised dividend, interest, other receivables and reversals, which amounted to HK$98 million (2006: HK$147 million). The decrease mainly refl ected the effect of a one-off recovery item in 2006, partly offset by higher interest income and higher dividend income from the Group’s overseas investment. 18 Hysan Annual Report 2007 Other Gains and Losses Other gains and losses mainly comprised net realised gain on disposal of available-for-sale investments and mark-to-market movements of fi nancial instruments. The Group’s average fi nance costs rose to 5.6% in 2007 (2006: 4.9%). Further discussions on fi nancial management, including fi nancing policy and fi nancial risk management, are set out in the “Financial Policy” section. Change in Fair Value of Investment Properties The Group has elected the fair value model for investment properties under the Hong Kong Accounting Standard (“HKAS”) 40. As at 31 December 2007, the investment properties of the Group were revalued at HK$35,711 million (2006: HK$32,473 million), by an independent professional valuer, being 10.0% higher than the corresponding value for last year. This refl ected a further increase in rentals of the Group’s existing investment properties portfolio and a higher realisable value on Hennessy Centre redevelopment. Excluding additions, fair value gains on investment properties of HK$3,131 million (2006: HK$2,576 million) were recognised in the consolidated income statement during the year. As at 31 December 2006 Additions Fair value gains As at 31 December 2007 Fair Value HK$ million 32,473 107 3,131 35,711 The Group manages its investment portfolio by continuing to follow prudent investment guidelines that sets out the permitted investments and limits, and with suffi cient fl exibility taking into account the prevailing volatility of the market. For fi nancial assets held as long-term investments, the Group manages them with the aim of balancing the anticipated liquidity position, funding needs and capital gains. For this reason, certain available-for-sale investments were disposed of during the year resulting in a net realised gain of HK$255 million (2006: HK$170 million). The remaining available-for-sale investment portfolio will continue to be held as the Group’s long-term investments. In addition, the Group enters into derivative instruments from time to time to manage volatilities and the pricing risks of its fi nancial assets and liabilities, as well as to enhance returns on its investment portfolio. Administrative Expenses Administrative expenses were lower than the 2006 level by HK$5 million (4.5%) mainly due to lower staff costs and professional fees. Finance Costs Finance costs increased by 7.4% to HK$175 million (2006: HK$163 million) mainly due to the generally higher HIBOR in 2007 and the expiration of interest rate hedging instruments secured in a low-interest environment a few years ago. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 19 20 Hysan Annual Report 2007 I Take Pride Hysan strongly believes in having the highest business ethics and accountability. All of us take pride in our work, acknowledge responsibility for our actions, and endeavour to complete our tasks in the right way. Hysan Annual Report 2007 21 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Operations Review Share of Results of Associates The Group’s share of results of associates increased substantially by 276.7% to HK$452 million (2006: HK$120 million). This was the combined result of an increased share of profi ts from the Shanghai Grand Gateway project to HK$421 million in 2007 (2006: HK$118 million) and that from the Singapore Amaryllis Ville project, which was HK$31 million (2006: HK$2 million). Shanghai Grand Gateway The Group’s share of operating results increased by 80.3% to HK$110 million (2006: HK$61 million). Overall satisfactory occupancy was achieved for the residential units whilst both the retail and offi ce properties remained virtually fully let. The remaining increase in share of profi ts was attributable to higher fair value gain on investment properties and an one-off adjustment to deferred taxation provision arising from the unifi cation of corporate income tax rate in China effective January 2008. Under HKAS 40, properties at Shanghai Grand Gateway have been revalued at market value by an independent professional valuer. The Group’s share of the increase in valuation, less the corresponding deferred tax thereon (including the effect of adjustment in income tax rate), amounted to HK$311 million (2006: HK$56 million). The Group’s effective interest in Shanghai Grand Gateway has increased to 24.7% at 2007 year-end (2006: 23.7%), following the acquisition of an additional interest in this project by the Hong Kong joint-venture partners in December 2007. Singapore Amaryllis Ville The Group has a 25% interest in the Singapore Amaryllis Ville project. All the remaining units at the project were disposed of during the year and contributed to a signifi cant increase in profi t as compared to last year, refl ecting the buoyant luxury property market in Singapore. Taxation Tax provision increased by HK$187 million to HK$745 million in 2007 (2006: HK$558 million) principally due to increase in deferred tax provision relating to higher revaluation gains on investment properties and a provision for prior year taxation of HK$58 million. The Group has been in dispute with the Hong Kong Inland Revenue Department (“IRD”) regarding additional tax assessments for the years of assessment 1995/1996 to 1999/2000. Full amount of tax in dispute has been provided for in the Group’s accounts for previous years. No agreement with IRD has been reached at the date of approval of the 2007 fi nancial statements. Taking into consideration the lapse of time and in light of recent developments in tax case law and practices, an additional provision of HK$58 million was made in the 2007 fi nancial statements being the current estimate of the interest payable on the tax in dispute should IRD’s claim be successful. 22 Hysan Annual Report 2007 Condensed Consolidated Balance Sheet as at 31 December 2007 HK$ million 2006 HK$ million Change HK$ million Change % Investment properties Available-for-sale investments – listed Avaliable-for-sale investments – unlisted Interests in associates Cash and bank balances Other assets Total assets Borrowings Taxation – current – deferred Other liabilities Total liabilities Net assets Shareholders’ funds Minority interests 35,711 2,439 40 1,601 484 615 40,890 32,473 1,678 67 1,272 385 378 36,253 2,861 2,821 270 3,910 1,001 8,042 225 3,349 950 7,345 3,238 761 (27) 329 99 237 4,637 (40) (45) (561) (51) (697) 32,848 28,908 3,940 31,652 1,196 32,848 27,828 1,080 28,908 3,824 116 3,940 Adjusted Shareholders’ Funds 35,072 30,729 4,343 Investment Properties The investment properties were valued at HK$35,711 million, up by 10.0% (HK$3,238 million) from HK$32,473 million in 2006. The Group’s investment properties value by sector as at year-end 2007 is as follows: Available-for-Sale Investments Available-for-sale investments comprised principally securities listed in Hong Kong. Overall, the Hong Kong stock market performed strongly during 2007, notwithstanding a sharp adjustment in the fourth quarter. Total returns from the Group’s listed securities portfolio, including both dividend income and capital value growth, were 65.9% (2006: 57.3%). Total fair value of our listed securities portfolio, classifi ed as available-for-sale investments, as at 31 December 2007 was HK$2,439 million (2006: HK$1,678 million). The decrease in unlisted available-for-sale investment relates to two Singapore residential joint venture projects (10% interest in each). With all the completed units of the projects having been sold, the aggregate amount represents return of the Group’s capital by way of disposal of joint venture interest and loan repayment. 10.0 45.4 (40.3) 25.9 25.7 62.7 12.8 (1.4) (20.0) (16.8) (5.4) (9.5) 13.6 13.7 10.7 13.6 14.1 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 23 Operations Review Interests in Associates Interests in associates increased by HK$329 million (25.9%) over last year. This mainly represented the Group’s share of results in the Shanghai Grand Gateway and Singapore Amaryllis Ville projects. Cash and Bank Balances The cash and bank balances amounted to HK$484 million as at 2007 year-end (2006: HK$385 million), principally refl ecting positive operating cash fl ows during the year and cash generated from disposal of listed securities. Borrowings The carrying amount of the Group’s borrowings stood at HK$2,861 million at year-end 2007, which was maintained at similar level as at year-end 2006 (HK$2,821 million). Taxation Provision for current taxation and deferred taxation increased to HK$4,180 million in 2007 (2006: HK$3,574 million). The net increase was made up of a HK$148 million charge for the year, HK$540 million related to additional deferred tax associated with investment properties revaluation gains, and a prior year tax provision of HK$58 million, reduced by tax payments less refund of HK$140 million. Shareholders’ Funds Shareholders’ funds increased by 13.7% from HK$27,828 million in 2006 to HK$31,652 million in 2007, mainly attributable to results for the year and revaluation gains associated with investment properties and listed securities portfolios. Adjusted Shareholders’ Funds rose by 14.1% from HK$30,729 million in 2006 to HK$35,072 million in 2007. Minority Interests The increase of HK$116 million in minority interests was attributable to increased profi t contribution as well as a revaluation surplus from Lee Gardens Two. Contingent Liabilities The Group has underwritten its associates on cash calls to fi nance working capital requirements. Based on currently available information, management does not anticipate any major call for cash contributions in the foreseeable future. Critical Accounting Estimates and Judgements The preparation of fi nancial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The most signifi cant estimate relates to the valuation of the Group’s investment properties. For details, please refer to note 4 to the fi nancial statements. 24 Hysan Annual Report 2007 Capital Expenditure and Management The Group is committed to enhancing the asset value of its investment property portfolio through selective re-tenanting, refurbishment, repositioning and redevelopment. The Group also has in place a portfolio-wide whole-life cycle maintenance programme as part of its ongoing strategy to pro-actively review and implement maintenance activities. Total cash outlay of capital expenditure (excluding purchase of plant and equipment) during the review year was HK$125 million. The following graph illustrates capital expenditure patterns during the last fi ve years: The Group has an internal control system for scrutinising capital expenditures. Detailed analysis of expected risks and returns is submitted to division heads, and Executive Directors or the Board for consideration and approval, depending on strategic importance, cost/benefi t and the size of the projects. The criteria for assessment of fi nancial feasibility are generally based on net present value, pay back period and internal rate of return from projected cash fl ow. At year-end, the Group had HK$3,600 million undrawn committed bank facilities. These facilities, together with the Medium Term Note Programme, available-for-sale investments and positive cash fl ows from local and overseas operations, provide adequate fi nancial resources to fund the level of planned capital expenditure, including the Hennessy Centre redevelopment project. Hennessy Centre Redevelopment Demolition work for the former Hennessy Centre site had been completed and the design of the new building fi nalised. Design enhancements, in response to market demand, will increase prime retail space, fl exibility to adjust the offi ce/retail mix with ease, and provisions for better connectivity with neighbouring facilities generally. Improved rental revenue will offset anticipated additional costs, with project completion now expected to be in 2011. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 25 26 Hysan Annual Report 2007 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Through seamless teamwork, Hysan provides creative and effective solutions to our clients. Our thought leadership applies to all strategic and operational issues, including creating a vision for our ever-evolving hub in Causeway Bay. I Forge Ahead Hysan Annual Report 2007 27 Financial Policy We adhere to a policy of fi nancial prudence. Our objectives are to: • maintain a strong balance sheet by actively managing debt level and cash fl ow • secure diversifi ed funding sources from both banks and capital markets • minimise refi nancing and liquidity risks by attaining healthy debt repayment capacity, maturity profi le, and availability of banking facilities with minimum collateral on debt • manage the exposures arising from adverse market movements in interest rates and foreign exchange through appropriate hedging strategies • monitor counter-party risks by imposing proper counter-party limits and reduce fi nancial investment risks by holding quality marketable securities Performance indicator Average Finance Costs How it is measured Significance to the Group – Interest expenses divided by average borrowing – Our treasury aims to manage and optimise for the year – 2007: 5.6% (2006: 4.9%) Floating Rate Debt (% on Total Debt) by total debt – 2007: 60.1% (2006: 64.7%) – Debt effectively in fl oating interest rate divided – A measure to calculate the percentage of fi nance costs – HIBOR moved up gradually from the beginning of 2007 to mid-October though signifi cant decline was noted in the last two months of 2007 – As a measure of diversifi cation of funding sources – No movement – An indicator of the pressure for refi nancing or repaying the existing borrowings in the near term – The average maturity has shortened by about one year borrowings subject to fl uctuation in market interest rates – No signifi cant change – It represents the Group’s fi nancial strength from operating activities to meet its interest payment obligations – Higher gross profi t and interest income outweighed the effect of higher average fi nance cost – A benchmark as to the healthy debt level as well as an indicator of the Group’s ability to raise further debt – Higher adjusted capital with net debt level similar to last year Bank Facilities: Capital Market Issuance Average Debt Maturity – The proportion of the borrowings from banks and from capital market relative to the total borrowings – 2007: 24.7%: 75.3% (2006: 24.7%: 75.3%) – The weighted average of remaining maturity period of the Group’s borrowings – 2007: 4.0 years (2006: 5.0 years) Net Interest Coverage – Gross profi t less administrative expenses before depreciation divided by net interest expenses – 2007: 7.8 times (2006: 6.9 times) Net Debt to Equity – Borrowings less cash and cash equivalents divided by Adjusted Shareholders’ Funds – 2007: 6.8% (2006: 7.9%) 28 Hysan Annual Report 2007 Credit Ratings Moody’s – 2007: Baa1 (2006: Baa1) – Investment-grade ratings unchanged Standard and Poor’s – 2007: BBB (2006: BBB) The Treasury policy manual lays down the acceptable range of operational parameters and gives guidance on the above areas in order to achieve the objective of fi nancial prudence. Treasury has an overall objective of optimisation of borrowing costs: that is, to minimise the fi nance costs subject to the constraints of the operational parameters. The cost of fi nancing was 5.6% for 2007. FINANCING As at 31 December 2007, the outstanding gross debt of the Group amounted to HK$2,921 million, approximately at the same level as in 2006. All the outstanding borrowings are on unsecured and committed basis. The Group always takes a prudent approach in managing its loan portfolio. On the individual loan level, the Group strives to lower the borrowing margin as far as possible; but on the portfolio level, the more important objectives are to ensure suffi cient available facilities, diversify the funding sources and to maintain a suitable average tenor relative to the overall duration of the use of the funds. The Group has also established long-term relationships with a number of local and overseas banks. At present, 13 local and overseas banks have provided bilateral banking facilities to the Group and such bank borrowings accounted for about 24.7% of the Group’s outstanding gross debt while the remaining 75.3% outstanding debts were sourced from the capital market. LIQUIDITY AND CASH BALANCE The Group understands the importance of liquidity and thus places great emphasis on liquidity management. The Group’s major sources of liquidity are from the strong recurring cash fl ows of the business and the committed banking facilities. Further liquidity reserve is maintained in the form of highly liquid securities listed on The Stock Exchange of Hong Kong Limited. As at 31 December 2007, the market value of these securities amounted to HK$2,534 million and the balance of bank deposits was about HK$484 million. Furthermore, the total undrawn committed facilities of HK$3,600 million as at 31 December 2007, essentially allows the Group to obtain the same level of liquidity as holding the equivalent amount of cash. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 29 Financial Policy Other measures taken against liquidity risk due to the lack of funds for repayment of maturing debts include maintaining an evenly spread maturity profi le and reducing the concentration of debts maturing in the near term. As at 31 December 2007, around 73.3% of the outstanding debts will be due in more than two years but less than fi ve years. The average maturity of the debt portfolio was about 4.0 years. Therefore, there will not be any refi nancing pressure on the Group at least in the near term. The maturity profi le is as follows: 2007 2006 HK$ million HK$ million Maturing in more than one year but less than two years Maturing in more than two years but less than fi ve years Maturing in more than fi ve years Total gross debt 550 – 2,140 1,270 231 1,639 2,921 2,909 Total gross debt at the end of 2007 was HK$2,921 million, approximately at the same level as in 2006 (2006: HK$2,909 million). The source and application drivers leading to the marginally higher debt are analysed below: Condensed Consolidated Cash Flow Statement for the year ended 31 December 2007 HK$ million 2006 HK$ million Change HK$ million Operating Activities Cash generated from operations Net tax paid Investing Activities Additions less disposals of investment properties Interest and dividends received Disposals less additions of available-for-sale investments Receipts from overseas projects Net placement of principal-protected deposits Additions less disposals of held for trading investment Others Financing Activities Dividends paid Finance costs Net decrease in borrowings Consideration and expenses paid for repurchase of shares Proceeds on exercise of share options Net increase (decrease) in cash balances 1,184 (140) 1,044 (125) 87 394 140 (197) (102) 15 212 (497) (162) – (513) 15 979 (61) 918 (80) 60 95 106 – – (6) 175 (482) (144) (1,487) – 3 (1,157) (2,110) 99 (1,017) 205 (79) 126 (45) 27 299 34 (197) (102) 21 37 (15) (18) 1,487 (513) 12 953 1,116 30 Hysan Annual Report 2007 Net cash generated from operating activities was HK$1,044 million, an increase of HK$126 million from the previous year mainly attributable to a stronger business performance. Net amount of HK$140 million was used to pay tax amount due during the year. Net cash generated from investing activities was HK$212 million, increased from HK$175 million. The change was mainly due to disposal of available-for-sale investments, after offsetting the net cash outfl ows for principal-protected deposits and held for trading investment. Net cash used in fi nancing activities was HK$1,157 million, mainly for payment of dividends, fi nance costs and repurchase of shares. INTEREST RATE EXPOSURE Interest expenses account for a signifi cant proportion of the Group’s total expenses. Therefore, the Group monitors its interest rate exposures closely. Depending on our medium-term projections of interest rates, an appropriate hedging strategy would be adopted to manage the exposure. The Group’s cost of fi nancing in 2007 was 5.6%. The Federal funds rate had been stable at 5.25% before the easing cycle started in the fourth quarter and the rate reached 4.25% at the year end of 2007. Following the fi rst cut in the Federal fund rates, the upward trend of the HKD interest rates has reversed. In anticipation of further reduction in the rates, about 60.1% of the Group’s debts have been maintained in fl oating rates at the end of 2007. FOREIGN EXCHANGE EXPOSURE The Group aims to have minimal mismatches in currency and does not speculate in currency movements. With the exception of the US$182 million 10-year notes, which have been hedged by appropriate hedging instruments, all of the Group’s other borrowings were denominated in Hong Kong dollars. Other foreign exchange exposure relates to the investments in overseas projects in Singapore and Shanghai. These foreign exchange exposures amounted to the equivalent of HK$1,601 million or 3.9% of the total assets. USE OF DERIVATIVES The Group uses derivatives extensively to manage the volatilities and pricing risks of its treasury assets and liabilities, the bulk of which are related to hedging interest rate and foreign exchange exposures. To avoid the Group being exposed to losses arising from the use of derivatives, the potential impact of their use is evaluated thoroughly before executing the transactions. Before entering into any hedging transaction, the Group will ensure that the counterparty possesses strong investment-grade ratings so that the transaction will not expose the Group to undue credit risk. As part of our risk management, a limit on maximum risk- adjusted credit exposure is assigned to each counterparty. The level of the limit is basically in line with the credit quality of the counterparty. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 31 32 Hysan Annual Report 2007 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I I Share and Support Hysan maintains long-term and mutually benefi cial partnerships with our stakeholders. This enthusiasm to share and support shines through in our everyday dealings with our shareholders, clients, business partners and staff members. Hysan Annual Report 2007 33 Internal Controls and Risk Management RESPONSIBILITY Our Board of Directors has the overall responsibility to ensure that sound and effective internal controls are maintained, while management is charged with the responsibility to design and implement an internal controls system to manage risks. A sound system of internal controls is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable but not absolute assurance. HYSAN’S INTERNAL CONTROLS MODEL Our internal controls model is based on that set down by the Committee of Sponsoring Organisations of the U.S. Treadway Commission (“COSO”), and has fi ve components, namely Control Environment; Risk Assessment; Control Activities; Information and Communication; Monitoring. In developing our internal controls model based on the COSO principles, we have taken into consideration our organisation structure and nature of business activities: • Control Environment – this is very important as it sets the tone for internal controls in a company. Hysan is a tightly-knit organisation with around 500 staff members. The actions of management and its demonstrated commitment to effective governance and control are therefore very transparent to all. We have a strong tradition of good corporate governance and a corporate culture based on good business ethics and accountability. We aim to build risk awareness and control responsibility into our culture and regard this as the foundation of our internal controls system. • Control Activities – our core property leasing and management business involves well-established business processes. Control Activities have traditionally been built on senior management reviews, segregation of duties and physical controls. Nonetheless, we recognise that an appropriate level of further formalisation commensurate with the complexity of business processes is benefi cial for the continual development of the Group. There is also the general desire to move towards a management style based on systematic and structured control principles. 34 Hysan Annual Report 2007 FOCUS IN 2007 Our Control Environment is further enhanced. A company-wide briefi ng of our Code of Ethics was completed, to ensure all staff members have a good understanding not only of the Code provisions but also their application to daily operating activities. In order to make the staff even more comfortable and not be intimidated in reporting breaches of Code of Ethics, we have refi ned the whistle-blowing mechanism. An independent third-party service provider will be engaged to receive complaints and allegations, effective March 2008. It is a relatively new practice among Hong Kong corporations. These are accompanied by efforts to reinforce our corporate values by a range of communication channels, including newsletters, staff events, and corporate publications. The roles of the Board and Audit Committee in this regard were reinforced. For instance, corporate values and culture is a Board-level issue as formalised in the Board of Directors Mandate. To ensure alignment of staff roles, responsibilities as well as authorities to corporate objectives, we reviewed and updated job descriptions across the organisation. The levels of authorities were also reviewed and refi ned. In terms of Control Activities, we continued the phased project to document all key policies and procedures for operating, fi nancial reporting and compliance functions. An appropriate balance of preventive and detective controls was built in. We set up our Internal Audit function during the second half of the year to assist management in its “Monitoring” function by providing independent assessment and assurance. The principle of independence was fi rmly established, as evident by its reporting line to Audit Committee and Chief Executive Offi cer (Chairman acting). Other key principles, including the principle of objectivity under which internal auditors should not be involved in the operations being audited, are refl ected in an Internal Audit Charter approved by the Audit Committee. A special Audit Committee meeting was convened to ensure smooth working of the Internal Audit function. The 2008 Internal Audit Plan was approved by the Committee. 2007 REVIEW OF INTERNAL CONTROLS EFFECTIVENESS The Board is responsible for the Company’s system of internal controls and for reviewing its effectiveness. Internal Audit and management conduct reviews of the effectiveness of the Company’s system of internal controls. The Audit Committee reviews the fi ndings and opinion of Internal Audit and management on the effectiveness of the Company’s system of internal controls at least once each year and reports annually to the Board on such reviews. In respect of the year ended 31 December 2007, the Board considered the internal controls system effective and adequate. No signifi cant areas of concern which might affect the operational, fi nancial reporting, and compliance functions of the Company were identifi ed. WAY FORWARD We recognise that the strengthening of internal controls is a continuing process. The followings form the basis of further work in this light: • Governance – in light of the search of a new Chief Executive Offi cer and the coming on board of new senior executives, the governance structure will be reviewed to ensure clear and appropriate roles, responsibilities and authorities for the senior management team. • Policies and procedures – we shall continue our phased project to review and document policies and procedures covering key operating, fi nancial reporting and compliance functions. The focus will include inter-departmental issues and reviewing documented policies following implementation in the light of balancing controls and operating effi ciency. • Education and communication – an effective internal controls system does not stop at senior management level. We shall further strengthen risks and controls awareness among our staff across the organisation. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 35 Internal Controls and Risk Management THE HYSAN INTERNAL CONTROLS SYSTEM – HOW COSO PRINCIPLES ARE APPLIED The following is a summary of the key COSO principles and how Hysan has applied them. Control Environment Component Hysan’s way to achieve the principle Integrity and Ethical Values Basic Principle: Sound integrity and ethical values, particularly of top management, are developed, communicated and policed so that these set the standard of conduct for the organisation. Developing the values Hysan has in place a formal Code of Ethics, emphasising the key principles of (i) respect for people; (ii) ethics and business integrity; (iii) meeting our responsibility. Specifi c guidelines on various areas including corporate and fi nancial reporting, confl icts of interests, personal benefi ts, relations with suppliers and contractors are covered. Communication – Briefi ng of Code of Ethics covered in orientation programme for new recruits. – Code provisions posted on intranet to provide easy access to all. – During 2007, completed a company-wide briefi ng of our Code of Ethics to employees at all levels. Monitoring – (Effective March 2008) An independent third party service provider engaged to monitor the “whistle-blowing” system with direct reporting to Audit Committee Chairman. Mechanics: – available 24-hour-a-day, 7 days a week, option of remaining anonymous; via telephone / email / post – reporting – report to the Audit Committee directly to preserve impartiality where the allegation involves senior management or anyone in the Corporate Services Division Importance of the Board of Directors Basic Principle: The Board of Directors understands and exercises oversight responsibility related to internal controls. Formalised Board roles and responsibilities – Internal controls and risk management, corporate culture and values are Board-level activities. Formalised role expectations of Non-executive Directors – Key roles of Non-executive Directors are formalised, which roles include monitoring of management performance, review of risk management, in addition to requirements applicable to all Directors. 36 Hysan Annual Report 2007 Component Hysan’s way to achieve the principle Management’s Philosophy and Operating Style Basic Principle: Continual reinforcement – This is integrated into our daily operations and continually reinforced. – Use of communication channels including staff newsletters, events and corporate Management’s philosophy and operating style support achieving effective internal controls by setting the tone across the organisation. publications. Levels of Authority and Responsibility Basic Principle: Management and employees are assigned appropriate levels of authority and responsibility to facilitate effective internal controls. Human Resources Basic Principle: Human resources policies and practices are designed and implemented to facilitate effective internal controls, emphasising organisation and development of people and their competence. Levels of responsibilities – During 2007, we conducted a comprehensive review and update of job descriptions across the Company. Levels of authority – During 2007, we refi ned our written levels of authority across the Company. The principles of segregation of duties and confl icts of interests have been built in where appropriate. Human Resources policies – Hysan formalised and refi ned its human resources policies to ensure competence of our staff, and appropriate application of the principles of checks-and-balances and fairness in key people issues. Checks-and-balances – Neither business line nor human resources may have absolute power in key people issues including hiring/termination, disciplinary actions. Competence – Various background checks for new recruits; all staff expected to demonstrate behaviours consistent with Code of Ethics and reasonable standard of performance (Employee Discipline Policy); staff given growth opportunity for retention (Staffi ng Policy – internal transfers). Fairness – Employee Discipline Policy provides for various types of disciplinary actions (oral/written warning, dismissal) according to degree of misconduct; Grievance Handling Procedures provide for opportunity to be heard in an appeal system. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 37 Internal Controls and Risk Management Hysan’s way to achieve the principle – Management conducted an entity-wide exercise in 2006 to map all key control processes to appropriate control objectives. Process owners were identifi ed who have the responsibility for ensuring that (i) controls exist and are in operation; (ii) the relevant policies are documented and updated in light of self-risk assessment. To facilitate the process, a standardised template was developed for documenting these policies: – objectives of the policy – scope of the policy – functions/locations to which the policy applies – roles and responsibilities for ownership, creation, implementation, and maintenance of policy – key provisions covered by the policy – Our Control Activities include a range of activities such as management reviews of operating performance, approvals, reconciliations, security of assets and segregation of duties. An appropriate balance of preventive and detective controls is used. Balancing the availability of resources, duties are segregated to mitigate risks. Hysan’s way to achieve the principle – A review of internal controls system was conducted by independent consultants in 2006. – Set-up of Internal Audit function in 2007. Internal Audit performed an independent review of the overall effectiveness of internal controls system based on framework developed by independent consultants in 2006. – Internal Audit reports are distributed to senior management. Signifi cant fi ndings will be reported to Audit Committee immediately. Summary of fi ndings and audit work done will be presented to Audit Committee on a half-yearly basis. – In general, management monitoring of internal controls effectiveness is a by-product of monitoring the business through management’s direct involvement in business operations. Control Activities Component Basic Principle: Elements of Control Activities – policies and procedures are established and communicated throughout the Company, enabling management directives to be carried out. Basic Principle: Selection and development of Control Activities – Control Activities are selected and developed considering their cost and potential effectiveness in mitigating risks. Monitoring Component Basic Principle: On-going and separate evaluations of all fi ve internal controls components; internal controls defi ciencies are identifi ed and communicated in a timely manner to responsible parties for taking corrective action, and to management and the Board as appropriate. 38 Hysan Annual Report 2007 At the same time, we aim to attract the best talent and are prepared to go beyond the property industry for general management skills that complement our technical expertise. Key positions across the Group have been fi lled both by promotions within the existing employee population and by successful new hires. REWARD AND RECOGNITION We recognise that competitive compensation is a pre-requisite to recruiting and retaining talent. Hysan has always rewarded its staff based on performance and contribution. During the year, we refi ned our differentiated compensation system to better align the nature and market competitiveness of different job families. EMPLOYEE COMMUNICATION We understand that effective communication is key to fostering staff commitment to the Group and we continue to refi ne our employee communication programme. This includes briefi ngs and updates on results announcements and other key corporate developments, regular newsletters, and gatherings with senior management. THE HYSAN ADVANTAGE We aim to be the employer of choice in the property sector, attracting and retaining the best talent that share our corporate values emphasising quality, innovation, and achieving results the right way. We have identifi ed career management as an improvement area and plans are in place to address the issue. Human Resources People remain key to the ongoing growth and success of our business. As at 31 December 2007, we have a total of 459 staff members, including head offi ce asset management team and front-line building management staff. We operate in a business environment with increased competition. Our business strategy is to provide innovative real estate solutions, thereby capturing new customers as well as retaining existing ones. This drives our human resources strategy to become the employer of choice in the property sector. Our objective is to attract and retain high-performing employees who can add value to the business. We made good progress in delivering our human resources strategy covering the core areas of: • Talent management • Reward and recognition • Employee communication TALENT MANAGEMENT Considerable efforts were devoted to identifying core skills and competencies essential to the achievement of business objectives in the changing market and competitive environment. We recognise that we need to challenge the existing practices so as to provide a better solution to serve our existing and potential customers. This requires the skills of innovation — the ability to spot opportunities, to evaluate existing business practices including emulating those from other industries. We shall continue to develop our people by fostering the competencies of innovation and broader business perspectives in our daily operations. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 39 I Care Hysan takes responsibility by giving back to our community. Through our everyday business operations and active participation in community activities, Hysan demonstrates how corporations can give more than just fi nancially to make our society a better place. 40 Hysan Annual Report 2007 Hysan Annual Report 2007 41 Investment Properties Portfolio Bamboo Grove Mid-Levels Leighton Centre 500 Hennessy Road Lee Theatre Plaza One Hysan Avenue The Lee Gardens Lee Gardens Two 111 Leighton Road Sunning Plaza AIA Plaza Sunning Court BAMBOO GROVE 74-86 Kennedy Road, Mid-Levels A luxury residential complex in the Mid-Levels, Bamboo Grove commands panoramic views of the harbour and the greenery of the Peak, and is well served by a multitude of public transport. In addition to superb property management services and full club-house and sports facilities, tenants also enjoy personalised resident services that help ensure a comfortable stay. LEIGHTON CENTRE 77 Leighton Road, Causeway Bay This offi ce and retail complex enjoys close proximity to all forms of public transport. Its central location in the Causeway Bay area makes it a much sought-after location for many professional practices. LEE THEATRE PLAZA 99 Percival Street, Causeway Bay Like its predecessor, Lee Theatre, the Lee Theatre Plaza is a Hong Kong landmark, being one of the city’s best known shopping and dining complexes, housing many of the world's most famous lifestyle brands and restaurants. 500 HENNESSY ROAD Causeway Bay Under redevelopment. Total Gross Floor Area 691,546 sq.ft. Number of Units Parking Spaces Year Completed/ Renovated 345 436 1985/2002 Total Gross Floor Area 435,008 sq.ft. Number of Floors Parking Spaces Year Completed/ Renovated 28 264 1977/2004 Total Gross Floor Area 317,160 sq.ft. Number of Floors 26 Year Completed/ Renovated 1994 Estimated total Gross Floor Area Projected year of Completion Approx. 710,000 sq.ft. 2011 42 Hysan Annual Report 2007 Total Gross Floor Area 169,019 sq.ft. Number of Floors 26 Year Completed/ Renovated 1976/2002 Total Gross Floor Area 902,797 sq.ft. Number of Floors Parking Spaces Year Completed/ Renovated 53 200 1997 Total Gross Floor Area 626,996 sq.ft. Number of Floors Parking Spaces 34 176 Year Completed/ Renovated 1992/renovation of retail podium in 2003 Total Gross Floor Area 279,717 sq.ft. Number of Floors Parking Spaces 30 150 (jointly owned with Sunning Court) Year Completed/ Renovated 1982 Total Gross Floor Area 97,516 sq.ft. Number of Units Parking Spaces Year Completed/ Renovated 59 150 (jointly owned with Sunning Plaza) 1982/2003 Total Gross Floor Area 139,119 sq.ft. Number of Floors 25 Year Completed/ Renovated 1989 Total Gross Floor Area 79,905 sq.ft. Number of Floors 24 Year Completed/ Renovated 1988/2004 ONE HYSAN AVENUE 1 Hysan Avenue, Causeway Bay Located at the junction of three busy streets in the heart of Causeway Bay, this offi ce and retail complex enjoys a prime location with a variety of retail facilities in the surrounding area. THE LEE GARDENS 33 Hysan Avenue, Causeway Bay The Lee Gardens is the Group’s fl agship property comprising an offi ce tower, Manulife Plaza, and a high-end shopping centre. The development, close to the MTR Causeway Bay station, enjoys spectacular views of the Harbour and Happy Valley and is home to many international corporations, luxury fashion brands and renowned restaurants. LEE GARDENS TWO 28 Yun Ping Road, Causeway Bay Lee Gardens Two is an offi ce and retail complex. The complex is conveniently linked to the neighbouring The Lee Gardens and is home to many international corporations, luxury fashion brands, renowned restaurants and a children's concept fl oor. SUNNING PLAZA 10 Hysan Avenue, Causeway Bay Designed by the renowned architect I.M. Pei, Sunning Plaza greets tenants and visitors with a spacious entrance and lift lobby. Among its retail tenants are popular food and beverage outlets, which have established the plaza as a hub for relaxation and social recreation. SUNNING COURT 8 Hoi Ping Road, Causeway Bay The Sunning Court is a unique residential tower in the dynamic Causeway Bay area. Located in a pleasant environment with tree-lined streets, and within easy reach of all forms of relaxation and entertainment in the surrounding district, the building provides maximum comfort for its tenants. AIA PLAZA 18 Hysan Avenue, Causeway Bay AIA Plaza is a 25-level offi ce and retail complex at the corner of Hysan Avenue. The building boasts a bright and spacious lobby, and houses restaurants, specialty cafes and banking services. 111 LEIGHTON ROAD 111 Leighton Road, Causeway Bay Located in a pleasant and quieter area in the heart of Causeway Bay, 111 Leighton Road is an ideal offi ce location for professional and designer fi rms. The retail shops include a European kitchen concept store and a restaurant/fashion store. Hysan Annual Report 2007 43 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Our Governance We are proud of our commitment to maintaining the highest standards of corporate governance, the only means to achieve long-term and sustainable returns. Underlying this commitment is our aim to be a responsible business. 44 Hysan Annual Report 2007 CONTENT HIGHLIGHTS Our Board of Directors and Offi cers Corporate Governance Report Directors’ Report Directors’ Remuneration and Interests Report Audit Committee Report Hysan Annual Report 2007 45 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Our Board of Directors and Offi cers STRUCTURE The Board Audit Committee Chairman Chief Executive Officer Emoluments Review Committee Nomination Committee Investment Committee Chairman Peter Ting Chang LEE (I, chairing N) J.P. (currently acting as Chief Executive Offi cer) Independent non-executive Deputy Chairman Sir David AKERS-JONES (N, chairing A, E) G.B.M., K.B.E., C.M.G., J.P. Independent non-executive Directors Tom BEHRENS-SORENSEN (A) Fa-kuang HU (E) G.B.S., C.B.E., J.P. Dr. Geoffrey Meou-tsen YEH (E, N) S.B.S., M.B.E., J.P., D.C.S., M.Sc., F.C.I.O.B., F.Inst.D. Non-executive Directors Hans Michael JEBSEN (I) B.B.S. Anthony Hsien Pin LEE (chairing I) Chien LEE (A) Dr. Deanna Ruth Tak Yung RUDGARD Finance Executive Director Pauline Wah Ling YU WONG Company Secretary Wendy Wen Yee YUNG Corporate Services Property Investment Property Services Property Development (A) Audit Committee (E) Emoluments Review Committee (N) Nomination Committee Investment Committee (I) 46 Hysan Annual Report 2007 BOARD OF DIRECTORS Mr. Lee joined the Board in 1988, became Managing Director in 1999, and Chairman in 2001. Mr. Lee is a non-executive director of Cathay Pacifi c Airways Limited, CLP Holdings Limited, Hang Seng Bank Limited, SCMP Group Limited, Maersk China Limited, and a director of a number of other companies. He is also vice president of the Real Estate Developers Association of Hong Kong. He is a member of the founding Lee family and a director of Lee Hysan Estate Company, Limited, a substantial shareholder of the Company. Mr. Lee holds a Bachelor of Science Degree in Civil Engineering from the University of Manchester and is also qualifi ed as a Solicitor of the Supreme Court of England and Wales. He is aged 54. Sir David is Chairman of GAM Hong Kong Limited, Deputy Chairman of CNT Group Limited and a non-executive director of various other companies. He is also a chairman and member of various voluntary organisations. He received his Master of Arts Degree at Oxford University. He was formerly the Chief Secretary of Hong Kong. He was appointed a Director in 1989 and became the Deputy Chairman in 2001. He is aged 80. Mr. Behrens-Sorensen is the Group Executive Vice President of A.P. Moller-Maersk Group as well as Chairman of Maersk China Limited. He is also the Chairman of the Danish Chamber of Commerce in China and Chairman of the European Chamber of Commerce in China Transportation Working Group. He has over 20 years of experience with the A.P. Moller – Maersk Group in Asia and Australia. He was appointed an Independent non-executive Director in 2007 and is aged 49. Mr. Hu is Honorary Chairman of Ryoden Development Limited. He holds a Bachelor of Science Degree from Shanghai Jiao Tong University. He was appointed a Non-executive Director in 1979 and as Independent non-executive Director in 2008. He is aged 84. Mr. Jebsen is Chairman of Jebsen and Company Limited as well as a director of other Jebsen Group companies worldwide. He is also an independent non-executive director of The Wharf (Holdings) Limited. He was appointed a Non-executive Director in 1994 and is aged 51. Peter Ting Chang Lee Chairman (I, chairing N) J.P. Sir David Akers-Jones Independent non-executive Deputy Chairman (N, chairing A, E) G.B.M., K.B.E., C.M.G., J.P. Tom Behrens-Sorensen Independent non-executive Director (A) Fa-kuang Hu Independent non-executive Director (E) G.B.S., C.B.E., J.P. Hans Michael Jebsen Non-executive Director (I) B.B.S. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 47 Our Board of Directors and Offi cers Mr. Lee is a director and substantial shareholder of the Australian- listed Beyond International Limited, principally engaged in television programme production and international sales of television programmes and feature fi lms. He received a Bachelor of Arts Degree from Princeton University and a Master of Business Administration Degree from The Chinese University of Hong Kong. Mr. Lee is a member of the founding Lee family and a director of Lee Hysan Estate Company, Limited, a substantial shareholder of the Company. He was appointed a Non-executive Director in 1994 and is aged 50. Mr. Lee is a private investor and a non-executive director of a number of companies including Swire Pacifi c Limited and Television Broadcasts Limited. He is a member of the founding Lee family and a director of Lee Hysan Estate Company, Limited, a substantial shareholder of the Company. Mr. Lee received a Bachelor of Science Degree in Mathematical Science, a Master of Science Degree in Operations Research and a Master of Business Administration Degree from Stanford University. Mr. Lee was appointed a Non-executive Director in 1988 and is aged 54. Dr. Rudgard received a Master of Arts Degree, Bachelor of Medicine and of Surgery Degree from Oxford University. She is a member of the founding Lee family and a director of Lee Hysan Estate Company, Limited, a substantial shareholder of the Company. She was appointed a Non-executive Director in 1993 and is aged 68. Dr. Yeh is former Chairman of Hsin Chong Construction Group Ltd. He holds a Bachelor of Science Degree from University of Illinois and a Master of Science Degree from Harvard University. Dr. Yeh was appointed a Non-executive Director in 1979 and as Independent non-executive Director in 2001. He is aged 76. Mrs. Wong is responsible for the Group’s investment properties activities. Having obtained a Bachelor of Arts Degree from The University of Hong Kong, she qualifi ed as a Fellow Member of the Chartered Institute of Housing. She joined the Company in 1981 and has over 30 years of experience in the property fi eld. She was appointed a Director in 1991 and is aged 59. Anthony Hsien Pin Lee Non-executive Director (chairing I) Chien Lee Non-executive Director (A) Dr. Deanna Ruth Tak Yung Rudgard Non-executive Director Dr. Geoffrey Meou-tsen Yeh Independent non-executive Director (E, N) S.B.S., M.B.E., J.P., D.C.S., M.Sc., F.C.I.O.B., F.Inst.D. Pauline Wah Ling Yu Wong Executive Director 48 Hysan Annual Report 2007 OFFICERS From left to right: Pauline Wah Ling Yu Wong (Executive Director), Peter Ting Chang Lee (Chairman), Ricky Tin For Tsang (Chief Financial Offi cer), Wendy Wen Yee Yung (Company Secretary) Ricky Tin For Tsang Chief Financial Offi cer Mr. Tsang joined the Group in 2004 and oversees the areas of fi nancial control and accounting, treasury, corporate fi nance and institutional investors relations, as well as information technology. He had previously held senior positions in risk management, treasury and fi nancial control with major fi nancial institutions in the United Kingdom and in Hong Kong. Mr. Tsang holds a Masters’ Degree in Engineering from Oxford University, United Kingdom. He is also qualifi ed as a Chartered Accountant with the Institute of Chartered Accountants in England and Wales, and is a Fellow of Hong Kong Institute of Certifi ed Public Accountants. He is also a member of the Association of Corporate Treasurers in the United Kingdom. He is aged 46. Wendy Wen Yee Yung Company Secretary Ms. Yung joined the Group in 1999 and is responsible for the Group’s corporate services including legal and secretarial, human resources and administration, as well as corporate communications. A solicitor by training, Ms. Yung was a partner of an international law fi rm prior to joining the Group. Ms. Yung holds a Master of Arts Degree from Oxford University, United Kingdom. She is also a Member of the Hong Kong Institute of Certifi ed Public Accountants. She sits on the Hong Kong Selection Committee of the Rhodes Scholarships, as well as a number of committees of the Hong Kong Institute of Certifi ed Public Accountants and the Hong Kong Institute of Chartered Secretaries respectively. She is aged 46. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 49 Corporate Governance Report RESPONSIBLE BUSINESS AS THE GUIDING PRINICIPLE Hysan aims to be a fi nancially successful as well as responsible business. In our quest to deliver long-term sustainable value to our shareholders, we have to understand the context in which we operate and make decisions that balance the needs of various stakeholders. To our shareholders, this is translated into a commitment to maintaining the highest standards of corporate governance. The cornerstones of our corporate governance practices are accountability, transparency, and integrity. To us, therefore, good corporate governance is not an exercise in compliance. Nor is this restricted to the Board process. The Board must delegate to other executives, who in turn implement policies across the organisation. It is therefore crucial to reinforce our corporate culture and values, which emphasise good business ethics and responsible behaviour in general. STATEMENT OF COMPLIANCE WITH THE CODE ON CORPORATE GOVERNANCE Hysan has complied throughout the review year with the Code Provisions contained in the Code on Corporate Governance Practices (the “Corporate Governance Code”) set out in Appendix 14 of the Rules (the “Listing Rules”) Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (“Stock Exchange”), except that its Emoluments Review Committee (established since 1987) has the responsibility for determining executive Director compensation. In light of the current organisational structure and the relatively simple nature of Hysan’s business activities, the Board regards the current arrangements for the Emoluments Review Committee to determine executive Director compensation as appropriate. The Board will continue to review this arrangement in light of the needs of the Group. The Company’s Corporate Governance guidelines provide for separate roles of Chairman and Managing Director. Peter Ting Chang Lee serves as the Chairman. An open search is currently underway for a new Chief Executive Offi cer. 50 Hysan Annual Report 2007 Best Practices in Corporate Governance in Place at Hysan Exceeded Code Provisions The Board fi rst established a formal Corporate Governance Policy in 2004. The Board has formally designated a Senior Independent non-executive Director, Sir David Akers-Jones. He currently serves as Independent non-executive Deputy Chairman. The Board has established formal mandates and responsibilities for itself, with clear division of roles with management. The Board has established formal criteria and requirements for Non-executive Director appointments. Newly appointed Non-executive Directors are given formal letters of appointment. Board evaluation: Chairman and Non-executive Directors meet at regularly scheduled sessions without presence of management. All Corporate Governance Committees (Audit, Emoluments Review and Nomination) have at least a majority of Independent non-executive Directors, in compliance with Listing Rules requirements. Terms of Reference of such Committees have been refi ned to provide for in-camera meetings without management presence to further encourage objective and independent discussions and assessment. The Group has a written Code of Ethics applicable to all staff and Directors. Monitoring of the “whistle blowing” mechanism has been outsourced to an external independent third party provider to further enhance independence. The Group has established a Code for Securities Dealing applicable to those employees likely to have access to unpublished price-sensitive information. The Group has established a Corporate Disclosure Policy to guide its communications with its stakeholders in order to ensure consistent and timely disclosure. The Group has established an Auditor’s Services Policy to identify areas of confl icts and prohibits engagement of auditors in such areas to ensure objectivity and independence. The Group has demonstrated its commitment to transparency in shareholder reporting by publishing a separate Corporate Governance Report since 2001. It also publishes the following reports: (i) Audit Committee Report; (ii) Directors’ Remuneration and Interests Report; and (iii) Report on Internal Controls and Risk Management. The Group has formalised its Corporate Responsibility Policy and publishes a separate annual Corporate Responsibility Report. Since 2004 the Group has operated a new form of annual general meeting (“AGM”) that goes beyond the discharging of statutory business by including a detailed business review session led by the Chairman. The Group has initiated and funded a programme inviting major nominee companies to proactively forward communication materials to ultimate benefi cial shareholders at its expense. The Group continually enhances the use of its corporate website as a means of communication with shareholders. Principal corporate governance policies, guidelines, and terms of reference of related committees are posted. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 51 Corporate Governance Report FOCUS IN 2007 Reinforcement of our corporate culture and values was a main focus in 2007. This in fact forms an important element of further strengthening our control environment, a key component of our internal controls system. Our programme includes a Group-wide briefi ng of our Code of Ethics, establishing corporate culture and values as a Board-level matter, and strengthening the Board and Audit Committee’s oversight roles generally. These are complemented by a range of employee communication channels, including staff newsletters, events and corporate publication. In addition to enhancing the control environment, other steps were also undertaken to further strengthen our internal controls system. These are described in greater details in a separate report – “Internal Controls and Risk Management”. In terms of the Board infrastructure, we further reinforced the independence of corporate governance-related Board Committees (being Audit, Emoluments Review, and Nomination Committees). Currently, all Committees have at least a majority of Independent non-executive Directors. We refi ned their terms of reference and formalised the arrangements of in-camera meetings without management presence. This is intended to further encourage open and objective discussions and assessment. We improved the quality of corporate reporting and disclosure generally. In this annual report, we aim to provide comprehensive yet user- friendly information on all material matters regarding the Group, including the fi nancial situation, performance, and governance. To further facilitate the comparability of reporting and provide more insight into our performance, we included a greater use of key performance indicators, as well as general market and competitive information. We also enhanced the provision of information to facilitate shareholders’ exercising their rights. These enhancements include detailed information in the accompanying AGM circular on voting procedures, resolutions to be voted thereat, and shareholders’ rights generally. Recent Recognitions for Hysan’s Corporate Governance Achievements Year Awards 2007 2006 2005 – Platinum Award (Non-Hang Seng Index Category) in Best Corporate Governance Disclosure Awards 2007 by Hong Kong Institute of Certifi ed Public Accountants – Award Winner – Best Five Corporate Governance Practices in Asia/Pacifi c by The IR Global Rankings 2007. – Gold Award (Non-Hang Seng Index Category) in Best Corporate Governance Disclosure Awards 2006 by Hong Kong Institute of Certifi ed Public Accountants. – Award Winner – Best Five Corporate Governance Practices in Asia/Pacifi c by The IR Global Rankings 2006. – On the Top 10 Companies List with Best Corporate Governance in the Survey on Corporate Governance of Hong Kong Listed Companies 2006, jointly presented by The Hong Kong Institute of Directors and City University of Hong Kong. – Platinum Award (Non-Hang Seng Index Category) in Best Corporate Governance Disclosure Awards 2005 by Hong Kong Institute of Certifi ed Public Accountants. – “Citation for Achievement in Corporate Governance Disclosure” award in General Category by Hong Kong Management Association. – Third highest rated company in Hong Kong in the FTSE Institutional Shareholder Services Corporate Governance Index 2005. 2004 – Directors of The Year Awards 2004, in the Listed Companies Boards Category, organised by the Hong Kong Institute of Directors. 52 Hysan Annual Report 2007 CORPORATE GOVERNANCE REPORTING We have set out detailed information on our corporate governance structure and practices in the following separate reports: • Corporate Governance Report • Audit Committee Report (Page 79-80) • Directors’ Remuneration and Interests Report (Page 72-78) • Internal Controls and Risk Management (Page 34-38) Evolution of Hysan’s Corporate Governance Framework O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 53 Corporate Governance Report Chairman Peter T.C. Lee spoke on family ownership and professional management at the 2nd Asia-Pacifi c Corporate Governance Conference, August 2007 “When the issue of ‘family business’ is brought up…I am sure people can think of good things like ‘identity and values’…and ‘long-term vision’, while others may see the not-so-positives like ‘abuses by the majority shareholder’…So how should a family business stress the positives and eliminate the negatives?...The essence of Hysan’s governance model is an effective combination of the commitment and support of a family ownership and the best of professional management.” Transcript of the full speech is posted on www.hysan.com.hk 1. OUR GOVERNANCE MODEL Hysan’s governance model is based on an effective combination of family ownership and professional management. Our founding shareholding family remains a major shareholder today. We take the view that this element of family ownership can enable managers to take a long-term view in decision-making, balancing the need to produce short-term results or earnings targets. In general, family owners also have a more direct interest in the outcome of decisions made. This family ownership model is combined with a commitment to apply the principle of meritocracy in human resources management across the Group. Recruitment of professional management staff from outside the controlling shareholder base ensures that a wide net is cast for talent. Appropriate checks-and- balances are also built into our governance structure. These include the designation of a Senior Independent non-executive Director and the establishment of appropriate board committees. The roles and responsibilities of the Board, Non-executive Directors, and Board Committees are clearly delineated. 54 Hysan Annual Report 2007 2. OUR GOVERNANCE FRAMEWORK 3. THE BOARD AND MANAGEMENT Key Facts Key Facts There are many guidelines, policies and procedures that support the governance framework at Hysan. The following constitute key components of Hysan’s governance framework. They are posted on www.hysan.com.hk →(cid:3)Corporate Governance Guidelines → Board of Directors Mandate → Roles requirements of Non-executive Directors → Terms of Reference of various corporate governance-related Board Committees (Audit, Emoluments Review, and Nomination Committees) → Code of Ethics for Employees → Auditor Services Policy → Corporate Disclosure Policy The Board reviews its corporate governance practices annually The Corporate Governance Guidelines form the general framework of our corporate governance practices and cover: • Mission of the Board • Board appointment and induction • Board Leadership: Chairman, Managing Director and Senior Independent non-executive Director • “Independence” standards for outside Directors • Board authorities, delegations and discretions • Board compensation review • Board access to senior management; availability of information • Meeting procedures • Governance-related Board Committees → Board of Directors Mandate is posted on www.hysan.com.hk → The Board reviews its corporate governance practices annually → Board focus in 2007: internal controls; corporate culture and values; human resources The roles of the Board and of the management are separate and distinct. The Board’s responsibility is, fi rstly to formulate strategy and, secondly, to monitor and control operating and fi nancial performance in pursuit of the Group’s strategic objectives. On the other hand, the responsibility for the day-to-day management of the Group’s business activities and the implementation of the Group’s policies remains vested in management. The Board and management fully appreciate their respective roles and are supportive of the development of a healthy corporate governance culture. These are governed by a formal Board of Directors Mandate which sets out the key responsibilities of the Board in fulfi lling its stewardship roles. These include the following: • Strategic Planning and Monitoring • Internal Controls and Risk Management • Culture and Values • Capital Management • Corporate Governance • Board Succession O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 55 Corporate Governance Report A detailed list of Matters Reserved For Board Decisions is in place setting out key matters that are to be retained for full Board decision. These matters include: (Details on the 2007 Board review and general information on Group internal controls system are set out in “Internal Controls and Risk Management” on page 34 to 38) Group human talent was another area of attention. There was a general review and refi nement of core skill requirements in light of the changing market environment and competition. Regular updates on progress in continually strengthening the Group’s human resources were provided to the Board. Four Board meetings were held in 2007 and the meetings were structured to allow open discussion. Details of Directors’ Board attendance records are as follow: Director Executive Peter Ting Chang Lee Pauline Wah Ling Yu Wong Michael Tze Hau Lee Independent Non-Executive Sir David Akers-Jones Tom Behrens-Sorensen Fa-kuang Hu (Note) Dr. Geoffrey Meou-tsen Yeh Non-Executive Hans Michael Jebsen Anthony Hsien Pin Lee Chien Lee Dr. Deanna Ruth Tak Yung Rudgard Per Jorgensen Attendance/Total Board Meetings 4/4 4/4 2/2 4/4 2/2 3/4 4/4 (25% by alternate) 4/4 (75% by alternate) 4/4 4/4 4/4 2/2 Note: Designated as Independent non-executive Director in 2008. • Long-term objectives and strategies • Extension of Group activities into new business areas • Annual budgets • Preliminary announcements of interim and fi nal results • Dividends • Material banking facilities • Material acquisitions and disposals • Connected Transactions • Annual internal controls assessment and • Appointments to the Board following recommendations by the Nomination Committee Where applicable, the “materiality” thresholds are set at appropriate levels to ensure proper control while allowing for smooth day-to-day operations to be carried out by management. The schedule is reviewed periodically, at least once a year. It was last formally reviewed by the Board in March 2008. Board Focus in 2007 In addition to extensive discussions on Group leasing strategy, projects, and performance, the Board also focused on the following areas. The Board reiterated the importance of continually enhancing the Group’s internal controls system. In light of the nature of the Group being a family-controlled company and the possible perception this might give, the Board paid special attention to having appropriate checks-and-balances in its internal controls system. Group culture and values were reinforced generally, particularly as the Group entered into a stage of expanding its human talent. 56 Hysan Annual Report 2007 4. BOARD LEADERSHIP: CHAIRMAN AND SENIOR INDEPENDENT NON- EXECUTIVE DIRECTOR The Group’s Corporate Governance Guidelines provide for separate roles of Chairman and Managing Director. Peter Ting Chang Lee serves as the Chairman. An open search is currently underway for a Chief Executive Offi cer. The Group’s corporate governance model aims to effectively combine family control and professional management. Sir David Akers-Jones acts as the Independent non-executive Deputy Chairman of the Board. His role as the Senior Independent non- executive Director is formalised in the Group’s Corporate Governance Guidelines. He is available to shareholders and fellow Directors if they have concerns relating to matters that contact through the normal channels of Chairman and/or Chief Executive Offi cer has failed to resolve, or for which such contact is inappropriate. The Senior Independent non-executive Director also chairs two of Hysan’s corporate governance related committees, namely the Audit Committee and the Emoluments Review Committee. The presence of an Independent non-executive Deputy Chairman is designed to ensure that the Board functions effectively and is independent of management where appropriate. actively engaged in succession planning issues for both executive and non-executive roles. Diversity Hysan’s Board members bring an appropriately diverse set of experience, competencies, skills and judgment to the Board. We fi nd that diversity of background and experience contributes to more effective Board deliberations. Skill/Experience of the Hysan Board Members Executive Directors – Top management – Peter Ting Chang Lee (Chairman) – Business line – Pauline Wah Ling Yu Wong (Executive Director) Independent non-executive Directors – Civil service – Sir David Akers-Jones (Independent non-executive Deputy Chairman) – Multi-national corporations/global exposure – Tom Behrens-Sorensen – Related business (real estate and investment) – Fa-kuang Hu – Related business (construction) – Dr. Geoffrey Meou-tsen Yeh Non-executive Directors – Trading companies/global exposure – Hans Michael Jebsen – Finance and investment – Chien Lee and Anthony Hsien Pin Lee – Professional – Dr. Deanna Ruth Tak Yung Rudgard 5. BOARD COMPOSITION The Board currently comprises of two executive and eight non-executive Directors. The Board continually reviews its composition and is Directors’ biographies are set out on pages 47 and 48 and are also available on the Group’s website. “The outside directors bring their world of experience into our board room and these are especially invaluable during discussions on strategies and plans for the future. They are also watchdogs to ensure the strict requirements of the law and regulatory controls are observed. They make our management team much more aware of corporate governance requirements.” Extract from Chairman Peter T.C. Lee’s speech at the 2nd Asia Pacifi c Corporate Governance Conference Hysan Annual Report 2007 57 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Corporate Governance Report 6. BOARD INDEPENDENCE Key Facts → The Board’s “independence” standards are posted on www.hysan.com.hk → The Board reviews “independence” status of Non-executive Directors on an annual basis → All Non-executive Directors standing for re- election at the 2008 AGM are independent except Chien Lee because he is a member of the founding Lee family The Board has established “independence” standards as contained in the Corporate Governance Guidelines. It considers “independence” as a matter of judgment and conscience. A Director is considered independent only where he is free from any business or other relationship that might interfere with the exercise of his independent judgment. The Board makes a determination concerning the “independence” of a Director each year at the time the Board approves Director nominees for inclusion in the AGM circular. If a Director joins the Board mid-year, the Board makes a determination on the new Director’s independence at that time. Currently, the Group has four Independent non- executive Directors who are identifi ed in our Annual and Interim Reports and other communications with shareholders. Sir David Akers-Jones, Independent non- executive Deputy Chairman seeking re-election at this year’s AGM, has served the Board for more than nine years. Sir David Akers-Jones has clearly demonstrated his willingness to exercise independent judgment and to provide objective challenges to management. There is no evidence that length of tenure is having an adverse impact on his independence. The Board therefore considers that Sir David remains independent, notwithstanding the length of his tenure. Management Independent Not Independent March 2008 Review – Reason for Independence Status No business or other relationships with Group or management No business or other relationships with Group or management No business or other relationships with Group or management No business or other relationships with Group or management (Note 1) No business or other relationships with Group or management (Note 2) INDEPENDENCE STATUS Name Peter Ting Chang Lee Sir David Akers-Jones Tom Behrens-Sorensen (as from 8 May 2007) Per Jorgensen (up to 8 May 2007) Dr. Geoffrey Meou-tsen Yeh Fa-kuang Hu Hans Michael Jebsen Anthony Hsien Pin Lee Chien Lee Dr. Deanna Ruth Tak Yung Rudgard Pauline Wah Ling Yu Wong Note 1: Dr. Yeh is the former Chairman of Hsin Chong Group whose business includes construction and is on the Group’s tender list. As at 31 December 2007, Dr. Yeh and his associates hold less than 5% interest in the Hsin Chong Group. Note 2: Mr. Hu is a former director and shareholder of Ryoden Lift Services Limited and Ryoden Engineering Contracting Company Limited which have lift maintenance and miscellaneous works contracts with the Group. Since 2004, Mr. Hu and his associates no longer have interests in such companies. Mr. Hu formerly acted as Non-executive Director of a number of the Group’s non-operating subsidiaries. He has resigned from such positions in 2008. 58 Hysan Annual Report 2007 Best Corporate Governance Disclosure Awards 2007: Non-Hang Seng Index Catagory – PLATINUM AWARD Organised by The Hong Kong Institute of Certifi ed Public Accountants “The judges considered the 2006 report of Hysan set a good benchmark... in a number of respects, the company’s corporate governance practices exceeded the standards laid down by the Code on Corporate Governance Practices.” “Generally, the judges found the report to be an impressive and professionally presented report.” Extracted from Judges’ Report 7. DIRECTOR APPOINTMENTS AND RE-ELECTION Key Facts → Formalised role requirements of Non-executive Directors posted on www.hysan.com.hk → Non-executive Directors are appointed for a term of three years and are subject to rotation under our Articles of Association → Biographies and other details of Directors standing for re-election are found in the AGM circular accompanying this Annual Report Requirements There is a formal, rigorous and transparent procedure for the appointment of new Directors to the Board. The Board has established the Nomination Committee with the responsibility for recommending candidates to the full Board for consideration. The Committee and, in turn, the Board reviews the skill set of the Director candidates as well as the Board as a whole. There are formalised role requirements for Non-executive Directors who have four additional key roles as well as those requirements applicable to all Directors: • Strategy – constructively challenge, hence help develop proposals on strategy • Performance – scrutinise performance of management in meeting agreed goals and objectives • Risk – to satisfy themselves about the integrity of fi nancial information and the robustness of controls and systems of risk management • People – determine appropriate levels of remuneration for Executive Directors and to undertake succession planning Mr. Tom Behrens-Sorensen was appointed as an Independent non-executive Director during 2007. Term Non-executive Directors are appointed for a term of three years. New Directors are required to submit themselves for re-election at the fi rst AGM following their appointment. The Group’s Articles of Association contain provisions regarding rotation of Directors so that every Director will be subject to retirement by rotation at least once every three years. Retiring Directors are subject to re-election at the general meeting at which he retires. There is no cumulative voting in Directors elections, election on each candidate is by a separate resolution. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 59 Corporate Governance Report 8. SUPPLY OF INFORMATION AND EVALUATION Key Facts → The Chairman, with the assistance of the Company Secretary, is responsible for the induction of new Board members → New Directors’ induction includes provision of an induction package and discussion sessions with key management personnel Induction and Update On their appointment, Directors are advised on the legal and other duties and obligations they have as directors of a listed company. Newly appointed Directors receive a comprehensive induction package designed to provide a general understanding of the Group; its business; operation of the Board and main issues it faces; as well as an overview of the responsibilities of a Non-executive Director of the Group. Discussion sessions with key management personnel will also be held. Directors’ Induction Package The contents of the induction package are reviewed from time to time in light of the nature of the Group’s activities and the needs of the individuals concerned. They cover: • Directors’ Duties – including – Hysan Handbook on the Duties and Responsibilities of Directors – The Company’s Code for Securities Dealing by Directors – Checklist of circumstances that require notifi cation by a Director to the Company • The Group’s Business – including – Budget highlights – Company organisation chart – Details of any major litigation; summary of major group insurance policies including Directors and Offi cers’ Liabilities Insurance • Board Process and Current Board Issues – including – Minutes of last 3 Board meetings – Brief biographical details of all Directors, the Company Secretary and other key executives – Details of Board Committees together with terms of references. Our Directors are regularly updated on Hysan’s business, the environment in which it operates and other matters throughout their period in offi ce. Supply of Information The Board receives detailed quarterly reports from management in respect of their areas of responsibility. Appropriate key performance indicators are used to facilitate benchmarking and peer group comparison. Financial plans, including budgets and forecasts, are regularly discussed at Board meetings. From time to time, the Board also receives presentations, including from non-Board management members, on issues of signifi cance or on new opportunities for the Group. Directors also have access to non-Director management staff where appropriate. These ensure that the Board will be given the answers it needs. Independent Advice The Board recognises that there may be occasions when one or more Director feel it is necessary to take independent legal and/or fi nancial advice at the Company’s expense. There is an agreed procedure to enable them to do so, as laid down in our Corporate Governance Guidelines. Evaluation Hysan has in place a process of Board evaluation in the form of meetings between the Chairman and Non-executive Directors without management being present. A number of meetings were held in 2007. 60 Hysan Annual Report 2007 9. BOARD COMMITTEES Key Facts → The Board has three corporate governance- related committees → Work prepared by Audit Committee is found in a separate report from the Committee (page 79-80) → Work performed by the Emoluments Review Committee is found in a separate Directors’ Remuneration and Interests Report (page 72-78) In order to provide effective oversight and leadership and pursuant to its Corporate Governance Guidelines, the Board has established three governance-related Board Committees. All such Committees have at least a majority of Independent non-executive Directors. In common with the Board, each Committee has access to independent advice and counsel as required and each is supported by the Company Secretary. The terms of reference of these Committees are available on the Company website. A. Audit Committee Composition and Meetings Schedule Hysan’s Audit Committee is chaired by Sir David Akers-Jones, Independent non-executive Deputy Chairman. Its other members are Tom Behrens-Sorensen and Chien Lee. All members have experience in reviewing or analysing audited fi nancial statements of public companies or major organisations. The Audit Committee meets no less than twice a year. Meetings are also attended by invitation by management including the Chief Financial Offi cer. Roles and Authority Hysan believes that crucial to the effective functioning of an audit committee is a clear appreciation of the separate roles of management, the external auditors and Audit Committee members. Hysan management is responsible for selecting the appropriate accounting policies and for the preparation of the fi nancial statements. The external auditors are responsible for auditing and attesting to the Group’s fi nancial statements and evaluating the Group’s system of internal controls to the extent that they consider necessary to support their audit report. The Audit Committee, as the delegate of the full Board, is responsible for overseeing the entire process. The Audit Committee also has the responsibility for reviewing the Group’s “whistle-blowing” procedures for employees to raise concerns, in confi dence or anonymously, about possible breaches of its Code of Ethics and to ensure that these arrangements allow proportionate and independent investigation of such matters and appropriate follow up action. Activities and Report in 2007 Full details are set out in the “Audit Committee Report” on pages 79-80. Two meetings were held in 2007 with full attendance. B. Emoluments Review Committee Composition and Meetings Schedule The Group set up an Emoluments Review Committee in 1987 to review executive Director compensation. The Committee is chaired by Sir David Akers-Jones, Independent non-executive Deputy Chairman. Its current members are Fa-kuang Hu and Dr. Geoffrey Meou-tsen Yeh. The Committee generally meets at least once every year. Roles and Authority Management makes recommendations to the Committee on Hysan’s framework for, and cost of, executive Director remuneration and the Committee then reviews these recommendations. No Director nor any of his associates is involved in deciding his own remuneration. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 61 Corporate Governance Report Activities and Report in 2007 Full details are set out in the “Directors’ Remuneration and Interests Report” on pages 72-78. One meeting was held in March 2007 to consider executive Directors’ compensation. Sir David Akers-Jones and Mr. Fa-Kuang Hu attended the meeting. C. Nomination Committee Composition The Board established a Nomination Committee in 2005. It is chaired by Peter Ting Chang Lee, Chairman of the Board, and its other members are Sir David Akers-Jones and Dr. Geoffrey Meou-tsen Yeh. The Committee meets when it is considered necessary. Roles and Authority The Committee has the responsibility of nominating for Board approval candidates to fi ll Board vacancies as and when they arise and of evaluating the balance of skills, knowledge and experience of the Board. It is clearly set out in the terms of reference of the Committee that the Chairman of the Board shall not chair the Committee when it is dealing with the matter of succession of the chairmanship. Activities and Report in 2007 The Committee met once in 2007 with full attendance to consider the appointment of Mr. Tom Berhrens-Sorensen as Independent non-executive Director as from the conclusion of the 2007 AGM. 10. SHAREHOLDERS Key Facts → We operate a self-funded programme to proactively forward shareholder communication materials via nominee companies → Our AGM promotes shareholder communications by providing a business session led by Chairman (2007 review posted on www.hysan.com.hk) → Investor relations programme in place to maintain a continuing open dialogue with institutional shareholders → Corporate Disclosure Policy posted on www.hysan.com.hk → Detailed information on voting contained in AGM circular The Board and management fully recognise the signifi cance in having a governance framework that protects shareholder rights and their exercise of the same. At the same time, we aim to continually improve our communications with shareholders and obtain their feedback. AGENDA • 2006 Business Environment Overview • Management Philosophy • 2007 Outlook • Business Activities Review 62 Hysan Annual Report 2007 Communication with Shareholders Accountability to Shareholders and Corporate Reporting Disciplined measurement of our performance is an important aspect of our strategy to achieve long-term success. Reporting fi nancial and non-fi nancial results in a transparent fashion is critical, recognising that we are accountable to our stakeholders. A number of formal communication channels are used to account to shareholders for the performance of the Group. These include the Annual Report and Accounts, Interim Report and Accounts and press releases/announcements. Constructive Use of AGM The Board recognises the signifi cance of constructive use of AGMs as a useful means to enter into a dialogue with private shareholders based on mutual understanding of objectives. Individual shareholders can put questions to the Chairman at the general meeting. Board Committee Chairmen, as provided under the respective terms of references, attend AGMs to respond to any shareholder questions on the activities of the Committees. Since 2004, to enable shareholders to gain a better understanding of our business activities, we have included a “business review” session led by the Chairman in addition to the statutory part of the meeting. Topics covered at the last AGM included: Year 2006 business environment; business activities review and outlook. The arrangements were positively received by shareholders. Institutional Shareholders We are committed to maintaining a continuing open dialogue with institutional investors and analysts as a means of developing their understanding of our strategy, operations, management and plans and raising any issues they may have. The Chief Financial Offi cer participates in regular one-on-one meetings and roadshows in Hong Kong as well as overseas. Corporate Disclosure Policy We recognise the signifi cance of consistent disclosure practices aimed at accurate, timely and broadly disseminated disclosure of material information about Hysan. A Corporate Disclosure Policy is in place, which provides guidance for coordinating the disclosure of material information to investors, analysts and media as well as our processes for results announcements. This policy also identifi es who may speak on Hysan’s behalf, and outlines the responsibility for communications with various stakeholders groups. Shareholder Rights Self-funded Programme to Proactively Forward Shareholder Communication Materials via Nominee Companies Shareholders must be furnished with suffi cient and timely information concerning the Company and any material developments. There is currently no requirement in Hong Kong providing for mandatory forwarding of shareholder communication materials by nominee companies to benefi cial shareholders. Since 2005, we have initiated and funded a programme inviting major nominee companies to proactively forward communication materials to shareholders at our expense. Coverage of the programme has more than doubled since inception. Provision of Sufficient and Timely Information We recognise the signifi cance of providing information to shareholders to enable them to make an informed assessment in voting. Copies of the Annual Report and fi nancial statements and related papers were dispatched to shareholders more than 30 days prior to the AGM (statutory requirement: 21 days). O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 63 Corporate Governance Report Ordinance, shareholders holding not less than 5% of the paid up capital of the Company may convene an extraordinary general meeting by requisition stating the objects of the meeting, and deposit the signed requisition at the Company’s registered offi ce. The Hong Kong Companies Ordinance also provide for shareholder approval of decisions concerning fundamental corporate changes, including amendments to the Articles of Association, and extraordinary transactions including the transfer of all or a substantial part of a company’s assets. There are no limitations imposed by Hong Kong law or the Articles of Association on the right of non-residents or foreign persons to hold or vote on the Company’s shares other than those limitations that would generally apply to all shareholders. Detailed information on voting procedures (including procedures for demanding a poll) is given in a user-friendly “frequently-asked- questions-and-answers” format in the AGM circular which accompanies the Annual Report. Comprehensive information on each resolution to be proposed is also provided. Voting To ensure shareholders can obtain a degree of control proportionate to their equity ownership, the Company intends to conduct all voting at general meetings by poll which practice has been adopted for our AGMs since 2004. The poll is conducted by the Company’s Registrars and scrutinised by the Group’s auditors. Poll results are announced and posted on both the Stock Exchange’s and the Company’s websites. Relevant Provisions in Articles of Association and Hong Kong Law Under the Articles of Association of the Company and Hong Kong Companies “The idea of fair play….applies to the distinct separation of the private and public entities, as well as the relationship between majority and minority shareholders. The sense of fair play would become the cornerstone of what is now better known as ‘corporate governance’.” Extract form Chairman Peter T.C. Lee’s speech at the 2nd Asia Pacifi c Corporate Governance Conference 64 Hysan Annual Report 2007 Directors’ Report The Directors submit their report together with the audited fi nancial statements for the year ended 31 December 2007, which were approved by the Board of Directors on 13 March 2008. PRINCIPAL ACTIVITIES The principal activities of the Group continued throughout 2007 to be property investment, management and development. Details of the Group’s associates and principal subsidiaries at 31 December 2007 are set out in notes 19 and 41 respectively to the consolidated fi nancial statements. The revenue and result of the Group are principally derived from leasing of investment properties located in Hong Kong; accordingly, no segment fi nancial analysis is provided. A detailed review of the development of the business of the Group during the year, and likely future developments, is set out in Chairman’s Statement and Management’s Discussion and Analysis of the Annual Report. RESULTS AND APPROPRIATIONS The results of the Group for the year ended 31 December 2007 are set out in the consolidated income statement on page 84. An interim dividend of HK12 cents per share amounting to HK$127,232,025 was paid to shareholders during the year. The Board of Directors recommends the payment of a fi nal dividend of HK48 cents per share with a scrip alternative to the shareholders on the register of members on 14 May 2008, absorbing HK$497,985,483. The ordinary dividends proposed and paid in respect of the full year 2007 will absorb HK$625,217,508, the balance of the profi t will be retained. RESERVES Movements during the year in the reserves of the Group and the Company are set out in the consolidated statement of changes in equity on pages 88 and 89 and note 32 to the consolidated fi nancial statements respectively. INVESTMENT PROPERTIES All of the Group’s investment properties were revalued by an independent professional valuer at 31 December 2007. The revaluation resulted in a surplus of HK$3,130,712,676 as compared to carrying amount and is recognised in the consolidated income statement. Details of movements during the year in the investment properties of the Group are set out in note 15 to the consolidated fi nancial statements. Details of the major investment properties of the Group at 31 December 2007 are set out in the section under Schedule of Principal Properties of the Annual Report. PROPERTY, PLANT AND EQUIPMENT Details of movements during the year in the property, plant and equipment of the Group and the Company are set out in note 16 to the consolidated fi nancial statements. SHARE CAPITAL Details of movements in the share capital of the Company during the year are set out in note 31 to the consolidated fi nancial statements. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 65 Directors’ Report continued CORPORATE GOVERNANCE The Company is committed to maintaining a high standard of corporate governance and, save as otherwise stated and explained in the Corporate Governance Report, has complied throughout the year with the code provisions of the Code on Corporate Governance Practice (the “Code”) as set out in Appendix 14 of the Rules Governing the Listing of Securities (the “Listing Rules”) on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”). Further information on the Company’s corporate governance practices is set out in the following separate reports: (a) “Corporate Governance Report” (pages 50 to 64) – it gives detailed information on the Company’s compliance with the Code, and adoption of local and international best practices; (b) “Directors’ Remuneration and Interests Report” (pages 72 to 78) – it gives detailed information of Directors’ remuneration and interests (including information on Director’s compensation, service contracts, Directors’ interests in shares; contracts and competing business); (c) “Audit Committee Report” (pages 79 and 80) – it sets out terms of reference, work performed and fi ndings of the Audit Committee for the review year; (d) “Internal Controls and Risk Management” (pages 34 to 38) – it sets out the Company’s framework on internal control and risks assessment including methodology, control activities, work done during the year and further steps to be done; and (e) “Corporate Responsibility Report” – it set out the Company’s Corporate Responsibility Policies and Practices refl ecting its commitment to maintaining a high standard of corporate governance. THE BOARD The Board currently comprises Peter Ting Chang Lee, Chairman and Pauline Wah Ling Yu Wong, Executive Director and eight other non-executive Directors. Sir David Akers-Jones acts as the Independent non-executive Deputy Chairman, also chairing the corporate governance-related committees, namely, the Audit Committee and the Emoluments Review Committee. The biographies of the Directors as at the date of this Report appear on pages 47 and 48. Michael Tze Hau Lee and Per Jorgensen stepped down as Managing Director and Independent non-executive Director respectively and Tom Behrens-Sorensen was appointed as Independent non-executive Director as from the conclusion of the 2007 annual general meeting held on 8 May 2007 (“2007 AGM”). Accordingly, Timothy John Smith was appointed as alternate Director to Tom Behrens-Sorensen (previously acted as alternate Director to Per Jorgensen) as from the conclusion of the 2007 AGM. Save as the aforesaid, Raymond Liang-ming Hu, Li Kam Wing, V-nee Yeh served as alternate Directors throughout the year. According to Article 97 of the Company’s current Articles of Association, a Director appointed either to fi ll a casual vacancy or as an addition to the Board shall hold offi ce only until the next following annual general meeting. Under Article 114 of the Company’s current Articles of Association, one-third (or such other number as may be required under applicable legislation) of the Directors; and where the applicable number is not an integral number, to be rounded upwards, who have been longest in offi ce shall retire from offi ce by rotation. Details of Board changes effective as from the conclusion of the forthcoming annual general meeting (“2008 AGM”) including particulars of Directors seeking re-election at the 2008 AGM are set out in the accompanying circular to shareholders. The Company has received from each Independent non-executive Director an annual confi rmation of his independence pursuant to Rule 3.13 of the Listing Rules and the Company considered all of them to be independent. DIRECTORS’ INTERESTS IN SHARES Details of the interests and short positions of the Directors and alternate Director in the shares, underlying shares or debentures of the Company and its associated corporations are set out in Directors’ Remuneration and Interests Report on pages 72 to 78. 66 Hysan Annual Report 2007 SUBSTANTIAL SHAREHOLDERS’ AND OTHER PERSONS’ INTERESTS IN SHARES As at 31 December 2007, the interests or short positions of substantial shareholders and other persons of the Company, in the shares and underlying shares of the Company as recorded in the register required to be kept under section 336 of the Securities and Futures Ordinance (“SFO”), or as otherwise notifi ed to the Company, were as follows: Aggregate long positions in shares and underlying shares of the Company Name Lee Hysan Estate Company, Limited Lee Hysan Company Limited Capacity No. of ordinary shares held Benefi cial owner and interests of controlled corporations Interests of controlled corporations 433,130,735 (Note 2) 433,130,735 (Note 2) % of the issued share capital (Note 1) 41.75 41.75 Notes: (1) The percentage has been compiled based on the total number of shares of the Company in issue as at 31 December 2007 (i.e. 1,037,469,756 ordinary shares). (2) These interests represent the same block of shares of the Company. 270,118,724 shares were held by Lee Hysan Estate Company, Limited (“LHE”) and 163,012,011 shares were held by certain subsidiaries of LHE. LHE is a wholly-owned subsidiary of Lee Hysan Company Limited. Apart from the above, no other interest or short position in the shares or underlying shares of the Company were recorded in the register required to be kept under section 336 of the SFO as at 31 December 2007. RELATED PARTY TRANSACTIONS The Group entered into certain transactions with parties regarded as “Related Parties” under applicable accounting principles. These mainly relate to contracts entered into by the Group in the ordinary course of business, which contracts were negotiated on normal commercial terms and on an arm’s length basis. Further details are set out in note 39 to the consolidated fi nancial statements. Some of these transactions also constitute “Continuing Connected Transactions” under the Listing Rules, as identifi ed below. CONTINUING CONNECTED TRANSACTIONS Certain transactions entered into by the Group constituted continuing connected transactions (the “Transactions”) under the Listing Rules. Details of the Transactions as at 31 December 2007 are set out as follows: I. Lease granted by the Group (a) The Lee Gardens, 33 Hysan Avenue, Hong Kong (“The Lee Gardens”) The following lease arrangement was entered into by Perfect Win Properties Limited, a wholly-owned subsidiary of the Company and property owner of The Lee Gardens, as landlord, with Oxer Limited (formerly known as “Bonde Limited”), a company controlled by Michael Tze Hau Lee, former Managing Director of the Company. Details of the lease arrangement are set out below: Connected person Date of agreement Terms Premises Oxer Limited Rooms 3703 and 3704 and 1 carparking space 30 August 2007 (Lease and Supplemental Lease) 6 July 2007 (Carpark Licence Agreement) 3 years commencing from 1 July 2007 (for Room 3703) and 35 months commencing from 1 August 2007 (for Room 3704) 34 months commencing from 1 September 2007 (for a carparking space) Annual consideration (Note 1) 2007: HK$ 507,299 (on pro-rata basis) 2008: HK$ 1,458,060 2009: HK$ 1,458,360 2010: HK$ 729,180 (on pro-rata basis) Hysan Annual Report 2007 67 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Directors’ Report continued CONTINUING CONNECTED TRANSACTIONS continued I. Lease granted by the Group continued (b) Lee Gardens Two, 28 Yun Ping Road, Hong Kong (“Lee Gardens Two”) The following lease arrangements were entered into by Barrowgate Limited (“Barrowgate”), a 65.36% subsidiary of the Company and property owner of Lee Gardens Two, as landlord with the following connected persons: Connected person Date of agreement Terms Premises Offi ce units at 28th to 31st Floors Offi ce units at 28th, 30th and 31st Floors Shop G13 on the Ground Floor and portion of Lower Ground Floor (Shops 11-12) Shop G13A on the Ground Floor and Shops 2-10 and 11-12 on Lower Ground Floor Annual consideration (Note 1) 2007: HK$ 9,572,328 (on pro-rata basis) 2007: HK$ 6,805,776 (on pro-rata basis) 2008: HK$ 20,582,424 2009: HK$ 20,582,424 2010: HK$ 13,721,616 (on pro-rata basis) 2007: HK$ 13,267,560 2008: HK$ 1,643,808 (on pro-rata basis) 2007: HK$ 242,097 (on pro-rata basis) 2008: HK$ 10,578,491 2009: HK$ 12,469,416 2010: HK$ 9,821,341 (on pro-rata basis) (Note 6) Offi ce units at 24th and 25th Floors 2007: HK$ 6,596,532 558,431 2008: HK$ (on pro-rata basis) (i) Jebsen and Company Limited (Note 2) 10 September 2003 (ii) Jebsen and Company Limited 29 June 2007 (Note 3) 4 years commencing from 1 September 2003 3 years commencing from 1 September 2007 (iii) Hang Seng Bank Limited (Note 2) 7 June 2006 (Note 4) 3 years commencing from 1 October 2006 (iv) Hang Seng Bank Limited 15 October 2007 (Note 5) (v) MF Jebsen International Limited (Note 7) 23 April 2004 and a Supplemental Deed of 12 July 2004 72 months commencing from 15 October 2007 (for Shops 2-10 on the Lower Ground Floor) 68 months commencing from 15 February 2008 (for Shop G13A on the Ground Floor and Shops 11-12 on the Lower Ground Floor) 4 years commencing from 1 February 2004 and 3 years and 7 months commencing from 1 July 2004 68 Hysan Annual Report 2007 CONTINUING CONNECTED TRANSACTIONS continued I. Lease granted by the Group continued (c) Bamboo Grove, 74-86 Kennedy Road, Hong Kong (“Bamboo Grove”) The following leases were entered into by Kwong Wan Realty Limited (“Kwong Wan”), a wholly-owned subsidiary of the Company and property owner of Bamboo Grove as landlord, with LHE, a substantial shareholder of the Company (holding 41.75% interest) and Atlas Corporate Management Limited (“Atlas”), a wholly-owned subsidiary of LHE. Details of the leases are set out below: Connected person Date of agreement Terms Premises (i) Lee Hysan Estate Company, Limited 9 November 2005 and an extension agreement of 1 November 2007 2 years and 2 months commencing from 1 November 2005 Penthouse 01 on the 36th and 37th Floors and 1 carparking space Annual consideration (Note 1) 2007: HK$ 2,690,280 (Note 8) (ii) Atlas Corporate Management Limited 14 December 2005 (Formal tenancy agreement executed on 5 January 2006) 2 years commencing from 16 January 2006 Penthouse 01 on the 29th and 30th Floors and 2 carparking spaces 2007: HK$ 1,792,920 72,494 2008: HK$ (on pro-rata basis) (Note 9) (d) One Hysan Avenue, Causeway Bay, Hong Kong The following lease arrangement was entered into by OHA Property Company Limited, a wholly-owned subsidiary of the Company and property owner of One Hysan Avenue, with Atlas. Details of the lease are set out below: Connected person Date of agreement Terms Premises Atlas Corporate Management Limited 9 November 2005 3 years commencing from 1 November 2005 Whole of 21st Floor Annual consideration (Note 1) 2007: HK$ 1,397,664 2008: HK$ 1,169,800 (on pro-rata basis) II. Provision of leasing and property management services to a non-wholly-owned subsidiary regarding Lee Gardens Two The following management agreements were entered into by Hysan Leasing Company Limited and Hysan Property Management Limited, both being wholly-owned subsidiaries of the Company, with Barrowgate for the provision of services to Lee Gardens Two, including (i) leasing, marketing and lease administration services; and (ii) property management services: Connected person Date of agreement Terms Premises Barrowgate Limited 25 February 2004 and two Supplemental Appointment Letters of 19 July 2004 and 7 February 2007 3 years commencing from 1 April 2004 (renewable for a further 3 years) Whole premise of Lee Gardens Two Annual consideration HK$ 17,443,318 (i) and HK$ 2,525,278 (ii) (Note 10) O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 69 Directors’ Report continued CONTINUING CONNECTED TRANSACTIONS continued Notes: 1. The annual consideration are based on current rates of rental and operating charges and (for retail premises) promotional levies for each of the relevant fi nancial years. The rental and operating charges and promotional levies (as the case may be) are payable monthly in advance. 2. Jebsen and Company Limited (“Jebsen and Company”) and Hang Seng Bank Limited (“Hang Seng”) are benefi cial substantial shareholders of Barrowgate having equity interest of 10% and 24.64% respectively in Barrowgate. 3. This is a renewal of the lease mentioned under I(b)(i) above. 4. Barrowgate entered into a surrender agreement with Hang Seng on 15 October 2007 whereby Hang Seng agreed to surrender the premises mentioned under I(b)(iii) above with effect from 14 February 2008. 5. Barrowgate entered into an agreement for lease on 15 October 2007. 6. The rent for the period from 15 October 2010 to 14 October 2013 will be reviewed at the then prevailing market rent and to be agreed by Barrowgate and Hang Seng. 7. At the time of entering the lease, MF Jebsen International Limited was considered a connected person by virtue of it being a company controlled by an alternate Director of the Company. It has ceased to be a connected person upon expiry of 12 months from the resignation of the alternate Director. 8. The monthly management fees were revised with effect from 1 January 2007. An extension agreement was entered into between Kwong Wan and LHE on 1 November 2007 whereby Kwong Wan agreed to extend the term of the lease mentioned under I(c)(i) for a further period of 2 months commenced from 1 November 2007 and expired on 31 December 2007. 9. The monthly management fees were revised with effect from 1 January 2007 while the rental remained unchanged. 10. These represent the actual considerations for the year ending 31 December 2007, calculated on the basis of the fee schedules as prescribed in the respective management agreements. All the Transactions were entered in the ordinary and usual course of business of the respective companies after due negotiations on an arm’s length basis with reference to the prevailing market conditions. Announcements were published regarding the Transactions in accordance with the Listing Rules. The Stock Exchange has granted a waiver for the Transactions referred to in section I(b)(v) and section II above by virtue of Rule 14A.42 from strict compliance with the requirements of Rules 14A.35, 14A.45 to 14A.47 of the Listing Rules on condition that details of the Transactions be included in the Company’s subsequent published annual report for fi nancial years in which the relevant Transactions are subsisting. The Company confi rms that it has complied with the disclosure requirements in accordance with Chapter 14A of the Listing Rules in so far as they are applicable. Pursuant to Rule 14A.38 of the Listing Rules, the Board of Directors engaged the auditor of the Company to perform certain agreed upon procedures in respect of the Transactions of the Group to assist the Directors to evaluate whether the Transactions: 1. have received the approval from the Board of Directors; 2. were in accordance with the pricing policies of the Company where the Transactions involve provision of goods and services by the Company; 3. have been entered into in accordance with the agreement governing such Transactions; and 4. have not exceeded the cap stated in the relevant announcements. The auditor has reported the factual fi ndings on these procedures to the Board of Directors that the samples the auditor selected for the Transactions were in agreement in respect of items 1, 3 & 4 above and that according to the samples the auditor selected, in respect of item 2, the rent charged to the connected persons were either the same or fall within the range of rental offered to independent third parties. All Independent non-executive Directors of the Company have reviewed the Transactions and the report of the auditor and confi rmed that the respective contracts and terms of the Transactions are: 1. in the ordinary and usual course of business of the Company; 2. on normal commercial terms; and 3. in accordance with the relevant agreement governing them on terms that are fair and reasonable and in the commercial interests of the Group as a whole. 70 Hysan Annual Report 2007 INTEREST IN CONTRACTS OF SIGNIFICANCE The lease arrangement between Barrowgate, a non wholly-owned subsidiary, and Jebsen and Company, of which Hans Michael Jebsen is a director and shareholder, also constitutes a contract of signifi cance due to the annual consideration of the lease having a percentage ratio of 1.29% from the calculation of the revenue test (the percentage ratio for assets ratio and consideration ratio are 0.04% and 0.07% respectively) as at 31 December 2007. Details of the transaction are set out under I(b)(i) and (ii) of Continuing Connected Transactions. MAJOR CUSTOMERS AND SUPPLIERS The aggregate turnover attributable to the Group’s fi ve largest customers was less than 30% of total turnover. Details of the Group’s transactions with its major suppliers during the year are set out below: The largest supplier Five largest suppliers in aggregate Percentage of the Group’s total purchases 16% 33% Save otherwise disclosed, no Director, their associates or shareholders (which to the knowledge of the Directors own more than 5% of the Company’s issued share capital) were interested, at any time during the year, in the Group’s fi ve largest suppliers. PURCHASE, SALE OR REDEMPTION OF THE COMPANY’S LISTED SECURITIES The Company was authorised at the 2007 AGM to purchase its own ordinary shares not exceeding 10% of the aggregate nominal amount of its issued share capital at that time. During the year, the Company repurchased its ordinary shares on the Stock Exchange when they were signifi cantly trading at a discount in order to enhance shareholder value. During the year, the Company repurchased its own ordinary shares on the Stock Exchange as follows: Month of repurchase in 2007 August September October November Number of shares of nominal value of HK$5 each repurchased 871,000 22,720,000 100,000 542,000 24,233,000 Consideration per share Highest HK$ 19.64 22.00 21.00 23.00 Lowest HK$ 18.94 19.40 20.95 22.75 Aggregate consideration paid HK$ 16,844,269 480,117,127 2,099,650 12,404,450 511,465,496 The repurchased shares were cancelled during the year and the issued share capital of the Company was reduced by the nominal value thereof. Save as disclosed above, neither the Company nor its subsidiaries purchased, sold or redeemed any of the Company’s listed securities during the year. PUBLIC FLOAT Based on the information that is publicly available to the Company and within the knowledge of the Directors, the Company has maintained the prescribed amount of public fl oat during the year and up to the date of this report as required under the Listing Rules. DONATIONS During the year, the Group made donations totalling HK$1,299,170 for charitable and non-profi t-making organisations. AUDITOR A resolution for the re-appointment of Messrs. Deloitte Touche Tohmatsu as auditor of the Company is to be proposed at the 2008 AGM. On behalf of the Board Peter Ting Chang Lee Chairman Hong Kong, 13 March 2008 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 71 Directors’ Remuneration and Interests Report DIRECTOR COMPENSATION Executive Director emoluments The Board fi rst established the Emoluments Review Committee in 1987 to review and determine the remuneration of executive Directors. The Committee is chaired by Sir David Akers-Jones, Independent non-executive Deputy Chairman. Its other members are Fa- kuang Hu and Dr. Geoffrey Meou-tsen Yeh. Management makes recommendations to the Committee on the Company’s framework for, and cost of, executive Director remuneration and the Committee then reviews these recommendations. On matters other than those concerning him, the Chairman or Chief Executive Offi cer may be invited to Committee meetings. No Director is involved in deciding his own remuneration. The Group’s remuneration policy seeks to provide a fair market remuneration in a form and value to attract, retain and motivate high quality staff and at the same time to refl ect the importance of aligning awards with shareholder interests. Remuneration packages are set at levels to ensure comparability and competitiveness with Hong Kong-based companies competing within a similar talent pool, with particular emphasis on the property industry. Independent professional advice will be sought to supplement internal resources where appropriate. Following a review completed in November 2003 by the Committee, the Company has developed a policy that involves top management (the Chairman and Chief Executive Offi cer) having a remuneration package consisting of several remuneration components. The fi xed part of the package is a combination of basic salary and benefi ts. The proportion of performance-based compensation has been increased under this new structure. In addition, there are arrangements for a long-term incentive plan. The new levels of remuneration, taking effect as from December 2003, refl ected comparator market information and advice from independent consultants (Watson Wyatt Hong Kong Limited). Such salary levels would be reviewed by the Committee on an annual basis. The Committee met in March 2007 to review executive Director compensation packages. Except Dr. Geoffrey Meou-tsen Yeh, all members attended the meeting without any executive Director presence. Details are set out in note 8 to the consolidated fi nancial statements. The most recent meeting of the Committee was held in March 2008 with all members being present to review executive Director compensation packages. Details of Directors’ (including individual executive Directors) emoluments and options are set out in notes 8 and 40 respectively to the consolidated fi nancial statements. Non-executive Director emoluments The Directors’ fees are subject to shareholder approval at general meeting. The non-executive Directors (including the Independent non-executive Directors) received fees totalling HK$1,100,356 and the Independent non-executive Deputy Chairman received a total annual fee of HK$230,000 for 2007 (Please refer to note 8 to the consolidated fi nancial statements). Taking into consideration the level of responsibility, experience and abilities required of the Directors, and fees offered for similar positions in comparable companies, new levels of Directors’ fees were reviewed and approved at the annual general meeting (“AGM”) held on 10 May 2005: Board of Directors Chairman Deputy Chairman Director Audit Committee Chairman Member Other Committees Chairman Member Per annum HK$ 140,000 120,000 100,000 60,000 30,000 30,000 20,000 The non-executive Directors received no other compensation from the Group except for the fees disclosed above. None of the non-executive Directors receive any pension benefi ts from the Company, nor do they participate in any bonus or incentive schemes. 72 Hysan Annual Report 2007 DIRECTOR COMPENSATION continued Long-term incentives: Share Option Schemes The Company has granted options under two executive share option schemes. The purpose of both schemes was to strengthen the link between individual staff and shareholder interests. The power of grant to executive Directors is vested in the Emoluments Review Committee and endorsed by all Independent non-executive Directors as required under Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”). As approved by the Board, either the Chairman or the former Managing Director may make grants to management staff below executive Director level. Key terms of the share option schemes of the Company are summarised as follows: The 1995 Share Option Scheme (the “1995 Scheme”) The 1995 Scheme was approved by shareholders on 28 April 1995 and had a term of 10 years. It expired on 28 April 2005. All outstanding options granted under the 1995 Scheme will continue to be valid and exercisable in accordance with the provisions of the 1995 Scheme. As at 31 December 2007, shares issuable under options granted under the 1995 scheme was 303,667 representing less than 0.03% of the issued share capital of the Company. The maximum entitlement of each participant is substantially below the limit set out under the scheme rules (being 25% of the maximum number of shares in respect of which options may at any time be granted under the 1995 Scheme). The exercise price was initially fi xed at 80% of the average of the closing prices of the shares on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) for the 20 trading days immediately preceding the date of grant or the nominal value of a share whichever is the greater. The exercise price for options granted after 1 September 2001 was amended to comply with amendments to the Listing Rules. Consideration paid on each grant of option was HK$1.00, with full payment for exercise price to be made on exercise of the relevant option. Grants made prior to 8 March 2005 had a holding period of 2 years and a vesting period of 5 years. The 2005 Share Option Scheme (the “2005 Scheme”) The Company adopted the 2005 Scheme (together with the 1995 Scheme are referred to as the “Schemes”) at its AGM held on 10 May 2005, which has a term of 10 years and will expire on 9 May 2015. The maximum number of shares in respect of which options may be granted under the 2005 Scheme and any other share option scheme of the Company shall not exceed such number of shares as required under the Listing Rules, currently being 10% of the shares in issue (being 104,996,365 shares) as at 10 May 2005, the date of the AGM approving the 2005 Scheme. Under the Listing Rules, a listed issuer may seek approval by its shareholders in general meeting for “refreshing” the 10% limit under the scheme. The limit on the number of shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the 2005 Scheme and any other share option scheme of the Company must not exceed 30% of the shares in issue from time to time (or such number of shares as required under the Listing Rules). No options may be granted if such grant will result in this 30% limit being exceeded. The maximum entitlement of each participant under the 2005 Scheme must not during any 12-month period exceed such number of shares as required under the Listing Rules (which is 1% of the total shares in issue as at the date of shareholders’ approval). The exercise price shall be at least the highest of (i) the closing price of the shares as stated in the Stock Exchange’s daily quotations sheet on the date of grant; (ii) the average of the closing prices of the shares as stated in the Stock Exchange’s daily quotations sheets for the fi ve business days immediately preceding the date of grant; and (iii) the nominal value of the shares. Consideration to be paid on each grant of option is HK$1.00, with full payment for exercise price to be made on exercise of the relevant option. Grant and vesting structures With effect from 8 March 2005, the Board has approved a new grant and vesting structure. Grants will be made on a periodic basis. Vesting period is three years in equal proportion. Size of grant will be determined by reference to base salary multiple and job grades. A clear performance criterion will be a key driver. The Board will review the grant and vesting structures from time to time. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 73 Directors’ Remuneration and Interests Report continued DIRECTOR COMPENSATION continued Long-term incentives: Share Option Schemes continued Grant movements during the year During the year, a total of 863,000 shares options were granted under the 2005 Scheme. As at 31 December 2007, an aggregate of 1,297,667 shares are issuable for options granted under the Schemes, representing approximately 0.13% of the issued share capital of the Company. As at the date of this Report, 99,342,765 shares are issuable under the Schemes representing 9.58% of the issued share capital. Details of options granted, exercised, cancelled/lapsed and outstanding under the Schemes during the year are as follows: Changes during the year Date of grant Exercise price HK$ Exercisable period Name 1995 Scheme Executive Director Balance as at 1.1.2007 Granted Exercised Cancelled/ Balance as at lapsed 31.12.2007 Peter Ting Chang Lee 7.1.1999 9.22 (Note a) Eligible employees 30.3.2005 15.85 (Note b) 2005 Scheme Executive Directors 7.1.2001 – 6.1.2009 30.3.2005 – 29.3.2015 1,350,000 – (1,350,000) – – (Note g) 401,333 – (77,666) (20,000) 303,667 (Note h) (Note j) Peter Ting Chang Lee 6.3.2007 (Note c) 21.38 (Note e) 6.3.2007 – 5.3.2017 – 235,000 – – 235,000 Michael Tze Hau Lee 10.5.2005 16.60 (Note d) 30.3.2006 22.00 6.3.2007 Pauline Wah Ling Yu Wong (Note c) 6.3.2007 21.38 (Note e) 21.38 (Note e) Eligible employees (Note b) 9.8.2005 18.79 10.5.2005 – 9.5.2015 30.3.2006 – 29.3.2016 6.3.2007 – 5.3.2017 6.3.2007 – 5.3.2017 9.8.2005 – 8.8.2015 12.10.2005 18.21 12.10.2005 – 11.10.2015 30.3.2006 22.00 26.6.2006 20.11 30.3.2006 – 29.3.2016 26.6.2006 – 25.6.2016 30.3.2007 21.25 (Note f) 30.3.2007 – 29.3.2017 240,000 – (80,000) (160,000) (Note i) (Note j) 188,000 – – (188,000) (Note j) – 185,000 – (185,000) (Note j) – – – – 108,000 – – 108,000 96,000 120,000 325,000 110,000 – – – – – (96,000) (Note j) – (120,000) (Note j) – – – (106,000) 219,000 (Note j) – – 110,000 – 335,000 – (13,000) 322,000 (Note j) 2,830,333 863,000 (1,507,666) (888,000) 1,297,667 74 Hysan Annual Report 2007 DIRECTOR COMPENSATION continued Long-term incentives: Share Option Schemes continued Grant movements during the year continued Notes: (a) Options granted to Peter Ting Chang Lee had a holding period of 2 years and a vesting period of 5 years. (b) Eligible employees are working under employment contracts that are regarded as “continuous contracts” for the purposes of the Employment Ordinance. The options granted under the Schemes have vesting periods of 3 years in equal proportions. (c) Options granted to Peter Ting Chang Lee and Pauline Wah Ling Yu Wong have a vesting period of 3 years in equal proportions. (d) Options granted to Michael Tze Hau Lee had a vesting period of 3 years in equal proportions. Michael Tze Hau Lee stepped down from the Board of the Company as from the conclusion of the 2007 AGM held on 8 May 2007. (e) The closing price of the shares of the Company immediately before the date of grant (as of 5 March 2007) was HK$20.50. (f) The closing price of the shares of the Company immediately before the date of grant (as of 29 March 2007) was HK$21.30. (g) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$19.60. (h) The weighted average closing price of the shares of the Company immediately before the dates on which the options were exercised was HK$21.09. (i) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$21.20. (j) The options for 888,000 shares lapsed during the year upon the stepping down of Michael Tze Hau Lee and resignations of certain eligible employees. Apart from the above, the Company had not granted any share option under the Schemes to any other persons as required to be disclosed under Rule 17.07 of the Listing Rules. Particulars of the Company’s share option schemes are set out in note 40 to the consolidated fi nancial statements. Value of share options Pursuant to Rule 17.08 of the Listing Rules, the value of the share options granted during the year is as follows to be expensed through the Group’s income statement over the three-year vesting period of the options. The fair values of share options granted by the Company were determined by using Black-Scholes option pricing model (the “Model”). The Model is one of the commonly used models to estimate the fair value of an option. The variables and assumptions used in computing the fair value of the share options are based on the management’s best estimate. The value of an option varies with different variables of certain subjective assumptions. Any change in the variables so adopted may materially affect the estimation of the fair value of an option. The inputs into the Model were as follows: Closing share price at the date of grant Exercise price Risk free rate (Note a) Expected life of option (Note b) Expected volatility (Note c) Expected dividend per annum (Note d) Estimated fair value per share option Date of grant 30.3.2007 6.3.2007 HK$21.25 HK$21.25 4.192% 10 years 29.53% HK$0.416 HK$7.47 HK$20.80 HK$21.38 4.188% 10 years 30.12% HK$0.416 HK$7.21 Notes: (a) Risk free rate: being the approximate yields of 10-year Exchange Fund Notes traded on the date of grant, matching the expected life of each option. (b) Expected life of option: being the period of 10 years commencing on the date of grant, based on management’s best estimates for the effects of non-transferability, exercise restriction and behavioural consideration. (c) Expected volatility: being the approximate historical volatility of closing prices of the shares of the Company in the past one year immediately before the date of grant. (d) Expected dividend per annum: being the approximate average annual cash dividend for the past fi ve fi nancial years. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 75 Directors’ Remuneration and Interests Report continued SERVICE CONTRACTS No Director proposed for re-election at the forthcoming AGM has a service contract with the Company or any of its subsidiaries that is not determinable by the Group within one year without payment of compensation (other than statutory compensation). DIRECTORS’ INTERESTS IN SHARES As at 31 December 2007, the interests and short positions of the Directors and alternate Director in the shares, underlying shares or debentures of the Company and its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (“SFO”)) as recorded in the register required to be kept under section 352 of the SFO; or as otherwise notifi ed to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers (the “Model Code”), are set out below: Aggregate long positions in shares and underlying shares of the Company No. of ordinary shares held Name Personal interests Family interests Corporate interests Other interests Total % of the issued share capital (Note a) Peter Ting Chang Lee 3,370,708 Fa-kuang Hu – – – – 200,000 (Note b) – – 3,370,708 200,000 0.325 0.019 Hans Michael Jebsen 60,000 – 2,432,914 – 2,492,914 0.240 Tom Behrens-Sorensen Chien Lee 10,000 800,000 Deanna Ruth Tak Yung Rudgard 1,871,600 Pauline Wah Ling Yu Wong Geoffrey Meou-tsen Yeh V-nee Yeh (alternate to Geoffrey Meou-tsen Yeh) 154,000 258,288 43,259 (Note c) – – – – – – – – – – – – – – – – – – 10,000 800,000 1,871,600 154,000 258,288 43,259 0.001 0.077 0.180 0.015 0.025 0.004 Notes: (a) This percentage has been compiled based on the total number of shares of the Company in issue (i.e. 1,037,469,756 ordinary shares) as at 31 December 2007. (b) Such shares were held by a company which was wholly-owned by Fa-kuang Hu and he was deemed to have benefi cial interest in all these shares. (c) Such shares were held through a corporation in which Hans Michael Jebsen was a member entitled to exercise no less than one-third of the voting power at general meeting. Certain executive Directors of the Company have been granted share options under the Company’s share option schemes (details are set out in the section headed “Long-term incentives: Share Option Schemes” above). These constitute interests in underlying shares of equity derivatives of the Company under the SFO. 76 Hysan Annual Report 2007 DIRECTORS’ INTERESTS IN SHARES continued Aggregate long positions in shares of associated corporations Listed below are certain Directors’ interests in the shares of Barrowgate Limited (“Barrowgate”), a 65.36% subsidiary of the Company, and Parallel Asia Engineering Company Limited (“PAECL”), a 25% associate of the Company. Name Hans Michael Jebsen Fa-kuang Hu Raymond Liang-ming Hu (alternate to Fa-kuang Hu) No. of ordinary shares held Corporate interests Other interests 1,000 – – – 5,000 5,000 % of the issued share capital 10 (Note a) 50 (Note b) 50 (Note b) Total 1,000 5,000 5,000 Notes: (a) Jebsen and Company Limited (“Jebsen and Company”) held a 10% interest in the issued share capital in Barrowgate through a wholly-owned subsidiary. Hans Michael Jebsen was deemed to be interested in the shares of Barrowgate by virtue of being the controlling shareholder of Jebsen and Company. (b) Ryoden Development Limited (“Ryoden Development”) held a 50% interest in the issued share capital in PAECL through a wholly-owned subsidiary. Fa-kuang Hu and Raymond Liang-ming Hu were deemed to be interested in the shares of PAECL by virtue of their interests as a founder and/or benefi ciaries of a discretionary trust which had an indirect controlling interest in Ryoden Development. Apart from the above, no other interest or short position in the shares, underlying shares or debentures of the Company or any associated corporations as at 31 December 2007 were recorded in the register required to be kept under Section 352 of the SFO; or as otherwise notifi ed to the Company and the Stock Exchange pursuant to the Model Code. Compliance of the Model Code for Securities Transactions by Directors of Listed Issuers The Company has adopted the Model Code set out in Appendix 10 to the Listing Rules as its own code of conduct regarding Director’s securities transactions. All Directors have confi rmed, following specifi c enquiry by the Company, that they have complied with the required standards set out in the Model Code throughout the review year. DIRECTORS’ INTERESTS IN CONTRACTS During the review year, certain Directors are parties to contracts with the Group. These contracts constitute Related Party Transactions, Connected Transactions or Contracts of Signifi cance under applicable accounting or regulatory rules (details are disclosed in the Directors’ Report). DIRECTORS’ INTERESTS IN COMPETING BUSINESS The Group is engaged principally in the property investment, development and management of high quality investment properties in Hong Kong. The following Directors (excluding Independent non-executive Directors during 2007) are considered to have interests in other activities (the “Deemed Competing Business”) that compete or are likely to compete with the said core business of the Group, all within the meaning of the Listing Rules. For the reasons stated below, and coupled with the diligence of the Group’s Independent non-executive Directors and the Audit Committee, the Group is capable of carrying on its business independent of and at arm’s length from the Deemed Competing Business. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 77 Directors’ Remuneration and Interests Report continued DIRECTORS’ INTERESTS IN COMPETING BUSINESS continued (i) Peter Ting Chang Lee, Anthony Hsien Pin Lee, Chien Lee, Michael Tze Hau Lee (former Managing Director who stepped down from the Board on 8 May 2007) and Dr. Deanna Ruth Tak Yung Rudgard are members of the founding Lee family whose range of general investment activities include property investments in Hong Kong and overseas. In light of the size and dominance of the portfolio of the Group, such disclosed Deemed Competing Business is considered immaterial. (ii) Fa-kuang Hu and his alternate, Raymond Liang-ming Hu, are directors and have an indirect substantial interest in Designcase Limited and its subsidiaries, which are engaged in investment holding, property investment and development, property agency and management, project management in both the People’s Republic of China and Hong Kong. (iii) Hans Michael Jebsen and his alternate, Kam Wing Li, hold the offi ces of directors in each of Jebsen and Company and Jebsen China Services Limited (the “Companies”) and some of their subsidiaries, of which their business activities include, inter alia, investment holding and property investment in both the People’s Republic of China and Hong Kong. Mr. Jebsen is also a substantial shareholder of the Companies. Mr. Jebsen is an independent non-executive director of The Wharf (Holdings) Limited whose business includes, inter alia, property investment, development and management in both the People’s Republic of China and Hong Kong. (iv) Chien Lee is an independent non-executive director of Swire Pacifi c Limited whose business includes, inter alia, property investment and trading in Hong Kong, the People’s Republic of China and the USA. The Company’s management team is separate and independent from that of the companies identifi ed in (ii), (iii) and (iv) above. In addition, save and except Peter Ting Chang Lee and Michael Tze Hau Lee, the relevant Directors have non-executive roles and are not involved in the Company’s day-to-day operations and management. By Order of the Board Wendy Wen Yee Yung Company Secretary Hong Kong, 13 March 2008 78 Hysan Annual Report 2007 Audit Committee Report The Audit Committee has three members chaired by Sir David Akers-Jones, Independent non-executive Deputy Chairman, and has a majority of Independent non-executive Directors. Under its terms of reference, the Committee oversees the Company’s fi nancial reporting process; it also reviews the Company’s internal control and risk management system and its relationship with external auditors. The Committee presents a report to the Board on its fi ndings after each Committee meeting. The Committee held two meetings during 2007, on 5 March and 14 August. All members attended the above meetings. A meeting was also held on 1 February 2008 to consider matters relating to the new Internal Audit function. The meeting held on 12 March 2008 was to consider the consolidated fi nancial statements for the year ended 31 December 2007. Signifi cant matters, as reviewed and discussed in the relevant meetings, include the following: FINANCIAL REPORTING In the process of fi nancial reporting, management is responsible for the preparation of Group fi nancial statements including the selection of suitable accounting policies. External auditors are responsible for auditing and attesting to Group fi nancial statements and evaluating Group’s system of internal control in such regard. The Committee oversees the respective work of management and external auditors to endorse the processes and safeguards employed by them. • August 2007 : • March 2008 : The Committee reviewed and recommended to the Board for approval the unaudited consolidated fi nancial statements for the fi rst six months of 2007, prior to public announcement and fi ling. The Committee received reports from and met with external auditors to discuss the scope of their review and fi ndings. The Committee had discussions with management on signifi cant judgments affecting Group’s fi nancial statements. The Committee reviewed and discussed with management and external auditors the 2007 consolidated fi nancial statements included in the Annual Report 2007, prior to public announcement and fi ling. The Committee received reports from and met with the external auditors to discuss the general scope of their audit work and fi ndings. The Committee had discussions with management with regard to signifi cant judgments affecting the Group fi nancial statements. Based on these review and discussions, and the report of the external auditors, the Audit Committee recommended to the Board approval of the consolidated fi nancial statements for the year ended 31 December 2007, with the Independent Auditor’s Report thereon. REVIEW OF INTERNAL CONTROL AND RISK MANAGEMENT SYSTEMS • August 2007 : The Committee considered management’s report on implementing the improvement areas identifi ed by an independent international accounting fi rm following its 2006 review of internal controls, and was satisfi ed as to the same. • February 2008 : The Committee met to discuss the work performed by the new internal audit function set up during the second half of 2007. The Committee also considered and approved audit plan for 2008. • March 2008 : The Committee, upon receiving confi rmation of management and internal audit, was satisfi ed as to the effectiveness of the Company’s internal controls system; that there were no matters of material concerns relating to fi nancial, operational, or compliance controls. Hysan Annual Report 2007 79 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Audit Committee Report continued RELATIONSHIP WITH EXTERNAL AUDITORS • August 2007 and : March 2008 The Committee reviewed and considered the terms of engagement of the external auditors in respect of the 2007 interim results reviews and 2007 annual audit and the related results announcement and annual confi rmation. The Committee assessed the auditor’s independence and objectivity. Factors considered include the arrangement for lead audit partner rotation, and the provision of non-audit services by the auditors. The Committee recommended to the Board that the shareholders be asked to re-appoint Deloitte Touche Tohmatsu as the Group’s external auditors for 2008. For the year ended 31 December 2007, external auditors received a total fee of HK$2,341,840 (audit services: HK$1,700,000; non-audit services HK$301,000; and tax compliance services: HK$340,840). Members of the Audit Committee David Akers-Jones (Chairman) Chien Lee Tom Behrens-Sorensen Hong Kong, 13 March 2008 80 Hysan Annual Report 2007 Financial Statements and Valuation 82 Directors’ Responsibilities for the Financial Statements Independent Auditor’s Report 83 84 Consolidated Income Statement 85-86 Consolidated Balance Sheet 87 Balance Sheet 88-89 Consolidated Statement of Changes in Equity 90-91 Consolidated Cash Flow Statement 92-134 Notes to the Financial Statements 135-136 Five-Year Financial Summary 137 Report of the Valuer 138 Schedule of Principal Properties 139-140 Shareholding Analysis Recurring Underlying Profi t Up Overall Turnover Up 25.8% 7.9% 18.8% 20.0% Dividends Up Like-for-Like Turnover Up Hysan Annual Report 2007 81 Directors’ Responsibilities for the Financial Statements The Companies Ordinance requires the Directors to prepare fi nancial statements for each fi nancial year which give a true and fair view of the state of affairs of the Company and of the Group as at the end of the fi nancial year and of their respective profi t or loss for the year then ended. In preparing the fi nancial statements, the Directors are required to: (a) select suitable accounting policies and apply them on a consistent basis, making judgments and estimates that are prudent, fair and reasonable; (b) state the reasons for any signifi cant departure from accounting standards; and (c) prepare the fi nancial statements on the going concern basis, unless it is not appropriate to presume that the Company and the Group will continue in business for the foreseeable future. The Directors are responsible for keeping proper accounting records, for safeguarding the assets of the Company and of the Group and for taking reasonable steps for the prevention and detection of fraud and other irregularities. 82 Hysan Annual Report 2007 Independent Auditor’s Report TO THE MEMBERS OF HYSAN DEVELOPMENT COMPANY LIMITED 希慎興業有限公司 (incorporated in Hong Kong with limited liability) We have audited the fi nancial statements of Hysan Development Company Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”) set out on pages 84 to 134, which comprise the consolidated and Company’s balance sheets as at 31 December 2007, and the consolidated income statement, the consolidated statement of changes in equity and the consolidated cash fl ow statement for the year then ended, and a summary of signifi cant accounting policies and other explanatory notes. Directors’ responsibility for the financial statements The directors of the Company are responsible for the preparation and the true and fair presentation of these fi nancial statements in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certifi ed Public Accountants and the Hong Kong Companies Ordinance. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of the fi nancial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor’s responsibility Our responsibility is to express an opinion on these fi nancial statements based on our audit and to report our opinion solely to you, as a body, in accordance with section 141 of the Hong Kong Companies Ordinance and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certifi ed Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the fi nancial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the fi nancial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the fi nancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and true and fair presentation of the fi nancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the fi nancial statements. We believe that the audit evidence we have obtained is suffi cient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the fi nancial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2007 and of the Group’s profi t and cash fl ows for the year then ended in accordance with Hong Kong Financial Reporting Standards and have been properly prepared in accordance with the Hong Kong Companies Ordinance. Deloitte Touche Tohmatsu Certifi ed Public Accountants Hong Kong, 13 March 2008 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 83 Consolidated Income Statement For the year ended 31 December 2007 Turnover Property expenses Gross profi t Investment income Other gains and losses Administrative expenses Finance costs Change in fair value of investment properties Share of results of associates Profi t before taxation Taxation Profi t for the year Attributable to: Equity holders of the Company Minority interests Dividends Paid Proposed Earnings per share (expressed in HK cents) Basic Diluted Notes 2007 HK$ million 2006 HK$ million 5 6 7 10 11 12 13 13 14 14 1,368 (208) 1,160 98 302 (106) (175) 3,131 452 4,862 (745) 4,117 3,949 168 4,117 549 498 1,268 (240) 1,028 147 201 (111) (163) 2,576 120 3,798 (558) 3,240 3,099 141 3,240 474 422 375.46 375.25 293.96 293.70 84 Hysan Annual Report 2007 Consolidated Balance Sheet At 31 December 2007 Non-current assets Investment properties Property, plant and equipment Prepaid lease payments Investments in associates Available-for-sale investments Other fi nancial assets Other receivables Current assets Accounts receivable and other receivables Amount due from an associate Held for trading investments Other fi nancial assets Time deposits Cash and bank balances Current liabilities Accounts payable and accruals Other fi nancial liabilities Rental deposits from tenants Amounts due to minority shareholders Taxation payable Net current assets Total assets less current liabilities Non-current liabilities Borrowings Other fi nancial liabilities Rental deposits from tenants Deferred taxation Net assets Notes 2007 HK$ million 2006 HK$ million 15 16 17 19 20 21 22 22 24 25 21 26 26 27 21 28 29 21 30 35,711 73 123 1,011 2,479 235 22 39,654 66 590 95 1 478 6 32,473 69 123 630 1,745 2 23 35,065 159 642 – 2 382 3 1,236 1,188 278 40 124 327 270 1,039 197 253 40 102 327 225 947 241 39,851 35,306 2,861 17 215 3,910 7,003 2,821 45 183 3,349 6,398 32,848 28,908 Hysan Annual Report 2007 85 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Consolidated Balance Sheet continued At 31 December 2007 Capital and reserves Share capital Reserves Equity attributable to equity holders of the Company Minority interests Total equity Notes 31 2007 HK$ million 2006 HK$ million 5,187 26,465 31,652 1,196 32,848 5,276 22,552 27,828 1,080 28,908 The consolidated fi nancial statements on pages 84 to 134 were approved and authorised for issue by the Board of Directors on 13 March 2008 and are signed on its behalf by: Peter Ting Chang Lee Director David Akers-Jones Director 86 Hysan Annual Report 2007 Balance Sheet At 31 December 2007 Non-current assets Property, plant and equipment Investments in subsidiaries Investments in associates Available-for-sale investments Other receivables Current assets Accounts receivable and other receivables Amounts due from subsidiaries Time deposits Cash and bank balances Current liabilities Accounts payable and accruals Amounts due to subsidiaries Taxation payable Net current assets Net assets Capital and reserves Share capital Reserves Total equity Notes 2007 HK$ million 2006 HK$ million 16 18 19 20 22 22 23 26 26 27 23 31 32 5 – – 2 1 8 2 12,781 – 6 12,789 19 42 50 111 12,678 12,686 5,187 7,499 7 – – 2 2 11 2 13,017 46 4 13,069 22 104 68 194 12,875 12,886 5,276 7,610 12,686 12,886 The fi nancial statements on pages 84 to 134 were approved and authorised for issue by the Board of Directors on 13 March 2008 and are signed on its behalf by: Peter Ting Chang Lee Director David Akers-Jones Director O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 87 Consolidated Statement of Changes in Equity For the year ended 31 December 2007 Attributable to equity holders of the Company At 1 January 2006 Change in fair value of available-for-sale investments Surplus on revaluation of properties for own use Exchange differences on translation of an overseas associate Change in fair value of derivatives designated as cash fl ow hedge Transfer to profi t and loss for derivatives designated as cash fl ow hedge Net income recognised directly in equity Transfer to profi t and loss on disposal of available-for-sale investments Profi t for the year Total recognised income and expenses for the year Issue of shares pursuant to scrip dividend schemes Issue of shares under share option schemes Recognition of equity-settled share-based payments Interim dividend declared for 2006 Dividends paid during the year (note 13) Proposed fi nal dividend for 2006 Share capital HK$ million Share premium HK$ million 5,266 1,420 – – – – – – – – – 9 1 – – – – – – – – – – – – – 30 3 – – – – At 31 December 2006 5,276 1,453 Change in fair value of available-for-sale investments Surplus on revaluation of properties for own use Deferred taxation arising on revaluation of properties for own use Exchange differences on translation of an overseas associate Change in fair value of derivatives designated as cash fl ow hedge Transfer to profi t and loss for derivatives designated as cash fl ow hedge Net income recognised directly in equity Transfer to profi t and loss on disposal of available-for-sale investments Profi t for the year Total recognised income and expenses for the year Issue of shares pursuant to scrip dividend schemes Issue of shares under share option schemes Cancellation upon repurchase of own shares Expenses for repurchase of own shares Recognition of equity-settled share-based payments Forfeiture of share options Interim dividend declared for 2007 Dividends paid during the year (note 13) – – – – – – – – – – 25 7 (121) – – – – – – – – – – – – – – – 79 9 – – – – – – At 31 December 2007 5,187 1,541 Share options reserve HK$ million Investments revaluation reserve HK$ million 2 – – – – – – – – – – (1) 4 – – – 5 – – – – – – – – – – – (1) – – 4 (2) – – 6 796 687 – – – – 687 (170) – 517 – – – – – – 1,313 1,192 – – – – – 1,192 (382) – 810 – – – – – – – – 2,123 88 Hysan Annual Report 2007 Attributable to equity holders of the Company Properties revaluation reserve HK$ million Hedging reserve HK$ million Translation reserve HK$ million Capital redemption reserve HK$ million General reserve HK$ million Dividend reserve HK$ million Retained profi ts HK$ million Total HK$ million Minority interests HK$ million Total HK$ million 1 – 1 – – – 1 – – 1 – – – – – – 2 – 8 (1) – – – 7 – – 7 – – – – – – – – 9 35 (4) 155 100 369 16,527 24,667 986 25,653 – – – (11) (22) (33) – – (33) – – – – – – 2 – – – – 1 (2) (1) – – (1) – – – – – – – – 1 – – 5 – – 5 – – 5 – – – – – – 1 – – – (2) – – (2) – – (2) – – – – – – – – (1) – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 105 (474) 422 – – – – – – – 3,099 687 1 5 (11) (22) 660 (170) 3,099 3,099 3,589 – – – (105) 39 3 4 – – (474) (422) – – – – – – – – 141 141 – – – – (47) – 687 1 5 (11) (22) 660 (170) 3,240 3,730 39 3 4 – (521) – 155 100 422 19,099 27,828 1,080 28,908 – – – – – – – – – – – – 121 – – – – – 276 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 127 (549) – – – – – – – – 3,949 1,192 8 (1) (2) 1 (2) 1,196 (382) 3,949 3,949 4,763 – – (511) (2) – 2 (127) – 104 15 (511) (2) 4 – – (549) – – – – – – – – 168 168 – – – – – – – (52) 1,192 8 (1) (2) 1 (2) 1,196 (382) 4,117 4,931 104 15 (511) (2) 4 – – (601) 100 – 22,410 31,652 1,196 32,848 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 89 Consolidated Cash Flow Statement For the year ended 31 December 2007 Operating activites Profi t before taxation Adjustments for: Other gains and losses Finance costs Change in fair value of investment properties Share of results of associates Dividend income Interest income Reversal of impairment loss recognised in respect of investment in an associate Recovery of a loan to an associate Depreciation of property, plant and equipment Loss on disposal of property, plant and equipment Share-based payment expenses Operating cash fl ows before movements in working capital Decrease in accounts receivable and other receivables Increase (decrease) in accounts payable and accruals Increase in rental deposits from tenants Cash generated from operations Hong Kong profi ts tax paid Hong Kong profi ts tax refund Net cash from operating activities Investing activities Interest received Dividends received from available-for-sale investments Proceeds on disposal of investment properties Proceeds on disposal of available-for-sale investments Proceeds upon maturity of principal-protected deposits Proceeds on disposal of held for trading investments Receipts from equity derivatives Repayment from associates Repayment from investees Recovery of a loan to an associate Additions to investment properties Purchases of property, plant and equipment Purchases of available-for-sale investments Additions to principal-protected deposits Purchases of held for trading investments Payment for equity derivatives Net cash from investing activities 90 Hysan Annual Report 2007 2007 HK$ million 2006 HK$ million 4,862 3,798 (302) 175 (3,131) (452) (53) (30) (11) – 7 – 4 1,069 3 58 54 1,184 (141) 1 1,044 34 53 – 394 81 21 169 132 8 – (125) (3) – (278) (123) (151) 212 (201) 163 (2,576) (120) (41) (18) – (87) 7 1 4 930 27 (7) 29 979 (61) – 918 23 37 1 187 – – – – 19 87 (81) (6) (92) – – – 175 Financing activities Interest paid Bank charges Medium Term Note Programme expenses Payment for hedging expenses Dividends paid Dividends paid to minority shareholders of a subsidiary Repayment of unsecured bank loans Purchases of fi xed rate notes Consideration paid for repurchase of shares Expenses paid for repurchase of shares Proceeds on exercise of share options Net cash used in fi nancing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December Analysis of the balances of cash and cash equivalents Time deposits Cash and bank balances 2007 HK$ million 2006 HK$ million (151) (8) (1) (2) (445) (52) – – (511) (2) 15 (1,157) 99 385 484 478 6 484 (136) (7) (1) – (435) (47) (1,337) (150) – – 3 (2,110) (1,017) 1,402 385 382 3 385 Hysan Annual Report 2007 91 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Notes to the Financial Statements For the year ended 31 December 2007 1. GENERAL The Company is a public listed company incorporated in Hong Kong and its shares are listed on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”). The addresses of the registered offi ce and principal place of business of the Company are disclosed in the shareholder information section of the annual report. The principal activities of the Company and its subsidiaries (collectively referred to as the “Group”) are property investment, management and development. These fi nancial statements are presented in Hong Kong dollars, which is the same as the functional currency of the Company. 2. APPLICATION OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (“HKFRSs”) In the current year, the Group has adopted, for the fi rst time, the following new standard, amendment and interpretations (“new HKFRSs”) issued by the Hong Kong Institute of Certifi ed Public Accountants (“HKICPA”), which are effective for the Group’s fi nancial year beginning on 1 January 2007. HKAS 1 (Amendment) HKFRS 7 HK(IFRIC) – INT 7 HK(IFRIC) – INT 8 HK(IFRIC) – INT 9 HK(IFRIC) – INT 10 Capital Disclosures Financial Instruments: Disclosures Applying the Restatement Approach under HKAS 29 Financial Reporting in Hyperinfl ationary Economies Scope of HKFRS 2 Reassessment of Embedded Derivatives Interim Financial Reporting and Impairment The adoption of the new HKFRSs had no material effect on how the results and fi nancial position for the current or prior accounting periods have been prepared and presented. Accordingly, no prior year adjustment has been required. The Group has not early applied the following new and revised standards or interpretations that have been issued but not yet effective. HKAS 1 (Revised) HKAS 23 (Revised) HKFRS 8 HK(IFRIC) – INT 11 HK(IFRIC) – INT 12 HK(IFRIC) – INT 13 HK(IFRIC) – INT 14 Presentation of Financial Statements 1 Borrowing Costs 1 Operating Segments 1 HKFRS 2 – Group and Treasury Share Transactions 2 Service Concession Arrangements 3 Customer Loyalty Programmes 4 HKAS 19 – The Limit on a Defi ned Benefi t Asset, Minimum Funding Requirements and their Interaction 3 1 Effective for annual periods beginning on or after 1 January 2009. 2 Effective for annual periods beginning on or after 1 March 2007. 3 Effective for annual periods beginning on or after 1 January 2008. 4 Effective for annual periods beginning on or after 1 July 2008. The Directors of the Company anticipate that the application of these standards or interpretations will have no material impact on the results and the fi nancial position of the Group. 3. SIGNIFICANT ACCOUNTING POLICIES These fi nancial statements have been prepared on the historical cost basis except for certain properties and fi nancial instruments, which are measured at revalued amounts or fair values, as explained in the accounting policies set out below. These fi nancial statements have been prepared in accordance with HKFRSs issued by the HKICPA and the Hong Kong Companies Ordinance. In addition, these fi nancial statements include applicable disclosures required by the Rules Governing the Listing of Securities on the Stock Exchange (the “Listing Rules”). The principal accounting policies adopted are as follows: Basis of consolidation The consolidated fi nancial statements incorporate the fi nancial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the fi nancial and operating policies of an entity so as to obtain benefi ts from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. 92 Hysan Annual Report 2007 3. SIGNIFICANT ACCOUNTING POLICIES continued Basis of consolidation continued Where necessary, adjustments are made to the fi nancial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Minority interests in the net assets of consolidated subsidiaries are presented separately from the Group’s equity therein. Minority interests in the net assets consist of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since the date of the combination. Losses applicable to the minority in excess of the minority’s interest in the subsidiary’s equity are allocated against the interests of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses. Investments in subsidiaries Investments in subsidiaries are included in the Company’s balance sheet at cost less any identifi ed impairment loss. The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable during the year. Investments in associates An associate is an entity over which the Group has signifi cant infl uence and that is neither a subsidiary nor an interest in a joint venture. Signifi cant infl uence is the power to participate in the fi nancial and operating policy decisions of the investee but is not control or joint control over those policies. The results, assets and liabilities of associates are incorporated in the consolidated fi nancial statements using the equity method of accounting. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Group’s share of the net assets of the associate, less any identifi ed impairment loss. When the Group’s share of losses of an associate equals or exceeds its interest in that associate (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate), the Group discontinues recognising its share of further losses. An additional share of losses is provided for and a liability is recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of that associate. Any excess of the Group’s share of the net fair value of the identifi able assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profi t or loss. Where a group entity transacts with an associate of the Group, profi ts and losses are eliminated to the extent of the Group’s interest in the relevant associate. Investments in associates are included in the Company’s balance sheet at cost less any identifi ed impairment loss. The results of associates are accounted for by the Company on the basis of dividends received and receivable during the year. Investment properties Investment properties are properties held to earn rental and/or for capital appreciation. On initial recognition, investment properties are measured at cost, including any directly attributable expenditure. Subsequent to initial recognition, investment properties are measured at their fair values using the fair value model. Gains or losses arising from changes in the fair value of investment property are included in profi t or loss for the period in which they arise. An investment property is derecognised upon disposal or when the investment property is permanently withdrawn from use or no future economic benefi ts are expected from its disposals. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated income statement in the year in which the item is derecognised. Property, plant and equipment Property, plant and equipment are stated at cost or fair value less subsequent accumulated depreciation and accumulated impairment losses. Buildings held for use in the production or supply of goods or services, or for administrative purposes, are stated in the balance sheet at their revalued amounts, being the fair values at the date of revaluation less any subsequent accumulated depreciation and any subsequent accumulated impairment losses. Revaluations are performed with suffi cient regularity such that the carrying amount does not differ materially from that which would be determined using fair values at the balance sheet date. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 93 Notes to the Financial Statements continued For the year ended 31 December 2007 3. SIGNIFICANT ACCOUNTING POLICIES continued Property, plant and equipment continued Any revaluation increase arising on revaluation of buildings is credited to the properties revaluation reserve, except to the extent that it reverses a revaluation decrease of the same asset previously recognised as an expense, in which case the increase is credited to the consolidated income statement to the extent of the decrease previously charged. A decrease in net carrying amount arising on revaluation of an asset is dealt with as an expense to the extent that it exceeds the balance, if any, on the properties revaluation reserve relating to a previous revaluation of that asset. On the subsequent sale or retirement of a revalued asset, the attributable revaluation surplus is transferred to retained profi ts. Depreciation is provided to write off the cost or fair value of items of property, plant and equipment over their estimated useful lives and after taking into account of their estimated residual value, using the straight-line method. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefi ts are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the consolidated income statement in the year in which the item is derecognised. Prepaid lease payments The land and buildings elements of a lease of land and buildings are considered separately for the purpose of lease classifi cation. To the extent that the allocation of the lease payments between the land and buildings elements can be made reliably, the leasehold interests in land are classifi ed as prepaid lease payments, which are carried at cost less subsequent accumulated amortisation and accumulated impairment losses, and is amortised to the consolidated income statement on a straight-line basis over the terms of relevant land leases. Impairment of non-financial assets At each balance sheet date, the Group reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised immediately in profi t or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised immediately in profi t or loss, unless the relevant asset is carried at revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. Financial instruments Financial assets and fi nancial liabilities are recognised on the balance sheet when a group entity becomes a party to the contractual provisions of the instrument. Financial assets and fi nancial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of fi nancial assets and fi nancial liabilities (other than fi nancial assets and fi nancial liabilities at fair value through profi t or loss) are added to or deducted from the fair value of the fi nancial assets or fi nancial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of fi nancial assets or fi nancial liabilities at fair value through profi t or loss are recognised immediately in profi t or loss. Financial assets The Group’s fi nancial assets are classifi ed into one of the three categories, including (i) fi nancial assets at fair value through profi t or loss (“FVTPL”), (ii) loans and receivables and (iii) available-for-sale fi nancial assets. The classifi cation depends on the nature and purpose of the fi nancial assets and is determined at the time of initial recognition. All regular way purchases or sales of fi nancial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of fi nancial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. The accounting policies adopted in respect of each category of fi nancial assets are set out below. Financial assets at FVTPL Financial assets are classifi ed as at FVTPL where the fi nancial asset is either held for trading or it is designated as at FVTPL. A fi nancial asset is classifi ed as held for trading if it has been acquired principally for the purpose of selling in the near future or it is a derivative that is not designated and effective as a hedging instrument. A fi nancial asset other than the one held for trading may be designated as at FVTPL upon initial recognition if it contains one or more embedded derivatives and HKAS 39 permits the entire combined contract (asset or liability) to be designated as at FVTPL. 94 Hysan Annual Report 2007 3. SIGNIFICANT ACCOUNTING POLICIES continued Financial instruments continued Financial assets continued Financial assets at FVTPL continued At each balance sheet date subsequent to initial recognition, fi nancial assets at FVTPL are measured at fair value, with changes in fair value recognised directly in profi t or loss in the period in which they arise. The net gain or loss recognised in profi t or loss includes any dividend or interest earned on the fi nancial asset. Loans and receivables Loans and receivables are non-derivative fi nancial assets with fi xed or determinable payments that are not quoted in an active market. At each balance sheet date subsequent to initial recognition, loans and receivables (including accounts receivable and other receivables, amount due from an associate, time deposits and bank balances) are carried at amortised cost using the effective interest method, less any identifi ed impairment losses (see accounting policy on impairment of fi nancial assets below). The effective interest method is a method of calculating the amortised cost of a fi nancial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the fi nancial asset or, where appropriate, a shorter period. Available-for-sale financial assets Available-for-sale fi nancial assets are non-derivatives that are either designated as such or not classifi ed as fi nancial assets at FVTPL or loans and receivables. At each balance sheet date subsequent to initial recognition, available-for-sale fi nancial assets (including certain equity securities investments) are measured at fair value. Changes in fair value are recognised in equity in the investments revaluation reserve with the exception of impairment losses, which are recognised directly in profi t or loss. Where the fi nancial asset is disposed of or is determined to be impaired, at which time, the cumulative gain or loss previously recognised in equity is removed from equity and recognised in profi t or loss (see accounting policy on impairment of fi nancial assets below). For available-for-sale equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, they are measured at cost less any identifi ed impairment losses at each balance sheet date subsequent to initial recognition (see accounting policy on impairment of fi nancial assets below). Impairment of financial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the fi nancial asset, the estimated future cash fl ows of the fi nancial assets have been impacted. For an available-for-sale equity investment, a signifi cant or prolonged decline in the fair value of that investment below its cost is considered to be objective evidence of impairment. For all other fi nancial assets, objective evidence of impairment could include: • signifi cant fi nancial diffi culty of the issuer or counterparty; or • default or delinquency in interest or principal payments; or • it becoming probable that the borrower will enter bankruptcy or fi nancial re-organisation. For fi nancial assets carried at amortised cost, an impairment loss is recognised in profi t or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash fl ows discounted at the original effective interest rate. For fi nancial assets carried at cost, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash fl ows discounted at the current market rate of return for a similar fi nancial asset. Such impairment loss will not be reversed in subsequent periods. The carrying amount of the fi nancial asset is reduced by the impairment loss directly for all fi nancial assets with the exception of accounts receivables and amount due from an associate, where the carrying amount is reduced through the use of an allowance account (if any). Changes in the carrying amount of the allowance account are recognised in profi t or loss. When an account receivable or amount due from an associate is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited to profi t or loss. For fi nancial assets measured at amortised cost, if, in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment losses was recognised, the previously recognised impairment loss is reversed through profi t or loss to the extent that the carrying amount of the asset at the date of impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 95 Notes to the Financial Statements continued For the year ended 31 December 2007 3. SIGNIFICANT ACCOUNTING POLICIES continued Financial instruments continued Financial assets continued Impairment of financial assets continued Impairment losses on available-for-sale equity investments will not be reversed in profi t or loss in subsequent periods. Any increase in fair value subsequent to impairment loss is recognised directly in equity. For available-for-sale debt investments, impairment losses are subsequently reversed if an increase in the fair value of the investment can be objectively related to an event occurring after the recognition of the impairment loss. Derecognition of financial assets Financial assets are derecognised when the rights to receive cash fl ows from the assets expire or, the fi nancial assets are transferred and the Group has transferred substantially all the risks and rewards of ownership of the fi nancial assets. On derecognition of a fi nancial asset, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised directly in equity is recognised in profi t or loss. Financial liabilities and equity Financial liabilities and equity instruments issued by a group entity are classifi ed according to the substance of the contractual arrangements entered into and the defi nitions of a fi nancial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. The Group’s fi nancial liabilities are generally classifi ed into (i) fi nancial liabilities at FVTPL and (ii) other fi nancial liabilities. The accounting policies adopted in respect of fi nancial liabilities and equity instruments are set out below. Financial liabilities at FVTPL Financial liabilities at FVTPL, that are held for trading, comprise derivatives that are not designated and effective as hedging instruments. At each balance sheet date subsequent to initial recognition, fi nancial liabilities at FVTPL are measured at fair value, with changes in fair value recognised directly in profi t or loss in the period in which they arise. The net gain or loss recognised in profi t or loss includes any interest paid on the fi nancial liabilities. Other financial liabilities Other fi nancial liabilities (including accounts payable and accruals, rental deposits from tenants, amounts due to minority shareholders and borrowings) are subsequently measured at amortised cost, using the effective interest method. In respect of the fi xed rate notes and the zero coupon notes, the carrying amounts are further adjusted for the gain or loss attributable to the hedged risk. The effective interest method is a method of calculating the amortised cost of a fi nancial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the fi nancial liability, or, where appropriate, a shorter period. Interest expense is recognised on an effective interest basis for fi nancial liabilities, other than those fi nancial liability designated as at FVTPL, of which the interest expense is included in net gains or losses. Equity instruments Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. Consideration paid to repurchase the Company’s own equity instruments are deducted from equity. No gain or loss is recognised in profi t or loss. Derecognition of financial liabilities Financial liabilities are derecognised when the obligation specifi ed in the relevant contract is discharged, cancelled or expires. The difference between the carrying amount of the fi nancial liability derecognised and the consideration paid and payable is recognised in profi t or loss. Derivative financial instruments and hedging Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair values at each balance sheet date. The resulting gain or loss is recognised in profi t or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profi t or loss depends on the nature of the hedge relationship. The Group designates certain derivatives to hedge its exposure against interest rate and foreign exchange rate fl uctuation. 96 Hysan Annual Report 2007 3. SIGNIFICANT ACCOUNTING POLICIES continued Financial instruments continued Embedded derivatives Derivatives embedded in non-derivative host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at fair value with changes in fair value recognised in profi t or loss. Hedge accounting The Group designates certain derivatives as hedging instruments as either fair value hedge or cash fl ow hedge. At the inception of the hedging relationship, the entity documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument that is used in a hedging relationship is highly effective in offsetting changes in fair values or cash fl ows of the hedged item. Fair value hedge Changes in the fair values of derivatives that are designated and qualify as fair value hedges are recorded in profi t or loss immediately, together with any changes in the fair values of the hedged items that are attributable to the hedged risk. Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifi es for hedge accounting. Cash flow hedge The effective portion of changes in the fair values of derivatives that are designated and qualify as cash fl ow hedges are deferred in equity. The gain or loss relating to the ineffective portion is recognised immediately in profi t or loss as other gains or losses. Amounts deferred in equity are recycled in profi t or loss in the periods when the hedged item is recognised in profi t or loss. Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifi es for hedge accounting. For a hedge of the foreign currency risk or interest rate risk of a fi rm commitment, when the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifi es for hedge accounting, the cumulative gain or loss that was deferred in equity from the period when the hedge was effective shall remain separately recognised in equity until the forecast transactions ultimately recognised in profi t or loss. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Rental income is recognised on a straight-line basis over the term of the relevant lease. Management fee income and security service income are recognised when services are rendered. Dividend income from investments including fi nancial assets at FVTPL is recognised when the shareholders’ right to receive payments has been established. Interest income from a fi nancial asset excluding fi nancial assets at FVTPL is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts the estimated future cash receipts through the expected life of the fi nancial asset to that asset’s net carrying amount. Leases Leases are classifi ed as fi nance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classifi ed as operating leases. The Group as lessor Rental income from operating leases is recognised in the consolidated income statement on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised as an expense on a straight-line basis over the lease term. The Group as lessee Rentals payable under operating leases, including the leasehold interests in land, are charged to profi t or loss on a straight-line basis over the term of the relevant lease. Benefi ts received and receivable as an incentive to enter into an operating lease are recognised as a reduction of rental expense over the lease term on a straight-line basis. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 97 Notes to the Financial Statements continued For the year ended 31 December 2007 3. SIGNIFICANT ACCOUNTING POLICIES continued Foreign currencies In preparing the fi nancial statements of each individual group entity, transactions in currencies other than the functional currency of that entity (foreign currencies) are recorded in its functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchanges prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non- monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items, and on the translation of monetary items, are recognised in profi t or loss in the period in which they arise, except for exchange differences arising on a monetary item that forms part of the Group’s net investment in a foreign operation, in which case, such exchange differences are recognised in equity in the consolidated fi nancials statements. For the purposes of presenting the consolidated fi nancial statements, the assets and liabilities of the Group’s foreign operations are translated into the presentation currency of the Company (i.e. Hong Kong dollars) at the rate of exchange prevailing at the balance sheet date, and their income and expenses are translated at the average exchange rates for the year, unless exchange rates fl uctuate signifi cantly during the period, in which case, the exchange rates prevailing at the dates of transactions are used. Exchange differences arising, if any, are recognised as a separate component of equity (the translation reserve). Such exchange differences are recognised in profi t or loss in the period in which the foreign operation is disposed of. Borrowing costs All borrowing costs are recognised as and included in fi nance costs in the consolidated income statement in the period in which they are incurred. Retirement benefit costs Payments to the Mandatory Provident Fund Scheme (“MPF Scheme”) are charged as an expense when employees have rendered service entitling them to the contributions. Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. Current tax The tax currently payable is based on taxable profi t for the year. Taxable profi t differs from profi t as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the fi nancial statements and the corresponding tax bases used in the computation of taxable profi t, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profi ts will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profi t nor the accounting profi t. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, 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. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that suffi cient taxable profi ts will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised. Deferred tax is charged or credited to profi t or loss, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. 98 Hysan Annual Report 2007 3. SIGNIFICANT ACCOUNTING POLICIES continued Equity-settled share-based payment transactions The fair value of services received determined by reference to the fair value of share options granted at the grant date is expensed on a straight-line basis over the vesting period, with a corresponding increase in equity (share options reserve). At each balance sheet date, the Group revises its estimates of the number of options that are expected to ultimately vest. The impact of the revision of the estimates, if any, is recognised in profi t or loss over the remaining vesting period, with a corresponding adjustment to share options reserve. At the time when the share options are exercised, the amount previously recognised in share options reserve will be transferred to share premium. When the share options are forfeited after the vesting date or are still not exercised at the expiry date, the amount previously recognised in share options reserve will be transferred to retained profi ts. 4. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY In the application of the Group’s accounting policies, which are described in note 3, the management of the Company are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The followings are the key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a signifi cant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next fi nancial year. Fair value of investment properties At the balance sheet date, the Group’s investment properties are stated at fair value of HK$35,711 million (2006: HK$32,473 million) based on the valuation performed by an independent qualifi ed professional valuer. In determining the fair value, the valuers have based on market value existing use basis which involves, inter-alia, certain estimates, including comparable market transactions, appropriate capitalisation rates and reversionary income potential and redevelopment potential. In relying on the valuation, management has exercised their judgement and is satisfi ed that the method of valuation is refl ective of the current market conditions. Fair values of financial instruments Financial instruments, such as interest rate swaps, cross currency swaps, foreign exchange derivatives and equity derivatives, are carried at the balance sheet at fair value, as disclosed in note 21. The best evidence of fair value is quoted prices in an active market, where quoted prices are not available for a particular fi nancial instrument, the Group uses the market values determined by independent fi nancial institutions or internal or external valuation models to estimate the fair value. The use of methodologies, models and assumptions in pricing and valuing these fi nancial assets and liabilities is subjective and requires varying degrees of judgment by management, which may result in signifi cantly different fair values and results. Details of the assumptions used and of the results of sensitivity analyses regarding these assumptions are provided in note 34. 5. TURNOVER Turnover represents gross rental income from investment properties for the year. As the turnover and results of the Group are principally derived from investment properties located in Hong Kong, no business or geographical segment analysis is presented. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 99 Notes to the Financial Statements continued For the year ended 31 December 2007 6. INVESTMENT INCOME Investment income comprises: Dividends from – listed investments – unlisted investments Interest income Reversal of impairment loss recognised in respect of investment in an associate Recovery of a loan to an associate Sundry income Investment income earned on fi nancial assets, analysed by category of asset, is as follows: Loans and receivables (including time deposits and bank balances) Available-for-sale equity investments Investment income earned on non-fi nancial assets Income recognised in respect of fi nancial assets designated as at FVTPL is disclosed in note 7. 7. OTHER GAINS AND LOSSES Other gains and losses comprise: Gain on fair value change of fi nancial assets designated as at FVTPL (Loss) gain on fair value change of fi nancial assets or fi nancial liabilities classifi ed as held for trading Recycling of gains from reserve on disposal of available-for-sale equity investments Gain (loss) on hedging instruments under fair value hedge (Loss) gain on hedged items under fair value hedge Hedge ineffectiveness on cash fl ow hedges 8. DIRECTORS’ EMOLUMENTS Directors’ fees Other emoluments Basic salaries, housing and other allowances Bonus Share-based payments (note 40) Retirement benefi ts scheme contributions 100 Hysan Annual Report 2007 2007 HK$ million 2006 HK$ million 41 12 30 11 – 4 98 41 – 18 – 87 1 147 2007 HK$ million 2006 HK$ million 24 60 84 14 98 105 41 146 1 147 2007 HK$ million 2006 HK$ million 6 (99) 382 41 (28) – 302 – 20 170 (3) 6 8 201 2007 HK$ million 2006 HK$ million 1 9 2 1 – 13 2 11 2 1 – 16 8. DIRECTORS’ EMOLUMENTS continued The emoluments paid or payable to each of the Directors of the Company for the two years ended 31 December 2007, calculated with reference to their employment as Directors of the Company, are set out below: Executive Directors Peter Ting Chang Lee (Note b) Pauline Wah Ling Yu Wong Michael Tze Hau Lee (Notes c and d) Non-executive Directors Fa-kuang Hu Hans Michael Jebsen Anthony Hsien Pin Lee Chien Lee Dr. Deanna Ruth Tak Yung Rudgard Independent non-executive Directors Sir David Akers-Jones Dr. Geoffrey Meou-tsen Yeh Tom Behrens-Sorensen (Note e) Per Jorgensen (Note f) Executive Directors Peter Ting Chang Lee (Note b) Pauline Wah Ling Yu Wong Michael Tze Hau Lee (Note c) Non-executive Directors Fa-kuang Hu Hans Michael Jebsen Anthony Hsien Pin Lee Chien Lee Dr. Deanna Ruth Tak Yung Rudgard Independent non-executive Directors Sir David Akers-Jones Dr. Geoffrey Meou-tsen Yeh Per Jorgensen For the year ended 31 December 2007 Basic salaries, housing and other allowances HK$’000 Directors’ fees HK$’000 (Note a) Bonus HK$’000 Share-based payments HK$’000 Retirement benefi ts scheme contributions HK$’000 190 100 42 120 120 130 130 100 230 140 85 46 4,304 2,925 1,215 1,183 344 38 862 396 – 12 273 5 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Total HK$’000 6,551 4,038 1,300 120 120 130 130 100 230 140 85 46 1,433 8,444 1,565 1,258 290 12,990 For the year ended 31 December 2006 Basic salaries, housing and other allowances HK$’000 Directors’ fees HK$’000 (Note a) Bonus HK$’000 Share-based payments HK$’000 Retirement benefi ts scheme contributions HK$’000 190 100 120 120 120 130 130 100 230 140 130 4,213 2,769 3,599 1,213 245 1,027 – – 1,171 12 227 12 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Total HK$’000 5,628 3,341 5,929 120 120 130 130 100 230 140 130 1,510 10,581 2,485 1,171 251 15,998 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 101 Notes to the Financial Statements continued For the year ended 31 December 2007 8. DIRECTORS’ EMOLUMENTS continued Notes: (a) Breakdown of Directors’ fees of each of the Directors of the Company for the year ended 31 December 2007 is set out below: Emoluments Investment Nomination Review Board Committee Committee Committee Committee HK$’000 HK$’000 HK$’000 HK$’000 Audit HK$’000 Executive Directors Peter Ting Chang Lee Pauline Wah Ling Yu Wong Michael Tze Hau Lee (Note d) Non-executive Directors Fa-kuang Hu Hans Michael Jebsen Anthony Hsien Pin Lee Chien Lee Dr. Deanna Ruth Tak Yung Rudgard Independent non-executive Directors Sir David Akers-Jones Dr. Geoffrey Meou-tsen Yeh Tom Behrens-Sorensen (Note e) Per Jorgensen (Note f) 140 100 35 100 100 100 100 100 120 100 65 35 – – – – – – 30 – 60 – 20 11 1,095 121 – – – 20 – – – – 30 20 – – 70 20 – 7 – 20 30 – – – – – – 77 30 – – – – – – – 20 20 – – 70 2007 Total HK$’000 2006 Total HK$’000 190 100 42 120 120 130 130 100 230 140 85 46 190 100 120 120 120 130 130 100 230 140 – 130 1,433 1,510 (b) Year 2007: The Emoluments Review Committee reviewed his 2007 fi xed base salary and determined his 2006 performance-based bonus in March 2007. It was decided to make an increment on his base salary as from April 2007. Accordingly, his fi xed base package (including housing allowance which amount remains unchanged) paid during the year was HK$4,304,000. The stated bonus fi gure includes adjustment for 2006 bonus accrued in 2006 accounts (following fi nalisation of bonus by the Emoluments Review Committee in March 2007), and 2007 target bonus fi gures pending fi nalisation by the Emoluments Review Committee after year-end in March 2008. Year 2006: The Emoluments Review Committee reviewed his 2006 fi xed base salary and determined his 2005 performance-based bonus in March 2006. It was decided to make an increment on his base salary as from April 2006. Accordingly, his fi xed base package (including housing allowance which amount remains unchanged) paid during the year was HK$4,213,000. The stated bonus fi gure includes adjustment for 2005 bonus accrued in 2005 accounts (following fi nalisation of bonus by the Emoluments Review Committee in March 2006), and 2006 target bonus fi gures pending fi nalisation by the Emoluments Review Committee after year-end in March 2007. (c) Year 2007: The Emoluments Review Committee reviewed his 2007 fi xed base salary and determined his 2006 performance-based bonus in March 2007. Accordingly, his fi xed base package (including housing allowance which amount remains unchanged) paid during the year was HK$1,215,000. The stated bonus fi gure includes adjustment for 2006 bonus accrued in 2006 accounts (following fi nalisation of bonus by the Emoluments Review Committee in March 2007). Year 2006: The Emoluments Review Committee reviewed his 2006 fi xed base salary and determined his 2005 performance-based bonus in March 2006. It was decided to make an increment on his base salary as from April 2006. Accordingly, his fi xed base package (including housing allowance which amount remains unchanged) paid during the year was HK$3,599,000. The stated bonus fi gure includes adjustment for 2005 bonus accrued in 2005 accounts (following fi nalisation of bonus by the Emoluments Review Committee in March 2006), and 2006 target bonus fi gures pending fi nalisation by the Emoluments Review Committee after year-end in March 2007. (d) Michael Tze Hau Lee stepped down as Managing Director as from the conclusion of 2007 annual general meeting held on 8 May 2007. (e) Tom Behrens-Sorensen was appointed as Independent non-executive Director as from the conclusion of 2007 annual general meeting held on 8 May 2007. (f) Per Jorgensen stepped down as Independent non-executive Director as from the conclusion of 2007 annual general meeting held on 8 May 2007. 102 Hysan Annual Report 2007 9. EMPLOYEES’ EMOLUMENTS Of the fi ve individuals with the highest emoluments in the Group, two (2006: three) are Directors of the Company, details of whose emoluments are included in note 8 above. The emoluments of the remaining three (2006: two) individuals are detailed as follows: Basic salaries, housing and other allowances Bonus Share-based payments Their emoluments are within the following bands: HK$2,000,001 to HK$2,500,000 HK$3,000,001 to HK$3,500,000 HK$3,500,001 to HK$4,000,000 10. FINANCE COSTS Finance costs comprise: Interest on bank loans and overdrafts wholly repayable within fi ve years Interest on fl oating rate notes wholly repayable within fi ve years Interest on fi xed rate notes wholly repayable within fi ve years Interest on fi xed rate notes not wholly repayable within fi ve years Imputed interest on zero coupon notes not wholly repayable within fi ve years Total interest expenses Net interest receipts on interest rate swap and cross currency swaps designated as fair value hedges Recycling of gains from reserve on fi nancial instruments designated as cash fl ow hedges Bank charges Medium term note programme expenses Other fi nance costs 2007 HK$ million 2006 HK$ million 7 1 2 10 5 1 1 7 Number of individuals 2007 2006 1 – 2 3 – 1 1 2 2007 HK$ million 2006 HK$ million 35 26 100 – 12 173 (7) (2) 8 1 2 175 38 26 – 108 11 183 (10) (22) 7 1 4 163 Hysan Annual Report 2007 103 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Notes to the Financial Statements continued For the year ended 31 December 2007 11. TAXATION Current tax Hong Kong profi ts tax – current year – overprovision in prior years – prior years’ tax provision Deferred tax (note 30) Change in fair value of investment properties Other temporary differences 2007 HK$ million 2006 HK$ million 130 (3) 58 185 540 20 560 745 90 (1) – 89 448 21 469 558 Hong Kong profi ts tax is calculated at 17.5% of the estimated assessable profi t for both years. The taxation for the year can be reconciled to the profi t before taxation per the consolidated income statement as follows: Profi t before taxation Tax at Hong Kong profi ts tax rate of 17.5% Tax effect of share of results of associates Tax effect of expenses not deductible for tax purposes Tax effect of income not taxable for tax purposes Tax effect of estimated tax losses not recognised Utilisation of estimated tax losses previously not recognised Overprovision in prior years Prior years’ tax provision Others Taxation for the year 2007 HK$ million 2006 HK$ million 4,862 3,798 851 (79) 8 (85) 20 (12) (3) 58 (13) 745 664 (21) 1 (62) 2 (17) (1) – (8) 558 In addition to the amount charged to the consolidated income statement, deferred tax relating to the revaluation of the Group’s leasehold buildings has been charged directly to equity (see note 30). At the date of approval of these fi nancial statements, the Group had disputes with the Hong Kong Inland Revenue Department (“IRD”) regarding the deductibility of certain expenses in assessing the taxable profi ts for the years of assessment 1995/1996 to 1999/2000. Full amount of tax in dispute has been provided for in the Group’s accounts for previous years. No agreement with IRD has been reached at the date of approval of the 2007 fi nancial statements. The Group reviews its tax position annually and has made adequate provisions for each year based on the then prevailing tax law and practices. After taking into account the lapse of time and recent developments in tax case law and practices, an additional provision of HK$58 million was made in the current year being current estimate of interest payable on the tax in dispute should IRD’s claim be successful. The Directors believe that the Group has made suffi cient tax provisions as at the balance sheet date based on professional advice obtained. 104 Hysan Annual Report 2007 12. PROFIT FOR THE YEAR Profi t for the year has been arrived at after charging (crediting): Auditor’s remuneration Amortisation of prepaid lease payments (note 17) Depreciation of property, plant and equipment Gross rental income from investment properties Less: – Direct operating expenses that generated rental income – Direct operating expenses that did not generate rental income Loss on disposal of property, plant and equipment Staff costs, comprising: – Directors’ emoluments (note 8) – Share-based payments – Other staff costs Share of income tax of an associate (included in share of results of associates) 13. DIVIDENDS (a) Dividends recognised as distribution during the year: 2007 interim dividend paid – HK12 cents per share 2006 interim dividend paid – HK10 cents per share 2006 fi nal dividend paid – HK40 cents per share 2005 fi nal dividend paid – HK35 cents per share 2007 HK$ million 2006 HK$ million 2 – 7 2 – 7 (1,368) (1,268) 205 3 234 6 (1,160) (1,028) – 13 3 111 127 81 1 16 3 117 136 57 2007 HK$ million 2006 HK$ million 127 – 422 – 549 – 105 – 369 474 Scrip dividend alternatives were offered to the shareholders in respect of the above dividends. These alternatives were accepted by the shareholders as follows: 2007 interim dividend (2006 interim dividend): – Cash payment – Share alternative 2006 fi nal dividend (2005 fi nal dividend): – Cash payment – Share alternative 2007 HK$ million 2006 HK$ million 99 28 346 76 549 94 11 341 28 474 Hysan Annual Report 2007 105 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Notes to the Financial Statements continued For the year ended 31 December 2007 13. DIVIDENDS continued (b) Dividends proposed after the balance sheet date: Final dividend proposed – HK48 cents per share (2006: HK40 cents per share) 2007 HK$ million 2006 HK$ million 498 422 The 2007 fi nal dividend of HK48 cents per share (2006: HK40 cents per share) has been proposed by the Directors on 13 March 2008 and is subject to approval by the shareholders at the forthcoming annual general meeting. Such dividend is not recognised as a liability as at 31 December 2007. The proposed 2007 fi nal dividend will be payable in cash with a scrip dividend alternative. 14. EARNINGS PER SHARE (a) Basic and diluted earnings per share The calculation of the basic and diluted earnings per share attributable to the equity holders of the Company is based on the following data: Earnings for the purposes of basic and diluted earnings per share: Profi t for the year attributable to equity holders of the Company Weighted average number of ordinary shares for the purpose of basic earnings per share Effect of dilutive potential ordinary shares: Share options issued by the Company Weighted average number of ordinary shares for the purpose of diluted earnings per share Earnings 2007 HK$ million 2006 HK$ million 3,949 3,099 Number of shares 2007 2006 1,051,770,437 1,054,166,353 607,460 923,579 1,052,377,897 1,055,089,932 The computation of diluted earnings per share does not assume the exercise of certain of the Company’s outstanding share options as the exercise prices are higher than the average market price per share. 106 Hysan Annual Report 2007 14. EARNINGS PER SHARE continued (b) Adjusted basic earnings per share For the purpose of assessing the performance of the Group’s principal activities (i.e. leasing of investment properties), the management is of the view that the profi t for the year attributable to the equity holders of the Company should be adjusted in the calculation of basic earnings per share as follows: Profi t for the year attributable to equity holders of the Company Gain arising from change in fair value of investment properties Effect of deferred taxation on change in fair value of investment properties Effect of minority interests’ shares Gain arising from share of change in fair value of investment properties (net of deferred taxation) of an associate Underlying profi t attributable to equity holders of the Company Prior years’ tax provision Net realised gain on disposal of available-for-sale investments Reversal of impairment loss recognised in respect of investment in an associate Recovery of a loan to an associate Recurring underlying profi t 2007 2006 Profi t HK$ million Basic earnings per share HK cents Profi t HK$ million Basic earnings per share HK cents 3,949 375.46 3,099 293.96 (3,131) (297.69) (2,576) (244.31) 540 111 51.34 10.55 448 97 42.54 9.20 (311) (29.57) (56) (5.36 ) 1,158 58 110.09 5.52 1,012 – 96.03 – (255) (24.24) (170) (16.16 ) (11) – 950 (1.05) – 90.32 – (87) 755 – (8.27 ) 71.60 The denominators used are the same as those detailed above for basic earnings per share. 15. INVESTMENT PROPERTIES Fair value At 1 January Additions Disposals Transfer to a group company Net increase in fair value At 31 December The Group The Company 2007 HK$ million 2006 HK$ million 2007 HK$ million 2006 HK$ million 32,473 107 – – 3,131 35,711 29,815 83 (1) – 2,576 32,473 – – – – – – 4,061 – – (4,061) – – The carrying amount of investment properties shown above comprises: Leasehold land in Hong Kong: – Medium-term lease – Long lease The Group The Company 2007 HK$ million 2006 HK$ million 2007 HK$ million 2006 HK$ million 6,200 29,511 35,711 5,640 26,833 32,473 – – – – – – Hysan Annual Report 2007 107 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Notes to the Financial Statements continued For the year ended 31 December 2007 15. INVESTMENT PROPERTIES continued The fair value of the Group’s investment properties at 31 December 2007 have been arrived at on the basis of a valuation carried out on that date by Knight Frank Petty Limited, an independent qualifi ed professional valuer not connected with the Group. Knight Frank Petty Limited has appropriate qualifi cations and recent experiences in the valuation of similar properties in the relevant locations. The valuation, which conforms to Hong Kong Institute of Surveyors Valuation Standards on Properties, was mainly arrived at by reference to comparable market transactions for similar properties. All of the Group’s property interests held under operating leases to earn rentals and/or for capital appreciation purposes are measured using the fair value model and are classifi ed and accounted for as investment properties. 16. PROPERTY, PLANT AND EQUIPMENT Buildings in Hong Kong under long lease HK$ million Furniture, fi xtures and equipment HK$ million Computers HK$ million Motor vehicles HK$ million Total HK$ million 55 – – 55 – – 7 62 – 62 62 – 1 – (1) – 1 – (1) – 62 55 49 5 (3) 51 2 – – 53 53 – 53 42 3 (2) – 43 3 – – 46 7 8 20 1 – 21 1 (1) – 21 21 – 21 12 3 – – 15 3 (1) – 17 4 6 1 – – 1 – – – 1 1 – 1 1 – – – 1 – – – 1 – – 125 6 (3) 128 3 (1) 7 137 75 62 137 55 7 (2) (1) 59 7 (1) (1) 64 73 69 The Group Cost or Valuation At 1 January 2006 Additions Disposals At 31 December 2006 Additions Disposals Surplus on revaluation At 31 December 2007 Comprising: At cost At valuation 2007 Accumulated Depreciation At 1 January 2006 Provided for the year Eliminated on disposals Eliminated on revaluation At 31 December 2006 Provided for the year Eliminated on disposals Eliminated on revaluation At 31 December 2007 Carrying Amounts At 31 December 2007 At 31 December 2006 108 Hysan Annual Report 2007 16. PROPERTY, PLANT AND EQUIPMENT continued Furniture, fi xtures and equipment HK$ million Computers HK$ million Motor vehicles HK$ million Total HK$ million The Company Cost At 1 January 2006 Additions Disposals At 31 December 2006 Additions Disposals At 31 December 2007 Accumulated Depreciation At 1 January 2006 Provided for the year Eliminated on disposals At 31 December 2006 Provided for the year Eliminated on disposals At 31 December 2007 Carrying Amounts At 31 December 2007 At 31 December 2006 22 – (1) 21 1 – 22 20 1 (1) 20 1 – 21 1 1 19 1 – 20 1 (1) 20 11 3 – 14 3 (1) 16 4 6 1 – – 1 – – 1 1 – – 1 – – 1 – – 42 1 (1) 42 2 (1) 43 32 4 (1) 35 4 (1) 38 5 7 The above items of property, plant and equipment are depreciated on a straight-line basis at the following rates per annum: Leasehold buildings Furniture, fi xtures and equipment Computers Motor vehicles Over the shorter of the term of the lease or 40 years 20% 20% 25% The Group’s leasehold buildings were revalued at 31 December 2007 by Knight Frank Petty Limited, an independent qualifi ed professional valuer, on market value basis. The surplus of HK$8 million (2006: HK$1 million) arising on revaluation have been credited to the properties revaluation reserve. Had the Group’s leasehold buildings been measured on a historical cost basis, their carrying amounts would have been HK$50 million (2006: HK$52 million) at the balance sheet date. Furniture, fi xtures and equipment of the Group include assets carried at cost of HK$19 million (2006: HK$18 million) and accumulated depreciation of HK$17 million (2006: HK$16 million) in respect of assets held for leasing out under operating leases. Depreciation charges in respect of those assets for the year amounted to HK$1 million (2006: HK$1 million). There is no property, plant and equipment of the Company held for renting out under operating leases for the year or at the balance sheet date. 17. PREPAID LEASE PAYMENTS The Group’s prepaid lease payments represent leasehold land in Hong Kong held under long lease, and are amortised on a straight-line basis over the terms of leases. The amortisation of prepaid lease payments for the year was approximately HK$163,000 (2006: HK$163,000). Hysan Annual Report 2007 109 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Notes to the Financial Statements continued For the year ended 31 December 2007 18. INVESTMENTS IN SUBSIDIARIES The Company’s investments in subsidiaries are the interest in unlisted shares stated at cost of approximately HK$5,000 (2006: HK$5,000). Details of the principal subsidiaries held by the Company at 31 December 2007 are set out in note 41. 19. INVESTMENTS IN ASSOCIATES Cost of unlisted investments Loan to an associate Share of post-acquisition profi ts and reserves, net of dividend received Less: Impairment loss recognised The Group The Company 2007 HK$ million 2006 HK$ million 2007 HK$ million 2006 HK$ million 3 112 896 1,011 – 1,011 3 186 452 641 (11) 630 – – – – – – – – – – – – Loan to an associate of HK$112 million (2006: HK$186 million) is unsecured and interest-free. In the opinion of the Directors, the loan is considered as part of the Group’s investment cost in the associate and, accordingly, the loan is included in the amount of investments in associates. During the year, the Directors conducted a review of the Group’s investments in associates and determined that the recoverable amount of investment in an associate exceeded its carrying amount. Accordingly, impairment loss of HK$11 million recognised in respect of that associate in prior year was reversed at the balance sheet date. The Company’s investments in associates are the interest in unlisted shares stated at cost of approximately HK$3,000 (2006: HK$3,000). Details of the Group’s associates at 31 December 2007 are as follows: Name of associate Wingrove Investment Pte Ltd Country Link Enterprises Limited Shanghai Kong Hui Property Development Co., Ltd Shanghai Grand Gateway Plaza Property Management Co., Ltd Form of business structure Place of registration and operation Class of share held/ registered capital Effective interest held by the Group Private company limited by shares Singapore Ordinary share 25.0% * Private limited company Sino-Foreign equity joint venture Sino-Foreign equity joint venture Hong Kong Ordinary share 26.3% * US$165,000,000 # 24.7% * US$140,000 # 23.7% * The People’s Republic of China The People’s Republic of China Parallel Asia Engineering Company Limited Private limited company Hong Kong Ordinary share 25.0% Principal activities Property development and leasing Investment holding Property development and leasing Property management Under liquidation * Indirectly held # Registered capital 110 Hysan Annual Report 2007 19. INVESTMENTS IN ASSOCIATES continued The summarised fi nancial information in respect of the Group’s associates based on the unaudited management accounts for the year ended 31 December 2007 is as follows: Total assets Total liabilities Net assets Group’s share of net assets of associates Turnover Profi t for the year Group’s share of results of associates for the year 20. AVAILABLE-FOR-SALE INVESTMENTS 2007 HK$ million 2006 HK$ million 8,445 (4,272) 4,173 1,011 1,055 1,723 452 6,928 (4,535) 2,393 641 669 457 120 The Group The Company 2007 HK$ million 2006 HK$ million 2007 HK$ million 2006 HK$ million Available-for-sale investments comprise: Listed investments: – Equity securities listed in Hong Kong, at fair value 2,439 1,678 Unlisted investments: – Equity securities in overseas, at cost Less: Impairment loss recognised Add: Amounts due therefrom – Club debentures, at cost Less: Impairment loss recognised 93 (55) 38 – 38 3 (1) 2 117 (60) 57 8 65 3 (1) 2 2,479 1,745 – – – – – – 3 (1) 2 2 – – – – – – 3 (1) 2 2 The equity securities in overseas represent the Group’s investments in unlisted equity securities issued by private entities incorporated in Singapore. These private entities are engaged in property investment and development activities in Singapore. They are measured at cost less any identifi ed impairment loss at each balance sheet date because the range of reasonable fair value estimates is so signifi cant that the management is of the opinion that their fair values cannot be measured reliably. In the current year, the Group disposed of an unlisted equity security at its carrying amount of HK$19 million, which had been carried at cost less impairment before the disposal. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 111 Notes to the Financial Statements continued For the year ended 31 December 2007 21. OTHER FINANCIAL ASSETS/LIABILITIES Other fi nancial assets Derivatives under hedge accounting: Cash fl ow hedges – Interest rate swaps – Foreign exchange derivatives Fair value hedges – Cross currency swaps Financial assets designated as at FVTPL: Principal-protected deposits Total Other fi nancial liabilities Derivatives under hedge accounting: Cash fl ow hedges – Interest rate swaps – Foreign exchange derivatives Fair value hedges – Interest rate swap – Cross currency swaps Other derivatives classifi ed as held for trading (not under hedge accounting): Foreign exchange derivatives Equity derivatives Total The Group Current Non-current 2007 HK$ million 2006 HK$ million 2007 HK$ million 2006 HK$ million – 1 – 1 – 1 2 – – – 2 – 38 38 40 1 1 – 2 – 2 – – – – – – 40 40 40 – 2 30 32 203 235 – – – – – 17 – 17 17 – 1 1 2 – 2 – 1 4 8 13 32 – 32 45 Except for the fair values of principal-protected deposits, equity derivatives and the interest rate swap designated as fair value hedge being determined based on market values provided by the counterparty fi nancial institutions, the fair values of other derivatives are calculated using discounted cash fl ow analysis based on the applicable yield curves and foreign exchange rates. 112 Hysan Annual Report 2007 21. OTHER FINANCIAL ASSETS/LIABILITIES continued (a) Cash flow hedges (i) Interest rate risk The Group uses interest rate swaps to manage its exposure to interest rate changes of certain amounts of its fl oating rate notes and the interest rate changes in relation to fl oating-interest-rate payments of certain fi nancial instruments. The interest rate swaps match the major terms of the hedged underlying items such that the management considers that the interest rate swaps are highly effective hedging instruments. At the balance sheet date, the maturity periods of interest rate swaps at notional amount were as follows: Within one year The Group 2007 HK$ million 2006 HK$ million 660 949 As at 31 December 2007, the fl oating-to-fi xed interest rate swaps locked in the interest rates ranging from 4.31% to 4.71% (2006: 2.11% to 2.45%). As at 31 December 2007, fair value losses of HK$2 million (2006: fair value gains of HK$1 million) from the interest rate swaps under cash fl ow hedges have been deferred in equity and are expected to be released to the consolidated income statement at various dates during the lives of the swaps when the hedged interest payables occur. During the year, the Group had recycled approximately HK$1 million (2006: HK$21 million) gains on interest rate swaps from the hedging reserve to profi t or loss as fi nance costs. (ii) Foreign currency risk The Group designates forward foreign exchange contracts as cash fl ow hedges to manage its foreign currency exposure in relation to the coupon payments of the US$65 million out of the US$182 million fi xed rate notes for both years. The principal terms of the foreign exchange derivatives have been negotiated to match the coupon payments of the fi xed rate notes. At the balance sheet date, the maturity periods of the forward foreign exchange contracts at notional amount were as follows: Within one year More than one year, but less than fi ve years More than fi ve years The Group 2007 HK$ million 2006 HK$ million 34 118 – 152 34 138 14 186 As at 31 December 2007, fair value gains of HK$3 million (2006: HK$1 million) from the forward foreign exchange contracts have been deferred in equity and are expected to be released to the consolidated income statement at various dates when the coupon payments of the US$65 million fi xed rate notes occur. During the year, the Group had recycled approximately HK$1 million (2006: HK$1 million) gains on forward foreign exchange contracts from the hedging reserve to profi t or loss as fi nance costs. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 113 Notes to the Financial Statements continued For the year ended 31 December 2007 21. OTHER FINANCIAL ASSETS/LIABILITIES continued (b) Fair value hedges The Group designates an interest rate swap as fair value hedge to minimise its interest rate risk exposure in relation to the zero coupon notes, and designates cross currency swaps as fair value hedges to manage interest rate and foreign currency risk in relation to the principal and coupon payments of the US$117 million out of the US$182 million fi xed rate notes. The principal terms of the interest rate swap and cross currency swaps match the corresponding notes and the management considers that the swaps are highly effective hedging instruments. At the balance sheet date, the maturity periods of the swaps at notional amount were as follows: Interest rate swap More than fi ve years Cross currency swaps More than one year, but less than fi ve years More than fi ve years The Group 2007 HK$ million 2006 HK$ million 227 913 – 913 215 – 913 913 As a result of the hedge accounting, the carrying amount of the fi xed rate notes was adjusted by gains of approximately HK$54 million (2006: gains of approximately HK$78 million) while the carrying amount of the zero coupon notes was adjusted by losses of approximately HK$72,000 (2006: gains of approximately HK$4 million). The changes in fair values of the notes for the hedged risk were included in profi t or loss at the same time that the changes in fair value of the swaps were included in profi t or loss. The fi xed-to-fl oating interest rate swap hedging the zero coupon notes converted a fi xed rate of 5.19% to HIBOR plus 0.69% for both years. (c) Financial assets designated as at FVTPL During the year, the Group entered into certain contracts of structured deposits with certain fi nancial institutions. The deposits with notional amounts of HK$118 million and HK$80 million will mature in 2009 and 2010 respectively. The structured deposits are principal-protected at the maturity dates and contain embedded derivatives which are not closely related to the host contract. The interest rates of such deposits vary in relation to the relative movements of the underlying assets, such as foreign exchange rates. The entire combined contracts have been designated as fi nancial assets at FVTPL on initial recognition. (d) Other derivatives classified as held for trading (not under hedge accounting) The notional amounts of other derivatives classifi ed as held for trading not under hedge accounting are as follows: Derivatives Forward foreign exchange contact Net basis swaps Equity derivatives Notional amount US$6 million US$65 million HK$147 million Maturity 2008 2012 2008 The Group entered into net basis swaps to minimise the foreign currency exposure in relation to the principal of the US$65 million of the US$182 million fi xed rate notes. The equity derivatives were call options of certain listed securities in Hong Kong. 114 Hysan Annual Report 2007 22. ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES Rents from leasing of investment properties are normally received in advance. At the balance sheet date, accounts receivable of the Group and the Company mainly represented rents receipts in arrears, which were aged less than 90 days. 23. AMOUNTS DUE FROM/TO SUBSIDIARIES The amounts due from/to subsidiaries are unsecured, interest-free and repayable on demand. 24. AMOUNT DUE FROM AN ASSOCIATE The amount due from an associate is unsecured, interest-free and repayable on demand. 25. HELD FOR TRADING INVESTMENTS The Group’s held for trading investments represent investments in equity securities listed in Hong Kong. 26. TIME DEPOSITS/CASH AND BANK BALANCES Time deposits, cash and bank balances comprise cash and short-term bank deposits carrying effective interest rates ranging from 0.88% to 3.45% (2006: 3.73% to 3.93%) with an original maturity of three months or less. 27. ACCOUNTS PAYABLE AND ACCRUALS At the balance sheet date, accounts payable and accruals of the Group and the Company were aged less than 90 days. 28. AMOUNTS DUE TO MINORITY SHAREHOLDERS The amounts due to minority shareholders are unsecured, interest-free and repayable on demand. 29. BORROWINGS The analysis of the carrying amounts of borrowings is as follows: Unsecured bank loans Floating rate notes Fixed rate notes Zero coupon notes The Group 2007 HK$ million 2006 HK$ million 720 549 1,362 230 2,861 720 549 1,338 214 2,821 (a) Unsecured bank loans The unsecured bank loans of HK$720 million (2006: HK$720 million) are guaranteed as to principal and interest by the Company and are repayable after two years, but not exceeding fi ve years. At the balance sheet date, all the Group’s unsecured bank loans are variable-rate borrowings with effective interest rates (which are also equal to contracted interest rates) ranging from 3.94% to 4.17% (2006: 4.39% to 4.58%) per annum denominated in Hong Kong dollars. Interest rate is normally re-fi xed at every one to six months. (b) Floating rate notes In 2004, HK$550 million fi ve-year fl oating rate notes were issued by Hysan (MTN) Limited, a wholly-owned subsidiary of the Company. The notes are guaranteed as to principal and interest by the Company, bear effective interest rates (which are equal to contracted interest rates) ranging from 3.98% to 5.08% (2006: 4.24% to 5.04%) per annum at the balance sheet date and are repayable in full in 2009. The Group has entered into interest rate swaps to hedge against the interest rate risk of certain fl oating rate notes (see note 21). O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 115 Notes to the Financial Statements continued For the year ended 31 December 2007 29. BORROWINGS continued (c) Fixed rate notes Fixed rate notes Less: Notes repurchased and cancelled Net gain attributable to hedged risks The Group 2007 HK$ million 2006 HK$ million 1,416 – (54) 1,362 1,556 (140) (78) 1,338 In February 2002, US$200 million 10-year fi xed rate notes were issued by Hysan (MTN) Limited. The notes are guaranteed as to principal and interest by the Company, bear an effective interest rate (which is equal to contracted interest rate) of 7% per annum and are repayable in full in February 2012. During the year ended 31 December 2006, a total nominal amount of US$18 million was repurchased and cancelled. The outstanding nominal amount of the notes at both balance sheet dates was US$182 million. The Group has entered into cross currency swaps to hedge against the interest rate and foreign exchange rate risks in relation to the principal repayment and coupon payments of the US$117 million (2006: US$117 million) fi xed rate notes under fair value hedge. The Group has also entered into forward foreign exchange contracts to hedge against the foreign exchange rate risk arising from the coupon payments of the remaining US$65 million fi xed rate notes and the forward foreign exchange contracts are accounted for as cash fl ow hedges (see note 21). The net gain of HK$54 million (2006: HK$78 million) represented changes in fair value attributable to the hedged interest rate and foreign exchange rate risks of the US$117 million (2006: US$117 million) fi xed rate notes under fair value hedge. (d) Zero coupon notes Zero coupon notes Less: Net gain attributable to hedged risk The Group 2007 HK$ million 2006 HK$ million 230 – 230 218 (4) 214 In February 2005, 15-year zero coupon notes of nominal amount of HK$430 million were issued at an issue price of around 46.37% of the nominal amount by Hysan (MTN) Limited. The notes are guaranteed as to nominal amount by the Company, bear an effective yield (which is equal to contracted yield) at the rate of 5.19% per annum and are repayable at par in February 2020. Hysan (MTN) Limited has the option to redeem the notes on 7 February 2015 at a price of about 77.4% of the nominal amount. The Group has entered into an interest rate swap to hedge against the interest rate risk of the zero coupon notes under fair value hedge (see note 21). The net loss of approximately HK$72,000 (2006: gain of approximately HK$4 million) represented changes in fair value attributable to the hedged interest rate risk of the zero coupon notes under fair value hedge. 116 Hysan Annual Report 2007 30. DEFERRED TAXATION The following are the major deferred tax liabilities (assets) recognised by the Group and the Company and movements thereon during the year: Accelerated tax depreciation HK$ million Revaluation of properties HK$ million Tax losses HK$ million Total HK$ million The Group At 1 January 2006 Charge to consolidated income statement for the year (note 11) At 31 December 2006 Charge to consolidated income statement for the year (note 11) Charge to equity for the year At 31 December 2007 The Company At 1 January 2006 Credit to income statement for the year At 31 December 2006 and 31 December 2007 224 20 244 20 – 264 2,658 448 3,106 540 1 3,647 (2) 1 (1) – – (1) 2,880 469 3,349 560 1 3,910 Accelerated tax depreciation HK$ million Revaluation of properties HK$ million Total HK$ million 10 (10) – 480 (480) – 490 (490) – At the balance sheet date, the Group has unused estimated tax losses of HK$400 million (2006: HK$456 million) available for offset against future profi ts. A deferred tax asset has been recognised in respect of HK$5 million (2006: HK$7 million) of such losses. No deferred tax asset has been recognised in respect of the remaining estimated tax losses of HK$395 million (2006: HK$449 million) as the utilisation of these estimated tax losses is uncertain. These estimated tax losses may be carried forward indefi nitely. At the balance sheet date, the Group has deductible temporary differences of HK$4 million (2006: HK$49 million). No deferred tax asset has been recognised in relation to such deductible temporary differences as it is not probable that taxable profi t will be available against which the deductible temporary differences can be utilised. The Company does not have any unused tax loss as at balance sheet date. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 117 Notes to the Financial Statements continued For the year ended 31 December 2007 31. SHARE CAPITAL Ordinary shares of HK$5 each Authorised: At 1 January and 31 December Number of shares 2007 2006 Share capital 2007 HK$ million 2006 HK$ million 1,450,000,000 1,450,000,000 7,250 7,250 Issued and fully paid: At 1 January Issue of shares pursuant to scrip dividend schemes Exercise of share options Cancellation upon repurchase of own shares At 31 December 1,055,137,409 1,053,260,841 1,700,301 176,267 – 5,057,681 1,507,666 (24,233,000) 1,037,469,756 1,055,137,409 5,276 25 7 (121) 5,187 5,266 9 1 – 5,276 (a) Issue of shares pursuant to scrip dividend schemes On 12 June 2007 and 5 October 2007 respectively, the Company issued and allotted a total of 3,623,799 shares and 1,433,882 shares of HK$5 each in the Company at HK$21.11 and HK$19.412 to the shareholders who elected to receive shares in the Company in lieu of cash for the 2006 fi nal and 2007 interim dividends pursuant to the scrip dividend schemes announced by the Company on 8 May 2007 and 3 September 2007. These shares rank pari passu in all respects with other shares in issue. (b) Issue of shares under share option schemes During the year, options to subscribe for a total of 1,350,000 shares, 77,666 shares and 80,000 shares were exercised at the exercise prices of HK$9.22, HK$15.85 and HK$16.60 per share respectively. These shares rank pari passu in all respects with other shares in issue. Details of options outstanding and movements during the year are set out in note 40. (c) Cancellation upon repurchase of own shares The Company was authorised at the 2007 annual general meeting to purchase its own ordinary shares not exceeding 10% of the aggregate nominal amount of its issued share capital at that time. During the year, the Company repurchased its ordinary shares on the Stock Exchange when they were signifi cantly trading at a discount in order to enhance shareholder value. During the year, the Company repurchased its own ordinary shares on the Stock Exchange as follows: Month of repurchase in 2007 Number of shares of nominal value of HK$5 each repurchased August September October November 871,000 22,720,000 100,000 542,000 24,233,000 Consideration per share Highest HK$ 19.64 22.00 21.00 23.00 Lowest HK$ 18.94 19.40 20.95 22.75 Aggregate consideration paid HK$ million 17 480 2 12 511 The repurchased shares were cancelled during the year and the issued share capital of the Company was reduced by the nominal value thereof. The premium paid on repurchase of the shares of HK$390 million was charged to retained profi ts. Pursuant to section 49H of the Hong Kong Companies Ordinance, an amount of HK$121 million equivalent to nominal value of the shares cancelled was transferred from the retained profi ts of the Company to the capital redemption reserve. Save as disclosed above, neither the Company nor its subsidiaries purchased, sold or redeemed any of the Company’s listed securities during the year. 118 Hysan Annual Report 2007 32. RESERVES OF THE COMPANY The Company’s reserves available for distribution to its equity holders as at 31 December 2007 amounted to HK$5,676 million (2006: HK$5,997 million), being its general reserve, dividend reserve and retained profi ts at that date. Share premium HK$ million Share options reserve HK$ million Capital redemption reserve HK$ million General reserve HK$ million Dividend reserve HK$ million Retained profi ts HK$ million Total HK$ million At 1 January 2006 Premium on issue of shares pursuant to scrip dividend schemes Premium on issue of shares under share option schemes Recognition of equity-settled share-based payments Profi t for the year Interim dividend declared for 2006 Dividends paid during the year (note 13) Proposed fi nal dividend for 2006 At 31 December 2006 Premium on issue of shares pursuant to scrip dividend schemes Premium on issue of shares under share option schemes Cancellation upon repurchase of own shares Expenses for repurchase of own shares Recognition of equity-settled share-based payments Forfeiture of share options Profi t for the year Interim dividend declared for 2007 Dividends paid during the year (note 13) 1,420 30 3 – – – – – 1,453 79 9 – – – – – – – At 31 December 2007 1,541 Note: General reserve was set up from the transfer of retained profi ts. (Note) 100 155 369 5,273 7,319 – – – – – – – – – – – – – – – – – – 105 (474) 422 – – – 729 (105) – (422) 30 2 4 729 – (474) – 155 100 422 5,475 7,610 – – 121 – – – – – – – – – – – – – – – – – – – – – – 127 – – (511) (2) – 2 739 (127) 79 8 (390) (2) 4 – 739 – (549) – (549) 276 100 – 5,576 7,499 2 – (1) 4 – – – – 5 – (1) – – 4 (2) – – – 6 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 119 Notes to the Financial Statements continued For the year ended 31 December 2007 33. CAPITAL RISK MANAGEMENT The Group manages its capital to ensure that the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The Group’s overall strategy remains unchanged from prior year. The Group monitors its capital structure on the basis of a net debt to adjusted capital ratio. For this purpose, the Group defi nes net debt as borrowings as shown in the consolidated balance sheet less total cash and cash equivalents. Adjusted capital comprises all components of equity, adjusted by cumulative deferred tax provided on fair value gain on the investment and owner-occupied properties attributable to equity holders. The management reviews the Group’s net debt to adjusted capital ratio regularly and adjust the ratio through the payment of dividends, the issue of new share or debt, the repurchase of shares and the redemption of existing debt. The net debt to adjusted capital ratio at the year end was as follows: Unsecured bank loans Floating rate notes Fixed rate notes Zero coupon notes Borrowings Less: Time deposits Cash and bank balances Net debt Equity attributable to equity holders of the Company Add: Group’s share of cumulative deferred tax on properties revaluation Adjusted capital Net debt to adjusted capital The Group 2007 HK$ million 2006 HK$ million 720 549 1,362 230 2,861 (478) (6) 2,377 31,652 3,420 35,072 6.8% 720 549 1,338 214 2,821 (382) (3) 2,436 27,828 2,901 30,729 7.9% Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements. 120 Hysan Annual Report 2007 34. FINANCIAL INSTRUMENTS (a) Categories of financial instruments Financial assets Financial assets at FVTPL – designated as at FVTPL – held for trading Derivative instruments under hedge accounting Available-for-sale fi nancial assets Loans and receivables (including cash and cash equivalents) Financial liabilities Financial liabilities at FVTPL – held for trading Derivative instruments under hedge accounting Amortised cost The Group The Company 2007 HK$ million 2006 HK$ million 2007 HK$ million 2006 HK$ million 203 95 33 2,479 1,162 3,972 55 2 3,805 3,862 – – 4 1,745 1,209 2,958 72 13 3,686 3,771 – – – 2 – – – 2 12,790 12,792 13,071 13,073 – – 61 61 – – 126 126 (b) Financial risk management objectives and policies The Group’s major fi nancial instruments include cash and bank balances, time deposits, accounts receivable, equity investments, amount due from an associate, other receivables, borrowings, accounts payable and accruals, amounts due to minority shareholders, rental deposits from tenants and derivative fi nancial instruments. The Company’s major fi nancial instruments include cash and bank balances, time deposits, accounts receivable, other receivables, amounts due from/to subsidiaries and accounts payable and accruals. Details of these fi nancial instruments are disclosed in respective notes. The risks associated with these fi nancial instruments and the policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner. (i) Credit risk The credit risk of the Group and the Company are primarily attributable to rents receivable from tenants, amount due from an associate, derivative fi nancial instruments, time deposits and bank balances. The Group’s and the Company’s maximum exposure to credit risk which will cause a fi nancial loss to the Group and the Company due to failure to discharge an obligation by the counterparties and fi nancial guarantees issued by the Group and the Company is arising from: • • the carrying amount of the respective recognised fi nancial assets as stated in the consolidated and Company’s balance sheets; and the amount of contingent liabilities in relation to fi nancial guarantee issued by the Group and the Company as disclosed in note 36. For rents receivable from tenants, credit checks are part of the normal leasing process and stringent monitoring procedures are in place to deal with overdue debts. In addition, the Group reviews the recoverable amount of each individual trade debt at each balance sheet date to ensure that adequate impairment losses are made for irrecoverable amounts. To mitigate counterparty risk, the Group enters into derivative contracts only with sound fi nancial institutions with strong investment-grade credit ratings, limits exposure to each fi nancial institution, and monitors each rating regularly. The Group’s and the Company’s time deposits and bank balances are placed with banks of high credit ratings in Hong Kong. The Group and the Company has set an exposure limit to each single fi nancial institution. Other than concentration of credit risk on amount due from an associate, the Group and the Company have no signifi cant concentration of credit risk, with exposure spread over a number of counterparties and tenants. Hysan Annual Report 2007 121 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Notes to the Financial Statements continued For the year ended 31 December 2007 34. FINANCIAL INSTRUMENTS continued (b) Financial risk management objectives and policies continued (ii) Liquidity risk The Group and the Company closely monitors its liquidity requirements and the suffi ciency of cash and available banking facilities so as to ensure that the payment obligations are met. The following table details the remaining contractual maturity of the Group and the Company for their non-derivative fi nancial liabilities. The table has been drawn up based on the undiscounted cash fl ows of fi nancial liabilities based on the earliest date on which the Group is required to pay. The table includes both interest and principal cash fl ows. The interest payments are computed using contractual rates or, if fl oating, based on the prevailing market rate at the balance sheet date. For cash fl ows denominated in currency other than Hong Kong dollars, the prevailing foreign exchange rates at the balance sheet date are used to convert the cash fl ows into Hong Kong dollars. Total contractual Carrying undiscounted cash fl ow amount HK$ million HK$ million Within 1 year or on demand HK$ million More than 1 year but less than 2 years HK$ million More than 2 years but less than 5 years HK$ million More than 5 years HK$ million The Group As at 31 December 2007 Non-derivative fi nancial liabilities Accounts payable and accruals Rental deposits from tenants Amounts due to minority shareholders Unsecured bank loans Floating rate notes Fixed rate notes Zero coupon notes As at 31 December 2006 Non-derivative fi nancial liabilities Accounts payable and accruals Rental deposits from tenants Amounts due to minority shareholders Unsecured bank loans Floating rate notes Fixed rate notes Zero coupon notes (278) (339) (327) (720) (549) (1,362) (230) (278) (339) (327) (809) (589) (1,866) (430) (3,805) (4,638) (253) (285) (327) (720) (549) (1,338) (214) (253) (285) (327) (850) (615) (1,963) (430) (3,686) (4,723) (278) (124) (327) (29) (22) (99) – (879) (253) (102) (327) (28) (23) (102) – (835) – (104) – (29) (567) (99) – – (107) – (751) – (1,668) – (799) (2,526) – (57) – (32) (23) (99) – – (121) – (790) (569) (297) – – (4) – – – – (430) (434) – (5) – – – (1,465) (430) (211) (1,777) (1,900) 122 Hysan Annual Report 2007 34. FINANCIAL INSTRUMENTS continued (b) Financial risk management objectives and policies continued (ii) Liquidity risk continued Total contractual Carrying undiscounted cash fl ow amount HK$ million HK$ million Within 1 year or on demand HK$ million More than 1 year but less than 2 years HK$ million More than 2 years but less than 5 years HK$ million More than 5 years HK$ million The Company As at 31 December 2007 Non-derivative fi nancial liabilities Accounts payable and accruals Amounts due to subsidiaries As at 31 December 2006 Non-derivative fi nancial liabilities Accounts payable and accruals Amounts due to subsidiaries (19) (42) (61) (22) (104) (126) (19) (42) (61) (22) (104) (126) (19) (42) (61) (22) (104) (126) – – – – – – – – – – – – – – – – – – O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 123 Notes to the Financial Statements continued For the year ended 31 December 2007 34. FINANCIAL INSTRUMENTS continued (b) Financial risk management objectives and policies continued (ii) Liquidity risk continued The following table details the Group’s remaining contractual maturity for its derivative fi nancial instruments. The table has been drawn up based on the undiscounted net cash infl ows (outfl ows) on the derivative instruments that settle on a net basis and undiscounted gross infl ows (outfl ows) on those derivatives that require gross settlement. When the amount payable or receivable is not fi xed, the amount disclosed has been determined by the prevailing market rate at the balance sheet date. For cash fl ows denominated in currency other than Hong Kong dollars, the prevailing foreign exchange rates at the balance sheet date are used to convert the cash fl ows into Hong Kong dollars. Total contractual Carrying undiscounted cash fl ow amount HK$ million HK$ million Within 1 year or on demand HK$ million More than 1 year but less than 2 years HK$ million More than 2 years but less than 5 years HK$ million More than 5 years HK$ million The Group As at 31 December 2007 Derivative settled net Interest rate swap Derivative settled gross Forward foreign exchange contracts Outfl ow Infl ow Cross currency and net basis swaps Outfl ow Infl ow As at 31 December 2006 Derivative settled net Interest rate swap Derivative settled gross Forward foreign exchange contracts Outfl ow Infl ow Cross currency and net basis swaps Outfl ow Infl ow (2) 3 13 (3) 1 (39) 41 – 2 8 31 (201) 206 (1,659) 1,707 (83) 85 (57) 64 (34) 35 (52) 64 (84) 86 (1,550) 1,579 – – – – 33 7 1 4 21 (185) 191 (1,731) 1,767 (34) 35 (59) 65 (34) 35 (56) 64 (103) 106 (168) 191 (14) 15 (1,448) 1,447 At the balance sheet date, the Company has no contractual maturity for any derivative fi nancial instruments. (iii) Interest rate risk The Group manages its interest rate exposure based on interest rate level and outlook as well as potential impact on the Group’s fi nancial position arising from volatility. Interest rate swap is the hedging instrument most commonly used by the Group to manage the interest rate exposure (see note 21 for details). As at 31 December 2007, about 60.1% of the Group’s gross debts were effectively on a fl oating rate basis. The ratio could change with changes to the interest rate trend going forward. The Group’s policy is to maintain the proportion of borrowings in fi xed rates and fl oating rates within an appropriate range. Accordingly, the Group entered into (i) interest rate swaps to hedge the interest rate risk of the Group’s fl oating rate borrowings including bank loans and fl oating rate notes; and (ii) cross currency swaps and an interest rate swap to hedge the interest rate risk of certain amounts of the Group’s fi xed rate notes. 124 Hysan Annual Report 2007 34. FINANCIAL INSTRUMENTS continued (b) Financial risk management objectives and policies continued (iii) Interest rate risk continued Sensitivity analysis The sensitivity analysis below has been determined assuming that the change in interest rates had occurred at the balance sheet date and had been applied to both derivative and non-derivative fi nancial instruments that would have affected the profi t or loss and equity. A change of 75 basis points (“bps”) was applied to the yield curves at respective balance sheet date. As at 31 December 2007 As at 31 December 2006 The Group Increase (decrease) in profi t or loss Increase (decrease) in equity 75 bps increase HK$ million 75 bps decrease HK$ million 75 bps increase HK$ million 75 bps decrease HK$ million 2 4 (2) (5) 1 1 (1) (1) (iv) Currency risk The Group aims to minimise its currency risk and does not speculate in currency movements. The majority of the Group’s and the Company’s assets by value are located, and all rental income are derived, in Hong Kong, and denominated in Hong Kong dollars. As at 31 December 2007, all of the Group’s debts were denominated in Hong Kong dollars with the exception of the US$182 million 10-year fi xed rate notes. The Group has entered into appropriate hedging instruments to hedge against the potential currency risk (see note 21). Other than the 10-year fi xed rates notes, the Group has no other signifi cant currency risk. Sensitivity analysis The sensitivity analysis below has been determined assuming that a change in exchange rate had occurred at the balance sheet date and had been applied to both derivative and non-derivative fi nancial instruments that would have affected the profi t or loss and equity. A change of 300 bps was applied to the HKD:USD spot and forward rates at respective balance sheet date with the upper and lower boundaries at 7.75 and 7.85 respectively for the spot rate. As at 31 December 2007 As at 31 December 2006 The Group Increase (decrease) in profi t or loss Increase (decrease) in equity 300 bps increase HK$ million 300 bps decrease HK$ million 300 bps increase HK$ million 300 bps decrease HK$ million 2 1 (2) (1) 1 1 (1) (1) (v) Equity price risk The Group’s available-for-sale investments and held for trading investments in listed securities are measured at fair value at each balance sheet date with reference to the listed share price. Therefore, the Group is exposed to equity price risks and the management will monitor the price movements and take appropriate actions when it is required. As at 31 December 2007, the Group has outstanding equity derivatives. The equity derivatives are not designated as hedging instrument and hence are measured at fair value through profi t or loss. Sensitivity analysis The sensitivity analysis below has been determined assuming that a change in the corresponding equity prices had occurred at the balance sheet date and had been applied to both the derivatives and the investments that would have affected the profi t or loss and equity. A change of 10% in stock prices was applied at respective balance sheet date. As at 31 December 2007 As at 31 December 2006 The Group Increase (decrease) in profi t or loss Increase (decrease) in equity 10% increase HK$ million 10% decrease HK$ million 10% increase HK$ million 10% decrease HK$ million (10) (4) 9 4 251 168 (251) (168) Hysan Annual Report 2007 125 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Notes to the Financial Statements continued For the year ended 31 December 2007 34. FINANCIAL INSTRUMENTS continued (c) Fair value The fair value of fi nancial assets and fi nancial liabilities are determined as follows: • • • the fair value of listed investments classifi ed as held for trading and available-for-sale investments and other fi nancial assets and fi nancial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to the published price quotations; the fair value of other fi nancial assets and fi nancial liabilities (excluding derivative instruments) are determined in accordance with generally accepted pricing models based on discounted cash fl ow analysis using prices from observable current market transactions; and the fair value of derivative instruments are calculated using quoted prices from independent fi nancial institutions or using discounted cash fl ow analysis based on the applicable yield curves and foreign exchange rates. For the Company’s share options, the fair value is estimated using Black-Scholes option pricing model. The Directors consider that the carrying amounts of non-derivative fi nancial assets and fi nancial liabilities approximate their fair value, except for the carrying amount of US$182 million (approximate to HK$1,362 million) fi xed rate notes as stated in note 21 with fair value of US$198 million (approximate to HK$1,543 million). 35. RETIREMENT BENEFITS PLANS With effect from 1 December 2000, the Group set up an enhanced MPF scheme (the “Enhanced MPF Scheme”), a defi ned contribution scheme, for all qualifying employees. The Enhanced MPF Scheme is registered with the Mandatory Provident Fund Schemes Authority under Section 124(1) of the Mandatory Provident Fund Schemes (General) Regulation. Pursuant to the rules of the Enhanced MPF Scheme, the Group’s contributions to the plan are based on fi xed percentages of members’ salaries, ranging from 5% of MPF Relevant Income to 15% of basic salary. Members’ mandatory contributions are fi xed at 5% of MPF Relevant Income, in compliance with MPF legislation. Total contributions made by the Group during the year amounted to HK$5 million (2006: HK$5 million). Forfeited contributions for the year amounted to HK$3 million (2006: HK$3 million) were refunded to the Group. 36. CONTINGENT LIABILITIES At the balance sheet date, there were contingent liabilities in respect of the following: Corporate guarantee to a third party in respect of the sale of the interest in an associate Corporate guarantee to subsidiaries – for issue of fl oating rate notes – for issue of fi xed rate notes – for issue of zero coupon notes Guarantees to banks for providing fi nancing facilities to subsidiaries The Group The Company 2007 HK$ million 2006 HK$ million 2007 HK$ million 2006 HK$ million – – – – – – 4 – – – – – – 4 550 1,420 430 2,400 550 1,415 430 2,395 720 720 37. CAPITAL COMMITMENTS At the balance sheet date, the Group had the following capital commitments in respect of its investment properties: Authorised but not contracted for Contracted but not provided for 126 Hysan Annual Report 2007 The Group 2007 HK$ million 2006 HK$ million 1,006 134 1,012 153 38. LEASE COMMITMENTS (a) As lessee At the balance sheet date, the Company had commitments for future minimum lease payments under non-cancellable operating leases which fall due as follows: Within one year In the second to fi fth year inclusive The Company 2007 HK$ million 2006 HK$ million 15 6 21 15 20 35 Operating lease payments represent rentals payable by the Company to its subsidiaries for its staff quarters and offi ce premises which are negotiated and rental are fi xed for two years and three years respectively. At the balance sheet date, the Group had no commitment under non-cancellable operating lease. (b) As lessor At the balance sheet date, the Group had contracted with tenants for the following future minimum lease payments: Within one year In the second to fi fth year inclusive Over fi ve years The Group 2007 HK$ million 2006 HK$ million 1,104 1,468 10 2,582 831 1,134 53 2,018 Operating lease payments represent rentals receivable by the Group from leasing of its investment properties. Leases are negotiated and rentals are fi xed for an average of one to three years. 39. RELATED PARTY TRANSACTIONS AND BALANCES (a) Transactions and balances with related parties The Group has the following transactions with related parties during the year and has the following balances with them at the balance sheet date: Gross rental income received from (Note a) Construction cost payable to (Note b) Amount due to a minority shareholder (Note c) The Group Substantial shareholders Directors 2007 HK$ million 2006 HK$ million 2007 HK$ million 2006 HK$ million 6 – – 6 – – 26 – 94 23 2 94 Notes: (a) The sum of transactions with Directors represented the aggregate gross rental income received under various leases respectively with a Director of approximately HK$754,000 (2006: HK$407,000), and companies controlled by Directors or their associates in aggregate of approximately HK$25,199,000 (2006: HK$22,876,000). (b) Dr. Geoffrey Meou-tsen Yeh and his alternate, V-nee Yeh, were substantial shareholders (and V-nee Yeh was also Chairman) of Hsin Chong Construction Group Ltd., whose wholly-owned subsidiary, Hsin Chong Construction (Asia) Limited ("Hsin Chong Asia"), entered into a main contract with a subsidiary of the Company relating to the renovation project of Lee Gardens Two. During the year ended 31 December 2007, Dr. Geoffrey Meou-tsen Yeh and his alternate, V-nee Yeh, have disposed certain of their interests in Hsin Chong Construction Group Ltd. and thereafter they were interested in less than 5% of the issued share capital of Hsin Chong Construction Group Ltd. The sum represented the sum paid to, or as the case may be, outstanding balances due under the main contract with Hsin Chong Asia. To the best of the Company’s knowledge having made due enquiries, substantially the whole of such contracts were sub-contracted by Hsin Chong Asia to other sub-contractors. The sum is not the indicative of the amount actually derived by Hsin Chong Asia under the relevant contract, which amount is substantially less than the relevant contract sum. (c) The sum represented outstanding loan advanced to a non wholly-owned subsidiary of the Group, Barrowgate Limited (“Barrowgate”) by Jebsen and Company Limited, of which Hans Michael Jebsen is a director and shareholder, as shareholders loan in proportion to its shareholding in Barrowgate for general funding purpose. The amount is unsecured, interest-free and repayable on demand. Hysan Annual Report 2007 127 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Notes to the Financial Statements continued For the year ended 31 December 2007 39. RELATED PARTY TRANSACTIONS AND BALANCES continued (a) Transactions and balances with related parties continued The Company has the following balances with its subsidiaries at the balance sheet date: Amounts due from subsidiaries Less: Allowances on amounts due therefrom Amounts due to subsidiaries The Company 2007 HK$ million 2006 HK$ million 13,039 (258) 12,781 42 13,346 (329) 13,017 104 Details of amounts due from/to subsidiaries are disclosed in note 23 to the fi nancial statements. (b) Compensation of key management personnel The remuneration of Directors and other members of key management of the Group and the Company during the year was as follows: Salaries and other short-term employee benefi ts Share-based payments Retirement benefi ts scheme contributions 2007 HK$ million 2006 HK$ million 17 3 1 21 24 3 1 28 The remuneration of the Directors and key executives is determined by the Emoluments Review Committee and Managing Director respectively having regard to the performance of individuals and market trends. 40. SHARE-BASED PAYMENT TRANSACTIONS (a) Equity-settled share option schemes The 1995 Share Option Scheme (the “1995 Scheme”) The 1995 Scheme was approved by shareholders on 28 April 1995 and had a term of 10 years. It expired on 28 April 2005. All outstanding options granted under the 1995 Scheme will continue to be valid and exercisable in accordance with the provisions of the 1995 Scheme. The purpose of the 1995 Scheme was to strengthen the links between individual staff and shareholder interests. Under the 1995 Scheme, options may be granted to employees of the Company or any of its wholly-owned subsidiaries selected by the Board at its discretion to subscribe for ordinary shares of the Company. The maximum number of shares in respect of which options may be granted under the 1995 Scheme (together with shares issued and issuable under the scheme) is 3% of the issued share capital of the Company (excluding shares issued pursuant to the scheme and any other share option scheme) from time to time. The maximum number of shares issued under the scheme and other scheme will not exceed 10% of the issued share capital of the Company from time to time (excluding shares issued pursuant to the scheme and any other share option scheme). The maximum entitlement of each participant is substantially below the limit set out under the scheme rules (being 25% of the maximum number of shares in respect of which options may at any time be granted under the 1995 Scheme). The exercise price was initially fi xed at 80% of the average of the closing prices of the shares on the Stock Exchange for the 20 trading days immediately preceding the date of grant or the nominal value of a share whichever is the greater. The exercise price for options granted after 1 September 2001 was amended to comply with amendments to the Listing Rules. Consideration paid on each grant of option was HK$1.00, with full payment for exercise price to be made on exercise of the relevant option. Grants made prior to 8 March 2005 had a holding period of 2 years and a vesting period of 5 years. 128 Hysan Annual Report 2007 40. SHARE-BASED PAYMENT TRANSACTIONS continued (a) Equity-settled share option schemes continued The 2005 Share Option Scheme (the “2005 Scheme”) The Company adopted the 2005 Scheme (together with the 1995 Scheme are referred to as the “Schemes”) at its Annual General Meeting (“AGM”) held on 10 May 2005, which has a term of 10 years and will expire on 9 May 2015. The purpose of the 2005 Scheme is to provide an incentive for employees of the Company and its wholly-owned subsidiaries to work with commitment towards enhancing the value of the Company and its shares for the benefi t of its shareholders. Under the 2005 Scheme, options may be granted to employees of the Company or any wholly-owned subsidiaries (including executive Directors) and such other persons as the Board may consider appropriate from time to time on the basis of their contribution on the development and growth of the Company and the subsidiaries to subscribe for ordinary shares of the Company. The maximum number of shares in respect of which options may be granted under the 2005 Scheme and any other share option scheme of the Company shall not exceed such number of shares as required under the Listing Rules, currently being 10% of the shares in issue (being 104,996,365 shares) as at 10 May 2005, the date of the AGM approving the 2005 Scheme. Under the Listing Rules, a listed issuer may seek approval by its shareholders in general meeting for “refreshing” the 10% limit under the scheme. The limit on the number of shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the 2005 Scheme and any other share option scheme of the Company must not exceed 30% of the shares in issue from time to time (or such number of shares as required under the Listing Rules). No options may be granted if such grant will result in this 30% limit being exceeded. The maximum entitlement of each participant under the 2005 Scheme must not during any 12-month period exceed such number of shares as required under the Listing Rules (which is 1% of the total shares in issue as at the date of shareholders’ approval). The exercise price shall be at least the highest of (i) the closing price of the shares as stated in the Stock Exchange’s daily quotations sheet on the date of grant; (ii) the average of the closing prices of the shares as stated in the Stock Exchange’s daily quotations sheets for the fi ve business days immediately preceding the date of grant; and (iii) the nominal value of the shares. Consideration to be paid on each grant of option is HK$1.00, with full payment for exercise price to be made on exercise of the relevant option. (b) Grant and vesting structures With effect from 8 March 2005, the Board has approved a new grant and vesting structure. Grants will be made on a periodic basis. Vesting period is three years in equal proportion. Size of grant will be determined by reference to base salary multiple and job grades. A clear performance criterion will be a key driver. The Board will review the grant and vesting structures from time to time. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 129 Notes to the Financial Statements continued For the year ended 31 December 2007 40. SHARE-BASED PAYMENT TRANSACTIONS continued (c) Movement of share options The following table discloses movements of the Company’s share options held by the Directors and employees during the current year: Date of grant Exercise price HK$ Exercisable period Balance as at 1.1.2007 Changes during the year Granted Exercised Cancelled/ Balance as at lapsed 31.12.2007 7.1.1999 9.22 7.1.2001 – 1,350,000 – (1,350,000) – – 30.3.2005 15.85 6.1.2009 30.3.2005 – 29.3.2015 (Note g) 401,333 – (77,666) (20,000) 303,667 (Note h) (Note j) 6.3.2007 21.38 (Note e) 6.3.2007 – 5.3.2017 – 235,000 – – 235,000 Name 1995 Scheme Executive Director Peter Ting Chang Lee (Note a) Eligible employees (Note b) 2005 Scheme Executive Directors Peter Ting Chang Lee (Note c) Michael Tze Hau Lee (Note d) 10.5.2005 16.60 30.3.2006 22.00 6.3.2007 Pauline Wah Ling Yu Wong (Note c) 6.3.2007 21.38 (Note e) 21.38 (Note e) Eligible employees (Note b) 9.8.2005 18.79 10.5.2005 – 9.5.2015 30.3.2006 – 29.3.2016 6.3.2007 – 5.3.2017 6.3.2007 – 5.3.2017 9.8.2005 – 8.8.2015 240,000 – (80,000) (160,000) (Note i) (Note j) 188,000 – – (188,000) (Note j) – 185,000 – (185,000) (Note j) – – – – 108,000 – – 108,000 96,000 12.10.2005 18.21 12.10.2005 – 11.10.2015 120,000 30.3.2006 22.00 26.6.2006 20.11 30.3.2006 – 29.3.2016 26.6.2006 – 25.6.2016 325,000 110,000 – – – – – (96,000) (Note j) – (120,000) (Note j) – – – (106,000) 219,000 (Note j) – – 110,000 30.3.2007 21.25 (Note f) 30.3.2007 – 29.3.2017 – 335,000 – (13,000) 322,000 (Note j) 2,830,333 863,000 (1,507,666) (888,000) 1,297,667 130 Hysan Annual Report 2007 40. SHARE-BASED PAYMENT TRANSACTIONS continued (c) Movement of share options continued Notes: (a) Options granted to Peter Ting Chang Lee had a holding period of 2 years and a vesting period of 5 years. (b) Eligible employees are working under employment contracts that are regarded as “continuous contracts” for the purposes of the Employment Ordinance. The options granted under the Schemes have vesting periods of 3 years in equal proportions. (c) Options granted to Peter Ting Chang Lee and Pauline Wah Ling Yu Wong have a vesting period of 3 years in equal proportions. (d) Options granted to Michael Tze Hau Lee had a vesting period of 3 years in equal proportions. Michael Tze Hau Lee stepped down from the Board of the Company as from the conclusion of 2007 annual general meeting held on 8 May 2007. (e) The closing price of the shares of the Company immediately before the date of grant (as of 5 March 2007) was HK$20.50. (f) The closing price of the shares of the Company immediately before the date of grant (as of 29 March 2007) was HK$21.30. (g) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$19.60. (h) The weighted average closing price of the shares of the Company immediately before the dates on which the options were exercised was HK$21.09. (i) The weighted average closing price of the shares of the Company immediately before the date on which the options were exercised was HK$21.20. (j) The options for 888,000 shares lapsed during the year upon the stepping down of Michael Tze Hau Lee and resignations of certain eligible employees. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 131 Notes to the Financial Statements continued For the year ended 31 December 2007 40. SHARE-BASED PAYMENT TRANSACTIONS continued (c) Movement of share options continued The following table discloses movements of the Company’s share options held by the Directors and employees in prior year: Name 1995 Scheme Executive Director Peter Ting Chang Lee (Note a) Date of grant Exercise price HK$ Exercisable period Balance as at 1.1.2006 Changes during the year Granted Exercised Cancelled/ Balance as at lapsed 31.12.2006 7.1.1999 9.22 7.1.2001 – 1,350,000 – – – 1,350,000 Eligible employees 30.3.2005 15.85 (Note b) 2005 Scheme Executive Director Michael Tze Hau Lee (Note c) 10.5.2005 16.60 30.3.2006 22.00 (Note d) Eligible employees 9.8.2005 18.79 (Note b) 6.1.2009 30.3.2005 – 29.3.2015 10.5.2005 – 9.5.2015 30.3.2006 – 29.3.2016 9.8.2005 – 8.8.2015 535,000 – (128,267) (5,400) 401,333 (Note f) (Note h) 240,000 – – 188,000 – – – 240,000 – 188,000 144,000 – (48,000) – 96,000 (Note g) 12.10.2005 18.21 12.10.2005 – 120,000 – – – 120,000 11.10.2015 30.3.2006 22.00 (Note d) 30.3.2006 – 29.3.2016 26.6.2006 20.11 (Note e) 26.6.2006 – 25.6.2016 – 361,000 – (36,000) 325,000 (Note h) – 110,000 – – 110,000 2,389,000 659,000 (176,267) (41,400) 2,830,333 Notes: (a) Options granted to Peter Ting Chang Lee had a holding period of 2 years and a vesting period of 5 years. (b) Eligible employees are working under employment contracts that are regarded as “continuous contracts” for the purposes of the Employment Ordinance. The options granted under the Schemes have vesting periods of 3 years in equal proportions. (c) Options granted to Michael Tze Hau Lee had a vesting period of 3 years in equal proportions. (d) The closing price of the shares of the Company immediately before the date of grant (as of 29 March 2006) was HK$22.45. (e) The closing price of the shares of the Company immediately before the date of grant (as of 23 June 2006) was HK$20.25. (f) The weighted average closing price of the shares of the Company immediately before the dates on which the options were exercised was HK$22.09. (g) The weighted average closing price of the shares of the Company immediately before the dates on which the options were exercised was HK$21.00. (h) The options for 41,400 shares lapsed during the year upon resignations of certain eligible employees. 132 Hysan Annual Report 2007 40. SHARE-BASED PAYMENT TRANSACTIONS continued (d) Fair values of share options The Group has applied HKFRS 2 “Share-based Payments” to account for its share options granted after 7 November 2002 and vested after 1 January 2006. In accordance with HKFRS 2, fair value of share options granted to employees determined at the date of grant is expensed over the vesting period, with a corresponding adjustment to the Group’s share options reserve. In the current year, the Group recognised the share option expenses of HK$4 million (2006: HK$4 million) in relation to share options granted by the Company, of which HK$1 million (2006: HK$1 million) related to the Directors (see note 8), with a corresponding adjustment recognised in the Group’s share options reserve. The fair values of share options granted by the Company were determined by using Black-Scholes option pricing model (the “Model”). The Model is one of the commonly used models to estimate the fair value of an option. The variables and assumptions used in computing the fair value of the share options are based on the management’s best estimate. The value of an option varies with different variables of certain subjective assumptions. Any change in the variables so adopted may materially affect the estimation of the fair value of an option. The inputs into the Model were as follows: Closing share price at the date of grant Exercise price Risk free rate (Note a) Expected life of option (Note b) Expected volatility (Note c) Expected dividend per annum (Note d) Estimated fair value per share option 30.3.2007 6.3.2007 26.6.2006 30.3.2006 Date of grant HK$21.25 HK$21.25 4.192% 10 years 29.53% HK$0.416 HK$7.47 HK$20.80 HK$21.38 4.188% 10 years 30.12% HK$0.416 HK$7.21 HK$20.00 HK$20.11 4.915% 10 years 32.00% HK$0.392 HK$7.81 HK$22.00 HK$22.00 4.539% 10 years 27.04% HK$0.390 HK$7.78 Notes: (a) Risk free rate: being the approximate yields of 10-year Exchange Fund Notes traded on the date of grant, matching the expected life of each option. (b) Expected life of option: being the period of 10 years commencing on the date of grant, based on management’s best estimates for the effects of non-transferability, exercise restriction and behavioural consideration. (c) Expected volatility: being the approximate historical volatility of closing prices of the shares of the Company in the past one year immediately before the date of grant. (d) Expected dividend per annum: being the approximate average annual cash dividend for the past fi ve fi nancial years. O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 133 Notes to the Financial Statements continued For the year ended 31 December 2007 41. PRINCIPAL SUBSIDIARIES Name of subsidiary Admore Investments Limited Golden Capital Investment Limited HD Treasury Limited Hysan (MTN) Limited Hysan China Holdings Limited Hysan Leasing Company Limited Hysan Property Management Limited Hysan Treasury Limited Kwong Hup Holding Limited Kwong Wan Realty Limited Minsal Limited Mondsee Limited Stangard Limited Teamfi ne Enterprises Limited Tohon Development Limited Bamboo Grove Recreational Services Limited Earn Extra Investments Limited Gearup Investments Limited HD Investment Limited Kochi Investments Limited Lee Theatre Realty Limited Leighton Property Company Limited Main Rise Development Limited OHA Property Company Limited Perfect Win Properties Limited Silver Nicety Company Limited Barrowgate Limited Place of incorporation/ operation Hong Kong Hong Kong Hong Kong British Virgin Islands/ Hong Kong British Virgin Islands Hong Kong Hong Kong Hong Kong British Virgin Islands Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong British Virgin Islands British Virgin Islands Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Proportion of nominal value of issued share capital held by the Company indirectly directly Issued share capital HK$2 HK$2 HK$2 US$1 100% 100% 100% 100% HK$1 100% HK$2 HK$2 HK$2 HK$1 HK$1,000 HK$2 HK$2 HK$300,000 HK$2 HK$2 HK$2 HK$1 HK$1 HK$1 HK$1 HK$10 HK$2 HK$2 HK$2 HK$2 HK$20 HK$10,000 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% – – – – – – – – – – – – – – – – – – – – – – – – – – – 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 65.36% Principal activities Investment holding Investment holding Treasury operation Treasury operation Investment holding Leasing administration Property management Treasury operation Investment holding Property investment Property investment Property investment Provision of security services Investment holding Property investment Resident club management Property investment Property development Investment holding Capital market investment Property investment Property investment Investment holding Property investment Property investment Property investment Property investment The Directors are of the opinion that a complete list of all subsidiaries and their particulars will be of excessive length and therefore the above table contains only those subsidiaries which materially contribute to the net income of the Group or hold a material portion of the assets or liabilities or otherwise are operating subsidiaries of the Group. Other than fl oating rate notes, fi xed rate notes and zero coupon notes issued by Hysan (MTN) Limited as disclosed in note 29, none of the subsidiaries had issued any debt securities at the balance sheet date. 134 Hysan Annual Report 2007 Five-Year Financial Summary 2007 HK$ million 2006 HK$ million 2005 HK$ million 2004 HK$ million (restated) 2003 HK$ million (restated) Results Turnover Property expenses Gross profi t Investment income Other gains and losses Administrative expenses Finance costs Change in fair value of investment properties Share of results of associates Release of negative goodwill of associates Reversal of impairment loss recognised in respect of investments in securities Profi t before taxation Taxation Profi t for the year Minority interests Profi t attributable to equity holders of the Company Underlying profi t for the year Recurring underlying profi t for the year Dividends Dividends paid Dividends proposed Dividends per share (HK cents) Earnings per share (HK$), based on: Profi t for the year – basic – diluted Underlying profi t for the year – basic Recurring underlying profi t for the year – basic Performance Indicators Net debt to equity Net interest coverage (times) Net assets value per share (HK$) Adjusted net assets value per share (HK$) Net debt per share (HK$) Year end share price (HK$) 1,368 (208) 1,160 98 302 (106) (175) 3,131 452 – – 4,862 (745) 4,117 (168) 3,949 1,158 950 549 498 60.00 3.75 3.75 1.10 0.90 6.8% 7.8x 30.51 33.81 2.29 22.25 1,268 (240) 1,028 147 201 (111) (163) 2,576 120 – – 3,798 (558) 3,240 (141) 3,099 1,012 755 474 422 50.00 2.94 2.94 0.96 0.72 7.9% 6.9x 26.37 29.12 2.31 20.35 1,250 (237) 1,013 38 (25) (103) (214) 4,226 241 – – 5,176 (856) 4,320 (199) 4,121 1,005 641 420 369 45.00 3.92 3.92 0.96 0.61 10.7% 4.6x 23.42 25.76 2.75 19.20 1,154 (259) 895 27 15 (96) (162) – 39 2 63 783 (140) 643 (34) 609 609 586 381 315 40.00 0.58 0.58 0.58 0.56 24.9% 5.5x 19.59 21.33 5.32 16.35 1,139 (239) 900 25 48 (92) (168) – 10 2 – 725 (165) 560 (26) 534 534 534 378 277 36.50 0.51 0.51 0.51 0.51 31.8% 5.2x 16.51 17.78 5.66 12.00 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 135 Five-Year Financial Summary continued Defi nitions: (1) Underlying profi t for the year: profi t adjusted for group’s share of unrealised fair value changes on investment properties net of deferred tax (2) Recurring underlying profi t for the year: underlying profi t adjusted for aggregate of realised gain or loss on disposal of investment properties and available-for-sale investments, impairment, reversal, recovery and prior year tax provision (3) Net debt to equity: borrowings less cash and cash equivalents divided by adjusted shareholders’ funds (4) Net interest coverage: gross profi t less administrative expenses before depreciation divided by net interest expenses (5) Net assets value/Adjusted net assets value per share: shareholders’ funds / adjusted shareholders’ funds divided by number of issued shares at year end (6) Net debt per share: borrowings less cash and cash equivalents divided by number of issued shares at year end (7) Adjusted shareholders’ funds: shareholders’ funds adjusted for cumulative deferred tax provided for fair value changes on properties Assets and Liabilities Investment properties Interests in associates Available-for-sale investments Time deposit, cash and bank balances Other assets Total assets Borrowings Taxation Other liabilities Total liabilities Net assets Minority interests Shareholders’ funds Adjusted shareholders’ funds 2007 HK$ million 2006 HK$ million 2005 HK$ million 2004 HK$ million (restated) 2003 HK$ million (restated) 35,711 1,601 2,479 484 615 40,890 (2,861) (4,180) (1,001) (8,042) 32,848 (1,196) 31,652 35,072 32,473 1,272 1,745 385 378 36,253 (2,821) (3,574) (950) (7,345) 28,908 (1,080) 27,828 30,729 29,815 1,147 1,256 1,402 371 33,991 (4,301) (3,077) (960) (8,338) 25,653 (986) 24,667 27,134 27,917 855 1,018 22 335 30,147 (5,603) (2,332) (815) (8,750) 21,397 (831) 20,566 22,399 24,162 850 941 15 302 26,270 (5,914) (1,708) (779) (8,401) 17,869 (642) 17,227 18,553 Note: The fi gures for 2003 and 2004 have been restated to refl ect the prior year adjustments arising from (i) reclassifi cation of certain investment properties of the Group to property, plant and equipment as a result of the application of HKAS 40 “Investment Property”; (ii) recognition of deferred taxation in respect of revalued investment properties in accordance with HK(SIC)INT-21 “Income Taxes – Recovery of Revalued Non-Depreciable Assets”; and (iii) reclassifi cation of leasehold interests in land to prepaid lease payments under operating leases according to HKAS 17 “Leases”. 136 Hysan Annual Report 2007 Report of the Valuer To the Board of Directors Hysan Development Company Limited Dear Sirs, Annual revaluation of investment properties as at 31 December 2007 In accordance with your appointment of Knight Frank Petty Limited to value the investment properties in Hong Kong owned by Hysan Development Company Limited and its subsidiaries, we are pleased to advise that the market value of the investment properties as at 31 December 2007 was in the approximate sum of Hong Kong Dollars Thirty Five Billion Seven Hundred Eleven Million Only (i.e. HK$35,711 million). The investment properties have been valued individually, on market value basis, by reference to comparable market transactions and on the basis of capitalisation of the net income with due allowance for the reversionary income and redevelopment potential, without allowances for any expenses or taxation which may be incurred in effecting a sale. Yours faithfully, Knight Frank Petty Limited Hong Kong, 5 March 2008 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Hysan Annual Report 2007 137 Schedule of Principal Properties As at 31 December 2007 INVESTMENT PROPERTIES Address Lot No. The Lee Gardens 33 Hysan Avenue Causeway Bay Hong Kong Sec. DD of I.L. 29, Sec. L of I.L. 457, Sec. MM of I.L. 29, the R.P. of Sec. L of I.L. 29, and the R.P. of I.L. 457 Use Category of the Lease Percentage held by the Group Commercial Long lease 100% I.L. 8624 Residential Long lease 100% Commercial Long lease 65.36% Sec. G of I.L. 29, Sec. A, O, F and H of I.L. 457, the R.P. of Sec. C, D, E and G of I.L. 457, Subsec. 1 of Sec. C, D, E and G of I.L. 457, Subsec. 2 of Sec. E of I.L. 457 and Subsec. 1, 2, 3 and the R.P. of Sec. C of I.L. 461 Sec. B, C and the R.P. of I.L. 1451 Commercial Long lease 100% I.L. 1452, the R.P. of I.L. 472 and 476 Commercial Long lease 100% The R.P. of Subsec. 1 of Sec. J of I.L. 29, Subsec. 2 of Sec. J of I.L. 29 and the R.P. of Sec. J of I.L. 29 The R.P. of Subsec. 1 of Sec. J of I.L. 29, Subsec. 2 of Sec. J of I.L. 29 and the R.P. of Sec. J of I.L. 29 Commercial Long lease 100% Residential Long lease 100% The R.P. of Sec. GG of I.L. 29 Commercial Long lease 100% Sec. N of I.L. 457 and Sec. LL of I.L. 29 Commercial Long lease 100% 1. 2. 3. 4. 5. 6. 7. Bamboo Grove 74-86 Kennedy Road Mid-Levels Hong Kong Lee Gardens Two 28 Yun Ping Road Causeway Bay Hong Kong Leighton Centre 77 Leighton Road Causeway Bay Hong Kong Lee Theatre Plaza 99 Percival Street Causeway Bay Hong Kong Sunning Plaza 10 Hysan Avenue Causeway Bay Hong Kong Sunning Court 8 Hoi Ping Road Causeway Bay Hong Kong 8. One Hysan Avenue 1 Hysan Avenue Causeway Bay Hong Kong 9. AIA Plaza 18 Hysan Avenue Causeway Bay Hong Kong 10. 111 Leighton Road Sec. KK of I.L. 29 Commercial Long lease 100% 111 Leighton Road Causeway Bay Hong Kong 11. 500 Hennessy Road * Causeway Bay Hong Kong Sec. FF of I.L. 29 and the R.P. of Marine Lot 365 Commercial Long lease 100% * The property is currently under redevelopment. Demolition work on the existing building above ground had been completed and site formation work is currently underway. The site has a registered site area of approximately 47,738 square feet. The new development has a projected gross fl oor area of around 710,000 square feet and is projected for completion in 2011. 138 Hysan Annual Report 2007 Shareholding Analysis SHARE CAPITAL As at 31 December 2007: Authorised share capital: HK$7,250,000,000, comprising 1,450,000,000 ordinary shares of HK$5.00 each. Issued and fully paid-up capital: HK$5,187,348,780 comprising 1,037,469,756 ordinary shares of HK$5.00 each. Class of shares: one class of ordinary shares of HK$5.00 each with equal voting rights. DISTRIBUTION OF SHAREHOLDINGS (as at 31 December 2007, as per register of members of the Company) Size of registered shareholdings 5,000 or below 5,001 – 50,000 50,001 – 100,000 Above 100,000 Total No. of shareholders % of shareholders No. of % of the issued share capital shares (Note a) 2,626 1,015 92 82 3,815 4,896,259 68.83% 15,575,533 26.61% 2.41% 6,918,771 2.15% 1,010,079,193 0.47% 1.50% 0.67% 97.36% 100% 1,037,469,756 100% TYPES OF SHAREHOLDERS (as at 31 December 2007, as per register of members of the Company) Type of shareholders Lee Hysan Company Limited, Lee Hysan Estate Company, Limited and their subsidiaries Other corporate shareholders Individual shareholders Total LOCATION OF SHAREHOLDERS (as at 31 December 2007, as per register of members of the Company) Location of shareholders Hong Kong United States and Canada United Kingdom Singapore Others Total shares held Number of % of the issued share capital (Note a) 433,130,735 555,623,745 48,715,276 41.75% 53.55% 4.70% 1,037,469,756 100% shares held Number of % of the issued share capital (Note a) 1,031,916,417 4,289,319 1,131,330 65,042 67,648 99.46% 0.41% 0.11% 0.01% 0.01% 1,037,469,756 100% Hysan Annual Report 2007 139 O V E R V I E W O U R S T R A T E G Y I N A C T O N I O U R G O V E R N A N C E F I N A N C A L I S T A T E M E N T S A N D V A L U A T O N I Shareholding Analysis continued TOP 10 LARGEST SHAREHOLDERS (as at 31 December 2007, as per register of members of the Company) No. Name of shareholder Atlas Corporate Management Limited (Note b) Lee Hysan Estate Company, Limited (Note b) Kenwin Assets Limited (Note b) 1. HKSCC Nominees Limited 2. 3. 4. Overton Holdings Limited (Note b) 5. 6. Hang Seng (Nominee) Limited 7. Clipperton Company Limited (Note b) Besticom Investment Limited (Note b) 8. Shanghai Commercial Bank (Nominees) Limited 9. 10. Gowin Investments Limited (Note b) shares held Number of % of the issued share capital (Note a) 521,178,555 270,118,724 43,902,720 43,902,720 39,809,001 18,577,014 17,019,739 8,834,176 8,392,080 3,740,105 50.24% 26.04% 4.23% 4.23% 3.84% 1.79% 1.64% 0.85% 0.81% 0.36% Total 975,474,834 94.03% Notes: (a) The percentages have been compiled based on the total number of shares of the Company in issue as at 31 December 2007 (i.e. 1,037,469,756 ordinary shares). (b) These are wholly-owned subsidiaries of Lee Hysan Company Limited, a substantial shareholder of the Company (see “Substantial Shareholders’ and Other Persons’ Interests in Shares” section in Directors’ Report). 140 Hysan Annual Report 2007 Shareholder Information FINANCIAL CALENDAR Full year results announced Ex-dividend date for fi nal dividend Closure of register of members Annual General Meeting Record date for fi nal dividend Dispatch of scrip dividend circular and election form Dispatch of fi nal dividend warrants / defi nitive share certifi cates 2008 interim results to be announced * subject to change DIVIDEND The Board recommends the payment of a fi nal dividend of HK48 cents per share. Subject to shareholder approval, the fi nal dividend will be payable in cash with a scrip dividend alternative to shareholders on the register of members as at Wednesday, 14 May 2008. The scrip dividend alternative is conditional upon the granting by the Listing Committee of The Stock Exchange of Hong Kong Limited of the listing of and permission to deal in the new shares to be issued pursuant thereto. A circular containing details of the scrip dividend and the form of election will be mailed to shareholders on or about Wednesday, 21 May 2008. Shareholders who elect for the scrip dividend, in lieu of the cash dividend, in whole or in part, shall return the form of election to the Company’s Registrars on or before Wednesday, 11 June 2008. Defi nitive share certifi cates in respect of the scrip dividend and cheques (for those shareholders who do not elect for scrip dividend) will be dispatched to shareholders on or about Wednesday, 18 June 2008. The register of members will be closed from Friday, 9 May 2008 to Wednesday, 14 May 2008, both dates inclusive, for the purpose of determining shareholders’ entitlements to the proposed fi nal dividend and during which period no transfers of shares will be registered. In order to qualify for the proposed fi nal dividend, all transfer documents accompanied by the relevant share certifi cates must be lodged with the Company’s Registrars not later than 4:00 p.m. on Thursday, 8 May 2008. SHARE LISTING Hysan’s shares are listed on The Stock Exchange of Hong Kong Limited. It has a sponsored American Depositary Receipts (ADR) Programme in the New York market. STOCK CODE The Stock Exchange of Hong Kong Limited: 00014 Bloomberg: 14HK Reuters: 0014.HK Ticket Symbol for ADR Code: HYSNY CUSIP reference number: 449162304 13 March 2008 7 May 2008 9 to 14 May 2008 14 May 2008 14 May 2008 (on or about) 21 May 2008 (on or about) 18 June 2008 5 August 2008 * SHAREHOLDER SERVICES For enquiries about share transfer and registration, please contact the Company’s Registrars: Tricor Standard Limited 26/F., Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong Telephone: (852) 2980 1768 Facsimile: (852) 2861 1465 Holders of the Company’s ordinary shares should notify the Registrars promptly of any change of their address. The Annual Report is printed in English and Chinese language and is available on our website at www.hysan.com.hk. Shareholders may at any time choose to receive the Annual Report in printed form in either the English or Chinese language or both or by electronic means. Shareholders who have chosen to receive the Annual Report using electronic means and who for any reason have diffi culty in receiving or gaining access to the Annual Report will promptly upon request be sent a printed copy free of charge. Shareholders may at any time change their choice of the language or means of receipt of the Annual Report by notice in writing to the Company’s Registrars at the address above. The Change Request Form may be downloaded from the Company’s website at www.hysan.com.hk. INVESTOR RELATIONS For enquiries relating to investor relations, please email to investor@hysan.com.hk or write to the Company at: Investor Relations Hysan Development Company Limited 49/F., The Lee Gardens, 33 Hysan Avenue Hong Kong Telephone: (852) 2895 5777 Facsimile: (852) 2577 5153 OUR WEBSITE Press releases and other information of the Group can be found at our Internet website: “www.hysan.com.hk” e e L y b b o B y b o t o h P s r e c fi f O d n a y h p a r g o t o h P l i a p c n i r P d e t i m L i i n g s e D g n a T n a i l i L y b d e n g s e D i H y s a n D e v e o p m e n t l C o m p a n y L m i i t e d 2 0 0 7 A n n u a l R e p o r t OUR GUIDING VALUES 2007 Annual Report stock code: 00014 Hysan Development Company Limited 49/F The Lee Gardens 33 Hysan Avenue, Hong Kong T 852 2895 5777 F 852 2577 5153 www.hysan.com.hk 

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